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.
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.
Potential Advantages of Insurance Arbitration
Although there are significant pitfalls of insurance arbitration, there are some potential advantages. For one, time is rarely on the side of an insured, and insurance companies know that the longer they delay, the more leverage they can exert over a financially strapped policyholder. When handled by experienced counsel with neutral arbitrators, the arbitration process can move much more quickly than litigation. Whereas a state or federal court has hundreds or even thousands of cases at any one time, an arbitration is only subject to the schedule of the chosen arbitrators, the parties, and their attorneys. Deadlines in arbitration are usually firm, and delays are looked upon with disfavor unless there is a compelling reason. In court, there can often be delays based on other cases that are older or take priority, but arbitration is not subject to this type of unpredictability. The COVID pandemic, for example, has caused a significant backlog in jury trials that will likely last for multiple years. There are no such concerns in arbitration. When managed properly by experienced counsel who understand the issues, arbitration can be resolved in a matter of months rather than years.
As noted above, one of the pitfalls of arbitration is that is has a very limited rights to appeal. On the flip side, this may also provide real security to policyholders that when the arbitration is concluded in a favorable manner, the claim will be paid, and quickly. Contrast this against litigation in court, where a trial is sometimes followed by several years of appeals through multiple appellate courts, and payment delayed until the expiration of all appeals.
Like anything else, there are upsides and downsides, and the ability to secure the advantages of arbitration while minimizing disadvantages often turns on the experience and skill of the lawyers handling the proceeding.
Our Experience Handling Insurance Arbitration
In recent years, we have successfully resolved cases containing arbitration provisions either containing the AmRisc arbitration provision, or those substantially similar to them for various targeted property types, such as multi-family properties, office spaces, hotels, and school districts. We have fought the fight for our clients, and know the “when, where, and how” of these battles that few, if any, other law firms can truthfully claim. AmRisc, AmWins, and Velocity solicit insurance companies to underwrite form policies that contain unfair arbitration clauses. These clauses create an unfair playing field as the clauses limit Texas remedies, apply foreign laws, require policyholders to take on enormous costs for private arbitrators, and conduct proceedings in far away venues. However, through our experience in dealing with these programs we have been able to achieve fair and favorable results for our clients, which is evidenced by the tens of millions of dollars in awards we have won for our clients in arbitration related matters.
Further, our experience provides us with the knowledge to advocate against these arbitration provisions regardless of the type of loss event and regardless of the type of commercial property that has been damaged. These disputes have been subject to these unfair arbitration clauses after:
Hurricanes
For example, after Hurricane Harvey in 2017, Raizner Slania LLP represented a variety of commercial property owners across Texas, including:
A multi-family property owner against various underwriters, AmRisc, LLC, and several insurance brokers for damages. Our firm successfully remanded all claims against AmRisc and the insurance agent, Highpoint Insurance, applying Texas and 5th Circuit law. The arbitration against the underwriters was successfully conducted in New York and recently settled for a confidential amount.
The owner of several commercial properties in Corpus Christi, including, strip centers, commercial and retail warehouses, and a restaurant, against underwriters, various insurers, and AmRisc, LLC for damages. The parties extensively briefed questions of arbitrability and jurisdiction to the court, including issues addressing the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The case was settled for a confidential amount in 2019 while arbitration related briefing was underway in the Southern District of Texas.
The property owner of a real estate business against underwriters, various insurers and AmRisc, LLC, for damages resulting from Hurricane Harvey in 2017. The parties fully briefed the arbitrability of the claims pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the case was settled for a confidential amount in 2020.
The motel owner against insurer, Underwriters at Lloyd’s, London for damages. The parties submitted competing briefs regarding the arbitrability of the case, including impartiality and seat of the arbitration panel. On the eve of trial on the merits in 2019, the parties successfully resolved the case for a confidential amount.
While still helping clients recover from Harvey, Raizner Slania began assisting various Independent School Districts (ISDs) in the Rio Grande Valley after Hurricane Hanna in July 2020. Currently, Raizner Slania has been retained by multiple school districts that have dozens of campuses—some even across several counties—that have policies with arbitration provisions through AmRisc, LLC or the Velocity program, with policies produced by AmWins. With so many buildings to inspect, each ISD requires a team of engineers, adjusters and building consultants to thoroughly investigate the damage to provide accurate damage assessments to ensure these school systems are not taken advantage of further by these arbitration provisions. Raizner Slania works with some of the most highly qualified experts to prepare detailed and complex engineered damage assessments in order to prepare and prevail in arbitrations before sophisticated arbitration panels.
Hail and Windstorms
Raizner Slania LLP represented an apartment complex owner against underwriters, various insurers and AmRisc, LLC, for damages resulting from a hailstorm in 2015. The parties requested and briefed the arbitrability of the claims, and the case settled for a confidential amount in in 2018.
Raizner Slania LLP represented a hotel owner against underwriters, various insurers and AmRisc, LLC, for damages resulting from a wind and hailstorm in 2016. The parties engaged in litigation in both Texas and New York, briefed jurisdictional issues and the arbitrability of the claims in 2017. The case was successfully mediated and settled for a confidential amount.
Raizner Slania LLP represented the apartment complex owner against underwriters, various insurers and AmRisc, LLC, for damages resulting from a wind and hailstorm in 2016. The parties heavily disputed common hailstorm causation issues including segregation of damages, pre-existing damage exclusions, and the legal definition of replacement cost value. After extensive litigation and negotiation, the case settled in 2017 for a confidential amount.
Raizner Slania LLP represented the hotel owner against underwriters, various insurers and AmRisc, LLC, for damages resulting from a windstorm in 2016. The case was settled for a confidential amount in 2017.
Raizner Slania LLP represented the apartment complex owner against underwriters and insurers for damages resulting from a hail and windstorm in 2016. We filed a motion to remand and briefed the conflicting insurance policies amongst the various underwriters in the insurer tower, including one foreign policy that required arbitration, one that required appraisal, and one that required litigation in state court. The parties also litigated ethical considerations concerning primary liability when subsequent insuring layers dispute coverage. While jurisdictional pleadings were pending ruling, it settled for a confidential amount in 2019.
Raizner Slania LLP represented a McAllen strip center property owner against underwriters and AmRisc, LLC, for damages resulting from a windstorm in 2018. We successfully claimed building envelope failures were caused by the storm, as well as providing expert reporting on loss of business income and fixtures/inventory. The case was settled for a confidential amount in 2020.
Raizner Slania LLP represented the apartment complex owner against AmRisc, LLC, for damages resulting from a windstorm in 2019. The case was settled for a confidential amount in 2020.
Fire
Raizner Slania LLP represented an apartment complex owner against underwriters, various insurers and AmRisc, LLC, for damages resulting from a fire in 2017. The Defendants disputed the scope of loss, denied based on pre-existing conditions, and argued overall repair methodology. Shortly before proceeding to arbitration in 2018, the case was settled for a confidential amount.
Negligent Construction
Raizner Slania LLP represented an office space property owner against various underwriters, insurers and AmRisc, LLC, for damages resulting from heavy construction and vibration damages near the property in 2017. The parties litigated the denial of the claim under the Texas Insurance Code, specifically related to the ‘settlement’ and ‘wear and tear’ policy exclusions. The case against AmRisc and the insurers proceeded to arbitration in early 2020, and the claims against the insurers and AmRisc settled shortly thereafter. The negligence and trespass case against the contractor proceeded in Harris County.
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