Expert Commentary

Reinsurancese—Time for a Change?

In a recent court decision, Judge Richard Posner, of the Federal Seventh Circuit Court of Appeals, one of the most respected judges in the United States, had this to say about reinsurance: "Reinsurance is a dauntingly complex, esoteric field of business…."Indiana Lumbermens Mut. Ins. Co. v. Reinsurance Results, Inc., 513 F.3d 652 (7th Cir. 2008). He went on to describe the "forbidding jargon of reinsurance ('ceded unearned premium,' 'aggregate excess of loss,' 'under-ceded reinsurance loss,' 'reinsurance treaty,' and the rest)…."


Reinsurance
March 2008

Judge Posner concluded his opinion with the following, speaking about the lawyers' excellent advocacy in the case:

But their briefs, although well written and professionally competent, were difficult for us judges to understand because of the density of the reinsurance jargon in them. There is nothing wrong with a specialized vocabulary—for use by specialists … Every esoteric term used by the reinsurance industry has a counterpart in ordinary English … The able lawyers … could have saved us some work and presented their positions more effectively had they done the translations from reinsurance into everyday English themselves.

The Jargon of Reinsurance

Jargon—how we love it. We use words that only we know, and we keep everyone else in the dark. When we write to others outside our industry about our products, our contracts, and our issues, the terms and slogans we use become a mystery to those seeking to decipher what we are trying to say. But forbidding jargon? Is that how the reinsurance industry wants its contract terms to be perceived?

The reinsurance industry certainly has not cornered the market on industry jargon. Lawyers are routinely accused of hiding behind the dark cloak of legalese. The computer world uses a new language called techno-speak. The sciences are replete with technical jargon, acronyms, and "terms of art," which only those in that field can begin to understand. And let's not forget the kids and the world of texting, which give us wonderfully indecipherable phrases such as IMHO, BFF, and LOL.

But the reinsurance industry, as shown by Judge Posner, has its share of dense jargon. Some of our Reinsurance Expert Commentaries have attempted to address the industry's use of jargon and point out how jargon and terms of art, especially when they are ambiguous, can cause disputes even among those who purport to understand the vocabulary. See Commentaries from September 2000, October 2001, March 2002, and October 2007. Certainly, to the uninitiated, terms like aggregate loss extension, gross net ceded premium, obligatory facultative, and surplus share treaty are not beacons of clarity. So Judge Posner certainly has a point.

When is Jargon Appropriate?

Judge Posner was not saying that industries like the reinsurance industry should not use technical terms, specialized vocabulary, and industry jargon. In fact, as quoted above, he understands that a specialized vocabulary is appropriate between industry experts. A treaty is a treaty, and between ceding insurers and reinsurers, the word "treaty" is no mystery shrouded in a dense fog (for those still scratching their heads, a "treaty" is simply a reinsurance contract covering a segment of a ceding insurer's policies. See our March 2002 Commentary).

Between industry specialists, jargon is appropriate, as long as it is not ambiguous. Where jargon becomes problematic is where a specialized vocabulary is used beyond industry specialists. Judge Posner's soft criticism was aimed at the lawyers who filled their well-written briefs with incomprehensible jargon. The trick—which is a well-known legal advocacy and general writing trick—is to know your audience and then write appropriately for that audience (which I hope I have done). When communicating with nonspecialists, plain language is better than reinsurancese.

In the world of reinsurance disputes, the audience is often industry specialists who serve as arbitrators of most reinsurance disputes. When presenting the case to arbitrators made up of industry specialists, reinsurance jargon may be appropriate and necessary. That does not suggest that the jargon must be overly dense, particularly if the dispute centers on a more esoteric segment of the industry. Standard terms of art make sense with industry arbitrators, but plain English makes sense when a particular contract term is ambiguous or highly specialized beyond the expertise of the arbitration panel.

But when the dispute spills into the courts, either because there is no arbitration clause in the reinsurance contract or because enforcement of the arbitration clause or an arbitration award is required, then the industry jargon should take a backseat to plain and simple terminology to explain the forbidding jargon. The parties should make the judge's job easier by explaining industry terms and issues in plain English. Making the judge work harder to find for your position by using dense jargon is not going to advance a party's cause. And advocates should not assume that a judge truly understands industry terms of art. Just because a judge has decided a few reinsurance or insurance disputes does not mean that the judge knows or remembers the nuances of this specialized vocabulary.

For example, many judges in the federal court in New York City have heard of the reinsurance doctrine known as "follow-the-fortunes." As the saying goes, a little knowledge can be dangerous. Judges may use the term out of context in an insurance coverage dispute by trying to convince a lawyer that their client, an excess insurer, must follow the terms and conditions of the primary policy by saying that the excess policy has to follow the fortunes of the primary policy. Industry specialists know that the follow-the-fortunes doctrine has nothing to do with whether an excess insurance policy must follow the terms of a primary insurance policy, but the judge may not.

Risks Associated with Reinsurancese

Explaining specialized vocabulary in simple, plain English to the court will make it easier for a court or even an arbitration panel to understand how the reinsurance contract works. This was Judge Posner's point. And this point is especially important today with investment analysts, rating agencies, and state attorneys general constantly examining insurance and reinsurance transactions.

When industry practices are couched in jargon, those charged with analyzing, examining, and investigating industry practices and transactions become suspicious. While financial or finite reinsurance was no mystery to those in the alternative risk segment of the insurance and reinsurance industry, it was certainly a head-turner for certain attorneys general and for the Securities and Exchange Commission. While certainly not true, a specialized vocabulary that is shrouded in dense jargon is more likely to be seen as a purposeful attempt by insiders to hide from outsiders the truth about the business arrangements. Using jargon to explain jargon usually does not make an investigative subpoena go away.

Plain English for Contracts

As those of you in the brokerage and direct insurance business know, a few decades ago, legislatures across the country amended their insurance and related laws to require that insurance policies be written in plain English (in fact, most legislatures required all consumer contracts to be in plain English). The obvious reason for this consumer movement, which continues today, is so that the ordinary insurance consumer could understand the terms and conditions of the insurance policies that the consumer purchased without having to struggle through dense jargon.

Despite these efforts, we still see the effects of industry jargon in insurance contracts when trying to figure out if a homeowner's policy covers storm surge. But the plain English in insurance contracts movement certainly has made all of our personal contracts more readable and understandable then they were a few decades ago.

The plain English movement, however, was not generally applicable to commercial insurance contracts. It was felt that in the commercial world, insurance buyers were represented by sophisticated brokers, risk managers, and lawyers, all of whom should be able to understand the terms and conditions of insurance policies. And there is a great deal of truth to this position. Companies generally need much less protection than consumers from confusing and jargon-filled insurance contracts.

But why not draft commercial insurance contracts in plain English (save the unnecessarily large font size)? And by extension, why not draft reinsurance contracts in plain English? No doubt, certain terms need to remain as part of the special vocabulary of the industry, but those terms can and should be well-defined so that each party knows precisely what the term means in the context of that contract (the ambiguity point raised in my September 2000 Commentary).

Conclusion

Judge Posner's recent observations about the reinsurance industry serve to highlight the need for more precision of language and clarity in reinsurance contracts. While the specialized vocabulary of the reinsurance industry is necessary in reinsurance contracts, clear, plain English for the basic contract terms and clear, plain definitions of terms of art will make reinsurance contracts more understandable to the contracting parties as well as to any court or arbitration panel that must interpret the contract in the future, or any investigator examining the transaction.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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