A reinsured often purchases its reinsurance from more than one reinsurer under the same reinsurance contract. In fact, it is common for there to be more than a few reinsurers participating on the same reinsurance contract at separate percentages of participation.
Having multiple reinsurers participating on the same reinsurance contract helps spread the reinsured's risk of loss further and avoids the reinsured having to rely on just one reinsurer for what might be a substantial liability in the future. Contracting with multiple reinsurers is particularly typical in the case of broad-based or treaty reinsurance covering a wide swath of the reinsured's policies.
But what happens if a reinsured pays a policyholder's claim under an insurance policy subject to the reinsurance contract and, after it bills its reinsurers, each of them politely declines to pay? If the reinsured has a typical reinsurance treaty, it is likely to have an arbitration clause covering all disputes, including the failure of the reinsurers to indemnify the reinsured for a paid loss. Within that arbitration clause, there may be a provision that requires the reinsurers to act as one party when more than one reinsurer is involved in the same factual and/or legal dispute. This commentary will discuss the "act-as-one" provision found in many arbitration clauses.
The Arbitration Clause and Selecting the Arbitrators
While there is no typical arbitration clause in U.S. reinsurance contracts, most have some common elements. The act-as-one provision is often a common element in a reinsurance arbitration clause.
The purpose of an arbitration clause in a reinsurance contract is to make it clear that disputes are not to go to court but are to be resolved by industry arbitrators in a private, confidential arbitration proceeding. Most U.S. reinsurance contracts use tripartite arbitration; that is, each side picks one arbitrator, and the two party-appointed arbitrators select a neutral arbitrator, often referred to as the umpire or chairman.
When there are multiple reinsurers, however, difficulties may arise in the arbitration panel selection process. If we stick with our example of multiple reinsurers refusing to pay a loss, when the arbitration demand is served on all reinsurers to enforce the reinsurance contract and compel indemnification, each of the reinsurers may respond by appointing its own arbitrator, because each reinsurer is typically severally and not jointly liable under the contract. Each reinsurer may have its own independent reason for not paying the loss and its own plan on how to defend against the arbitration demand.
When faced with multiple arbitrators appointed on the reinsurers' side, the reinsured has a problem. The arbitration clause typically provides for a panel of three arbitrators, not a panel of four or five (or more). Moreover, no reinsured wants the reinsurers' arbitrators to outnumber its arbitrator. The entire arbitration process can break down if multiple arbitrators are appointed. If there is no provision in the contract that addresses the multiple reinsurer situation, the entire arbitration will likely be stalled until a court provides guidance.
The Act-as-One Provision
An act-as-one provision avoids the situation where multiple reinsurers are all part of the same dispute and each wants to appoint its own arbitrator. There are various versions of this provision. A typical version looks like this:
If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for the purposes of this Article, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint.
In a recent case in New York federal court, the reinsurance treaty had the following clause, which is very similar to the BRMA model:
If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for the purposes of this clause and communications shall be made by [the reinsured] to each of the reinsurers constituting one party, provided, however, that nothing therein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers under the terms of this Contract from several to joint.
Munich Reinsurance Am., Inc. v. National Cas. Co., 10 Civ. 5782 (SHS), 2011 WL 1561067 (Apr. 26, 2011 S.D.N.Y).
The act-as-one provision compels the reinsurers to act in concert in the selection of the arbitration panel and in all major communications and decisions concerning the dispute. It reserves to the reinsurers the right to assert their own claims or defenses, and it is does not impair the several liability that typically exists under most reinsurance agreements. In essence, it allows the arbitration process to move forward without confusion as to how many arbitrators the disputing parties will appoint. Essentially, it treats the reinsured as one party (which it obviously is) and the reinsurers as one party when the dispute involves more than one reinsurer. This way, the two "parties" or sides can each appoint one arbitrator, and the party-appointed arbitrators can appoint the umpire, fulfilling the contractual requirement of a three-arbitrator panel.
In theory, the act-as-one provision should end the multiple reinsurer issue. But reality is, as they say, stranger than fiction. Consider this scenario in the context of a retrocessional treaty—reinsurance for the reinsurers. A group of insurance companies band together in a reinsurance pool and agree to assume risks from underlying reinsureds. The pool manager purchases reinsurance (retrocessional cover) for the reinsurance pool. Two of the pool members are also retrocessionaires of the pool.
A dispute arises over the manner in which the pool manager operated the pool and, in particular, the nature of the business and premium volume assumed by the pool and retroceded to the retrocessionaires compared to what was disclosed in the underwriting submission. The retrocessional contracts have an arbitration clause, which includes an act-as-one provision. The pool members (less the two pool members who are also retrocessionaires) demand arbitration against the retrocessionaires seeking to enforce the retrocessional contracts. Cross-demands are made by the retrocessionaires against the pool members seeking rescission and/or reformation. One of the pool members/retrocessionaires decides that it wants to be on its own side—it has disagreements with both the pool and with the other retrocessionaires.
This was a real case. See Connecticut Gen. Life Ins. Co. v. Sun Life Assurance Co. of Canada, 210 F.3d 771 (7th Cir. 2000); In re Gen. & Cologne Life Re of Am. v. Connecticut Gen. Life Ins. Co., No. 600278/2001 (N.Y. Sup. Ct. Jul. 17, 2001). You can imagine the litigation that erupted concerning the shape of the arbitration. The parties eventually participated in a single arbitration, and the two pool member/retrocessionaires eventually chose sides (although neither the federal court nor the state court compelled that either was required to choose a side).
Of course, it is impossible to draft for every contingency. While it is not uncommon, it is a bit unusual for a party to be both a reinsured and a reinsurer at the same time on the same contract.
A slightly more mundane scenario follows from the Munich Re case. A reinsured entered into a reinsurance treaty with two reinsurers. The reinsured paid a claim and sought indemnification for that claim from both reinsurers. Both reinsurers refused to pay. The reinsurance contract contained an arbitration clause with an act-as-one provision. An arbitration was commenced against both reinsurers, but one of the reinsurers objected to the reinsured's law firm, claiming that a conflict of interest existed because that firm had represented the reinsurer. The reinsured nevertheless sought to move forward with the arbitration against the reinsurer that was not making the conflict claim.
In an interesting strategic move, the reinsurer argued that it could not proceed with umpire selection until the conflict issue was resolved, and the other reinsurer was participating in the arbitration. The reinsurer based its position on the act-as-one provision. Essentially, the reinsurer was saying that the reinsured could only proceed against both reinsurers at the same time when there was a dispute involving both reinsurers. To proceed piecemeal would violate the express terms of the reinsurance contract.
The reinsured petitioned the federal court to compel arbitration against the one reinsurer without the conflict. The reinsurer countered with a request that the court enjoin the arbitration pending resolution of the other reinsurer's dispute over the attorney conflict. In resolving the issue, the federal court held that the arbitration panel and not the court should resolve whether and how to apply the act-as-one provision. Thus, the court directed that the arbitration between the reinsured and the reinsurer without the conflict go forward. In that arbitration, the court stated, the reinsurer can raise the issue of whether the arbitration can proceed on the merits without the other reinsurer because of the act-as-one provision. The court denied the injunction and required the parties to follow the umpire selection process set forth in the reinsurance contract to move forward with the arbitration.
While not explicitly enforcing the act-as-one provision, the court clearly stated that the provision has not been rendered "meaningless" because the arbitrators will determine the provision's applicability based on the specific facts of the case.
An act-as-one provision promotes efficiency in the reinsurance arbitration process where there are multiple reinsurers involved in the same factual or legal dispute with the reinsured. Including an act-as-one provision in the body of the arbitration clause in a reinsurance contract is something a reinsured should strongly consider. There generally is no upside for a reinsured to fight separate battles to recover under a reinsurance contract from multiple reinsurers where the disputes are the same. If, however, there is a question about how the act-as-one provision should operate, courts likely will defer that determination to the arbitration panel.
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