Prior to the 1980s, very few reinsurance cases came before the courts. Since that time, with billions of dollars at stake and a proliferation of insurance and reinsurance companies going into run off or in financial difficulties, it is hardly surprising that more and more companies are entering into formal disputes. Litigation and arbitration have become big business and provide an excellent living to lawyers and retired insurance and reinsurance professionals, not to mention specialist companies providing inspection of recoards and dispute resolution services.

What is more surprising, however, is that far too little consideration and effort is invested in trying to seek a commercial settlement before the parties and their legal advisors enter into the acrimony and expense of litigation or arbitration. Not enough is done to manage the expectation of the disputing parties. Mediation has been championed as the sensible alternative to arbitration and litigation, but is it the ideal model for resolving complex insurance and reinsurance disputes? How is it used and abused in practice?

There has been an identifiable and stereotypical perception of mediation in that:

● It is less expensive and time-consuming than litigation and arbitration
● It is a safe and secure environment to explore settlement in complete confidence
● The parties control the outcome, facilitated by a highly trained neutral
● It is focused on solutions not issues
● It gives an increased chance of preserving relationships
● It boasts a track record of success (greater than 80% of cases settle)

So why are there so few mediations in comparison to arbitrations and litigations? The two main problems are process and timing.

Mediation has developed as a part of the litigation/arbitration process, rather than an alternative. It is most effective when introduced early in a dispute, before significant legal costs have been incurred. All too often, however, lawyers leave any mediation attempts until settlement offers have been made at the steps of court. Mediation has become an alternative to the final court or tribunal hearing, rather than an alternative to the processes of litigation or arbitration themselves.

Settling a mediation two weeks before trial is a great result for solicitors - all the rewards of a protracted litigation or arbitration process with the risk of failing at the trial or the hearing are magically removed. But does this reflect the best management of risk and expense for the client, insurance and reinsurance companies?

The main questions therefore are: can the hurdles to mediation be overcome and can it grow to become the primary method of dispute resolution? First let's set down some of the more standard objections to mediation:

● A general fear of the unknown.
● The notion that a proposal to mediate can be seen as a sign of weakness.
● Inappropriate for resolving “yes or no” disputes.
● Lack of access to disclosure that may identify additional issues/defences.

Somewhat tongue in cheek, but with more than a hint of realism, I would add the following to that list:

● Disputes are farmed out routinely and immediately to the lawyers, who are trained to litigate/arbitrate.
● Litigation/arbitration is a game - and mediation is a new tool for lawyers to play with.
● Lawyers love raising, debating and fighting issues.
● Mediation requires a willing spirit and a desire for compromise on both sides for it to work - not what most lawyers would see as their primary attributes or indeed what their clients would expect from them.

Both the courts and arbitration panels actively try to force parties to mediate. Sponsorship of the mediation process by the courts, however, was dealt a major blow by the Halsey vs Milton Court of Appeal decision in May 2004 where Lord Justice Dyson ruled that compulsion to use ADR (alternate dispute resolution) would impose an unacceptable obstacle to access to the court. In the eyes of many, this decision failed to penalise those who refuse to mediate and condemned the process to becoming merely a tactic in dispute management, rather than being a dispute resolution in of itself.

Recoverability of outwards reinsurance is a matter to consider in mediating inwards exposure. The normal tenet of reinsurance is to indemnify only claims that fall within both the direct policy and the reinsurance policy. In the absence of a “Follow the Settlements” clause it may be necessary to involve the reinsurer in the mediation process so as to avoid a subsequent defence that there is no legal liability created by a “compromise” settlement.

It would appear, therefore, that whilst mediation can be very successful in the right circumstances, it isn't a panacea for the ills of litigation and arbitration. Most importantly, mediation cannot provide the ultimate commercial solution while it continues to be called upon merely as a pre-trial weapon in support of litigation and arbitration.

I predict that new approaches to mediation will continue to be explored. We will see alternatives that endeavour more directly to contain costs and preserve commercial relationships without being shackled to the traditions and restrictions of litigation and arbitration. The ideal solution will lie somewhere in a process which dampens the antagonistic heat of a dispute, identifies and focuses upon the core issues involved and provides a framework for the parties to reach their own understanding and decision - before and without the intervention of agents provocateurs!

This Feature item appeared in issue 112 of JTW News - February 2007

Author: Julian Ward - JTW Reinsurance Consultants