The Potential Pitfalls of Insurance Arbitration
While there are advantages to arbitration for both the insurer and insured, there are many ways arbitration can work against the policyholder as there is potential for waiver of rights, secrecy, lack of fairness, and asymmetrical power. The playing field isn’t always level, and the deck can be stacked in favor of the insurance company
A binding arbitration involves waiving the constitutional right to a jury trial. Juries are fundamental to our judicial system and basic notions of fairness, including due process. Foregoing a trial by jury puts a policyholder at risk of a biased judgment. Jurors are often more receptive to arguments seeking to demonstrate that an insurance company is manipulating the system to its economic advantage. Arbitrators on the other hand are selected by the parties. There may be a built-in financial incentive for an arbitrator to side with an insurance company due to the possibility of repeat future assignments. Insurance companies are frequently embroiled in arbitration and litigation, while a business or other policyholder may have never seen the inside of a courthouse or arbitration conference room. The promise of such repeat business can unfortunately incentivize some arbitrators to favor insurance companies in this type of environment, whether in a conscious or unconscious manner.
Another drawback to the streamlined process of arbitration is the limit on the usually lengthy, information-seeking process of discovery involved with trials. Mandatory and binding arbitration could rig the system in insurers’ favor by restricting the access to information. This limitation may deny policyholders the opportunity to put on a full case. Furthermore, except under extremely rare circumstances, a binding arbitration is not appealable, so a policyholder would likely have no recourse to overturn an erroneous decision.
Arbitration clauses often tend to limit the types of recovery allowed in litigation, such as exemplary and punitive damages as well as recovery of attorneys’ fees. This erosion of rights, coupled with the privacy of proceedings, creates a concern that mandatory arbitration provisions may shield abusive business practices from scrutiny. Many arbitrations are completely confidential, so there is no public record of repetitive, bad faith tactics used by insurance companies and no damages recourse to prevent insurance companies from continuing to engage in harmful business practices.
In the court system, judges and jurors are compensated by the taxpayers and not the parties. In arbitration, the parties must share in the costs of the arbitration panel. These costs can sometimes be very high, and many policyholders lack the resources to pay for costly arbitrators.