1. Duty of utmost good faith in dispute resolution
C1 Disputes inevitably arise in commercial relationships, particularly when commercial actors are involved in long-term contracts and business relationships. Logically, the duty of utmost good faith that attends the reinsurance relationship extends throughout the duration of the relation, including periods when the parties are in dispute. Although an adversary proceeding, such as arbitration or litigation, may place the parties at odds, their duties to one another remain and they must continue to conduct themselves accordingly.
2. In particular: Prohibition of opportunistic behavior
C2 Depending on the circumstances of the dispute, one of the parties may have greater incentive to delay, extend, or multiply the proceedings in order to gain commercial advantage. The duty of utmost good faith requires that disputing parties refrain from opportunistic behavior.
C3 Opportunistic behavior is conduct that deprives another party of the benefit of the bargain by making it unduly difficult to resolve contractual disputes expeditiously and with a minimum investment of resources. Disputants should not make frivolous claims or mount frivolous defenses and should provide reasonable cooperation regarding disclosure of information and expediting resolution of their dispute. A party acting in utmost good faith raises only legitimate issues, rather than manufacturing issues or arguments in an attempt to avoid contract obligations or delay its performance of contract obligations. Similarly, a contracting party disputing in good faith refrains from delaying or diversionary tactics.
Illustrations
I1. Reinsured A, after properly notifying Reinsurer B and keeping it informed of the situation, defends its policyholder, a Silicon Valley start-up against allegations of gender discrimination by a female worker. Trial results in a multi-million judgment because a manager’s behavior has been particularly crude. Three other women workers at the company have similar claims involving the same disagreeably harassing manager. Reinsured A settles the claims, paying several hundred thousand dollars to each of the plaintiffs. Reinsurer B, which knew of the planned settlements and did not protest, now refuses to reimburse Reinsured A, alleging that the settlements were unreasonably high. Reinsurer B in fact understands that Reinsured A’s settlement decisions were reasonable under the circumstances but is resisting payment both to delay payment and in hopes that it can get Reinsured A to absorb a higher share of the cost than provided in the contract. Reinsurer B’s conduct breaches the duty of utmost good faith.
I2. Reinsured A seeks payment from Reinsurer B for Reinsured A’s payments in connection with a large portfolio of automobile liability claims. Reinsurer B resists on several very weak grounds because it has favorable investments and profits from delay in payment. In addition to raising meritless defenses to payment, Reinsurer B rejects all of Reinsured A’s suggestions regarding the choice of arbitrators, forcing Reinsured A to seek a determination by the arbitral tribunal, causing further delay. Then Reinsurer B rejects the proffered dates for a hearing on the matter, even though Reinsurer B can accommodate the tribunal’s suggested hearing dates. Reinsurer B has breached the duty of utmost good faith.
I3. Reinsured A and Reinsurer B dispute whether a particular group of claims falls within the contract. Reinsurer B offers settlement negotiations. Reinsured A refuses to consider the proposal and sues Reinsurer B in a jurisdiction inconvenient for Reinsurer B. Reinsured A has breached its duty to make reasonable and diligent efforts to resolve the dispute.
I4. Reinsured A and Reinsurer B enter into a contract that contains both a service of suit clause and an arbitration agreement. A dispute arises. Reinsurer B proposes arbitration. Reinsured A ignores the proposal and files suit against Reinsurer B. In light of industry norms, the arbitration agreement should take precedence, and Reinsured A has breached its duty of utmost good faith by rejecting arbitration and pursuing litigation.
C4 The rules of proper litigation and arbitration conduct provide a minimum threshold that must be met by reinsurance disputants. However, if the duty of utmost good faith is to have meaning, certain sharp practices that may be permitted between strangers or other contracting parties should not be pursued in disputes concerning reinsurance contracts.
C5 The rules of tribunals, courts in particular, provide a series of benchmarks as to what constitutes unacceptable disputing behavior (see, e.g., 28 USC § 1927 (a party that vexatiously delays or multiplies litigation may be sanctioned); US Fed R Civ P 11 (providing for sanctions if counsel or a party makes claims without legal or evidentiary support or solely to disrupt opposing parties). Yet because litigation is inherently adversarial, particularly in the US and the UK where judges are expected to act more as referees rather than active investigators, tactics that might be considered excessive in social or business settings may be tolerated – at least where the disputants are strangers (e.g. tort litigation) or have only an arm’s-length and competitive business relationship. By contrast, a contract of reinsurance is a more cooperative, collaborative, ongoing relationship where the parties are expected to work together subject to the duty of utmost good faith. As a consequence of these differences from other dispute resolution settings, a higher level of conduct is expected between a reinsured and a reinsurer.
Illustrations
I5. Reinsurer B is reluctant to pay Reinsured A until it is provided with additional claim data in view of the many large settlements agreed to by Reinsured A during the contract period. Arbitration proceedings result. In the arbitration, Reinsurer B makes a formal request for production of the information. The arbitration rules are unclear but the contract clearly gives Reinsurer B broad inspections rights. Nevertheless, Reinsured A refuses to produce the documents for the arbitration. Reinsured A has breached its duty of utmost good faith.
I6. Same facts as in the previous Illustration, except that Reinsured A agrees to permit inspection – provided that Reinsurer B sends someone from its office in Zurich to a small town in Alaska where Reinsured A collected the documents after the dispute arose. Reinsured A refuses to provide the documents in electronic form or to otherwise make copies. The location of Reinsured A’s document depository was chosen precisely because it was remote. Reinsured A hoped that it would discourage inspection and also expected that requiring such on-site inspection would make it more likely that Reinsurer B’s counsel would miss important information in the documents. Reinsured A has breached the duty of utmost good faith.