Arbitration was traditionally favoured over litigation to resolve coverage disputes, but some recent cases have cast doubt on whether this is always the best method to follow

arbitration conflict

Insurers, reinsurers and policyholders have traditionally favoured arbitration over litigation when it comes to determining coverage disputes. This is predominantly owing to concerns over confidentiality and, historically at least, because arbitration is perceived to be quicker and cheaper.

Another advantage, at least on the face of it, is that the grounds for appealing an arbitration award under the UK Arbitration Act 1996 are limited, providing a degree of finality for the parties. Occasionally, however, a tribunal’s decision might be so unsatisfactory that one party is prepared to forego confidentiality and have the award considered by the courts. Some recent cases have cast doubt on whether the English courts’ reluctance to intervene in an arbitration award strikes the right balance between achieving certainty and obtaining justice.

Appeals under the Act

The Act provides three grounds of appeal: section 67 (substantive jurisdiction); section 68 (serious irregularity); and section 69 (point of law). Sections 67 and 68 are mandatory, but the parties can exclude section 69.

An appeal under section 69 can be brought only if all parties agree or if the court grants permission, which it will do only if the tribunal’s decision is obviously wrong or if issues of public importance are concerned and there is serious doubt as to the tribunal’s conclusions. One would think that, in such circumstances, the court would be willing to thoroughly review the tribunal’s conclusions. Unfortunately, that is not always the case.

Aioi Nissay Dowa v Heraldglen and Advent Capital

On 11 September 2001, four aircraft were hijacked in a co-ordinated plan conceived by al Qaeda to destroy a number of US landmarks. Two aircraft were flown into the World Trade Center (WTC): one into the North Tower and one into the South Tower. Both towers collapsed, causing widespread property damage and loss of life.

The defendants, which aggregated the losses as two events, paid out under a series of inward reinsurance contracts. They then sought to recover $3.23m (€2.78m) under four outward reinsurance contracts, in which reinsurer Aioi had participated.

The key issue was whether the defendants’ losses resulted from an occurrence (or series of occurrences) arising from one event (Aioi’s position – one co-ordinated act of terrorism) or two events (the defendants’ contention – two separate hijackings) for the purpose of the aggregation provisions in the outward reinsurance contracts. The tribunal concluded that the losses arose from two events.

Aioi sought permission to appeal under section 69. Mr Justice Popplewell held that the tribunal’s decision was open to serious doubt and concerned an issue of general public importance for the reinsurance market, which was still processing WTC claims.

At the appeal, Aioi claimed the tribunal had erred in law in three respects:

  1. Rather than confining its analysis to whether the attacks on the WTC constituted one event, the Tribunal wrongly focused on the number of loss events arising from the hijacking of all four planes.
  2. When assessing the four ‘unities’ of time, location, cause and intent, the tribunal took an overly narrow approach, disregarding the unity of intent on the part of the human agents involved.
  3. Rather than assessing the unities from the viewpoint of an informed observer in Manhattan at the time the aircrafts hit the WTC (when the catastrophe reinsurance policies were affected), the tribunal made its assessment on the facts as they would have appeared to an observer being transported from one place to another at the time the hijackings began on each plane (when there was no guarantee that the catastrophe reinsurance policies would ever be reached).

Mr Justice Field concluded that the Tribunal had made no error of law because: (i) it had identified the applicable law; and (ii) in exercising judgment on that law, it had reached a decision that was open to it to reach. The court did not analyse or comment on whether the tribunal’s decision was right, merely satisfying itself that the correct law had been identified and all relevant factors (and no impermissible factors) had been taken into account.

Aioi’s case was that the tribunal had misapplied the relevant case law - the fact that the court only satisfied itself that the correct case law had been identified did not address this concern. Moreover, permission to appeal was granted, in part, because the reinsurance market was looking to the English courts for some guidance on the issue of one or two events. The court’s decision, that the tribunal could have determined the question either way and been correct, did not provide any guidance to the industry at all.

Of course, a balance must be struck between certainty and justice, but the Act provides the ideal opportunity for this exercise to be undertaken when permission to appeal is sought. Where two commercial parties have not excluded their right to appeal under section 69 and the high hurdle for obtaining leave has been met, the English courts’ apparent protection of finality over justice is unsatisfactory.

In recent years, the English courts have focused on keeping costs proportionate and managing cases efficiently while arbitration has become an increasingly expensive and, with specialist arbitrators being kept extremely busy, lengthy process. Ultimately, apart from confidentiality, the traditional benefits of arbitration may no longer outweigh the risk of injustice and insurers and policyholders may consider turning their backs on arbitration in the future.

Harriet Stokes is a solicitor and Garbhan Shanks is a partner at Michelmores