Every cedent and every reinsurer has on their balance sheets a number of contracts that are sitting in limbo with balances due or owing. Some of them are with entities in runoff or in insolvency proceedings. Others are legacy pieces of business with claims slowly running off. Still others are live disputes with relatively modest balances. With the high cost of collection, especially if it involves full-blown litigation or arbitration, these balances may sit on the company’s books for years (or decades). This blog post suggests some ways to help clean up the balance sheet.
Lower value balances in dispute can be divided into two buckets. The truly lower value balances, probably under $100,000 (Bucket 1) and the somewhat higher balances between $100,000 and $1 million (some would go up to $1.5 or $2 million) (Bucket 2). Efficiently resolving the balances in both buckets requires diligence, persistence and the right people.
For Bucket 1, it is a matter of communication. A phone call (best), an email or letter (if the postal services survive) to the counterparty may result in receiving a check. If you don’t make contact, you won’t get the money. Persistent follow-up should yield results. You may not clean it all up, but you can reduce the Bucket 1 items to a level where a write-off decision might be appropriate.
I want to focus on Bucket 2. A traditional litigation or arbitration is likely not very cost effective, especially for balances under $1 million. The alternative is two-fold (besides directly negotiating obviously). First, reach out to the counterparty and suggest mediation with a mediator experienced in reinsurance issues. Mediation is a very cost effective way of resolving commercial disputes. Mediation works for billion dollar disputes and for $25,000 disputes (which is why this makes sense for the higher end of Bucket 1 as well).
Mediation is not an adversarial proceeding. Think of it as a moderated negotiation. Both parties agree on a neutral who is a subject matter expert and who has the time and willingness to help the parties resolve the dispute.
The timeline for a mediation can be relatively short. Once the mediator is selected, the mediator will schedule a pre-mediation call with counsel or the parties if counsel is not involved. During the pre-mediation call, the mediation session will be scheduled, usually within a month or so from the call. Short mediation statements will be provided to the mediator several days before the mediation session (the mediation statements might be exchanged or might be just for the mediator). The mediator (and the parties) may request a private phone conference (or two) before the mediation session to speak with the parties and learn more about the dispute and each party’s position and concerns.
The mediation session itself, whether virtual or in person, can take several hours, the entire day or require several sessions depending on the issues, the parties and the progress toward settlement being made. Remember, the mediator is a neutral party there to help the parties reach a compromise. The mediator is not the judge or jury and will not be deciding who is right or wrong. A good mediator will listen, probe, and develop an understanding of what is important to each party. The mediator will lead the parties, primarily though private, confidential meetings called caucuses, toward finding a resolution.
Good mediators, who listen, show empathy and understanding, and who are persistent, generally have a good success rate in resolving disputes through mediation. The mediation spend, even with counsel involved, is far less than litigation or a full-blown arbitration.
The second alternative is using a single arbitrator with streamlined procedures. Unlike a mediation, an arbitration is an adversarial proceeding and the arbitrator will render a binding decision. Many organizations have procedures geared at resolving smaller arbitrations. For example, National Arbitration and Mediation (NAM) (with whom I am affiliated) Standard Rules assume limited discovery and an expedited and cost-efficient proceeding. Both ARIAS·U.S. and AIRROC have streamlined and small matter procedures. Nevertheless, even in an ad hoc context (no rules or administration), a single arbitrator can, with the parties’ agreement, limit discovery and expedite the proceeding.
To make an arbitration work for a dispute in Bucket 2 (or high end Bucket 1), the parties must agree to streamlined procedures before a single arbitrator that simplify and limit discovery, avoid depositions if possible, and have the dispute submitted on briefs either with no argument or with very limited argument. Using a single arbitrator experienced with reinsurance issues, and who has the ability to render a fair, impartial decision, will lead to a resolution of the balance sheet item in a reasonably cost-effective manner.
The advantage of arbitration is that there will be a final determination that is not appealable (under the Federal Arbitration Act parties can petition to vacate or modify an arbitration award, but the grounds are very restricted and success is rare). This achieves certainty. The disadvantage is that even with an expedited proceeding, an arbitration could cost more than a mediation, but that is not always the case.
I’ll conclude with this. The key to a successful mediation or arbitration of smaller reinsurance disputes is selecting the right person to serve as mediator or arbitrator. There is no shortage of people who can help you do this. So why wait to resolve your open items? There is no time like the present to invest a little time and effort to cleaning up the balance sheet and resolving those annoying smaller balances.