When parties to a contractual relationship have a disagreement, they typically have the option to invoke a dispute resolution procedure either publicly or privately. For most insurance disputes, the parties can choose to go to court where they will present evidence at a trial to obtain a ruling from a judge or a jury of their peers. But over the past several years, there has been an increasing trend for insurance policies to require that disputes be resolved in arbitration, which is a private and usually confidential dispute resolution procedure. Insurance companies have vast resources at their disposal to exercise as much leverage as they can in arbitration, and the playing field is not always level for policyholders. When handled properly, arbitration can be a fast and efficient way to resolve complex insurance disputes, but the outcome can often turn on the quality and experience of a policyholder’s legal team.
What is an Insurance Arbitration?
Arbitration is an alternative form of dispute resolution that may be used to privately settle an insurance dispute, in lieu of filing a public lawsuit. The decision makers in an arbitration are either a single arbitrator, or more commonly, a panel of three arbitrators. In a three-member arbitration tribunal, each side will select an arbitrator, and the arbitrator(s) in turn will select a third arbitrator who is sometimes referred to as an “umpire” or “neutral.” Some arbitration agreements will require that the arbitrators possess a certain level of expertise in handling insurance claims. The arbitrators are usually lawyers, but they do not necessarily have to be, and sometimes engineers, adjusters or claims executives serve as insurance arbitrators. The parties present their case to the arbitrator or tribunal who renders a binding decision enforceable by law. Depending on the terms of the arbitration clause, depositions and other discovery may be limited. Some arbitration clauses may limit the types of damages that can be recovered, or even apply the law of a state that has virtually no relationship to the matters in dispute.
Agreeing to Arbitration
Because arbitration is an alternative to a court proceeding, all parties must generally consent to its use. However, mandatory arbitration provisions are becoming increasingly common in insurance policies. Insurance contracts are contracts of adhesion, which is a contract where the terms and conditions of the contract are set by one of the parties—the insurance company—and the other party—the policyholder—has little or no ability to negotiate. In many cases, the policyholder may not even be aware that they have consented to arbitration. The insurance quote may not reference arbitration, and the insurance broker may not have disclosed the arbitration provision to the policyholder. But most courts have nevertheless enforced arbitration agreements when they are contained in the insurance policy.
Arbitration in Texas
Due to extreme weather events, such as hurricanes, hailstorms, tornadoes, and wildfires, Texas policyholders are charged some of the highest Insurance premiums in the country to cover the high volume of claims filed. Costly insurance and increasing litigation costs creates an incentive for both consumers and insurance companies to cut costs. The arbitration process has fewer formal procedures, which may provide greater flexibility than traditional litigation and can streamline proceedings—making it a speedier form of dispute resolution. When handled properly, insurance arbitrations can be resolved in a matter of months rather than years of litigation and appeals. To avoid rising litigation costs and court backlogs, mandatory arbitration provisions are becoming much more common. Because a mandatory arbitration provision in an insurance policy deprives policyholders’ right to a trial by jury, many states have blanket prohibitions on arbitration agreements in insurance policies. However, Texas is silent on this issue, with few if any laws or regulations regarding insurance arbitration. Accordingly, most courts in Texas will enforce arbitration agreements.