The criticism of arbitration expressed in these articles is not new.  For years people (including I) have said that arbitration can be as expensive or more so than litigation.  People have repeatedly complained about how arbitration has become more like “arbigation,” and how Federal Arbitration Act satellite litigation has proliferated.  Or they criticize arbitrators for substituting rough justice for reasoned, legal analysis.  And so on. 

If you are a business person, or someone at a business whose responsibilities include drafting or approving contracts, you might throw up your hands and declare that your business will never, ever even think about agreeing to arbitrate.  But we think that you would be far better off giving more thought to what it is you desire from a system of dispute resolution, and how best to achieve your goals. 

The criticism expressed in the articles, and in the past, is generally valid, albeit misdirected.  It is directed at “arbitration,” as if arbitration was an institution unto itself, imposed on us by the legal system or perhaps by divine order.   

But, at least in B-2-B contracts negotiated at arms’-length, “arbitration” is not something imposed on the parties; it is something the parties impose on themselves.  We, the parties, are the architects of our own dispute resolution system.  If it turns out we designed or agreed to something reminiscent of Charles Dickens’  Bleak House, we should not blame the non-existent institution “arbitration.”  We should blame ourselves, or, more accurately, whomever drafted or approved the Dickensian arbitration agreement. 

The problems we sometimes associate with arbitration could be avoided if parties would give more thought to the type of dispute resolution they desire, and how any particular arbitration agreement — or agreement to administered arbitration under a set of arbitration provider rules — will likely be interpreted, and by whom.  Perhaps the best thing about arbitration is that parties have a lot of leeway not only to select the decisionmakers for their dispute, but also to design and structure the arbitration so that it suits their needs, and proceeds with as much or as little pre-hearing fanfare as the parties desire.  Within some basic limits, parties can structure their agreement as they see fit, and that can be something from which businesses can reap benefits. 

But many parties apparently are not aware of the extent to which arbitration can be tailored to fit particular situations, or simply do not consider the prospect of a future arbitration to be important enough to invest some modest time and effort into considering what is likely to transpire in the event of a dispute.  The problem is compounded by contract drafters, including attorneys, that simply do not have the requisite arbitration, litigation and arbitration-law experience to make informed judgments about whether the agreement they have drafted is likely to suit the parties’ dispute resolution needs.  I have been involved in a number of arbitrations that would have proceeded more expeditiously, efficiently and effectively had they been conducted pursuant to a well-drafted arbitration agreement, instead of one that was apparently selected without a lot of thought given to the type of proceeding the agreement authorized, and whether it was what the parties wanted.  We have all heard horror stories about arbitrations that would not have been so horrifying had the parties placed some limits on how the proceedings were to be conducted.  

The solution to the problem is relatively easy and not very costly.  Hire an arbitration lawyer with litigation, arbitration and arbitration-law experience to help you draft an effective arbitration agreeement that suits your needs and goals.  Depending on the scope of the project, only a few hours of the lawyer’s time may be needed.  And the return on the modest investment could be substantial in the event a dispute ever arises under the contract.

Your arbitration lawyer should initially focus on finding out from you what you desire from your dispute resolution system, and what it is about court adjudication you wish to avoid.  Depending on what your goals are, he or she may recommend that you opt for court adjudication and perhaps add choice-of-forum and choice-of-law clauses to your contract.  Or he or she may conclude that arbitration can further your goals, and help you draft an arbitration agreement designed to achieve them. 

So if you or your employer or business negotiates contracts with others, and you want more out of dispute resolution than ordinary court adjudication is likely to provide, hire an arbitration lawyer with litigation, arbitration and arbitration-law experience to help guide you along.  You probably won’t incur much in the way of legal fees, and you will be able to take better control of your own dispute-resolution destiny.

The group actively discusses issues concerning U.S. and international ceded and assumed reinsurance claims.  It enables members to share information; discuss and debate issues; access a number of excellent reinsurance- and insurance-related blogs; and network with others in the domestic and international reinsurance community.  

The group welcomes new members, and encourages (but does not require) active participation.  The only requirement for membership is a bona fide interest in reinsurance claims.  The group is not a forum for, and does not permit, advertising or blatant self-promotion, so our members need not be concerned about being subject to sales pitches and the like. 

If you are already a member of LinkedIn, please click here to apply for membership in the group.  If you are not a LinkedIn member, please click here and you will be guided through the process of creating a profile (which does not need to be completed in one step).  Once your profile is started, and you have a user name and password, you can click here to apply for membership in the group.  Joining LinkedIn is free, as is joining the group.

We look forward to meeting you online!

[Editor's Note:  If you are also interested in reinsurance and other types of arbitration and mediation, then we invite you to join LinkedIn's Commercial and Industry Arbitration and Mediation Group, which is now over 900 members strong.  (Post here, which contains information on how to join.)]

The group, which was formed in May 2009, is now 900 members strong and is growing by the week.  Many different industries are represented, including the insurance and reinsurance industry.  The group enables members to share information; discuss and debate issues; directly access numerous excellent ADR-related blogs; and network with others in the domestic and international ADR community. 

The group welcomes new members, and encourages (but does not require) active participation.  The only requirement for membership is a bona fide interest in ADR.  The group is not a forum for, and does not permit, advertising or blatant self-promotion, so our members need not be concerned about being subject to sales pitches and the like. 

If you are already a member of LinkedIn, please click here to apply for membership in the group.  If you are not a LinkedIn member, click here, and you will be guided through the process of creating a profile (which does not need to be completed in one step).  Once your profile is started, and you have a user name and password, you can apply for membership in the group (which entails no more than clicking on a button).  Joining LinkedIn is free, as is joining the group. 

We hope you’ll join up!

Regular readers have heard us preach about the importance of knowing arbitration law cold (here), understanding and identifying when an arbitration award is final (here), and being keenly aware of Federal Arbitration Act deadlines (here).  The United States Court of Appeals for the Seventh Circuit recently decided a case that illustrates these points well.  See Board of Trustees of the University of Illinois v. Organon Teknika Corp. LLC, ___ F.3d ___, slip op. (7^th Cir. July 27, 2010) (Easterbrook, C.J.). 

The Court held that, in the circumstances, an arbitration award was final notwithstanding a provision in the award that said the arbitrator reserves his right to change his mind.  But there is more to it than that. 

B.   Background

 Organon Teknika Corp. LLC (“Teknika”) is a subsidiary of Merck & Co, Inc. and licenses from the University of Illinois (“the University”) certain intellectual property rights necessary to manufacture a cancer drug.  The royalty is tied to Teknika’s sale price for the drug and the contract allows Teknika to sell to its affiliates. 

Recognizing that Teknika’s affiliate sales could reduce royalties in the event Teknika offered insider prices, the contract allows the University to reopen its royalty rate if Teknika charges its affiliates prices less than it would charge unrelated buyers in arms’-length transactions.  The contract contains an arbitration agreement that requires an arbitrator to determine, based on comparable transactions, whether Teknika is charging its affiliates arms’-length prices.   Because the issue of arms’-length pricing can repeatedly arise throughout the life of the license, the clause necessarily contemplates the possibility that the same pricing issue may have to be determined on various occasions, all based on contemporaneous and comparable sales to affiliates and non-affiliates.       

The University concluded that Teknika’s sales to its affiliates were not at arms’-length prices and demanded arbitration.  The parties selected an arbitrator who was a member of an intellectual-property-asset-management consulting firm.  He heard evidence concerning 39 allegedly comparable transactions, all of which were supposedly negotiated at arms’-length.  The University argued that they were not comparable transactions. 

The arbitrator selected four of these as benchmarks, found they had been negotiated at arms’-length, and concluded that they showed that the University was not entitled to a royalty-rate adjustment.  He entered an award closing the proceeding without changing the royalty rate.  A cover letter accompanying the award said it was “final,” and the arbitrator’s firm sent a “final” invoice for his services. 

But the award said:

The foregoing opinions and conclusions contained in this report are based on the documents, information and research undertaken as of the date of this report.  I reserve the right to revisit my analysis and amend my conclusions, should additional information become available for review. 

The University waited six months without seeking arbitral reconsideration or judicial review.  It then asked the arbitrator to reconsider, seizing on the proviso quoted above.  It argued that two of the four benchmark transactions had not been negotiated at arms’-length. 

The arbitrator asked his firm’s lawyers whether he could reconsider the award, and the lawyers told him he could, provided both parties agreed.  He sought consent from the parties and Teknika refused. 

The University moved in federal district court to compel arbitration, requesting an order compelling Teknika to resume with the arbitration.  Teknika responded that it had honored its obligation to arbitrate, the arbitration was over, the University lost, and that Federal Arbitration Act Section 12’s 90-day (actually three-month) period to vacate or modify the award had elapsed. 

In a move that took both parties for surprise, the district court said there was no dispute to resolve because the arbitrator had not made a final award.  The matter therefore remained before the arbitrator, leaving the court with nothing to do but dismiss Teknika’s action without prejudice. 

That left things in a state of semi-stasis.  Teknika had prevailed, but was troubled by the terms of the district court’s order, which stated the award was not final.  The University had lost, but might have been able to persuade the arbitrator to render a revised award on terms more favorable to Teknika than the original, perhaps without Teknika’s participation in the proceeding. 

So Teknika, technically the prevailing party, appealed.  The University, technically the losing party, did not. 

In a characteristically terse, well-written and well-reasoned opinion, Chief Judge Frank H. Easterbrook, joined by Circuit Judges William J. Bauer, and David F. Hamilton, reversed the district court and declared that the arbitration was over.      

C.   The Seventh Circuit’s Opinion

The Court initially had to resolve an appellate jurisdiction problem.  A prevailing party can’t appeal from a judgment in its favor on the ground it did not agree with the court’s opinion.  But the Court said Teknika could appeal this one. 

Teknika had a problem with the terms of the judgment, not the language of the opinion.  Teknika wanted a judgment dismissing the University’s claim with prejudice, conclusively resolving the royalty dispute, but what it got was one dismissing the University’s action without prejudice.  Armed with that judgment, the University could resume its suit against Teknika when it saw fit, or perhaps even persuade the arbitrator to modify his award despite Teknika’s continuing refusal to participate in the arbitration.  “No matter[,]” said the Court, for “[i]t was enough to say that Teknika is aggrieved by the terms of the judgment as well as the language of the opinion and is therefore entitled to appellate review.”  Slip op. at 5 (citations omitted). 

Turning to the merits, the Court held that the “district court plainly erred in thinking that [the arbitrator’s] award was not final.”  The award

resolves the parties’ dispute; it was accompanied by a cover letter calling it the final decision; the parties paid their final bills; nothing further happened for six months – and neither side suggested to the other that something should have been happening to get the proceeding wrapped up.  It had been wrapped up already. 

Slip op. at 5-6 (citations omitted; emphasis in original). 

The language in the arbitrator’s opinion contemplating possible revision of the award did not impugn its finality.  The Court said that language was “the arbitral equivalent of Fed. R. Civ. P. 60(b)(2), which allows a judgment to be reopened to consider ‘newly discovered evidence that with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b).’”  Slip op. at 6 (quoting Fed. R. Civ. P. 60(b)(2)).  But just as the ever-present risk of Rule 60(b)(2) relief does not render a judgment non-final, so too the arbitrators’ reference to his right to reconsider the award did not render the award non-final: 

No one thinks that the possibility of reopening a district court’s judgment under Rule 60(b)(2) six months after its entry makes the judgment non-final and hence precludes an appeal.  Likewise no one should think that the equivalent language in the arbitrator’s opinion makes the decision non-final. 

Slip op. at 6 (citations omitted). 

The Court noted that “[t]he parties have regaled us with discussions of the ‘functus officio doctrine’ and other technicalities of arbitration law, but none of them matters[,]” because “[t]he situation is as simple and straightforward as we have described it.”  Slip op. at 6. 

Having drawn an analogy to Rule 60(b)(2), the Court had to deal with a timing issue.  While Rule 60(c)(1) sets a one-year deadline on a Rule 60(b)(2) application, the arbitrator imposed no deadline on a request for reconsideration.  The Court said the default rule was not Rule 60(c)(1)’s one-year deadline, but Federal Arbitration Act Section 12’s  90-day (actually three-month) deadline for a party to move to vacate or modify an award.  The parties, noted the Court, “did not supersede that rule by contract[:]”  “They bargained for a final and conclusive decision, not for perpetual arbitration.”  Slip op. at 6. 

Because the University waited six-months before commencing an action to compel arbitration, its “request came too late.”  So, as Chief Judge Easterbrook succinctly put it, “[t]his arbitration is over.”  Slip op. at 7. 

D.   Analysis

Teknika shows that courts resolve doubts in favor of finality.  And it shows that litigants need to assume that courts will do exactly that. 

We obviously do not know all of the details about this case, let alone what motivated each party’s conduct in connection with it.  We also have the benefit of 20/20 hindsight – something the parties obviously did not.  But the result might have been different had the University treated the award as final, and not waited six months to seek arbitral relief. 

Courts tend to resolve doubts in favor of finality for at least two reasons.  First, finality of awards is necessary to ensure that arbitration works.  One of the avowed purposes of the Federal Arbitration Act is to enable parties to resolve disputes in a speedy and efficient manner.  When awards that otherwise appear to be final and conclusive are deemed non-final for technical reasons, disputes are not resolved, let alone in a timely and efficient manner.        

Second, parties almost always agree that awards should be “final and binding,” and judicial interpretations of the Federal Arbitration Act generally seek to enforce the parties’ arbitration agreement.  Just as the parties in Teknika bargained “for a final and conclusive decision, not for perpetual arbitration [,]” so it is with most other parties that agree to arbitrate.   The Court’s decision enforced that bargain. 

The principal reason that litigants should assume that courts will resolve doubts in favor of finality is that finality determines whether time limits for judicial review have begun to run.  Federal Arbitration Act Sections 9, 10, and 11 all have been held applicable only to final awards (or awards intended to be final, but for some technical reason are not).  The reason is that these judicial-review provisions contemplate the possibility that a court will enter a final judgment confirming the award, and a judgment confirming a non-final award would not conclusively resolve the rights and obligations that are the subject of the award any more than the non-final award did.  Such a judgment would therefore not be final.  

Parties – like the University – who assume that an award is not final, and forgo seeking judicial review, risk being time-barred if they let the applicable limitation period expire before seeking review.   If there are doubts about whether an award is final, then the safer course is to treat it like it is, and act accordingly.  

We conclude with a couple of other observations and a caveat.  We wonder why Teknika did not cross-move to confirm the award in response to the University’s motion to compel arbitration.  While that would likely not have changed the outcome in the district court, a denial of a motion to confirm without prejudice would have provided a firmer basis for appellate jurisdiction, and the end result of the appeal would have been a judgment confirming the award, which probably would also have stated that it was too late to seek reconsideration.  Perhaps that’s just a picayune point of Federal Arbitration Act practice and procedure; in all likelihood Teknika’s rights will be as fully protected as they would have been had it cross-moved to confirm.  Things would probably have proceeded a little more smoothly had the cross-motion been made, but we say that solely with the benefit of 20/20 hindsight, and not knowing what (if anything) motivated Teknika not to cross move.    

We were also somewhat surprised that the Court deemed Section 12’s three-month time limit for certain types of judicial review to be the applicable limitation period for arbitral review, particularly when that period has nothing to do with reconsideration of an award  — something a court has no power to grant.  We suspect it was because the Court chose not to address the functus officio question of whether reconsideration by the arbitrator would have been proper in the circumstances — despite what the award said – and so needed an (elapsed) time limit to rely upon, so that functus officio would not – as the Court put it — “matter.” Section 12 supplied a limitation period by analogy that allowed the Court to dispose of the case while avoiding nettlesome functus officio questions. 

But even though Section 12 was, as we read it, intended solely to set a time limit on seeking certain types of judicial relief, it provided an acceptable analogue for filling a gap in the Federal Arbitration Act.  If a party is time-barred from seeking judicial relief that might result in a modified award or a remand to the arbitrator, then it at least arguably follows that a party should likewise be precluded from seeking arbitral relief from a final award.  In any event, as discussed in more detail below, there may be cases where state law would provide an even better analogue. 

As the previous sentence implies, our caveat is “beware of state law.”  The Court in Teknika suggested that the University could have made a timely request to the arbitrator for reconsideration, provided it was made within the three-month period provided by Federal Arbitration Act Section 12.  Apparently there was no potentially applicable state law better suited to fill the gap. 

Even where an arbitration is governed by the Federal Arbitration Act, and the parties have not agreed that state arbitration law applies, a court might look to state law for a more specific gap filler than Federal Arbitration Act Section 12.  New York State’s arbitration law provides, for example, that an application to the arbitrators to modify an award must be made “within twenty days after delivery of the award to the applicant. .  .  .”  See New York Civ. Prac. L & R § 7509.  Although this rule permits modification only to the extent a court could grant it pursuant to an application for modification made under New York Civ. Prac. L & R. § 7511(c) – Section 7511(c) authorizes modification on limited grounds similar to those set forth in Federal Arbitration Act Section 11 and, like Section 11, does not authorize an application for reconsideration – it would still be a better analogue for a default rule than Section 12.  For Section 12 sets the time limit for applying to a court to vacate or modify an award, whereas CPLR 7509 expressly sets a time limit for making an application for modification to an arbitrator.  Section 12 would therefore arguably not preempt Section 7509, and a New-York-based court faced with a situation like that in Teknika might find that it supplied a better default rule. 

Since state law may (like CPLR 7509) impose a time limit shorter than three months on applications to arbitrators to modify or reconsider awards, to make reasoned strategy decisions, counsel faced with an issue like that presented in Teknika must have a grasp on what state arbitration law has to say (if anything) about this subject.

Lecture over and class dismissed (with prejudice, of course…). 

[Editor’s Note:  For a different analysis of Teknika, and one more critical of the Court's than ours, see our friend Marc Goldstein’s excellent post here.] 

We are also pleased that The Claims SPOT – an excellent insurance and reinsurance claims blog owned by our good friend and fellow LinkedIn Reinsurance Claims group co-manager, Marc Lanzkowsky – also made the top 50 list.  Congratulations, Marc and keep up the great work! 

Making LexisNexis’s Insurance Law Community’s Top 50 list is a great honor and privilege, and we would like to thank the LexisNexis Insurance Law Community for selecting The Claims Spot, the Loree Reinsurance and Arbitration Law Forum, and the 48 other great blogs that made the list.

But there is more.  Every one of these people is a great human being that is a pleasure to know and with whom it is a privilege to collaborate.  All are readily approachable and willing to share freely their impressive knowledge, skills and experience.  And that is what makes for a great Web 2.0 discussion and networking group.    

Nigel Shepherd, J.D., CPCU, ARe.  Nigel has twenty-five years of insurance and reinsurance experience, with a focus on global claims management. 

Nigel owns NCS Capital Management LLC, a boutique consulting firm that focuses on property and casualty (“P&C”) reinsurance and insurance matters.  NCS partners with New-York-City-based Lanzko Consulting, Inc. (co-manager Marc Lanzkowsky’s firm) to design and implement proactive strategies to reduce claims costs and mitigate loss exposure.   

Prior to forming NCS, Nigel was Global Head of Claims for both Aspen Specialty Insurance and the Alea Insurance Group, where he was responsible for claims strategies and operations worldwide.  He was part of Aspen’s Global Leadership Team, responsible for establishing and implementing a strategic plan for the worldwide claims operation.  Nigel integrated the diverse Group Claims business units into one team, simplified key operational risks associated with loss adjustment, and reduced redundancies, operational costs and paperwork.  He also formulated policies and procedures for legal service procurement, independent adjusters, third-party administrators and fraud control.    

Prior to his Aspen and Alea roles, Nigel was a Senior Vice President with Converium Reinsurance (f/k/a Zurich Re) and an Assistant Vice President at XL Reinsurance, leading and managing teams for a variety of reinsurance programs.  During his Converium tenure, Nigel had management responsibility for the professional liability, medical liability and special casualty liability business units.   Nigel also functioned as the Head of Claims, where he successfully managed commercial auto and general liability claims, and was instrumental in integrating into the underwriting department the claims department’s expertise in claims, actuarial matters and accounting.    

Nigel received a J.D. from Pace University School of Law in 1993, and a B.S. in Finance from Syracuse University’s Martin J. Whitman School of Management in 1984.  He is a member of the New York bar and holds the Chartered Property and Casualty Underwriting (“CPCU”) and Associate in Reinsurance (“ARe”) professional designations.   

Nigel’s insurance and reinsurance industry knowledge and experience, coupled with his legal and extensive claims management background, is a tremendous benefit to the group and its members.   

Robert Bear, FCAS, CPCU.  Robert Bear is a P&C consulting actuary and a reinsurance arbitrator and consultant.  He owns RAB Actuarial Solutions LLC, where he performs loss reserve studies and reinsurance pricing analyses requiring complex loss simulations; serves as a reinsurance arbitrator and expert witness in insurance and reinsurance arbitrations; resolves complex insurance coverage problems; researches and develops loss reserving models; and provides litigation and investor support. 

He has over 33 years of insurance and reinsurance industry experience, including 20 years managing reinsurance actuarial services.  He began his career at the Insurance Services Office (“ISO”), and served as an actuarial manager at the Prudential Reinsurance Company, Signet Star Re, L.L.C. and SCOR Reinsurance Company.  He then served as Senior Vice President and Chief Actuary of the PXRE Group, where he was responsible for actuarial loss reserving and pricing model development, as well as related corporate modeling. 

Bob is a Fellow of the Casualty Actuarial Society (“FCAS”), an ARIAS-U.S. certified insurance and reinsurance arbitrator, a Chartered Property Casualty Underwriter, a member of the American Academy of Actuaries, and a Fellow in the Conference of Consulting Actuaries.  He earned MS degrees in theoretical mathematics from New York University and in applied mathematics and economic systems from the Polytechnic Institute of New York.  He graduated summa cum laude from the University of Bridgeport, where he earned a B.A. in mathematics.   

Bob serves as Chairperson of the Casualty Actuarial Society (”CAS”) Dynamic Risk Modeling Committee and as co-chairperson of the CAS Loss Simulation Model Working Party.  He previously served as a Chairperson of the Reinsurance Association of America (“RAA”) Actuarial Committee and as President of Casualty Actuaries in Reinsurance (“CARe”).  He has authored several CAS discussion papers and articles on reinsurance pricing, loss reserving, and risk modeling issues.  His blog on actuarial and dynamic risk modeling issues is here. 

Bob also serves as a co-manager of LinkedIn’s Commercial and Industry Arbitration and Mediation Group, which is now over 880 members strong and is one of the premier online ADR discussion groups.   (See the latest post here)

Bob’s formidable technical and actuarial skills, combined with his industry and dispute-resolution knowledge and experience, are a great asset to the group and its members.    

Marc Lanzkowsky.    Marc is the founder and principal of Lanzko Consulting, Inc. and the Managing Editor of The Claims SPOT  blog, one of the only blogs (if not the only blog) that focuses exclusively on insurance and reinsurance claims.   Lanzko provides top notch claims consulting, auditing and management services, as well as claims-related operational management consulting services. 

Marc started his career as an insurance defense and coverage attorney in New York City, representing physicians and hospitals against malpractice claims and defending insurance companies in coverage disputes.  After practicing law for seven years, he became a Specialty Claims Adjuster at Zurich Insurance Company.  Managing physician, hospital and nursing liability claims, he was part of a black-belt team that helped improve claims-department operations.  

After being promoted to Northeast Regional Manager for Healthcare Medical Malpractice Claims, Marc was responsible for over 1,900 professional liability claims and more than $250 million in case and expense reserves.  He was subsequently promoted to Claims Director for Operational Innovation for the Specialty Claims Division.  As a direct report to the Vice President of Specialty Claims, Marc ensured operational efficiency for multiple specialty lines in a department consisting of 150 claims professionals handling 14,000 open claims.   He developed performance metrics to improve productivity and facilitate team management.  Tapped for the company’s 9-11 disaster recovery team, Marc assisted in the relocation of over 100 claims professionals within one week of that terrible tragedy. 

Following a successful career at Zurich, Marc was recruited to help build a specialty claims organization as Vice President (and, later, Senior Vice President) of Home Office Claims Management for Arch Insurance Company.  Charged with developing and implementing all internal processes and best practices for this new global P&C insurer, he created an innovative, fully accessible and paperless claims technology system, which was used by claims professionals worldwide.  Marc also assisted senior management in due diligence for potential acquisitions, and formed and managed relationships with multiple claims vendors.  As the company and department grew, Marc was put in charge of performance metrics and best-practices oversight for its 85 claims professionals and third-party administrators handling over 20,000 open claims. 

He also led the litigation management department and created a special investigation unit to help combat insurance fraud.  And by implementing a program to review legal invoices, he was able to reduce litigation expenses an average of 11% in the first year.  Outsourcing several back office functions and transferring the handling of primary casualty files to a new Midwestern claims office, he also helped reduce the company’s unallocated expense costs significantly. 

In addition to his work at Lansko, Marc serves as a member of the Board of Directors for IncentOne, a provider of integrated incentive solutions to clients ranging from small business to FORTUNE 500 companies. 

Marc received a bachelor’s degree from New York University  in 1988 and a Juris Doctorate degree from Pace University School of Law  in 1991.  He is a member of the New York bar. 

Marc’s extensive experience in direct insurance claims matters — coupled with his involvement in reinsurance-related matters, impressive contributions to the blogosphere, and energetic, entrepreneurial spirit – enables him to provide a unique perspective on the subject matter of this group.    

Theresa W. Hajost.   Theresa W. Hajost, an experienced, AV-rated reinsurance attorney, is a partner at Halloran & Sage LLP, and Senior Partner of its Washington Office.  She has over fifteen years of experience in reinsurance dispute resolution, and more than twenty-years of experience handling insurance coverage litigation.  She represents both cedents and reinsurers in arbitration and litigation; performs reinsurance claims audits and reserve sufficiency evaluations; negotiates commutations; and counsels clients on effective presentation of reinsurance claims.

In addition to reinsurance disputes, her litigation experience includes insurance-coverage cases arising from an assortment of claims and policy-types, with a concentration in complex environmental and toxic tort claims.  She has litigated professional liability, errors and omissions, directors and officers, bankers’ bonds, architects and engineers, and board of education claims.  She also has significant experience handling federal and state appeals. 

Theresa is also a lecturer for the University of Wisconsin Business School’s annual courses “Reinsurance Management and Accounting” and “Reinsurance:  Advanced Concepts,” and has authored a number of articles concerning reinsurance, insurance and arbitration practice and procedure.  Throughout her legal career, Theresa has maintained an active pro bono practice, representing clients ranging from children in abuse and neglect proceedings to persons committed to mental institutions.   

Theresa’s wide-ranging experience as an expert reinsurance and insurance litigator, instructor, author and commentator gives her a unique perspective not only on reinsurance claims, but on reinsurance dispute resolution in general, all of which she shares with the group and its members.    

Bill Hook.   Bill is a long-time friend, mentor and colleague of mine, as well as a sometimes client.  Based in London, he was Head of Technical Operations (and Group Head of Claims) for the Tawa Group.  With Tawa’s purchase of Pro Insurance Solutions Ltd. (”Pro”), which now manages the runoff of CX Re, KX Re and PX Re, Bill has assumed a senior claims management role in that firm.  Pro provides run-off management and professional services to the international insurance and reinsurance industry. 

Bill has over 30 years experience in the insurance and reinsurance industry.  He initially worked as an underwriter in 1971 for a composite insurer and moved to its reinsurance arm in 1979 where he undertook a claims supervisory role.  In 1982 he joined CIGNA and subsequently became Claims Director for their European run-off operations.  From there he joined Price Waterhouse Coopers  (U.K.) (“PwC”), where he specialized in claims management and reinsurance disputes on behalf of a number of U.K. insolvencies, including The Charter Re, The Independent and Black Sea & Baltic.  He also provided claims consultancy services for a number of active writers, including Lloyd’s syndicates, and was responsible for the business development of the claims consultancy offering of the firm. 

Bill left PwC to join the Tawa Group in 2004, where he became Head of Claims, and later, Head of Technical Operations.  Part of the Tawa senior management team, he operates extensively in the due diligence process of run-off acquisition targets, manages the Tawa/Pro claims team, and provides claims and runoff management consultancy services to a large number of  companies outside the Tawa Group.    

Bill has contributed articles on claims management and claims audits/inspections to Insurance Day, Run-off & Restructuring Magazine, and Mealey’s Reports, and periodically speaks at industry seminars.  In November 2009 he was appointed to the Board of the prestigious Association of Run-off Companies (“ARC”), where he is a member of the Marketing & Public Relations Committee as well as the Academy training facility.    

Bill brings to bear a wealth of reinsurance and run-off-management-related knowledge, skill and experience, and the unique perspective he has on the U.S., London and European markets gives the group a truly international focus.     

Philip J. Loree Jr.  You can read about my background and experience at the Loree & Loree website here. 

The other co-managers and I are thrilled about the new group and look forward to making it work for its members. 

The group, which is already more than 80 members strong, welcomes new members, and encourages (but does not require) active participation.  The only requirement for membership is a bona fide interest in reinsurance claims.  The group is not a forum for, and does not permit, advertising or blatant self-promotion, so our members need not be concerned about being subject to sales pitches and the like. 

If you are already a member of LinkedIn, please click here to apply for membership in the group.  If you are not a LinkedIn member, please click here and you will be guided through the process of creating a profile (which does not need to be completed in one step).  Once your profile is started, and you have a user name and password, you can click here to apply for membership in the group.  Joining LinkedIn is free, as is joining the group.

We look forward to meeting you online!

Over a year ago we ran a Reinsurance Nuts & Bolts feature entitled “Aggregate Extension Clauses”  (here).  To our considerable surprise, that article was, and remains, one of our more popular ones. 

At the close of the article we said (tongue and cheek):  “If you, the reader, have gotten this far, then perhaps you would like to delve into a discussion of ‘Aggregate Extraction Clauses.’  But these clauses – which conjure up some of the more frightening scenes from Marathon Man (1976) – are better left for another day.  .  .  . ”  Brace yourselves, for we fear that day has arrived.  .  .  .        

B.   What is an Aggregate Extraction Clause? 

To put aggregate extraction clauses in context a very brief review of aggregate cover and aggregate extension clauses is in order.  As discussed in our aggregate extension clause feature (here), policies covering on an aggregate basis are designed to insure principally against the risk that the frequency of relatively small (i.e., low severity) losses will exceed an expected level during a given period.  That’s why products liability risks are frequently written on an aggregate basis – i.e., to protect against the high-frequency, low-severity “Coca-Cola-type”  losses discussed by the English Court of Appeal in Yasuda Fire & Marine Co. of Europe Ltd v. Lloyd’s Underwriting Syndicates No. 209, 356 & Ors., [1998] Lloyd’s Rep. LR. 343 (C.A.). 

The existence and amount of aggregate coverage is determined by aggregating together all losses occurring within a specified period, irrespective of their severity.  That aggregate amount is subject to an aggregate deductible and frequently an aggregate limit.   

Reinsuring aggregate cover on an excess of loss basis presents problems because the amount of each loss or occurrence is generally not high enough to exceed the retention of the excess of loss treaty.  Over a period, however, the accumulated loss covered by the policy might well exceed the retention of the excess of loss treaty were it deemed to arise from a single occurrence.   

We explained in our prior article (here) that the aggregate extension clause effectively extends the aggregate cover of the underlying policy into the excess of loss treaty.   Instead of subjecting each individual loss or occurrence to a separate retention and limit, it allows the aggregation of losses or occurrences when the original policy is written on an aggregate basis.   

The aggregate extraction clause deals with the special problems that may arise when losses covered on an aggregate basis arise out of a single occurrence that has also caused loss under one or more policies (or coverage parts) that were not written on an aggregate basis.  If – as is sometimes the case — the loss arising out of a single occurrence is of relatively high severity, then it is not the type of loss that either the aggregate policy or the aggregate extension clause was principally designed to cover.   And when the relatively severe loss is lumped into the aggregate cover provided by the reinsurance contract, it eats up capacity that was designed principally to accommodate high frequency, low severity losses. 

At the same time, the cedent is deprived of the ability to accumulate the single-occurrence aggregate-loss with non-aggregate losses on other reinsured policies arising out of the same occurrence.   Thus, while the cedent may get the benefit of clash cover protection on single-occurrence, non-aggregate losses arising out of multiple, non-aggregate policies, it loses that benefit in situations where a portion of the loss arising out of the occurrence is covered on an aggregate basis.   (An excess of loss contract provides clash cover when a single occurrence under the treaty is subject to a single retention and limit, irrespective of the number of original policies that respond to the occurrence.  This type of cover reinsures against the accumulation of net retained liability under multiple, original policies arising from the same occurrence.)   

The aggregate extraction clause addresses both of these problems.   It allows the cedent to extract from aggregate reinsurance coverage a single-occurrence-based loss on policies written on an aggregate basis and combine it with other losses on non-aggregate policies that arise out of the same occurrence.  Brokers and Reinsurance Markets Association (”BRMA”) clause 4A is an example of an aggregate extraction clause: 

As regards liability incurred by the Company for losses on a policy or policies covering on an aggregate basis, the Company shall be permitted to extract from such aggregate policy or policies the amount of loss sustained by it arising from one loss occurrence in order that such loss can be added to the Company’s losses from the same occurrence on [an]other policy or policies, if any.

For the purposes of this Article, the amount of loss from one occurrence on an aggregate policy shall be deemed to be that percentage of the aggregate loss to the Company that the total loss from the particular occurrence bears to the total aggregate losses to the insured or company on the business protected by such aggregate policy. 

To operate the clause requires the following: 

1.  There must be liability incurred by the Company for losses under a policy covering on an aggregate basis;  

2.  Some of that loss (in 1., above) must arise out of a single occurrence for the purposes of the reinsurance contract;

3.  The cedent must have also incurred liability for loss or losses under one or more other original policies that do not provide cover on an aggregate basis; and

4.  Those losses (referred to in 3., above) must arise out of the same occurrence as the aggregate loss referred to in 2., above.  

When all these requirements are met, the cedent may remove from aggregate coverage the loss referred to in 2., above, and combine it with the losses referred to in 3., above. 

Typically, the loss extracted from aggregate reinsurance coverage will be of relatively high severity compared to the other losses falling under the reinsurance contract’s aggregate coverage.   Otherwise there would likely be little reason for the cedent to exercise the aggregate extraction option. 

The second paragraph of the clause provides a formula for determining the amount of aggregate loss deemed to arise out of the single occurrence.  To calculate that amount, our hypothetical ceded-claims person would divide the total amount of loss arising from the occurrence under all reinsured policies by the “total aggregate losses to the insured or company on the business protected by such aggregate policy,” multiply the result by 100, and multiply the resulting percentage figure by the total amount of aggregate loss on the aggregate policy.  The product would equal the amount of loss under that aggregate policy deemed to arise out of the single occurrence and therefore subject to aggregate extraction.  

And that, in a nutshell, is what an aggregate extraction clause is and does.   .  .

U.S. Law Week is a subscription only publication, but I received permission from the Bureau of National Affairs (”BNA”) to post a copy of the article on my LinkedIn profile.  So, if you are a member of Linkedin, you can access a copy of the article here (it does not appear in my “public” LinkedIn profile).

We would like to take this opportunity to thank Tom P. Taylor for conducting a very professional interview and following up with a very professional article.  We would also like to thank Bernard J. Pazanowski, who co-authored the article with Tom.

Section 1028 of the Dodd-Frank Act directs the Bureau to study mandatory, pre-dispute arbitration in contracts under its jurisdiction and report back to Congress.  The agency will then be authorized to either ban or regulate pre-dispute arbitration clauses in contracts under its jurisdiction, provided that the “Bureau finds that such prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”  The Bureau’s findings must “be consistent” with its study. 

Section 921 of the Dodd-Frank Act likewise authorizes the Securities and Exchange Commission (“SEC”) to “prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations hereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.’’ Section 921 also authorizes the SEC to ban or regulate pre-dispute arbitration in contracts between “customers or clients of any investment adviser.” 

In addition, Section 1414 of the Dodd-Frank bans pre-dispute arbitration in residential mortgages and home-equity loans, and Section 922 renders unenforceable pre-dispute agreements to arbitrate whistleblower claims.

After being in existence for only two days, the group has grown to 38 members, and our good friends Marc Lanzkowsky, Theresa Hajost and George Simpson, IV have  graciously agreed to join Nigel, Robert and me on the co-management team.  We intend to publish a shortly an article discussing the backgrounds and credentials of our very talented and diverse team. 

The group is a forum for the open discussion of issues and sharing of information concerning ceded and assumed reinsurance claims in the U.S. and overseas markets.  Topics of discussion may include, but are not limited to the presentation, adjustment, processing, settlement and payment of ceded and assumed reinsurance claims; claims dispute resolution, including litigation, arbitration, mediation and other forms of ADR; commutation; handling claims for a company in run-off; handling claims for an active writer; collections, including collections from companies in run off; comparative claims practices and procedures (e.g., London versus U.S. market); claims issues pertinent to insurance insolvencies; and coordination between the claims department and other departments of the company.  The group welcomes members from both the U.S. and international community.

Persons who should consider joining the group include in-house claims professionals; in-house and outside counsel; claims consultants and experts; actuaries; reinsurance arbitrators and mediators; brokers with claims responsibilities; and anyone genuinely interested in learning more about the subject.  The purpose of the group is information sharing and professional networking.  

The group welcomes new members, and encourages (but does not require) active participation.  The only requirement for membership is a bona fide interest in reinsurance claims.  The group is not a forum for, and does not permit, advertising or blatant self-promotion, so our members need not be concerned about being subject to sales pitches and the like. 

If you are already a member of LinkedIn, please click here to apply for membership in the group.  If you are not a LinkedIn member, click here, and you will be guided through the process of creating a profile (which does not need to be completed in one step).  Once your profile is started, and you have a log-in name and password, you can click here to apply for membership in the group.  Joining LinkedIn is free, as is joining the group. 

We hope you’ll join up!