AmRisc has crafted what it refers to as the “Compass Form” insurance policy. The hidden hallmark of the AmRisc Compass Form insurance policy is a mandatory arbitration provision that requires that the insured relinquish their legal rights to a trial before a jury of their peers and overseen by an impartial judge and it mandates the insured arbitrate any dispute before a private arbitrator or panel of arbitrators. It also requires that the arbitration to be conducted in New York, under New York law, often with insurance industry arbitrators including current and former insurance company executives and insurance defense counsel. Why, you might ask, would an insurance policy owned by a Texas company covering property located in Texas and underwritten by foreign insurers contain a provision requiring arbitration to occur in New York, and to apply New York law? The only answer is because this venue and chosen law favor the insurance carriers.
What is AmRisc?
AmRisc is a company that touts itself as a “Managing General Underwriter for Commercial property Risks.” According to its filings with the Texas Department of Insurance, AmRisc acts as an excess and surplus lines managing general agent in Texas. Essentially, this allows AmRisc to put together portfolios of insurance risk for out-of-state (and in many cases, out of the United States) insurance companies that are not admitted to do business in the State of Texas. Through a wholesale broker, AmRisc markets its Compass Form available to retail insurance agents throughout the Gulf Coast targeting commercial, nonprofit, and institutional policyholders who, given their size and location, have been led to believe that they cannot obtain affordable insurance coverage in the traditional markets and must, instead, turn to the surplus lines insurance markets for coverage. And that is where AmRisc offers coverage through its Compass Form and AmRisc’s hand-picked carriers, free of the regulations that govern the traditional insurance marketplace.
AmRisc’s Arbitration Scheme
AmRisc’s model places policyholders into pre-packaged insurance policies with pre-selected, unauthorized and mostly foreign insurance carriers. Because they are not operating in the traditional insurance marketplace, the AmRisc policies have not been reviewed and approved by the Texas Department of Insurance and AmRisc’s subscriber-insurance carriers have not been approved to operate as insurance companies in Texas.
Because it is not operating in a regulated marketplace, AmRisc has been able to enhance its profitability through an arbitration scheme that policyholders often do not learn about until it is too late and they’ve been locked into an insurance policy that they’ve sometimes never seen before. In the surplus lines insurance market, consumers are often only shown a “binder” from AmRisc that lists dozens of material policy terms (e.g., deductibles, sublimits, etc.) but rarely, if ever, discloses the existence of a binding New York arbitration provision. The arbitration scheme AmRisc has devised and implemented has greatly enhanced its profitability because the carriers are fully in control of the private, confidential process. Arbitrators are often prohibited from considering extra-contractual claims and from awarding consequential, punitive, or exemplary damages. And, by locating the arbitration process in New York, AmRisc is also increasing costs to a sometimes prohibitive level, while simultaneously preventing policyholders from obtaining the benefits and protections of state laws, like those in Texas, fought for by the public and designed to protect consumers and policyholders. This lowers the ultimate payments to policyholders and increases profits for AmRisc and its insurer-clients. In addition, as the policyholder must pay for the arbitration process, including the high-priced New York arbitrators’ time—which often times amounts to over $1,000 per hour—the cost of pursuing any claim in arbitration greatly disincentivizes policyholders to pursue dispute resolution if their claims are denied or underpaid.
What types of properties does the AmRisc program target?
AmRisc markets itself to the following kinds of kinds of businesses:
- Real Estate / Lessor’s Risk
- Commercial Habitation / Apartments / Condominiums
- Office Buildings / Retail / Shopping Centers
- Hospitality / Hotels / Restaurants
- Health Care Facilities / Hospitals / Assisted Living Facilities
- Public Entities / Municipalities / School Districts
How AmRisc Earns Significant Profits from its Scheme
This scheme is believed to be highly profitable for AmRisc, because it is involved at both ends of the insurance transaction: the placing of insurance and the administration and adjusting of claims. AmRisc is believed to take a percentage of the premium paid by the policyholder and earns a premium on the profit that its policies earn. Thus, AmRisc’s purely financial incentives are to sell expensive insurance policies with high premiums that rarely pay out any money to policyholders when disaster strikes and claims are necessary.
AmRisc completes the underwriting risk valuations and physically inspects the commercial properties prior to coverage being bound. This provides AmRisc the ability to evaluate and price the properties being insured and it also gives AmRisc an opportunity to sell coverage that an insured will likely never need or use but will increase their premium. AmRisc also uses the same third-party claim administrator on all of its claims, CJW Associates, a subsidiary of Sedgwick, which manages all of AmRisc’s claims. Like AmRisc, Sedgwick/CJW are incentivized to minimize claim payments thereby increasing the profit of both the carriers and AmRisc, because AmRisc’s compensation is believed to be directly tied to the portfolio or “book profitability,” which is based on a ratio—the sum of the incurred losses and expenses, divided by the earned premium. The lower the ratio, the higher the profit. In other words, the less AmRisc’s handpicked insurance carriers have to pay out compared to the amount of premiums taken in, the greater both their and AmRisc’s profitability.
How The AmRisc Arbitration Scheme Harms Texas Policyholders
AmRisc has successfully orchestrated a scheme to maximize its own profits, and that of the surplus lines insurance carriers it recruits, through the use of an arbitration provision that purports to require New York law and a New York venue for insurance claims that have no relationship to New York. The purpose is to discourage policyholders from asserting valid claims, increase their costs, and then reduce claim payments if and when they are made.
While arbitration in New York under New York law may be appropriate for other businesses and industries, it has a chilling effect on the efficient management of Texas based commercial and governmental property insurance claims for a variety of reasons. The program takes a very local evaluation of Texas real estate, and turns it into an out of state dispute. At a minimum, this can discourage an arbitration panel from conducting a physical inspection of the property. It also discourages depositions and interviews of key witnesses, all of whom reside in Texas where the property is located. It reduces the capacity of experts to meet, compare data, and align or narrow the engineering and cost information that is inherently a part of the claim. AmRisc’s arbitration clause also prohibits exemplary, punitive, multiple, or other damages of a similar nature that are expressly available to policyholders under Texas law. These are all deliberate inefficiencies that AmRisc injects into its program with the objective of increasing claim costs for its policyholders, reducing the ability of the parties or the arbitration panel to fully assess the condition of the property, and ultimately reducing claim payments so that AmRisc can make more money.
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