By Connie O’Mara

Does the Duty of Utmost Good Faith still exist or has it been eroded beyond recognition by courts and arbitrators? As it is such a fundamental concept to the industry, AIRROC conducted a seminar that focused on the Duty and how it has evolved in recent cases. The daylong session hosted by Munich Re brought together reinsurance lawyers, industry representatives, and arbitrators for an interactive discussion that culminated in a mock arbitration. All of the participants were involved in mock settlement negotiations that dramatized the arguments, positions, and potential resolutions/decisions that resulted from arguments asserting an alleged breach of the duty. The mock panel deliberation demonstrated how an arbitration panel steeped in industry pattern and practice viewed the parties’ conduct in light of this fundamental principle of the cedent/reinsurer relationship.

The seminar began with an overview of the case law presented by Robin Dusek (Freeborn & Peters, LLP) and Seema Misran (Strook, Strook & Lavan, LLP). Their debate over the case law reviewed a line of cases, starting with Commercial Union v. Seven Provinces and ending with Associated Industries Insurance Co v. Excalibur Reinsurance Corp., and discussed key facts and arguments that persuaded courts that a party’s conduct, either in the underwriting or claim process, breached the duty. The seminar also involved a discussion of how generic cedents and reinsurers approach the cases in dispute settings. [The case law is covered in Is the Duty of Utmost Good Faith in Runoff? in the Spring issue of AIRROC Matters, by Joseph McCullough and Peter Steffen, starting at p. 12].

This set the stage for a lively panel discussion moderated by Aaron Stern that included: Craig Brown, VP and Deputy General Counsel, Riverstone; Thomas Wamser, Associate General Counsel, ACE Group; Joseph McCullough, Freeborn & Peters; and Daryn Rush, White & Williams. In addition to discussing how the Duty of Utmost Good Faith can be used to frame the facts and assert that the opposing party is a “bad guy”, the panel addressed intriguing questions that included: Has the bar been raised for finding a violation of the Duty? Can withholding payments in and of itself be a breach of the Duty? Are courts and panels more skeptical of run-off companies and their motives? Should arbitration panels send a message by expressly “punishing” conduct they find to be a breach of the Duty? The answers highlighted the differences between making the argument in courts and before arbitrators. Of note was a polling of the audience, asking whether attendees would prefer to bring a claim for violation of the Duty to a court rather than an arbitration panel, with the result being only a small majority of the audience preferred arbitration. One panel member remarked that the fact that so many in attendance prefer courts to address such issues reflects a growing dissatisfaction with reinsurance arbitrations.

In the afternoon, the audience, divided into six opposing teams, three each for cedent and reinsurer, got to “walk the talk” and attempt to negotiate a resolution of a hypothetical dispute. None of the three sets of negotiations came close to settling the dispute. Reporting back on each set of negotiations, in a discussion moderated by Michael McMonagle of Munich Re, the results of the settlement negotiations demonstrated the similar and disparate results and viewpoints reached by the groups working from the same set of facts.

In the final session of the program, Peter Steffen and Edward Diffin (both of Freeborn & Peters) presented their closing arguments on those facts to a highly experienced panel of Jonathan Rosen (umpire), Howard Denbin and Roger Wiegley. By watching how counsel argued the issues to the panel, the audience could compare the arguments to those they themselves had made in the settlement negotiation exercise. The audience was then treated to a “behind the scenes” view of panel deliberations and how the panel used their combined years of experience in the industry to decide the issues. The culmination of the session was a dramatic decision by the panel that awarded fees and costs against the cedent whose conduct violated the Duty of Utmost Good Faith while enforcing the contract by compelling payment of the disputed billing.