There are many complexities and nuances included within insurance policies. While every policy is unique to the needs of the policyholder, disputes can still arise for a variety of reasons. When a disagreement over a claim between an insurance company and its insured arises, arbitration is often utilized as a tool to resolve the conflict without having to go through litigation. Understanding the role of arbitration in commercial property insurance disputes can help increase business owners’ awareness of their options in the event an issue arises.
Arbitration and Commercial Property Insurance
When a dispute over a commercial property insurance claim arises, some policies allow—and some require—arbitration to resolve the matter without having to go to court. Arbitration utilizes an independent third party, known as an arbitrator, or a panel of arbitrators, to settle the dispute. The arbitrator(s) should be unbiased and review the facts of the case to come to an appropriate decision. One of the most important factors when it comes to selecting an arbitrator is ensuring the party is unaffiliated with either party. The involved parties also have the option to choose to designate an organization like the American Arbitration Association, Judicial Arbitration and Mediation Services, Inc. (JAMS), or the National Arbitration Forum. Additionally, each party has the option to represent themselves or hire legal counsel to represent them in these proceedings.
Binding Arbitration vs. Non-Binding Arbitration
Once an arbitrator or panel makes a decision, an award is rendered. This award can be binding or non-binding and includes all the information on the case, along with the arbitrator’s final decision on fees, damages, and/or any disciplinary actions needed.
- Binding Arbitration: In binding arbitration, both parties agree that the arbitration award cannot be appealed at a later date regardless of the circumstances of the case. Essentially, this means a court cannot overturn the arbitrator’s decision since both sides have agreed to accept it as final ahead of time.
- Non-Binding Arbitration: Non-binding arbitration is used in the event both parties want to retain control over the resolution of the dispute. This allows either party to appeal the arbitration award in court if they are dissatisfied with the outcome.
There are several reasons why arbitration is utilized in lieu of litigation. For instance, arbitration is often less costly and the process is typically faster and more flexible than litigation. Another reason is that arbitrations are private, which means the dispute and resolution are kept out of the public eye.
Mandatory Arbitration vs. Voluntary Arbitration
Despite the positives of the process, there are other factors that commercial policyholders must be aware of before a dispute arises – particularly, the differences between mandatory and voluntary arbitration.
One of the most important factors that must be considered in arbitration even before selecting an arbitrator is whether or not arbitration is voluntary or mandatory. For instance, many insurance policies are starting to require mandatory arbitration as the means to resolve a dispute. Voluntary arbitration, on the other hand, occurs when both the insured and the insurer choose to use arbitration to settle a dispute out of court; however, unlike mandatory arbitration, either party can still pursue litigation despite an arbitration award, if necessary.
Unfortunately, there has been an increasing trend for commercial insurance providers to include mandatory arbitration clauses within their policies, which can put policyholders at a disadvantage. This is especially problematic as insurance policies are drafted by the insurance company and the policyholder has little to no bargaining power.
Mandatory Arbitration Can Put Commercial Policyholders at a Disadvantage
In recent years, insurance companies have realized that binding arbitration clauses can help them to gain an unfair advantage in disputes with their policyholders. Because of this, many insurance companies have begun to use mandatory arbitration clauses in their policies to immunize themselves ahead of a dispute, particularly when bad faith practices are in question.
The utilization of mandatory arbitration clauses allows insurance companies to avoid any litigation with commercial policyholders. This puts policyholders at a great disadvantage by dictating important terms, such as fees, expenses, and venue, which can strip policyholders of substantive and procedural rights.
For example, arbitration clauses often include a choice of forum and choice of law clause in mandatory, which may force policyholders to travel to and apply the laws of a state other than where the damaged property is located. Therefore, a Texas-based business with a clause stating arbitration must occur in and apply the laws of New York requires the policyholder to travel to New York and may eliminate certain damages that are recoverable under Texas law.
Insurance Arbitration Attorneys
Insurance companies have an upper hand through their ability to draft policies with little bargaining power given to policyholders. Because of this uneven playing field, policyholders are at a disadvantage when their policy requires arbitration as their case may not be able to be properly heard in the appropriate forum and/or decided under the laws of the state in which their property is located. At Raizner Law, we are well versed in insurance arbitrations and have worked with many commercial policyholders who have been taken advantage of by their insurers. If you need assistance with a claim that must be arbitrated, we can help. Contact us today to learn more about how we can assist you.