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18 9月 2024
Insight
Insurance contracts often contain arbitration agreements. Arbitrating is often seen as preferable, particularly from a confidentiality perspective. From a policyholder's perspective, the subject matter of a claim may be sensitive; from insurers' perspective, obtaining a confidential arbitral award can avoid wide-reaching precedent ramifications which can follow an unfavourable public judgment which addresses the proper construction of commonly used clauses (for example, the broad impacts of the FCA Test Case on Covid-related business interruption claims).
We are increasingly seeing policyholders commencing arbitration proceedings in order to pursue indemnity under their insurances. While in some ways the insurance market is the same as any other corporate counterparty, there are certain idiosyncrasies that require careful attention and consideration that we explore below:
Arbitration agreements in insurance policies
Popularity of arbitration
Insurers are generally amenable to dispute resolution (DR) by arbitration as opposed to litigation. Even if the insurance contract does not stipulate arbitration as the forum of disputes, there may nonetheless be scope to agree an arbitration process with insurers at the outset of a dispute. While there are insurance-specific institutions (such as ARIAS), we often see agreements providing for ad hoc arbitrations as well as those incorporating institutional rules such as the LCIA and ICC. Such agreements may require arbitrator nominees/appointees to have insurance experience, which can in practice restrict the pool of options.
Insurance contract
The form of insurance contracts can introduce risk to the validity of the arbitration agreement. An insurance contract can comprise several documents (eg, slip, schedule, and wording), all of which may cite a DR clause. In a perfect world, these would be consistent, but it is possible (and not as uncommon as it should be) for competing/inconsistent clauses to be introduced. Where the parties intend for disputes to be resolved by arbitration, care should be taken to ensure that the relevant arbitration agreements are legally effective without inconsistencies between them.
Layers of insurance
Insurance for larger risks is often structured in what is known as a 'tower', with excess 'layers' of insurance stacked on top of one another to provide the full limits of cover desired. Each such 'layer' is an insurance contract in its own right, containing its own DR clause which must be complied with. While such layers are often in a similar form to the layer below, DR clauses may differ between different layers. This brings a risk that a single claim may have to be pursued in multiple forums – this risk should be identified and resolved as early as possible. The intention of an insurance tower structure is not to cause issues in this respect and instead to allow a single set of proceedings for claims against the tower, but it is important to ensure that the arbitration agreements in each policy are consistent with that intention.
As each policy layer is a standalone contract, separate arbitrations may have to be commenced under each contract/arbitration agreement, which can incur additional upfront costs. However, there may be scope to consolidate such related proceedings once commenced (including under institutional rules, such as LCIA Article 22A), and arbitration agreements in the policy layers may include provisions to that effect.
Practicalities of arbitrating against insurers
Know your opponent
Insurers are sophisticated counterparties who are experienced in litigation: part of their business model necessarily involves defending claims for indemnity made against them, whether in arbitration or in litigation. Not only can this have an impact on the conduct of proceedings, but also on insurers' approach to settlement dynamics. Having specialist advice is therefore important to understanding these dynamics if the right outcome is to be achieved.
Nature of insurance arbitrations
Arbitration against the insurance market generally follows an approach aligned to High Court litigation. In other words, it will follow a "statement of case" approach of full written pleadings, disclosure, factual witnesses, expert evidence, final hearing, and costs (and other consequentials) rather than the "memorial-style" procedure. As noted above, the tribunal may be required to have insurance expertise: it is common for arbitrators appointed in such disputes (at least in London-based arbitrations) to be KCs with significant insurance experience rather than more general arbitration specialists.
Suing insurer entities
The insurance market includes a range of different types of entities, who may be registered in a number of different jurisdictions. An early challenge facing a policyholder seeking to arbitrate against the insurance market is correctly identifying the actual entities who are 'on risk' and need to be named as parties (which may require early engagement of insurers and their advisors). This can be a very complex exercise (and is beyond the scope of this article), but by way of examples:
Strategic considerations of pursuing insurers
Different insurer drivers
While we talk about arbitrating with 'the insurance market', it is wrong to assume that insurers participating on any one risk will act as a single entity, or even be aligned at all. This can be compounded where one is dealing with a tower structure with multiple layers, each consisting of a number of different insurers (with different rates of participation on their respective layers). Each individual insurer will have their own potential exposure based on where, and to what amount, they sit on each layer of cover.
Insurers' analysis of risk and exposure is likely to differ across layers. In general, insurers on primary and lower excess layers earn more premium but are more likely to be impacted by a claim. Insurers on higher layers or at the top will have earned less premium in return for a reduced risk and may therefore feel less exposed than lower layers.
Similarly, insurers who have an ongoing underwriting relationship with the policyholder (or who want one) may have a more constructive and/or conciliatory approach; conversely, insurers with no such concerns (including those run-off insurers who have acquired another insurer's portfolio of risk) may be more bullish in their position.
There are mechanisms by which the impact of divergence between insurers can be mitigated. Where multiple insurers participate on a layer, authority may be delegated to a small number of 'lead' insurers (although this is becoming less common). Specific arrangements apply in respect of Lloyd's syndicates and other insurers may have elected to sign up to other claims agreement terms. These mechanisms can assist in insurers taking a more cohesive approach. It will be very important to identify which insurers are or can be bound by others.
Potential settlement discussions
As discussed above, insurers are professional litigators. Their business is one based on an assessment of risk and value; compared to a normal commercial party to a dispute, it is very likely that an insurer counterparty will have a very clear sense of their exposure and risk and of the value of a claim from a settlement perspective. As a result, insurers are as a general rule rational risk-based actors in Without Prejudice discussions. Difficulty can arise where insurers may diverge on the basis of different objectives and/or risk assessments.
If engaging in settlement discussions with multiple insurers, it is vital for a policyholder to understand the dynamics and relationships in the market. This will include, for example:
Role of brokers
The role of the insurance broker can often be of vital importance in navigating and pursuing claims against the insurance market, whether by arbitration or otherwise. The broker may have long-term relationships with the insurers both on the claims and underwriting sides which can be a useful vehicle for engaging with insurers on a commercial level. In large and complex claims that are subject to arbitration, the best outcomes usually involve the policyholder and its legal advisor and broker working collectively.
Key contacts
Chapters
- Inside Arbitration – Issue 18
- Welcome to the 18th issue of Inside Arbitration
- Climate change before international courts – Explaining advisory opinions and why they matter
- Check your privilege – Exploring the different approaches to legal privilege in arbitration
- Spotlight on Emily Fox
- Disputes in space – The next frontier?
- Unearthing potential on the Silk Road – What Central Asia's critical minerals advantage means for investors
- Spotlight on Marco de Sousa
- A distinctive approach – Arbitration against insurers
- The digital transformation in construction – What you need to know
- Spotlight on Murphy Mok
- Views from the field – Mediation in arbitration
Legal Notice
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024