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Arbitration of Insurance Disputes

July 13, 2018

It is now commonplace to find an arbitration clause in a wide variety of contracts. Many consumer contracts now contain arbitration clauses.

 

 

  1. Contracts

    Many consumer contracts now contain arbitration clauses. Contracts with doctors, cell phone providers, cable, satellite and video streaming services, banks, auto dealerships, employers, credit card companies and real estate sales are just a small sample of the many companies and transactions that may require arbitration of a dispute. Similarly, commercial business disputes are routinely subject to arbitration based on the contract between the businesses. Therefore, it should come as no surprise that many insurance contracts and statutes also contain arbitration provisions.
     

  2. California Civil Code *2860(c)

    For example, California Civil Code *2860(c) provides for arbitration of fee disputes between an insurance carrier and independent counsel. Arbitration under *2860 is limited to disputes involving the amount of legal fees or the hourly billing rates at issue. Preliminary issues of duty to defend, existence of a conflict and coverage are not within the scope of the *2860 arbitration.
     

  3. Arbitration of Uninsured/Underinsured Motor Vehicle

    Arbitration of uninsured/underinsured motor vehicle claims comes into play where a negligent driver causes injury and is uninsured or underinsured. Assuming the injured party purchased uninsured motorist (UM) coverage, a claim can be made to the injured party*s own insurance carrier. If the injured insured and the carrier disagree over whether the insured is entitled to recover, or as to the value of the claim, the claim must then be resolved in arbitration. (California Insurance Code *11580.2(f).) A single neutral arbitrator conducts the arbitration. Unless the injured insured and the carrier reach an agreement, the arbitration must be completed before any UM policy benefits are payable to the injured insured. Depending on claims handling issues (unreasonable settlement offers etc.), the injured insured may also have a claim for extra-contractual damages in court against his or her own carrier but only after the arbitration is completed. Also, the carrier is entitled to reserve rights as to insurance coverage. Issues of insurance coverage are not determined in the UM arbitration--only issues of liability and damages.
     

  4. Insurance Carriers

    Insurance carriers often pursue subrogation. Rather than become embroiled in expensive courtroom litigation, many carriers subscribe to intercompany arbitration agreements which provide for a panel of experts or claims professionals to resolve claims. It is good practice to inquire whether your particular inter-carrier dispute is governed by such an agreement.
     

  5. Insurance Policies

    As mentioned above, many insurance policies now include an arbitration provision. This is especially prevalent in commercial and group policies. However, these vary widely in terms of scope and effect. For example, some policies provide that arbitration will take place only upon the *mutual consent of the parties*. Other policy provisions mandate arbitration where there is *a dispute concerning coverage under this policy*. Some arbitration clauses attempt to limit the scope of what is subject to arbitration by excluding the arbitrator*s authority to award punitive damages, exemplary damages or attorney's fees. Some provisions require the policyholder and insurer to split the cost of the arbitration. Whether state courts or state insurance regulators will view these provisions as *consumer friendly* and enforce these arbitration provisions remains to be seen. Many states already have statutes or regulations prohibiting the enforceability of these provisions. In some of these states, the courts have upheld statutes prohibiting such provisions. However, courts in several other states have found the statutes insufficient to prevent enforcement of an arbitration provision. For more information with respect to the position of the various states, the following website is instructive:

    State Laws Regulating Arbitration in Insurance Contracts
     

  6. Voluntary Arbitration

    Quite often, the parties voluntarily agree to arbitrate an insurance dispute. Voluntary arbitration may be a smart alternative to becoming embroiled in protracted coverage litigation. Additionally, in extra-contractual litigation, the parties may wish to obtain a phase I coverage ruling in arbitration. The parties may benefit from obtaining an expeditious ruling from an arbitrator who has expertise in insurance coverage.
     

  7. Coverage Issues

    Coverage issues often present a roadblock to settlement of a third-party claim or suit. Sometimes one party tries to join a coverage action with the underlying liability action. In such a situation, the parties may wish to obtain a binding coverage ruling from a knowledgeable arbitrator before proceeding further with settlement discussions in the third-party claim or suit.
     

  8. Conclusion

    Where contracts require arbitration, the courts have generally enforced arbitration provisions. AT&T Mobility LLC v Concepcion, 563 U.S. 333 (2011). However, as the above discussion illustrates, even where a contract or statute does not require arbitration of a particular dispute, arbitration of an insurance dispute may be worth considering as an alternative to courtroom litigation.

     

     

     

     

     

     

     

     

     

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