When a dispute arises between an insurer and their insured over a commercial property damage claim, an already stressful situation can quickly become contentious. In these instances, arbitration is often the favored process by insurance companies to resolve the issue. While this method of alternative dispute resolution can prove beneficial in certain situations, the negative effects of arbitration for commercial policyholders can greatly outweigh the positives.
Negative Impacts of Arbitration For Commercial PolicyholdersÂ
In the insurance industry, arbitration is used to resolve claims disputes with policyholders in lieu of litigation due to the length of time and costliness of taking a dispute to trial. With arbitration, unless the insurance policy requires a different procedure, both the insurance company and the insured select an independent individual called an arbitrator to resolve the matter based on the facts of the claim as presented by both sides. Once the arbitrator comes to a decision, an arbitration award can then be issued. This award may result in a legally binding decision on not only the number of covered losses, but also fees, further damages, and potential disciplinary actions required to resolve the dispute.Â
In many cases, arbitration is a voluntary process purported to be more cost-effective and less time-consuming than taking an insurance dispute to court. Despite this, arbitration can put commercial policyholders at a major disadvantage. Some of the most common ways arbitration can negatively affect a commercial policyholder include:
The Arbitration Award May Be Binding:Â
In voluntary or non-binding arbitration, both the insurer and the policyholder agree to meet with an arbitrator to review the claim. Once the arbitrator makes their decision on the claim, both parties then have the option to accept or reject it. If the decision is ultimately rejected, the case can then be appealed. However, binding arbitration is much more restrictive. In binding arbitration, both parties agree to accept the findings of the arbitrator no matter the outcome. This decision is final and no party can appeal it.
Arbitration Can Be Uneconomical For The Policyholder:
While under certain circumstances arbitration can indeed be a much cheaper alternative to litigation, it is not a free process and arbitrators must be paid for their work. This can become problematic if the amount of the disputed claim is modest. In these situations, it may not be worth the money to pursue arbitration as the cost would greatly outweigh the disputed claim amount. Payment responsibilities for arbitration are outlined in most commercial policies and should be reviewed thoroughly before pursuing it.
Arbitrator Standards May Be Dissatisfactory:Â
While arbitrators are required to be unbiased and have no stake in the claim involved, arbitration – like running an insurance company – is a for-profit business model. More often than not, arbitrators have little to no incentive to side with policyholders, as they are unlikely to encounter them in the future as a source of revenue. Insurance companies, on the other hand, can offer repeat business opportunities to arbitrators, which can lead to bias in favor of the insurer.Â
Even if an arbitrator is truly neutral, most arbitration clauses do not require any level of reasoning to support an award or final decision. The determination is ultimately left up to the arbitrator’s discretion, and they can decide how to explain their decision. When an arbitration award is based solely on an arbitrator’s unexplained or vague reasoning, this can make it very difficult to impossible to appeal.
Mandatory Arbitration Clauses Can Include A Choice Of Forum:Â
If arbitration is mandated under a commercial insurance policy, choice of forum and a choice of law clauses may also apply. These clauses have the potential to force policyholders to travel to and apply the laws of a state where they do not reside and where the property in question is not located. This can effectively eliminate certain recoverable damages which would be available in a policyholder’s home state, but are not available in the state where the arbitration is required to take place under the policy terms.
Insurance Arbitration Attorneys
Arbitration can put policyholders at a major disadvantage with their insurers in a claim dispute. At Raizner Slania, we understand the unfounded stress this can cause commercial property owners who only want to return their operations to normal after a disaster event damages their property. Our insurance arbitration attorneys are extremely experienced in successfully resolving insurance claims in arbitration proceedings, having worked with hundreds of commercial policyholders who have been taken advantage of by their insurers. If you need assistance with a commercial property claim that must be arbitrated, contact us today, and we can help protect your interests.
