Articles

MEDIATING REINSURANCE DISPUTES

by Peter Scarpato

For certain reinsurance disputes in the US, mediation is an available, effective but often misunderstood and underused process for companies seeking an efficient, cost-effective alternative to arbitration or litigation.

As the aggravation, expense and time required to arbitrate or litigate escalate, parties are beginning to opt either by contract or ad hoc agreement to mediate reinsurance disputes. For them, depending upon the case, LESS IS MORE; that is, compared to arbitration or litigation, mediation is a less aggressive, less costly, less damaging and less divisive alternative to tip the balance of POWER AND OPPORTUNITY in the parties’ favor.  A careful, experienced and patient mediator views disputes between parties, not as a battle, but as an OPPORTUNITY to give them the POWER to structure a resolution that best meets their respective short and long term needs. 

Despite this trend, many still debunk mediation as unnecessary, expensive and unproductive – complaints based mostly upon its non-binding nature and prior “bad” experiences with ineffective mediators.  From my discussions with many satisfied client and lawyer participants and my own work mediating such cases, I have found that parties and their counsel can and do benefit in many ways – even absent an immediate settlement – from mediating their reinsurance dispute. 

To illustrate how this works in practice, I will use the following facts from an actual reinsurance mediation I recently, successfully conducted. Some details were changed, and the names withheld, for confidentiality purposes:  Retrocedent seeks to collect $5MM in life reinsurance losses ceded to Retrocessionaire under a retro treaty.  The losses derived from three reinsurance claims made against Retrocedent by Reinsurer.  The three claims emerged from a large block of life reinsurance business Reinsurer had originally reinsured for and had ultimately assumed from Insurer, the quality of which Retrocedent discussed in placing information provided to Retrocessionaire when it agreed to participate on the retro treaty.  In its denial of the retroceded losses, Retrocessionaire raised errors in underwriting, delays in reporting and other issues arising in the underlying block of assumed business.  The parties agreed to mediate rather than arbitrate the dispute.

The Essence of the Mediation Process

In its classic form, mediation enlists an impartial, trusted facilitator to help parties explore, respect and react to the narrow and broad objective, subjective and psychological factors creating conflict between them, promoting their ability to perceive and communicate positions leading to an inexpensive, voluntary resolution of the dispute on their own terms. Notice that the technical aspects of the specific factual and legal issues in dispute are not necessarily the most important elements of the process.  In both joint meetings and private caucuses, parties (a) work with an experienced, professional mediator with no formal power to issue rulings (subject to parties’ modification), and (b) use an informal, confidential process (no rules of evidence or transcript) designed to suspend judgment and promote candor, (c) to identify and understand each side’s interests and goals underlying the actual dispute, (d) ultimately giving them the power to control the terms of a mutually-acceptable settlement. 

In this process, success is measured on various levels, in carefully timed, meaningful steps:

q         Step One: Before the actual mediation session, the mediator (a) obtains the parties’ mediation statements which contain documents and information revealing the salient facts and specific issues in dispute and (b) most importantly, works with them individually by phone or in person to help “set” the precise problems to be addressed which may go well beyond the narrow issues noted in their mediation statements. This step cannot be emphasized enough.  If the mediator does his/her job, the parties and counsel walk into the mediation room understanding that the real problems may involve other factors, such as each side’s as yet undisclosed, underlying needs and interests. 

q         In the case noted above, in addition to mediation statements, I asked the parties to provide only me with a Confidential Settlement Statement, designed to elicit (a) the history and end point of any prior settlement discussions (b) the underlying interests and needs they wished the mediation to address and (c) ideas for acceptable alternative paths to settlement.  While Retrocedent basically discussed initial, acceptable percentage discounts to the $5MM claim, Retrocessionaire requested that the mediation explore their concerns with the underlying assumed block of business (e.g., lack of underwriting, accommodation underwriting, sloppy claims handling). 

q         Step Two: In the opening joint session, the mediator sets the stage by convincing each party to actively listen to, understand and acknowledge the other side’s arguments. It is not enough that you nod your head.  You must be able to repeat the other side’s position back and believably communicate your appreciation and respect for such views (even if you disagree with them).  This often overlooked but incredibly powerful step builds trust, breaks down barriers and actually makes the other side less defensive and more candid, giving you and the mediator valuable information to use in the mediation process; information which, as noted in Step One above, helps define the proper depth and scope of issues the participants must address and resolve. 

q         Step Three: After hearing the parties’ positions in joint session, the mediator meets separately with each side in private caucuses.  Caucuses are used to encourage parties to suspend judgment and accept an environment where they can comfortably and critically evaluate the strengths and weaknesses of their positions, creatively explore options to resolve their differences and ultimately use the mediator to develop proposals designed to get what they need, not what they want, from a mutually-acceptable settlement. 

q         In the first caucus, Retrocessionaire expanded the discussion beyond the three claims and expressed grave concern over deviations between the qualities of claims handling and underwriting performed in the assumed block and representations Retrocedent had made in the placing information. If Retrocedent did not acknowledge and attempt to address these problems, Retrocessionaire was prepared to “walk” from the $5MM and file an arbitration seeking rescission. 

q         Step Four: Applying the old adage that “diplomacy is the art of letting someone else have it your way,” the mediator slowly and deftly helps parties develop, discuss and respond to successive financial and non-financial proposals and counterproposals, each supported by an articulated rationale, which satisfy both the offering party’s needs and the responding party’s interests. Simply put, party A must offer party B something that party A knows will help party B convince his company to accept the deal.   This is the heart of the process: an unscripted, evolving and changing dynamic which requires a perceptive, inventive and focused mediator, patient, calm and committed parties, and an open exchange of ever-broadening proposals that accentuate agreement and eliminate disagreement.

q         In our case, through several caucuses and carefully timed steps, the mediator moved the parties to accept the following terms that addressed (a) the Retrocessionaire’s need to identify and resolve potential problems with the assumed block,(b) the Retrocedent’s need to maintain its on going relationship with Reinsurer on other business and to collect balances legitimately ceded under the retro treaty and (c) their joint need to cooperate on steps designed to implement their settlement: First, to provide information both parties needed to assess the legitimacy of claims ceded to the retro treaty, Retrocedent and Retrocessionaire agreed to work together to design, conduct and share the expenses of an audit of Reinsurer’s questionable block of assumed business. Second, based upon the results of the audit, Retrocessionaire will pay all or any unchallenged portions of legitimate losses and, through Retrocedent, challenge any illegitimate cessions. Third, if Reinsurer rebuffed such challenge and instituted arbitration or legal collections proceedings, Retrocessionaire would pay 50% of any resultant legal and arbitrator expenses, legal fees and costs.

q         Having cooperated throughout this process, the parties were primed to return to productive discussions addressing the $5MM claim. While their cooperative mood allowed them to identify, discuss and produce documents to narrow the substantive issues and financial gap between them, certain process adjustments noted below were necessary to achieve a final settlement.  

Bridging the Gap

Often, despite everyone’s best efforts, a financial or non-financial gap leaves parties with a choice between an agreed settlement and a disappointing walk from the table.  Here, the mediator must maintain a positive, trusting relationship with the parties and continue moving the parties to propose alternatives and reframe the problem.  He/she must keep parties focused on re-evaluating barriers between them and brainstorming ways to eliminate them.  Very often, new alternatives uncover new forms of “value” that lead to acceptable compromises and settlement. 

q         In our case, two of the three retroceded claims made up most of the $5MM. In the original joint cession, the Retrocessionaire had alleged improper, accommodation underwriting of serious medical issues.  Since the parties’ prior achievements had built a spirit of cooperation and trust, Retrocedent agreed to immediately retrieve from both its and the Reinsurer’s files additional underwriting and claims records which were shared with both the me and Retrocessionaire.  Through additional caucuses, I helped the parties and counsel translate the substantive assessment of such records into rational, realistic and reasonable adjustments to the $5MM claim, narrowing the once “$5MM vs. rescission” gap to within $500,000.   

And even if a financial gap remains, the mediator can propose final alternatives.  Here are just a few examples:

(a)           First, if a financial gap remains, the mediator can ask the parties if they wish to give him/her privately their best, final good faith offer and further agree that (i) if the numbers overlap, the mediator can split the difference within the overlap and announce a settlement; or (ii) if the numbers do not overlap, the mediator can split the remaining gap between them and announce a settlement; or (iii) if the parties like (ii) but fear the gap might be too large, they set a smaller dollar limit on the gap within which the parties’ last, best offers must fall and agree that, if they do, the mediator may split the difference and announce a settlement.  Under all scenarios, if no settlement is reached, the mediator does not disclose the offers to the parties.

q         In our case, the parties agreed to option (iii) and gave me their last, best offers which fell within the narrowed gap, allowing me to split the difference and announce a final settlement. 

(b)          Second, the mediator can ask if the parties wish him/her to “cross the line” and, in separate caucuses, provide his/her opinion on their case.  Often, especially after hours of mediation, parties desire finality and, if they trust the mediator, welcome his/her opinion to help them mediate across the final gap. 

(c)           Third, in lieu of (b), the mediator can ask if the parties wish him/her to become an arbitrator and decide the dispute based upon the briefs, exhibits and parties’ positions disclosed during the mediation. The difference between (b) and (c) is that in (b), the parties still must mediate to a settlement and can walk away whereas, in (c), the mediator now arbitrator issues a final and binding decision.  

The Results of the Process        

Since this process often lasts one or two days, its benefits are obvious, even if parties fail to reach agreement. Without the aggravation, time and expense of lengthy discovery, pleadings, motions practice and legal and consulting fees, parties can work with a mediator experienced in the complexities and subtleties of reinsurance to

(a) gain an informed, enlightened perspective on both their and their opponent’s cases;

(b) acquire insights into the strengths and weaknesses of their substantive positions and the goals and interests of the other side;

(c) test each other’s desire to settle and measure the qualitative and quantitative gaps between their “bottom lines;”

(d) hear from and test the witness credibility of the other side’s key witness in subsequent proceedings;

(d) set the stage to comfortably resume settlement discussions later if and when discovery enhances or erodes their respective positions. Statistically, parties who mediate, even unsuccessfully, have a greater chance of settling cases earlier, more knowledgeably and less expensively than those who do not.

Conclusion

For certain reinsurance disputes, the mediation process allows parties to maintain relationships, reduce hostilities, avoid unpredictable panel or court decisions, assert more control over the terms of their settlements and lower litigation costs. In a world dominated by increasing numbers of arbitrated disputes, mediation is certainly a viable, beneficial option.

Created from an article that appeared in issue 108 of JTW News – September 2006

Author: Peter A. Scarpato – Conflict Resolved, LLC, peter@conflictresolved.com; www.conflictresolved.com