ARBITRATION IN INSURANCE
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 Arbitration on a Property Insurance Claim?
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.
Potential Concerns with 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.
Potential Advantages with 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. 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.
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—even those that enforce the application of New York law to the arbitration.
Why Choose Lundquist Law Firm?
All of our attorneys previously defended carriers in these exact types of disputes. Unlike most firms, this is all we do—our entire practice is dedicated to helping policyholders get the just compensation they deserve for their properties following storms. Indeed, for over 20 years, we have helped policyholders with their property damage claims, collecting over $100 million in confidential settlements from carriers for our clients. Additionally, as a smaller firm, we offer greater attention to detail and a hands-on approach. No matter how solid your claim, insurance companies will always look to protect themselves and try to avoid paying you what you are owed. We are a nationally recognized bad faith insurance litigation law firm that is familiar with the tactics insurance companies often use to deny claims. Our attorneys counter with successful strategies, including hiring professional roofing inspectors and engineers to fully inspect the nature of the damage to find clear, physical evidence of property damage covered under the specific terms of your policy. This allows us to have a detailed, comprehensive estimate of the real damage to your property and how much we should seek in claim compensation on your behalf. Our use of professional experts, contractors, and engineers sets us apart from other insurance litigation firms.
Want your lawyers to have a proven track record? Since 2017, in addition to our co-counsel, we are the only law firm who successfully went to trial on a commercial property insurance claim against any insurance company stemming from a denied Hurricane Harvey claim—obtaining a record-setting verdict in the process. The final judgment was entered by the judge for over $4.200,000, which TopVerdict determined to be the #1 Texas verdict against any insurance company in 2020.
To learn more about the legal assistance we can provide on your arbitration In insurance claim, give us a call at (346) 704-5295 or contact us today to schedule a free case evaluation.