When a dispute arises between an insurer and their insured over the outcome of a commercial property damage claim, an already stressful situation can quickly become contentious. When this happens, arbitration can be utilized as a tool to help resolve the dispute. However, there are several things about this legal process that business owners should be aware of ahead of time.
Arbitration and Commercial Property Insurance Claim Disputes
Arbitration for commercial property insurance claims occurs when there is a dispute between the policyholder and the insurance provider over the outcome of a claim. This process involves the use of an independent third party, known as an arbitrator, or panel of arbitrators, to help settle the dispute, rather than taking the case to court. The arbitrator(s) should be unbiased and must come to an appropriate decision based on the facts of the claim. Once the arbitrator completes their investigation, the resulting judgment or arbitration award can be given. The award includes all of the information about the case, along with the arbitrator’s decision regarding any related fees, damages, or disciplinary actions necessary to resolve the dispute.
Because resolving a claims dispute through litigation can often be lengthy and expensive, arbitration can be used as an alternative. Instead of filing a lawsuit, the insurer and the policyholder present their case to the arbitrator. The results may be binding depending on the requirements outlined in the insurance policy. If the arbitration is non-binding, either party can appeal the initial award if dissatisfied with the result.
Who Can Act as Arbitrator?
Several specifications must be met for someone to be able to act as an arbitrator. Arbitrators can either be an independent party who is unaffiliated with either side or a group that provides arbitration services. For example, the policyholder and the insurer can designate an organization like the American Arbitration Association, to help provide arbitration services. Additionally, each party can represent themselves or hire legal counsel in these proceedings. The experienced legal counsel at Raizner Slania for instance, has a dedicated team of commercial insurance claims attorneys with a vast knowledge of the arbitration process.
The Negative Impacts of Arbitration on Commercial Policyholders
In the insurance industry, arbitration is used to resolve claims disputes with policyholders instead 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 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.
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:
Arbitration Awards Can Be Binding
In voluntary or non-binding arbitration, 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 denied, the case can then be appealed.
However, binding arbitration is much more restrictive. In binding arbitration, both parties agree to accept the arbitrator’s findings, no matter the outcome. This decision is final and no party can appeal it.
Arbitration Can Sometimes Be Costly 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
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 create bias in favor of the insurer.
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 or impossible to appeal.
Mandatory Arbitration Clauses Can Include a Choice of Forum
If arbitration is mandated under a commercial insurance policy, the choice of forum and a choice of law clauses may also apply. These clauses can 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 that 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.
Commercial Property Insurance Claim Attorneys
Despite some of the positives that come with pursuing arbitration over litigation in a claims dispute, the negatives greatly outweigh them. This uneven playing field puts policyholders at a disadvantage before their commercial property has even been damaged. At Raizner Slania, we understand just how upsetting this can be. We are well-versed in the arbitration process and have worked with many commercial policyholders who have been taken advantage of by their insurers. If you need assistance with a commercial property insurance claim that must be arbitrated, we can help.
