Consolidation Issues in Reinsurance Contracts

June 2008

In many reinsurance relationships, there are multiple reinsurers participating on the ceding insurer's reinsurance agreement. In other reinsurance relationships, there are multiple reinsurance contracts working together in a comprehensive and integrated program to protect the ceding insurer from the same risk of loss.

by Larry P. Schiffer
Dewey & LeBoeuf LLP

These are some examples of the various combinations of reinsurers and reinsurance contracts that can quickly complicate disputes between reinsurers and their ceding insurer when those disputes arise.

The complication is whether a dispute or multiple disputes should be heard as one proceeding or whether there should be multiple, independent proceedings to resolve multiple disputes. Unless the reinsurance contract specifically provides for consolidation of disputes between reinsurers and/or reinsurance contracts, whether disputes between a ceding insurer and multiple reinsurers or over multiple reinsurance contracts can be consolidated is an open question. When these issues arise, the question is whether the court or the arbitration panel decides the consolidation problem. This article discusses the recent trend of courts to pass the procedural question of consolidation to the arbitrators for determination.

Consolidation Clauses

Consolidation clauses take different forms depending on the context and the reinsurance contract. Many reinsurance agreements have no provisions addressing consolidation. Other reinsurance agreements will have specific provisions that require the consolidation of all disputes between the ceding insurer and the reinsurer. This clause works where there are multiple reinsurance agreements between a ceding insurer and a specific reinsurer over time and allows for all disputes between these counterparties to be resolved in a single proceeding. And yet other reinsurance agreements require the consolidation of all disputes between the parties over the subject of that contract. So, for example, if the reinsurer claims that the ceding insurer owes it premium, and the ceding insurer claims that the reinsurer owes the ceding insurer indemnification for a specific claim, both disputes should be heard together.

In cases where there are multiple reinsurers on a single reinsurance agreement, a consolidation clause may require all reinsurers to act as one and select a single arbitrator in any dispute with the ceding insurer. This type of consolidation clause avoids multiple arbitrations over the same contract with different reinsurers, but only really works well if the claims against or by the reinsurers are basically the same.

Disputes arise over consolidation issues where there is either an ambiguous consolidation clause or no consolidation clause that provides guidance on how multiparty or multicontract reinsurance disputes should be handled. When these disputes arose in the past, parties initially turned to the courts for relief.

The Old Rule—The Courts Rule

In the past, the question of consolidation of a reinsurance dispute between multiple reinsurers and the ceding insurer, or between multiple reinsurance contracts, rested with the court. The court's task was straightforward. If the reinsurance contract had a consolidation provision, then the court allowed consolidation. If the reinsurance contract did not contain a clear consolidation provision applicable to the particular dispute, then the court would refuse to consolidate, and the parties would be left to their own devices.

Threshold issues like consolidation were routinely decided by the courts. While the courts typically deferred to the arbitration provision in the reinsurance contract, courts initially viewed it as the court's responsibility to construe the reinsurance contract and resolve these initial disputes. Parties—generally the ceding insurers—implored the courts to consider the practical effect of consolidation and the important efficiencies consolidation would bring to multiparty or multicontract disputes, even if the reinsurance contract did not contain an express consolidation provision.

The courts, however, often rejected these entreaties and left the parties to those perceived lack of efficiencies that arise when the parties do not contract for consolidation. While a few courts granted consolidation, the majority followed the unambiguous terms of the reinsurance contracts.

The New Rule—The Arbitrators Rule

The recent trend seen in consolidation disputes finds the courts abandoning their former role as gatekeeper and deferring the issue of consolidation to the arbitrators. Following recent U.S. Supreme Court cases, courts now restrict their role in arbitration to addressing issues like arbitrability of the dispute and other truly threshold issues that affect whether the dispute should be arbitrated. Issues of arbitration procedure are for the arbitrators to decide, not the courts, no matter the result. So how does this play out in reality? Let's look at a few recent cases.

Recent Caselaw

In one case about a series of asbestos settlements submitted to multiple reinsurance contracts, the parties disputed whether the controversy should be heard by two arbitration panels reflecting the ceding insurer's view that there were two reinsurance programs in place, or eight separate arbitration panels, reflecting the reinsurer's view that there were eight separate reinsurance contracts over a multiyear period. The district court ruled that the consolidation issue was for the arbitrators and not for the courts to decide. The court granted the ceding insurers' motion to compel arbitration and ordered the reinsurer to select a single arbitrator and to proceed to select a single umpire.

The court's order essentially set up a threshold arbitration panel to review the consolidation issue. The court specifically preserved the reinsurer's right to seek multiple arbitrations from the threshold arbitration panel. This decision was affirmed on appeal, with the Third Circuit Court of Appeals holding that because the parties had agreed to arbitrate the underlying dispute, the question was merely one of arbitration procedure. Certain Underwriters at Lloyd's London v. Westchester Fire Ins. Co., 489 F.3d 580 (3d Cir. 2007).

In another case, the ceding insurer was faced with 16 reinsurers and a clause which provided that if any dispute arose between the ceding insurer and "the reinsurer(s)," the dispute would be submitted to three arbitrators, one chosen "by each party" and the third chosen by the selected arbitrators. The ceding insurer believed that this provision required the reinsurers to choose one arbitrator for all of them. Many of the reinsurers, however, believed that each could choose their own arbitrator and that there would be separate arbitration panels for each reinsurer.

The ceding insurer made two arbitration demands (one for each claim—this was about Katrina and Rita property damage) and asked the court to compel the reinsurers to appoint its arbitrators for these two panels. The court, however, held that the arbitration provision was ambiguous because the term "reinsurer(s)" could apply to a collective group of reinsurers or to each reinsurer individually. The court decided to leave the procedures for selecting the arbitrators to the arbitration panel for each claim because the issue was not a gateway matter of validity of the reinsurance agreements or arbitrability under those agreements. Dorinco Reins. Co. v. ACE Am. Ins. Co., No. 07-12622, 2008 U.S. Dist. LEXIS 4593 (E.D. Mich. Jan. 23, 2008).

These two cases allowed for threshold arbitration panels to decide the issue of how many arbitrations (or arbitrators) there should be. But in yet another case, the court, faced with multiple arbitration panels in various states of formation, declined to select one of the panels as a threshold panel and left the question of consolidation to all of the panels, which were to proceed and decide the issues each of them had the authority to hear and to determine whether the disputes should be consolidated. Argonaut Ins. Co. v. Century Indem. Co., No. 05-5355, 2007 U.S. Dist. LEXIS 65863 (E.D. Pa. Sept. 6, 2007). One can only hope that the parties figured out a way forward to resolve the consolidation issue without having to present the issue to four different panels and receive four potentially inconsistent determinations.

Lessons Learned

When considering the format of a reinsurance agreement that likely will enjoy participation by multiple reinsurers, or when forming a multicontract reinsurance program, parties need to consider whether they have properly drafted their arbitration clause to account for consolidation issues. The current legal trend is that the courts will leave to the arbitration panel the issue of consolidation, but that is not a simple task as seen above when the court does not appoint a threshold arbitration panel to resolve the consolidation issue.

While it is impossible to know how a reinsurance contract will develop in the future (apologies to the actuaries), it is important to give consideration to whether an express consolidation provision should be part of your reinsurance contract. Ceding insurers likely will favor consolidation provisions, while reinsurers likely will resist them, but the issue should not be ignored. Spending time fighting about who will to decide your dispute after the fact does not benefit the bottom line. A properly worded arbitration clause with appropriate and unambiguous consolidation language may be a worthwhile negotiating point.

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