Insurance and Reinsurance Arbitrations: Some Issues

This article discusses a number of salient problems that arise in the context of insurance and reinsurance arbitrations. It is based upon a paper given at Hong Kong International Arbitration Centre on 22 November 2011.

In 1994, the then President of the International Association of Insurance Law (AIDA), John Butler, proposed the creation of an organisation dedicated to the resolution of insurance and reinsurance disputes. This initiative led to the establishment of the AIDA Reinsurance and Arbitration Service (ARIAS). To date, there are ARIAS sections in the UK, the US, France and Germany; others are in the process of being formed. A large number of UK and US arbitrations are now conducted under ARIAS Rules. In the UK, the procedures adopted are those of the London Court of lnternational Arbitration, which incorporate the terms of the English Arbitration Act 1996 (the 1996 Act).

lnsurance and reinsurance arbitrations are relatively uncommon in Asia but occupy much of the time of London lawyers. Many small claims are resolved by a sole arbitrator. Large claims, or at least those involving complex wording, tend to be heard by a tribunal of three, consisting of two market experts, one appointed by each party, and a legally-qualified chairman.

London arbitrations on insurance matters typically arise under policies governed, expressly or by implication, by English law. There is one important exception to this. In the 1980s, the insurance market developed the Bermuda Form. This was by way of response to massive liabilities imposed by US courts upon insurers in respect of asbestos liability claims, applying the principle that an insurer was required to provide cover if the policy has in force any time from initial exposure to the harmful substance to the ultimate onset of injury. The insurance is high-level excess layer cover which applies when losses reach an agreed level, and provides for arbitration in London but under policies governed by New York law. Such arbitrations are nearly always heard by retired judges or senior QCs, and co-counsel from England and New York are generally required. One necessary consequence of the separation of curial law from substantive law is that neither the English nor the New York courts can have jurisdiction to hear appeals on questions of law. English courts are debarred because they can only hear appeals on points of English law, and New York courts are debarred because they have no control over arbitrations¹.

1. See C v D [2008] 1 Lloyd's Rep 239 (Court of Appeal, England & Wales).

In 1957, following a report by the UK Law Reform Committee that was critical of the secrecy involved in the resolution of insurance claims, insurers agreed that they would no longer use arbitration clauses where issues of liability were at stake. Arbitration clauses are often couched in 'quantum only' terms. The pre-I957 form of wording, found in Jureidini v National British and Irish Millers Insurance Co Ltd², is still found today:

“If any difference arises as to the amount of any loss, destruction or damage such difference shall independently of all other questions be referred to the decision of an arbitrator.”

The difficulty here is that liability and quantum are very often intertwined. If, for example, insurers deny liability on the basis that the assured has submitted a fraudulently exaggerated claim, an arbitral tribunal cannot make a ruling on the amount of liability without at the same time resolving the fraud allegation. There is no authority on how this should be dealt with. A further issue is whether this wording confers jurisdiction on arbitrators to rule on the scope and meaning of contract terms under which the amount of a loss is to be ascertained, ie whether the arbitrators are concerned only with the mathematical calculation of the assured's actual loss or whether they can go on to determine the amount due under the policy. The argument in favour of the former is that there are wordings which indeed make it clear that the latter is intended. See, for example, the arbitration clause in Rondabosh International Ltd v China Ping An lnsurance (Hong Kong) Co Ltd³, where the court ruled that a dispute as to the amount of the assured's insurable interest had to be referred to arbitration:

“If the difference shall arise as to the amount to be paid under this Policy, such difference shall independently of all other questions be referred to the decision of an arbitrator.”

2. [1915] AC 499 (House of Lords).

3. HCA 581/2009, 29 December 2009, unreported (Court of First Instance, Hong Kong).

Article 7(6) of the UNCITRAL Model Law, as implemented by s 19(1) of the Hong Kong Arbitration Ordinance (Cap 609), provides that an arbitration clause in a document external to the contract itself may be regarded as incorporated by reference “provided that the reference is such as to make that clause part of the contract”. There is a difference of opinion between the English and Hong Kong courts as to whether as a matter of principle it is permissible to incorporate an arbitration clause by general reference to the document in which it appears. By way of example, where a bill of lading states “all terms as per charterparty” and the charterparty includes an arbitration clause, the English courts adhere to the view that the clause is not incorporated because express reference in the bill of lading to the arbitration clause is needed to deprive a person of his right to take his case to court, whereas the Hong Kong courts have shown greater flexibility and have recognised incorporation in such circumstances.⁴

The point is of great significance in the insurance and reinsurance context. Facultative (one-off) reinsurance contracts are typically written “as original” or, “all terms and conditions warranted as original”, the purpose being to bring the terms of the insurance policy into the reinsurance. Similarly, where insurance (or reinsurance) is arranged in layers, the excess layer will often contain a similar incorporation clause to ensure that the terms of cover are - financial limits apart - consistent. The English cases are clear that an arbitration clause in one insurance contract will not be incorporated into another by the usual “as original” formulation, not least because very often there is more than one underlying contract and identifying the “original” is not always straightforward⁵. The Model Law wording, which is reproduced in the English Arbitration Act 1996, has also been held not to alter the common law in this regard⁶. The issue has not faced the Hong Kong courts in the specific context of arbitration, though it is arguable that, in the interests of commercial certainty, the more restrictive English rule should be applied.

4. Editorial note: For an example of the more liberal approach of the Hong Kong courts towards incorporation by reference since the adoption of the UNCITRAL Model Law in 1990, albeit in the context of construction arbitration, see Astel-Peiniger Joint Venture v Argos Engineering & Heavy Industries Co Ltd [1995] 1HKLR 300 (High Court, Hong Kong).

5. See Pine Top lnsurance Co Ltd v Unione ltaliana Anglo Saxon Reinsurance Co Ltd [1987] 1 Lloyd's Rep 476 (QB Commercial Court, England & Wales).

6. Trygg Hansa lnsurance Co Ltd v Equitas Ltd [1998] 2 Lloyd's Rep 439 (QB Commercial Court, England & Wales).

Article 28(3) of the Model Law provides that:

“The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorized it to do so.”

In practice, arbitration clauses which confer upon arbitrators the power to consider wider issues are very few in number, and the earliest appeared in reinsurance contracts. Case law on the validity of such clauses prior to the implementation of the Model Law was conflicting. The wording “The arbitrators shall interpret this treaty as an honourable engagement” was held in Maritime lnsurance Co v Assecuranz-Union von 1865⁷ to render the reinsurance agreement void for uncertainty, though that decision was not followed in Home and Overseas lnsurance Co Ltd v Mentor lnsurance Co (UK) Ltd⁸, where similar wording was held to be binding. A clause permitting the arbitrators to resolve the dispute in accordance with equitable considerations was held permissible in Eagle Star lnsurance Co Ltd v Yuval lnsurance Co Ltd⁹ because it did no more than oust strict rules of construction and left other principles of law untouched. The matter has been resolved in England by s 46 of the 1996 Act, which follows the Model Law in slightly different language.

Ironically, now that their validity has been confirmed, honourable engagement and equity clauses are rarely seen in modem reinsurance contracts. Instead, the following provision is found in the Bermuda Form:

“The provisions ... of this policy are to be construed in an evenhanded fashion; where the language is ambiguous the issue shall be resolved in the manner most consistent with the relevant provisions ... (without regard to authorship of the language ... or reference to the reasonable expectations of either or to contra proferentem . . . or other extrinsic evidence).”

This again appears to have the limited effect of modifying the applicable law only in the sense of contract interpretation.

Whatever words are used, however, and even assuming that an appeal on a point of law could be mounted (which under Hong Kong law could only occur by means of an 'opt-in' agreement¹⁰), the court could scarcely intervene because to do so would entail substituting its own views for those of the almost certainly more knowledgeable arbitrators. In the recent decision of the Australian High Court in Westport lnsurance Corp v Gordian Runoff Ltd¹¹, however, the Court appears to have done precisely that, and to have reached its own view on what a contract meant even though there was an equity provision in the arbitration clause.

7. (1935) 52 Ll LR 16 (High Court, England & Wales).

8. [1989] 3 All ER 74 (Court of Appeal, England & Wales).

9. [1978] 1 Lloyd's Rep 357 (Court of Appeal, England & Wales).

10. Editorial note: See the Arbitration Ordinance (Cap 609), s 99(e) and Sch 2, ss 5-7.

11. [2011] HCA 37, 5 October 2011, unreported.

One final matter is of particular significance in the context of insurance and reinsurance. Arbitration proceedings and awards are confidential and third parties are not bound by their outcomes. This causes some difficulty in two particular situations.

First, it is necessary for an assured (or reinsured) to establish and quantify its own liability in order to substantiate a claim against (re)insurers. If that has been resolved in arbitration, it is generally assumed - although there remains some doubt about the point - that the award is binding for the purposes of proof, and that it is not open to the underwriters to go behind it unless they can show that the proceedings were not properly defended, or the arbitrators did not possess jurisdiction, or the award was manifestly perverse¹². But for this, the matter would have to be relitigated at the (re)insurance level.

Secondly, an arbitral award on the liability of (re)insurers may have consequences for a fallback claim possessed by the policyholder. In Aneco Reinsurance Underwriting Ltd (In liq) v Johnson & Higgins Ltd¹³, the trial judge ruled that reinsurers had the right to avoid a policy on the basis of nondisclosure by the reinsured's brokers. The present action was a claim by the reinsured against its brokers. The court inevitably held that the earlier award had to be disregarded and that it was incumbent on the reinsured to prove as a matter of law that the reinsurers were not liable and that the fault was that of the brokers. So, in effect, the arbitration had to be rerun, but before a court. An analogous situation arose in Lincoln National Life lnsurance Co v Sun Life Assurance Co of Canada¹⁴, where two reinsurers had each issued mutually exclusive cover to the reinsured. In an arbitration against the first reinsurer, the arbitrators held that the contract did cover the reinsured (thereby implicitly ruling that the second reinsurer did not face liability) but that it could be avoided. As a result of that award, the reinsured was left with a finding that the first reinsurer was not liable by reason of avoidance, and the second reinsurer was not liable by reason of lack of coverage. It was held by the Court of Appeal that there was no estoppel against the reinsured; who was perfectly free to commence arbitration against the second reinsurer to determine whether there was coverage under that policy, even though that entailed construing the meaning of the first reinsurer's policy all over again. Because of confidentiality, the outcome of that second arbitration is not in the public domain.

12. See Commercial Union Assurance Co PIc v NRG Victory Reinsurance Ltd [1998] Lloyd's Rep IR 439 (Court of Appeal, England & Wales).

13. [1998] 1 Lloyd's Rep 565 (QB Commercial Court, England & Wales).

14. [2004] EWCA Civ 1660, 10 December 2004, unreported (Court of Appeal, England & Wales).

Insurance and reinsurance arbitrations are big business. They raise questions of issues specific to the practice of underwriting but they also pose problems which are common to many other classes of arbitration. Many other points also arise, of course.

One final comment is that the practice of using arbitration in this market means that the substantive law has remained undeveloped in important respects. There are many questions that have been the subject of awards, and although the outcome of those awards is known in the market, they cannot be used as binding authority. Indeed, from 1927 to 1985, there were hardly any reported reinsurance cases in England, even though disputes were legion. On occasion, and faced with conflicting lines of authority from arbitrators, parties have waived arbitration clauses in order for a precedent to be established in the courts. It remains the case, however, that insurers and reinsurers remain wedded to arbitration. Their overriding motive is, almost always, the maintenance of confidentiality to prevent any decision becoming a binding test case on the wordings used.

This article was first published in January 2012 in Asian Dispute Review and is reproduced with their permission.