08 November 2006
Arbitration clauses in reinsurance treaties don't bind non-life reinsureds in NSW, meaning that disputes between reinsureds and reinsurers are more likely to end up in the courts. The NSW Supreme Court's decision could also affect reinsureds in other States.
Arbitration clauses and insureds and reinsureds in NSW
In HIH Casualty & General Insurance Limited (in liquidation) v Wallace [2006] NSWSC 1150, the liquidator of HIH wanted to sue Lloyd's Syndicate 683 to recover under policies of reinsurance. Syndicate 683 asked Justice Einstein in the NSW Supreme Court to stay the proceedings, arguing that the policies of reinsurance said that the parties had to go to arbitration instead of court.
Section 19 of the Insurance Act 1902 (NSW) says that arbitration clauses (either in a contract of insurance or other contract or agreement) do not bind the insured unless the dispute has already arisen and they agree at that stage to go to arbitration.
HIH argued that it was an insured and thus was not bound by the arbitration clause. Syndicate 683 on the other hand said first that section 19 doesn't apply to reinsureds, only insureds, and anyway the Commonwealth's International Arbitration Act 1974 overrode the State Act and made the arbitration clause binding.
Justice Einstein said that section 19 covers insureds and reinsureds alike. He then held the International Arbitration Act does not override the State Act; it applies only to arbitration agreements which are not "null and void, inoperative or incapable of being performed". Since section 19 of the State Act makes the arbitration clause non-binding on the insured, the arbitration clause is "inoperative" and the Commonwealth Act doesn't apply to it.
Non-life reinsureds in other states
To fall under the International Arbitration Act, an arbitration agreement must be in writing. Very broadly, this means that the parties have signed the same piece of paper or there has been an exchange of letters or telegrams which contain assent to the terms.
Lloyd's syndicates have a process for negotiating slips and treaty wordings which involves "scratching" (completing information), stamping and processing the slips. Syndicate 683 could not locate signed policies for certain years, and asked Justice Einstein to infer from the usual Lloyd's process that they were signed. He said he could not infer this.
It is thus possible that other arbitration clauses for other reinsureds might not be in writing. This means that in States which do not have an equivalent of section 19, reinsureds might still be able to avoid arbitration because their clauses are not in writing. Of course, as of 1 January 2007, APRA will require all reinsurance arrangements to be properly documented:
What does this mean for non-life reinsurers and reinsureds?
Although it's long been suspected that section 19 has this effect, this is the first decision which confirms it does.
The major result for non-life reinsurers is that they will have to review their dispute resolution processes as they can no longer automatically rely upon arbitration as an alternative to litigation. Reinsurance arbitration has frequently been very informal in this country and consequently fairly cheap; if litigation becomes the first option then dispute resolution costs will increase. Reinsurers should therefore look at their processes for handling disputes and see what incentives they can offer reinsureds to induce them to arbitration.
Reinsureds should first be aware that any arbitration clause is not necessarily effective in NSW. Outside of NSW, they should also be looking at their reinsurance treaties to see if there is in fact an arbitration clause that truly is an agreement in writing.
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