Reinsurance law conferences are not places one generally associates with impassioned argument. So what caused comparisons to be drawn between the moderator of last month's AIDA Reinsurance working party meeting in Lisbon and Jon Bercow trying to corral rowdy MPs during a Brexit debate? What could generate such fervour in a room filled with reinsurance law academics and practitioners? The answer: PRICL. The Principles of Reinsurance Contract Law, or PRICL, is an ambitious project borne of a collaboration between a selection of the most well respected reinsurance law academics with the backing of Swiss Re and many other major reinsurers. Its aim is simple – to significantly reduce reinsurance disputes around the world. How? By doing nothing less than rewriting reinsurance law on a global scale. It's a project which has been incubating quietly and with little publicity since 2016. It is now approaching completion and is shortly to break out into the real world.
Such an ambitious undertaking requires some context. The last time I wrote about reinsurance law at such length, I was working on an academic paper, highlighting some of the underlying difficulties that can arise in long chains of reinsurance. At that time, I had seen those manifested through multiple disputes arising out of the 9/11 property damage claims which featured heavily throughout the early years of my legal career. The issue there was the same one that has appeared time and time again within the reinsurance disputes I have worked on: uncertainty. Specifically, uncertainty as to the interpretation of contractual terms. In relation to the 9/11 losses, one of the major issues, which resulted in millions of dollars, pounds, yen and euros being spent on legal fees around the world, was the meaning of a single word: "event".
For some reinsurers, whether the destruction of the World Trade Center was a single event or not would mean the difference between a difficult year and bankruptcy. Despite having been involved in seven or eight such disputes in different jurisdictions, I could still not tell you today what the correct answer is with certainty. There are two main reasons for that. Firstly, most of the disputes, as is typical in reinsurance cases, were decided through arbitration and so behind closed doors. Even where the outcomes of those arbitrations sometimes became known through being appealed to court for example, the arbitral tribunal's decision is still not a binding precedent which others can reliably be expected to follow. The second reason stems from discrepancies arising as a result of the various laws governing the contracts in question. Different legal systems adopt different interpretations of particular terms and can also interact with each other where different governing laws apply to different contracts within the same chain.
It is this recurring issue, uncertainty in how we interpret contractual terms in reinsurance, which PRICL aims to address. If successful, it will provide an additional degree of certainty which will enable reinsurers all around the world to underwrite large risks with more confidence and, crucially, more predictable outcomes.
So how does one avoid the type of uncertainty that occupied many reinsurance lawyers for the best part of a decade following 9/11? When writing my paper back in 2011, I suggested it would be significantly reduced if all insurers exposed to a single programme reinsured it on identical terms and on contracts governed by a single system of law (English being an obvious choice given its long history of case law providing guidance for the interpretation of many different scenarios). PRICL takes that a step further. Borrowing from legal systems all over the world, when formally published in the coming months, it will set out a series of model terms which parties are invited to adopt into their reinsurance contracts. Having seen an advance preview the terms themselves, they are relatively brief and cover the major areas of dispute, including aggregation and the obligation to follow the fortunes of others within the chain.
A single codified set of terms clearly has an advantage in terms of certainty. A full set of terms which can be used for a wide range of situations does have some novelty to it but exists successfully in other contexts e.g. ISDA Master swap agreements. The London market also has many standard reinsurance wordings which have been developed and used repeatedly over decades and in some cases longer. Parties still defer to those same wordings rather than attempting to redraft them because they feel confident that they are tried and tested. Where there have been disputes as to their interpretation in the past, those have been worked out by the courts and the market, making their application predictable going forward.
PRICL borrows its standard terms from various different legal systems and theories. English law features heavily but is by no means exclusive. Part of the controversy of PRICL arises from the fact that it is deliberately not subject to any one governing law. Advocates of PRICL note that the rules will be accompanied by extensive guidance notes as to how the relatively brief principles should be interpreted and applied to any given set of facts. They see this as an advantage as reinsurance contracts placed all over the world will be interpreted on the same basis, removing the uncertainty that comes from having different reinsurers contracting (and interpreting the same terms) on the basis of different governing laws.
The critics point to the fact that no matter how detailed the guidance notes will be (and we have not yet seen them), history tells us that there will always be novel and unforeseen factual scenarios which arise against which these principles will need to be applied. When that happens, people will have to look at the facts and take a view as to the application of the particular PRICL principle in the same way as they would with any other contractual provision. Guidance notes may well assist but they will not cater for every circumstance. In the case of 9/11 and the example of the word "event", English law already had a well-developed test of four unities which was intended to provide the answer as to whether any given set of facts is deemed a single event or not. What 9/11 showed is that, even with such a well-developed test, that same test is still capable of being applied subjectively and to result in different outcomes. Critics argue the same will be true of guidance notes, which they posit are analogous to the case law which has built up over many centuries and provides a significant body of guidance as to how particular terms should be interpreted. PRICL's critics fear that even that even a comprehensive set of guidance notes will not provide the same degree of certainty as derives from English reinsurance law. They say any new system is bound to be less certain.
As the saying goes, time will tell. It was announced in Lisbon that Swiss Re intend to gradually incorporate some of the PRICL terms into their wordings in the not too distant future and to encourage other reinsurers to do the same. It will likely take some time before those terms form the subject of a dispute and only then will we see how they fare.
In the meantime, if you want to minimise uncertainty within insurance and reinsurance contracts:
- Make all contracts subject to English governing law wherever possible;
- Use existing standard form wordings developed through the London market; and
- Ideally, make any disputes subject to jurisdiction of the English Courts which are highly experienced in the resolution of these issues and whose judgments will form part of the existing body of precedent and assist others in the future.