Arbitration: Insurance Settlement Alternative

Arbitration is an alternative to litigation that is often used to settle disputes between insurance carriers and policyholders. It involves a neutral third party, known as an arbitrator, who is tasked with reviewing the facts of the case and making a decision to resolve the dispute. The process is designed to be faster and less expensive than traditional courtroom proceedings, and it offers privacy for sensitive matters. Arbitration can be either binding, where both parties agree to accept the arbitrator's decision, or non-binding, where either party can reject the decision and pursue legal action. While arbitration can be beneficial in certain situations, it's important to note that it may also negatively impact policyholders, particularly when mandatory arbitration clauses are involved.

Binding vs. non-binding arbitration

Arbitration is a form of alternative dispute resolution (ADR) that is encouraged by courts and is increasingly being used by corporations and individuals to resolve disputes. It is a more flexible, practical, and cost-effective alternative to formal litigation. In the context of insurance, arbitration is used to resolve claims disputes in place of litigation. Both the insurer and the policyholder select an independent arbitrator or a panel of arbitrators to decide the matter based on the facts available. The outcome of the arbitration process can be either binding or non-binding.

Binding arbitration is when both parties agree to accept the arbitrator's decision as final and cannot be appealed. In this type of arbitration, disputing parties waive their right to a trial and agree to be bound by the arbitrator's final decision. Binding arbitration is suitable for disputes where a quick outcome is necessary, and both parties need to resolve internal conflicts to expedite a result. For example, in a dispute between a construction company and a retailer, binding arbitration can help ensure the work is completed promptly and the construction company receives payment.

On the other hand, non-binding arbitration allows either party to appeal the arbitrator's award if they are dissatisfied with the outcome. In this case, the dispute may then proceed to court. Non-binding arbitration is a more casual process used to minimize court costs and delays and is often used for petty disputes. It is commonly employed in simple conflicts where both parties only need guidance or direction to resolve their issues. For instance, non-binding arbitration can be useful when two owners of the same restaurant disagree over a small amount of money.

While arbitration is generally beneficial for both parties, it is important to note that mandatory arbitration clauses in insurance policies can sometimes put policyholders at a disadvantage. These clauses may limit the timeframe for filing and appealing arbitration, restrict the policyholder's ability to use discovery procedures, and impose choice-of-forum clauses that require arbitration to take place in a specific state. As a result, policyholders may find themselves bound by unfavorable arbitration terms, making it challenging to dispute a claim further.

Mandatory vs. voluntary arbitration

Arbitration is the process of settling a dispute through a committee or third party rather than through the court system. It is often used to resolve insurance disputes between an insurance provider and a policyholder. This can be done through mandatory or voluntary arbitration.

Voluntary arbitration occurs when both parties opt for arbitration to settle a dispute. For example, when a company decides to settle out of court. It begins when the parties voluntarily submit a dispute to arbitrators for determination. This is usually done through a formal, written agreement. Voluntary arbitration can take two forms: pre-dispute arbitration and post-dispute arbitration. Pre-dispute arbitration occurs when a contract between parties contains an arbitration clause, meaning that any dispute over the contract will be arbitrated. Post-dispute arbitration occurs when the parties enter into an agreement to resolve a dispute through arbitration after the dispute has arisen.

Mandatory arbitration, on the other hand, is when a statute, court procedure, or contract dictates that arbitration must be used to resolve a dispute. Certain state and federal laws require parties to arbitrate specific types of disputes, such as alleged violations of rules put forward by the Financial Industry Regulatory Authority (FINRA). Mandatory arbitration is also common when a plaintiff seeks to recover a relatively small amount of money, such as $50,000 or less. In these cases, the lower costs associated with arbitration can be beneficial for all parties involved.

Both types of arbitration have their advantages and disadvantages. Voluntary arbitration allows parties to voluntarily agree to accept the ruling of the arbitrator, which can save time and money. However, if both parties are not fully on board with the idea, it can be problematic. On the other hand, mandatory arbitration can be seen as unfair, as parties may feel forced into arbitration without fully understanding the process or the implications.

Pros and cons of arbitration

Arbitration is an alternative to going to court over a business dispute. Instead, a neutral third party is recruited to settle the dispute. It is a quicker, simpler, and less expensive method of settling disputes than going to court. It is also a private process, which is why it is often used in cases where privacy is desired.

Pros of Arbitration

• Arbitration resolves cases faster than courtroom proceedings.
• It is a simpler process.
• It is less expensive than going to court.
• It is a private process, so it is often used in cases where privacy is desired, such as divorce settlements or other confidential matters.
• Arbitration benefits both parties.

Cons of Arbitration

• Arbitrators may be biased towards insurance companies as they are likely to be a repeat source of revenue.
• Discovery, a procedure used in civil litigation to obtain information from both parties, is often denied in arbitration.
• Arbitration clauses may include choice of forum and choice of law clauses that force a policyholder to travel to and apply the laws of a different state.
• Most mandatory arbitration clauses make the arbitration award binding, which means that the policyholder is unable to use other means to dispute the outcome of a claim.
• Arbitrators have little incentive to side with policyholders whom they are unlikely to encounter again in the future.
• Arbitrators may ignore or only partially apply routine statutory or common-law protections of the policyholder's interests.

Choosing an arbitrator

When it comes to choosing an arbitrator, there are a few key things to keep in mind. Firstly, it is important to select an independent and unbiased individual or panel with no affiliation to either party involved in the dispute. This ensures a neutral perspective in the decision-making process. The arbitrator can be a retired judge, an experienced lawyer, or any other qualified professional agreed upon by both parties. Additionally, arbitration groups such as the American Arbitration Association (AAA) can provide recommendations if needed.

It is worth noting that some policies may require the arbitrator to have senior-level experience in insurance claims or underwriting. This is something to keep in mind when making your selection. The chosen arbitrator should also have expertise relevant to the specific case, such as an understanding of injury claims or property damage assessments.

Once you have identified potential candidates, it is important to conduct thorough research. Review their background, experience, and any specialised knowledge they may have. If they are attorneys, check their websites to see what type of law they generally practice. It is generally advisable to avoid arbitrators who specialise in insurance defence, as they may be more likely to favour the insurance company. Instead, look for arbitrators with experience in personal injury law or commercial property damage cases.

When both parties have agreed on an arbitrator, a hearing date will be set. This process can take a few weeks, as it involves researching and contacting potential candidates, as well as coordinating schedules. During this time, both parties will also need to gather and share relevant documentation, evidence, and other information with each other and the arbitrator.

It is important to remember that the choice of arbitrator should be mutually agreed upon by both the insurance company and the policyholder. This ensures a fair and impartial resolution process. If there are limitations on the selection process specified in your insurance policy or state laws, be sure to take those into account as well.

Overall, selecting an arbitrator is a crucial step in the arbitration process, as it sets the tone for the entire proceeding. By choosing a qualified, unbiased, and experienced individual or panel, both parties can feel confident that their dispute will be resolved fairly and efficiently.

Costs of arbitration

Arbitration is an alternative to going to court to settle a dispute. Instead, a neutral third party is recruited to settle the dispute. This process is often chosen as it is quicker, simpler, and less expensive than going to court.

There are two main costs associated with arbitration: administrative fees and arbitrator compensation and expenses. The payment of these costs depends on several factors, such as the insurance policy or contract, the rules that apply to the case, the details of the dispute, how quickly the case is progressed, and the arbitrator's hourly or daily rate.

When working with an organisation like the American Arbitration Association (AAA) to hire an arbitrator, there is an additional administrative fee paid on top of the compensation and expenses paid directly to the arbitrator. These administrative fees include filing fees and final/hearing fees. Filing fees are paid out once the claim dispute has been filed, triggering the arbitration process. This fee can be a fixed amount or it can be based on the amount of money at stake in the claim. The final/hearing fees are paid in cases that proceed to further legal action or litigation.

The insurance company and the policyholder typically split the costs associated with hiring the arbitrator and any costs related to the arbitrator's work or travel. The amount of compensation the arbitrator receives depends on how much work must be done on the case. Arbitrators are paid based on their rate of compensation, which may be set by a fee schedule or at an hourly or daily rate. If the arbitrator has to travel a long distance, both parties are responsible for paying for their travel time, hotel, and other associated expenses.

In addition to administrative fees and arbitrator compensation, the parties are usually responsible for their costs to prepare and present their case in arbitration. These costs may include attorneys' fees, costs for expert witnesses, travel costs, and any other expenses associated with conducting their case, such as copying documents.

Frequently asked questions