Filing an insurance claim can be a complex process to navigate. Even under the best circumstances, policyholders and their insurers can end up disagreeing on the outcome of a claim. While litigation may be utilized in certain situations, arbitration has become a more popular method among insurers for resolving coverage disputes. Though both methods have different pros and cons for the parties involved, commercial policies often dictate that arbitration must be the means for resolving claims disputes. Unfortunately, these mandatory arbitration clauses are sometimes used to subvert the claims resolution process to the benefit of insurance companies rather than the policyholders.
In the insurance industry, arbitration is used as a means to resolve a claims dispute in place of litigation. In these instances, both the insurer and the policyholder select an independent individual known as an arbitrator, or a panel of arbitrators, to decide the matter based on the facts available. Once the arbitrator or arbitration panel comes to a decision, an arbitration award is issued. This award may be a legally binding decision on not only the amount of the covered loss, but also fees, further damages, and/or potential disciplinary actions required to resolve the dispute.
Arbitrators should be unbiased and unaffiliated with any party involved and can be a member of a group that provides arbitration services, like the American Arbitration Association. Once the arbitrator or panel is selected, each party has the option to represent themselves or to obtain legal counsel. After the arbitrator or arbitration panel comes to a decision, the outcome can be binding or non-binding:
Binding Arbitration: In instances of binding arbitration, both parties agree on an arbitrator or panel and agree to accept the decisions rendered. The arbitrator will hear arguments presented by both sides, review all pertinent claims and evidence, and render a decision. This decision is final and neither party can appeal it.
Non-Binding Arbitration: In non-binding arbitration, both parties agree to meet with an arbitrator or panel to review the case. The arbitrator will review the facts and render a decision. The parties then have the option to accept or reject the decision. In the event the decision is rejected, the case can then be taken to court.
While in some ways arbitration is favorable because it is a much faster and less costly route than going to court, some insurers have opted to utilize mandatory arbitration clauses in their policies. These clauses may put policyholders at a disadvantage by limiting the timeframe within which a party can file for and appeal the arbitration, the awards granted to the policyholder, and more.
The Negative Impacts of Insurance Arbitration Clauses On Commercial Policyholders
Although arbitration can be a process that is beneficial to the parties that choose to engage in it, its use by insurance carriers has also been partly to fix the amount of loss for property damage claims, helping them avoid legal repercussions for bad claims resolution practices. In recent years, some insurers have found that implementing mandatory, pre-dispute arbitration clauses in their policies can be used to gain an unfair advantage in fighting lawsuits by their policyholders. This is because making the arbitration process mandatory leaves the policyholder without other means to further dispute a claim. Some insurance companies employ these clauses to immunize themselves from bad faith claims or wrongful claim denials.
Some of the ways mandatory arbitration clauses negatively impact commercial policyholders include:
Despite the need for arbitrators to be unbiased and unaffiliated with any party involved, it doesn’t always happen. Arbitrator bias is, unfortunately, fairly common as some arbitrators work for the benefit of the insurance company as a way to get repeat business from them. This provides arbitrators with an incentive to favor the companies that are frequent users of the system.
It’s not just individual arbitrators either, as most arbitration panels include representatives of the industry being disputed against. As a result, the bias of the arbitrator leads to awards being a fraction of what they should be for the policyholder.
Unavailability of Discovery
Discovery is a procedure often used in civil litigation, during which the parties to a lawsuit can obtain information from each other as well as relevant third parties. This process is especially important in claim disputes where the insured may need access to certain records to prove their case. While discovery is offered as a right to each party in court proceedings, in arbitration it is used as a privilege granted at the discretion of the arbitrator. As mentioned above, arbitrators in insurance disputes can be biased in favor of the insurance company – making it unlikely they will grant the use of discovery to a policyholder as part of insurance arbitration.
Choice of Forum Clause
Under a mandatory arbitration clause, an insurance company may include choice of forum and choice of law clauses that force a policyholder to travel to and apply the laws of a state other than the one where the property involved is located. For example, if a Texas-based business is facing a major insurance dispute, the arbitration clause could mandate that arbitration take place in California and the matter be governed by California law, even though the dispute arose over a property located in Texas, where the decision would likely be more favorable to the policyholder.
Most mandatory arbitration clauses also make the arbitration award binding. This means that not only is the policyholder unable to use other means to dispute the outcome of a claim, but the award given at the end of the process stands as final. This makes it virtually impossible for a policyholder to appeal an arbitration ruling.
Insurance Programs With Common Mandatory Arbitration Clauses
Some examples of insurance programs that use mandatory arbitration clauses include:
The AmRisc Program
A common arbitration clause under the AmRisc Program requires the arbitration to be conducted in New York under New York law regardless of where the policyholder’s business is located. This program also shortens the timeframe within which a claimant must file for arbitration. In addition, damage limitations prevent an arbitrator from awarding any exemplary, punitive, multiple, consequential, or other damages of a similar nature, which severely limits the overall potential value of the claim.
The Velocity Risk Underwriters Program
The Velocity Risk Underwriters’ arbitration clause often requires arbitration to be conducted in Nashville, Tennessee. In addition, a policyholder only has a limited timeframe within which to file for arbitration and there are limitations on the awarded damages that can be recovered.
The AmWins Brokerage
AmWins Brokerage is a specialty insurance distributor that assists mostly coastal commercial property owners in obtaining proper coverage. AmWins often funnels specific entities – including independent school districts, municipalities, and others – into the Velocity Program and into the plans of other hand-picked insurance carriers. This puts these entities at risk of unknowingly being enrolled into an arbitration program that not only mandates the location of the arbitration but also limits the potential available damages and the timeframe within which one can bring a claim.
Insurance Arbitration Claims Attorneys
Insurance arbitration clauses can put unsuspecting commercial property owners at a disadvantage when it comes to claims disputes. These clauses work in favor of the insurer by contractually binding the policyholder to unfavorable and unfair arbitration terms. In these cases, the team at Raizner Slania can help. We’ve worked with many commercial policyholders who have been taken advantage of by their insurers. Contact us today to see how we can best assist with your claim.