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April 2009  |  Volume 1, Issue 2

The Case for Mediation of Reinsurance Disputes

Lovells Partner Urges Insurers and Reinsurers to Take a Fresh Look at Mediation as a Form of Reinsurance Dispute Resolution

An interview with Neal Moglin
by Teresa Zink

Mediation as a form of dispute resolution has gotten something of a bad rap in the United States, says international reinsurance attorney Neal Moglin.  He urges insurers and reinsurers to take a fresh look.

“We need to look at ways to make dispute resolution more approachable for companies,” Moglin says.  He notes that arbitration, “which started out as an alternative to ‘all singing all dancing litigation’ has veered off of that path.”  As cases have become more complex, so have the costs and procedural requirements.  Depositions, document discovery, electronic discovery, these all add to the costs of an arbitration proceeding.  While this may make sense “in a mega case” (depending on the circumstances) the cost of arbitrating smaller cases has for many companies is too high-there is a “disconnect between the potential up or downside on the one hand and the anticipated costs on the other.”  In these sorts of cases, mediation may provide a cost effective alternative for the parties.

The same can be said for “bet the company cases” of whatever size “where the cost to either party of losing is too heavy a risk to bear.  In those cases, a negotiated compromise crafted by the parties (rather than an arbitration panel) may be the best resolution.”  This is a particular consideration in the current market.

Moglin says that he has been advocating mediation as a way to “short form” the process of resolving disputes; to simplify it and make it more accessible.    “Not in every case, but for certain cases such as where “there is too high a downside for either entity to risk an up or down result (or a compromise crafted by arbitrators) or where there is an ongoing trading relationship between the companies that the parties want to preserve.  He notes that, “we have just came out of a period, and we may be going into another one, that sees a number of companies putting some or all of their business into runoff. Even in that situation, however, the lower costs associated with mediation could present an attractive option for the parties to consider.”

Mediation’s “Bum Rap”

Why don’t companies use mediation more?  There are a lot of reasons but “in the United States in particular mediation seems to have gotten a bad reputation. Many clients and reinsurance lawyers tend to view mediation as some sort of interim step in the discovery process.  Mediation needs to be viewed as a separate means to an end—a discreet form of dispute resolution,” says Moglin. Looking at mediation “from the other end of the telescope” we see that there are a number of countries that have vigorous and thriving mediation practices.  The process works in those countries “so we have to ask if there is an element of cause and effect at work here.”  Moglin believes this is true for several reasons.

First and foremost, some countries either for legislative or cultural reasons, require parties to engage in mediation as a first step or in some cases instead of litigation or arbitration.  This, in turn, has led to the creation of an established pool of qualified mediators who have been trained in appropriate mediation techniques.  “That is critical,” Moglin says, “because you can’t just wake up in the morning and call yourself a mediator.”  Mediation requires skills and training that are, by definition, different from what is required of judges and arbitrators.
He is quick to point out that while it is possible for a person to be trained as both an arbitrator and a mediator and to do both well, “you can’t just hang out a shingle or go to a weekend course and call yourself a mediator.  It is a unique set of skills that must be learned.”

A mediator’s primary job, says Moglin, is to “see through the ‘noise’ on both sides and get people over their inherent prejudices for their ‘team’ and for their case.”  Mediators also have to make sure the lawyers “are being policed and are doing their work,” says Moglin.  “Mediation isn’t where you go when you haven’t prepped properly.  Mediation is where you go after you have prepped very heavily and you know everything you need to know about your side of the case and, depending on where you are in the process, you know everything you can about the other side’s case.  It is only then that you can hope to achieve a negotiated result that will be acceptable to both sides.  Neither side will see it as a win, but it will be acceptable.”

“So part of the problem in the United States is maturity,” Moglin says.  “We just don’t have as mature a mediation history.  Part is the size of the pool of qualified mediators companies have to choose from though this is changing.  And part is getting the reinsurance industry and the lawyers that are part of that industry, to embrace it as a viable option.”

The Changing Market

“The market is changing, and changing in a number of ways,” says Moglin.  He points to the soft market and competition in reinsurance of the last several years. “There are a lot of people who thought rates were going to go up,” he says, but there are also some companies right now “that are motivated to retain business against some challenges.”  That is nothing new, he explains.  “That is just a function of the market.  There is frequently a disparity in the players and it is not always a level playing field.  You look to attract business the way you can and there might be some holding the line on rates that might be affecting other reinsurers.  So the market is potentially changing and the market might tighten up, at least at the upper end.”

There also are new threats in the underlying insurance market, according to Moglin.  “Underlying insurers, the ceding companies, are grappling with new products, new technologies, new threats like global warming and haven’t really decided yet, particularly in the area of climate change, how they’re going to react,” according to Moglin.  “As a reinsurer it is very difficult to underwrite the underwriting of a direct writer – particularly in the D&O market or the environmental insurance market – if you aren’t sure how that market is responding to potential threats.”

Climate Change

Taking climate change as an example, Moglin notes that the Attorneys General of California and New York have “filed some pretty high profile litigation against car makers and energy companies.”  Many of the suits were thrown out, but some were settled.  “The interesting thing about the settlements is, at least in New York, the settlements required disclosure – financial reporting disclosure – of environmental and climate change risks.  And that is extraordinary,” says Moglin.  Some are pushing for even broader reform, such as mandatory disclosure in SEC filings of not only environmental risks but also what are known as ESG (environmental, social and governmental) risks, according to Moglin.  Insurers, particularly D&O insurers, “are going to have to start thinking about what that means. So far directors and officers haven’t been sued over climate change, but that could happen.  So how do the products respond?”

“On the flip side,” he point out, “there is a potential opportunity to market some innovative products to deal with these challenges, either on the D&O side but particularly in the area of environmental insurance.  Could you sell an endorsement that specifically covered environmental risks?  If you do that, are you then signaling that your current exclusions don’t protect you?  Are you opening yourself up to a flood of litigation in the future?”

New threats always result in this kind of uncertainty, Moglin explains.  “We are at an interesting and exciting time in the industry because this hasn’t happened in a while.  So insurers are trying to come to grips with what their products do and don’t cover, and what, if any changes they need to make in their wordings, but also what if any changes they need to make in their underwriting.”

How are the Reinsurance Markets Responding?

Reinsurers, “have to think about how the underlying insurance market is going to respond, and is responding,” says Moglin.  In addition, “reinsurers need to take a step back and think about how they are measuring those responses.  Particularly a reinsurer who reinsures direct writers should be asking:  What are you looking at in terms of underwriting? What are you looking at in terms of policy wording? For their own part, reinsurers should be considering whether they need to add language to their existing treaty templates to protect themselves from some of these new threats.”

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Neal Moglin is a partner with the worldwide Insurance and Reinsurance Group at Lovells LLP.  For the past 14 years, his practice has focused on helping clients resolve complex disputes involving all types of insurance and reinsurance contracts. He is a co-chair of HB Litigation Conferences 16th Annual Insurance Insolvency & Reinsurance Roundtable to be held April 22 to 25 at the Fairmont Scottsdale Princess in Scottsdale, Arizona.

Mr. Moglin represents domestic and international insurers and reinsurers in litigation and arbitration, both in the U.S. and abroad. Partnering with lawyers in Lovells’ London, European and Asian offices, he has helped companies resolve disputes involving contract interpretation and coverage, aviation bodily injury carve out issues, access to records, adequacy of disclosures, letters of credit, and fraud. Mr. Moglin also regularly advises clients with respect to contract wording and product design and assists clients in due diligence reviews relating to mergers and acquisitions.