Summary: It is said that Albert Einstein believed that “the only source of knowledge is experience”. Last year, the English Court reached an unfortunate in TonicStar Ltd v Allianz Insurance plc and Sirius International Corp, in which the court decided that not all experience was made equal.

The case arises out of a reinsurance dispute regarding World Trade Center liabilities of the Port of New York, particularly a settlement reached with individuals involved in the clean-up operation for respiratory illnesses allegedly caused by negligent failures to provide adequate safety equipment.  Reinsurers Allianz (previously Cornhill Insurance plc) and Sirius appointed Mr Alistair Schaff QC (who has been advising insurers and reinsurers for many years) as arbitrator and the Lloyd’s Syndicate reinsured, Tonicstar, challenged his appointment on the grounds that he was not qualified according to the relevant arbitration clause incorporated into the reinsurance contract.

In the first instance decision in the Commercial Court in November 2017, the English court interpreted a standard London market reinsurance arbitration clause (produced by the Joint Excess Loss Committee or “JELC”) in such a way that lawyers specialising in insurance/reinsurance matters (as well as auditors or other advisers to the insurance and reinsurance industry) do not qualify where arbitrators require “experience of insurance or reinsurance”.

The clause in question provided:

Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years’ experience of insurance or reinsurance.

The first instance decision (now successfully appealed), had narrowed the potential pool of arbitrators available to parties to a reinsurance contract (with similar qualification wording) significantly.  Regrettably, the effect was that many reinsureds/reinsurers in the London market would have been unable to appoint lawyers (perhaps with many years’ experience of precisely the issues on which a dispute might arise) as arbitrators.  The unfortunate result was exacerbated in England as, unless otherwise agreed, parties can appeal an arbitration award on a point of law.

The first instance judgment in Tonicstar followed a year 2000 English decision on a materially identical clause; the judge did not feel that there were sufficiently powerful reasons to depart from the earlier authority and hinted that he might have adopted a wider interpretation of the clause, but for its existence:

…uninhibited by that decision [i.e. “X v Y”] I might well have decided that the ordinary and natural construction of the phrase in question did not limit the fields in which experience of insurance or reinsurance could be acquired.

The decision has now been overturned by the English Court of Appeal, a decision likely to be welcomed by the London reinsurance market.

Appeal

Wording imposes no restrictions

The Appeal Court was not constrained in the same way as the first instance court.   It took the view that the court’s previous interpretation of the words at issue in X v Y could not be supported. 

This was, primarily, because:

  1. the actual language of the clause does not impose any restriction on the way relevant experience is gained (and the meaning is “tolerably clear”); and
  2. given that the arbitrators are to apply English law, express words of exclusion (rather than inclusion) would be needed to disqualify lawyer arbitrators.

Experience of insurance/reinsurance law only?

The Court grappled with whether experience of insurance/reinsurance “itself” was, somehow, different to experience of insurance or reinsurance law, deciding that no distinction can be drawn between the two. 

The Court felt that, owing to the practical and legal aspects of insurance/reinsurance being “so intertwined”, market professionals and specialist lawyers are commonly appointed to hear disputes.

In doing so, the Court observed that:

  1. insurance/reinsurance contracts create legal rights and obligations and those who negotiate them, whether as underwriters or brokers, need to have an understanding of insurance/reinsurance law;
  2. insurance/reinsurance encompasses not only the placing and underwriting of risks but the handling of claims.  Whether or not a claims manager is legally qualified, he or she cannot assess whether a claim is properly payable or not, without having some knowledge of the applicable law; and
  3.  lawyers who practice in the field of insurance and reinsurance need to understand practical aspects of the business; it is a “safe inference” that a lawyer who has specialised in insurance and reinsurance cases for at least ten years will have acquired considerable practical knowledge of how insurance and reinsurance business is conducted.

Comment

We think that the London insurance/reinsurance market is likely to welcome the Appeal Court’s decision, especially those subscribing to reinsurance contracts which incorporate the JELC clauses.

As the court touched upon, the nature of insurance/reinsurance disputes in general instinctively lend themselves to determination by someone with legal experience, be it gleaned from underwriting contracts or settling claims or by advising underwriters/claims managers on those same matters.   This is, perhaps, even more so where an arbitrator’s duty is to apply the law (as it is under the JELC clauses).  The restrictive interpretation adopted by the English court before this most recent Appeal Court decision did not sit comfortably against this backdrop, not to mention it being inconsistent with the ordinary meaning of the words actually used in the clause in question.

It benefits dispute resolution in the reinsurance market for reinsureds/reinsurers to have the widest possible pool of people qualified to hear disputes, especially where the pool is determined before a dispute is even contemplated (let alone with any knowledge of the issues which actually become contentious). 

In many instances, legal expertise will be beneficial/desirable to have on an arbitration panel.  It also might breed confidence that an arbitration panel will consider the proper legal questions in reaching a decision, which can have material consequences for all concerned.

In fact, it seems that the JELC thought similarly.  A revised clause (effective from 1 January 2018) expressly includes lawyers/advisors as being qualified to act as arbitrators:

The Arbitrators shall be persons (including those who have retired) with not less than 10 years’ experience of insurance or reinsurance within the industry or as lawyers or other professional advisers serving the industry.

If reinsureds/reinsurers really do not want to have the option in the future to appoint arbitrators with many years’ experience gained in an advisory capacity in the reinsurance market, they are free to expressly exclude professionals in the clause they adopt.