3 April 2013News

The implications of rising arbitration

Re/insurance disputes are increasingly being settled through arbitration, but the costs associated with such an approach are not necessarily any less significant than litigation for the companies involved.

Bermuda: Re spoke with Keith Riley, executive director at Willis Re, about the rising costs of arbitration and how close attention to contract wording can help steer disputes towards an appropriate forum for debate.

Is a lawyer-led approach to arbitration increasing costs for re/insurers? Can the industry seize back the initiative?  

The approach in many cases is to appoint lawyers to the arbitration panels and for the process to follow litigation procedure, often because there are high stakes and/or difficult legal issues to resolve. The Arbitration Act 1996 in the UK provides for default procedure which is not unlike court procedure. But it is always open to the arbitrating parties to agree a different approach and sometimes they do. It is for the insurance industry to take the initiative to change the arbitration system to reduce the time and costs involved.

What are the pros and cons of a litigation-led versus an arbitration-led approach to settlements?  

Litigation in many jurisdictions is considered to be more predictable in its results and arbitration more of a lottery, with arbitration awards being very hard to appeal, even where they appear to be wrong in their application of the law.  On the other hand, arbitration allows a more flexible and commercial approach by the arbitration panel, precisely because arbitrators are not always bound to apply the strict letter of the law. Litigation is very public and will set a precedent. Arbitration is private and has little precedent value.

Can contract wording save the industry from some of these headaches? How?  

Yes, by providing for the type of arbitration procedure that the parties want or, in contrast, by not having arbitration as an option at all and allowing only for litigation. Arbitration could be by way of a shortened procedure, with the panel applying commercial judgment, rather than strict legal principles.  The appropriate forum for disputes may depend on the local expertise of the courts in specialist insurance or reinsurance matters (which could be very limited) – in such circumstances a skilled arbitration panel may be preferable to court.