Insurance and reinsurance disputes
August 2011 | TALKINGPOINT | LITIGATION & DISPUTE RESOLUTION
FW moderates a discussion looking at insurance and reinsurance disputes between Thomas Heitzer at Noerr LLP, who takes a direct insurance perspective, and Barry Leigh Weissman at SNR Denton US LLP, who offers a reinsurance perspective.
FW: In your opinion, what impact has legislation/regulation resulting from the financial crisis had on insurers?
Heitzer: The financial crisis started in the subprime market and affected banks and financial institutions all over the world. Today, we still face an economic crisis with the bailout of countries like Greece, Portugal and Ireland. In 2008, politicians all over Europe blamed bank directors for the extensive damage caused and the respective need for financial aid from certain countries. Increasing the personal liability of the directors by respective amendments to the law – decided overnight and necessary or not – fulfilled the public demand for justice and compensation for additional taxes paid by them and future generations. Banks and their directors now face stricter rules on liability, but most of all they face the risk of being held liable for at least part of the financial crisis. This of course has a major impact for the exposure of insurers and reinsurers.
Weissman: For the first time in the US there is actually direct regulation dealing with reinsurers. In the past most of the regulations have been on an indirect basis, that is, regulators required the insurer to have certain language in the reinsurance agreement in order for it to receive credit for reinsurance. Now there is specific legislation requiring reinsurers to behave in a specific manner. The National Association of Insurance Commissioners and the US Congress have enacted guidelines, model acts and legislation that allow non-US domiciled reinsurers to be licensed by a single jurisdiction rather than by every US state. In addition, several states are enacting revised laws dealing with collateral. In the past, if the reinsurer was not licensed in the jurisdiction it would have been required to post security for the insurers claims that would arise under the treaty. The amount of the security was, generally speaking, 100 percent of reserves. The new collateral requirements are reducing these security requirements based upon the financial status of the reinsurer. These reduced collateral requirements mean the stronger the rating of the reinsurer, the less collateral it is required to post. At the present time there are approximately five states that have enacted these reduced collateral requirements. These states generally have five levels of collateral ranging from no security to 100 percent security.
FW: Can you outline some of the specific issues you have seen arising from recent claims and litigation?
Weissman: The most fascinating issue here is the rise in life reinsurance disputes. In the past, almost all disputes were on the property and casualty side and it was almost unheard of to hear of a life arbitration. However, in the last several years we have seen a substantial increase in life arbitrations. A number of these arbitrations involve similar type issues, for example allocation, accounting, coverage, and so on, but life business is completely different because life reinsurers are on for the life of the contract, rather than having reinsurers change every year as one has in the property & casualty side of the business.
Heitzer: The number of disputes on insurance products like D&O and E&O policies has increased by a huge percentage, not only in relation to financial institutions but also as a consequence of the lack of capital and financial liquidity of companies. Companies’ financing needs are not satisfied by the existing banks and other financial institutions as they are not able, or not willing, to lend fresh money to them. Also, the number of claims filed by private or institutional investors against banks for misselling has increased, and the BGH, the German Federal Court of Justice, has passed some decisions in favour of the investors, which can be seen as very consumer friendly and, of course, as a demand for stricter and more comprehensive compliance within the financial institutions. Finally, the current atmosphere of holding directors liable for any and all failure in business must be regarded as a result of the fear of the members of the supervisory board who do not want to breach their obligations by inactivity.
FW: Over the past 12 months, what are the most remarkable court decisions for the insurance industry that you have seen? How do you assess the impact of ‘Morrison v. National Australia Bank’?
Heitzer: Morrison v National Australia Bank presents a very important decision for European business operations in the US. It limits the extraterritorial reach of US securities law to non-US conduct. In its decision, the Supreme Court emphasised principles of international comity which underlie its extraterritoriality jurisprudence and avoided conflicts with foreign laws and procedures. For those European companies which have been sued on the grounds of the Securities Exchange Act of 1934, the decision has supported the dismissal of claims brought against them in the US. However, as Europe still has no comparable system of class actions as the US has, the demand for the development of a similar legal framework in Europe will accelerate.
FW: What influence are regulatory investigations having on insurance cases?
Heitzer: Regulatory investigations initiated by the authorities and conducted and paid for by companies with the support of international law firms and accountants significantly increase the amount of damages awarded.
In such cases the company has to commit to full cooperation with, and disclosure to, the authorities, otherwise the company risks endangering its business. In relation to the amount of insurance coverage, the costs for such investigations are outrageous and it is questionable whether or not such costs are covered under the D&O or E&O insurance policy. The differentiation starts where the investigations are not only for purposes of disclosure but also for the avoidance and implementation of a working compliance system. Insurance policies usually do not answer this very difficult question with the necessary accuracy.
Weissman: In the reinsurance world, we are not really seeing too much of an influence on disputes. The influence is more on the contract drafting and interaction between cedent and reinsurer.
FW: Are more of insurance cases ending up in litigation, or do insurance companies prefer to explore mediation and arbitration as alternatives?
Weissman: The majority of reinsurance cases have been resolved by arbitration. However, in recent years, as the cost of arbitrations and uncertainty in results increase there has been an increase in looking at other ADR alternatives, including mediation. In fact, some cedents are requiring in the reinsurance contracts a mandatory mediation prior to going to arbitration or litigation. Additionally, there has been an increase in ‘baseball’ type of arbitrations. Here each side selects a result and the arbitration panel may or may not know the parties selection. The panel then has a hearing and issues its award. However, regardless of what the panel awards, the result will be the one selected by the parties that is closest to the panel’s award. Finally, many reinsurance contracts are also including various forms of arbitrations depending upon the amount involved. The smaller the amount, the more restrictive the arbitration process, specifically limits on discovery.
Heitzer: Generally, insurers consider very carefully and diligently whether or not they will deny coverage and endanger a business relationship with a client. The facts and legal basis of each case are analysed to the highest possible extent, and most insurers try to anticipate how a cost and time sensitive litigation might proceed. Although the EU passed the European Mediation Directive in 2008, the procedures of mediation for out of court settlements are not regulated by a binding legal framework in every European country. Particularly in the insurance sector, mediation and arbitration are the preferred and appropriate legal courses and therefore should be supported by the European states to a much higher degree.
FW: What are some of the common challenges that surface in insurance and reinsurance disputes at the cross-border level?
Heitzer: All insurance cases in which European insurers deal with a US exposure create major problems in claims handling. The regulation in European countries differs from the US – as to what disclosures must be made by the insured parties, what damages are recoverable, what discovery is available in litigation, what constitutes fraud, and many other issues. Furthermore, the relationship among co-insurers differs widely from a US, UK or continental European perspective. The understanding of how such insurance programs are handled, which information duties the leading insurer has, and how a settlement and costs should be allocated among the insurers differs widely. In such contractual relations, it is essential to understand the technical legal ground that determines the rights and duties of the respective participating carriers.
Weissman: When dealing with the US the biggest challenge is always discovery. US lawyers are used to substantial amounts of written discovery and depositions while our European counterparts do not have the same procedures.
FW: Where do you expect the next bubble to form, putting insurance companies at risk?
Heitzer: I expect the next bubble to come from any kind of bribery. In Europe we have already seen some major cases of bribery systems where companies have business all over the world. Obviously, in certain areas of the world and in certain areas of the economy, it is very difficult to run a business without the use of such a tool. In most cases, the allegation of bribery leads to investigations by the state prosecutors and tax authorities. If the company is listed in the US, the SEC and the DoJ are involved. Insurance coverage for such risks leads to a very high exposure for the insurance sector and the current atmosphere within companies to disclose and investigate any act of bribery will accelerate the quality and number of such claims.
FW: What advice would you give to insurance companies on dispute avoidance? What steps can they take to minimise future conflict, especially at the contractual stage?
Heitzer: Insurance contracts and the understanding of the scope of coverage, extent of exclusions and the process of pre-contractual disclosure remain very often unclear and create disputes when a claim occurs. The underwriting process and the necessary documentation of the agreed understanding and conditions of the insurance contract are essential, and it is surprising to see how these issues are dealt with in reality. The same applies for co-insurance agreements and the respective understanding of how the insurance program should work. An appropriate documentation of the contractual relation could avoid any differences in understanding how the co-insurers deal with a claim.
Weissman: Both parties must take more care in the drafting of reinsurance agreements. It is not uncommon to see a reinsurance contract that is internally inconsistent, where statements on one page are contradicted on the next page. Additionally, it is not uncommon for companies to just copy prior agreements without paying attention to changes in practice or law that might have occurred in the interim. Finally, the parties must ensure that the contract contains only the paragraphs that are necessary for the program being reinsured. When a dispute erupts, the lawyers will look at the contract as a whole and will attempt to give meaning to each word in the document, regardless of how much sense they make in the particular program being reinsured.
Dr Thomas Heitzer is a partner at Noerr LLP. He is co-head of Noerr’s London office and advises German and international insurance and reinsurance companies on insurance law, including disputes, matters of regulatory law, corporate law and the distribution of insurance products. He is ranked as a leading insurance lawyer by Chambers Europe 2010 and is a frequent speaker at insurance and reinsurance conferences. Dr Heitzer can be contacted on +44 20 7562 4336 or by email: email@example.com.
Barry Leigh Weissman is a partner at SNR Denton US LLP. He is a leading reinsurance lawyer, representing clients in a variety of complex reinsurance and commercial matters. Mr Weissman has served as the chair of the Standing Committee on Insurance Law of the Business Law Section of the California State Bar and is active on several committees of the National Association of Insurance Commissioners. He also previously served on the California State Senate Advisory Commission on Malpractice Insurance. He can be contacted on +1 212 398 5298 or by email: firstname.lastname@example.org.
© Financier Worldwide
Barry Leigh Weissman
SNR Denton US LLP