Alternative Dispute Resolution And Its Use In Commercial Insurance Disputes

Thursday, June 1, 2006 - 00:00

Robert Matlin
American Arbitration Association

Alternative Dispute Resolution (ADR) has been successfully used for a number of years as an effective method for resolving a wide variety of insurance-related disputes. Examples include the use of arbitration to resolve uninsured motorist and no-fault cases, as well as subrogation disputes between carriers. In the complex world of reinsurance, arbitration has been the preferred method of resolving disputes for more than a century. More recent examples of ADR's use include numerous court-annexed programs for personal injury and property damage claims as well as state-mandated programs set up to help resolve disputes arising from natural disasters, such as the Hurricane Katrina program administered by the American Arbitration Association (AAA).

Despite its use in a variety of insurance-related disputes, ADR is not currently the norm in commercial insurance disputes. This is because many standard-form commercial policies issued in the U.S. do not contain ADR clauses. After a dispute over an insurance claim arises, the relationship between policyholders and insurers often deteriorates rapidly, causing the use of a voluntary option such as ADR to become less likely. Given that commercial insurance disputes may often lead to protracted and expensive litigation, these types of cases may be ideal for non-judicial resolution. Increasing the presence of ADR clauses in commercial insurance policies followed, logically, by the use of ADR in these disputes could have important benefits for insurers as well as policyholders.1

ADR methods such as arbitration and mediation provide insurers and their policy holders with the opportunity for private, flexible, as well as quicker, less expensive dispute resolution with more amicable outcomes than court-based dispute resolution options. Such benefits may be particularly attractive for commercial insurance disputes for a number of reasons.

Privacy

Arbitrations are confidential and set no precedents. From an insurer's point of view, there is less concern that a decision involving an unsettled area of the law, which is fairly common in coverage disputes, will set precedent. Therefore, there is less concern that an adverse award or even settlement will have ramifications beyond the particular matter. From a policyholder perspective, there is less concern regarding the possible release of proprietary information subject to discovery or the need for protective orders. Confidentiality allows both sides to deal with the matter at hand without allowing the potential impact on other disputes to get in the way of resolution.

Expertise

Commercial insurance disputes frequently involve highly complex issues. Coverage disputes, in particular, often involve cutting edge questions of law. As apparent in the aftermath of Hurricane Katrina, business interruption claims can also be extremely complicated, involving issues of causation as well as damages. Unfortunately, in a jury trial, those involved may not be well versed enough to deal with these issues. In arbitration, however, organizations such as the AAA offer neutrals with specific expertise in these areas and arbitration allows the parties to select the neutral(s) who will decide their case.

Speed

Commercial insurance disputes can take at least two or three years to resolve in court whereas the average arbitration can take less than a year. From a policyholder perspective, speed is paramount. The length of time it takes to resolve a claim could have a significant impact on a policyholder's livelihood. Resolving claims in the most efficient and expeditious manner possible is a goal shared by insurers as it eliminates the unpredictable costs associated with unresolved matters.

Cost

Arbitration is less expensive than litigation. From an insurer's perspective, executives as well as underwriters understand the effect that litigation costs can have on an organization's bottom line. This need to manage legal fees associated with a dispute is shared by policyholders as well.

Flexibility

Insurance companies benefit from including arbitration clauses that encourage parties to reach common-sense dispute resolution in their agreements. Arbitration is a creature of contract which means that parties have the opportunity to design their dispute resolution process as part of their contractual agreement. In the context of standard commercial policies, items such as method of selection, number of arbitrators, locale, governing law, discovery, remedies, etc., can be addressed in the ADR clause itself. In addition, the clause will determine if "all disputes" under the policy are subject to the provision or limit the same to only certain types of disputes (i.e., damages when coverage is not in dispute).

Even after a case is submitted to arbitration, the parties can further customize the process. For example, an insurer and a policyholder with a dispute involving a property damage claim might agree to "baseball" arbitration wherein each side submits its "number" to the arbitrator(s), one of which the arbitrators must pick. This approach encourages each side to submit a reasonable number. Often insurers and policyholders are able to negotiate to a point, but are unable to close the gap. For this type of situation, the parties might set up an arbitration that must result in an award within that gap. This eliminates extreme risk and preserves the benefits of prior negotiations. Such options are not available in court.

More Amicable

A "scorched earth" approach to dispute resolution is less common in arbitration. Many insurers and policyholders have enjoyed long term relationships prior to a dispute arising over a claim. If the level of hostility exceeds a certain point, the likelihood of preserving that relationship may be greatly diminished.

Non-binding Dispute Resolution Options (Mediation, Mini-trials And Early Neutral Evaluation)

Generally speaking, mediation works. Although statistics regarding the success rate for mediations of commercial insurance disputes are not available, statistics from the AAA show that 75 to 85 percent of commercial cases that mediate end in written settlement agreements. For commercial insurance disputes, the timing of mediations can be extremely important.

Frequently, coverage actions involve extensive discovery. Mediations conducted too early in the dispute resolution process may impact an insurer's or policyholder's willingness to compromise. On the other hand the significant legal costs associated with discovery might make mediation worthy of consideration earlier rather than later in the process.

Mini-trial is a settlement process that can provide policyholders and insurers with a better understanding of the other side's case. After abbreviated presentations to a neutral with the other side present, facilitated settlement discussions occur. The parties can agree to limit the amount of discovery to be conducted prior to the mini-trial, which can control the high costs associated with complex insurance disputes.

Early Neutral Evaluation (ENE) is a non-binding process wherein an insurer and policyholder can receive an assessment of the merits of their case from someone with expertise in the particular area. Given the specialized nature of many types of commercial insurance disputes, particularly coverage, ENE offers both sides an opportunity for a reality check.

Interestingly, both insurers and commercial policyholders appear to be open to increased usage of ADR methods to resolve commercial insurance disputes. As indicated above, insurers are very familiar with the process and frequently include ADR clauses in their non-policy related commercial transactions. In the aftermath of Hurricane Katrina, several insurers have set up ADR programs to help resolve disputed commercial claims and one major insurer has even created an Office of Dispute Resolution to help promote effective alternatives to litigation. Likewise, commercial policyholders, typically small, medium and large businesses, make regular use of ADR clauses in their agreements.

In summary, underwriters as well as corporate risk managers should re-examine their commercial insurance policies and consider adding ADR clauses where they are absent. It is too powerful a tool to reach quick and amenable consensus on otherwise protracted, expensive disputes to ignore. 1 The question of whether any state-specific limitations could affect the enforceability of insurance related arbitration clauses is beyond the scope of this article. Although there is no prohibition against arbitration of insurance disputes under the FAA, a few states have enacted statutes relating to this area. Insurers filing policies with various state insurance departments will need to make their own determinations in this regard.

Robert Matlin is District Vice President of the American Arbitration Association.