Carefully Consider Your Policy Agreement Before Entering Into It
Case In Point: The Impact of Arbitration Provisions

By Craig Pynes, Esq.

Most businesses choose their workers’ compensation insurer (and other carrier lines) primarily on the cost of the policy being offered. This decision is generally made solely on the overall policy premium and, in many instances, the amount of the per claim deductible the business will have to pay out of pocket (which is chosen largely because it reduces the overall premium).

Unfortunately, most businesses do not focus on the many other costs passed on to them by insurers hidden in the prolix of largely undefined or under defined policy terms. Some of these costs include “allocated loss adjustment expense” addressed in a separate article in this newsletter and provisions requiring dispute resolution by arbitration instead of trial among others. These hidden costs can have a substantial impact on a business’ bottom line profits. While a difference in premiums may amount to a few thousand dollars, the difference in costs generate by such hidden provisions may result in hundreds of thousands of dollars in unanticipated costs.

One provision appearing more often, hidden at the end of many policies, requires policyholders to submit any disputes they have with the insurance company to arbitration. Policyholders often are not aware of such provisions, because they do not receive their policy until many months after their policy’s inception and do not even recognize the provision as it is hidden at the back of their policies. Such provisions are often further hidden under labels such as “Addendum” or “Dispute Resolution.”

“If your case is subject to contractual arbitration, you must take all steps to ensure that you have completely neutral arbitrators.”

If a dispute arises with your carrier, an arbitration provision may substantially impact your ability to obtain complete relief against your carrier. While choosing to arbitrate a case rather than proceeding to trial may save money in the short term, it can have critical consequences for your case unrelated to its merits.

For instance, many arbitration provisions contain related “choice of law,” “venue,” and “limitation of remedy” provisions. The former may require that arbitration proceed under the laws of the state of New York. While this may seem innocuous, New York’s laws provide very little protections to policyholders against their carrier’s bad faith mishandling of claims. A “venue” provision may actually require the arbitration to take place out of state, usually where the carrier maintains its headquarters. “Limitation of remedy” provisions limit policyholders’ ability to recover damages.

Many arbitration provisions require that the arbitrators selected be employed by the insurance industry, often for at least ten years. This provides a huge advantage to carriers before your case is even filed. Insurance industry executives are often hardened to even the most egregious insurer conduct. Thus, even if your case involves outrageous insurer misconduct, they will largely turn a deaf ear to your company’s plight. If they are sympathetic, the insurer’s limitation of remedy provision has stacked the deck ensuring that your recovery will be severely limited.

If your case is subject to contractual arbitration, you must take all steps to ensure you have completely neutral arbitrators. Impartiality is a greater consideration for arbitrators than for judges because arbitrators are not required to strictly follow the law. Accordingly, it is important to obtain complete disclosure of your arbitrator’s potential conflicts before your case proceeds to the hearing.

As is evident in many instances, contractual arbitration in the insurance context is not preferable to a trial by jury. At the outset of the relationship, determine if such a provision exists, and if so, is it tethered to choice of law, venue, and limitation of remedy provisions? If so, raise the red flag.

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