Have you heard the term “arbitration” in connection with insurance, but been unsure of what it means? Insurance disputes between an insurance agent and a client are typically resolved through arbitration.
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However, not every disagreement requires judicial intervention. Insurance companies and their policyholders can always resort to arbitration to settle any disagreements that may arise. Read on and we’ll explain the basics of arbitration to you.
Concepts About Arbitration In Insurance
Arbitration can be used to settle disagreements between an insurance agent and a client. In the event of a dispute between the insurance agency and a policyholder, an arbitrator can look over the policy’s terms and conditions and make a decision. Here are three ideas to get you started understanding insurance arbitration.
Concept #1. Types of arbitration
You can choose between binding and nonbinding arbitration. Both the insurance company and the policyholder must agree to the arbitrator’s decision before the meeting can proceed to binding arbitration. In this form of arbitration, an impartial third party hears arguments from both sides and makes a determination about who is at fault and how much money should be awarded to the prevailing party. As was agreed upon before the meeting began, the decision of the arbitrator is final and cannot be challenged.
Each party agrees to submit to non-binding arbitration before a neutral third party. The arbitrator’s job is to look at the evidence and decide who is at fault in the argument and how much money should be paid out in damages. Both parties are free to accept or reject the arbitrator’s ruling once it has been made. If they don’t agree with the arbitrator’s decision, they can challenge it in court.
In addition, the arbitration may be required by law or it may be optional, as mutually agreed upon by the parties. If a contract’s arbitration clause specifies that any dispute between the parties must be settled through arbitration, then that clause must be followed. However, when an arbitration clause is not included in the insurance contract, arbitration is optional. Without further involvement from the court system, the parties agree to resolve the dispute through arbitration. Knowing what insurance defense is probably a good idea.
Concept #2. Arbitration clause
The insurance company and the policyholder must use the arbitration clause to settle their differences over the insurance policy. It is a provision in an insurance policy that, in the event of a disagreement, directs the parties to attempt to reach an agreement outside of the court system. In the event of a disagreement regarding the insurance policy, the agent and the policyholder should agree to appoint an arbitrator to examine the relevant facts and policy and make a decision regarding liability and the appropriate amount of compensation.
Another common reason for including an arbitration clause is to save money for both the insurance company and the insured person during drawn-out court battles. Future policyholders will reap the rewards of lower premiums from the insurance company as it is relieved of the need to annually increase contract rates to cover rising costs. If you ever need to file a claim, you should be familiar with your policy and the insurance contract’s arbitration clause.
Concept #3. Benefits of arbitration
The insurance company and the policyholder both stand to gain from the arbitration process. The reduced cost of litigation is the primary advantage of using arbitration to settle insurance claims disputes. It can take years for a case to be resolved once it has been filed in a court of law.
Insurance disputes that go through the court appeals process can take years to resolve, often more than two years longer than an equivalent dispute settled through arbitration.
If your case drags on for years in court, you’ll end up spending way more money on legal representation, court fees, and other incidentals than you can afford. You can save time and money by opting for arbitration instead of litigation when reviewing insurance policies.
Time savings may also be gained through the use of arbitration. The time it takes to resolve the dispute between the insurance agent and the client is much shorter than the time it would take for a judge to rule on the case in court.
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How does arbitration work in business insurance?
A dispute between an insurance company and a policyholder may be resolved through arbitration. Instead of going to court, parties in arbitration present their arguments directly to a neutral third party. The arbitrator looks over the evidence and makes a ruling on how to settle the case. This could force the insurer to pay for losses it initially tried to deny, or it could force the policyholder to pay for losses the arbitrator determines are not covered.
An example of arbitration with an insurance claim
A policyholder’s dentist office has its front window shattered by a falling tree during a hurricane. The policyholder thinks the replacement window should be paid for by the company’s general liability insurance. However, the insurance company has rejected the claim, citing the exclusion of hurricane damage.
In the event of a dispute, the contract between the policyholder and insurer requires arbitration, and both parties agree to submit to the binding jurisdiction of the American Arbitration Association. An arbitrator has ruled that the insurer is not liable for the losses. The policyholder must pay the cost of repairing the window because the decision was final.
Arbitration benefits the provider and the policyholder
In most cases, arbitration is mutually beneficial. A case in federal court can drag on for years, costing an enormous amount of money and time for a business. Trials in U.S. district courts take about a year longer than those set for arbitration, per data from the American Arbitration Association. It can take almost two years longer in court than it would in arbitration if a case goes through the appeals process.
Arbitration is a less time-consuming and more cost-effective alternative to litigation between insurance companies and their policyholders. Look for an arbitration clause when signing a contract with an insurance provider to learn how any disputes will be settled.
Paying for Insurance Arbitration
When an insurance claim’s outcome is disputed between a policyholder and insurer, arbitration is an alternative to litigation. The first step in arbitration is always the mutual selection of an impartial and independent arbitrator or panel. The parties then present evidence and witnesses to the arbitrator or panel, either through their hired attorneys or on their own behalf.
The arbitrator(s) evaluates the evidence and makes a ruling on the merits of the case, including the awarding of any fees, damages, or disciplinary actions. The arbitration award is the final and binding decision or judgment reached by the arbitrators.
Despite the apparent simplicity of this process, one of the more murky aspects is how the arbitrator or panel will be compensated. Business policyholders need to be aware of these expenses and their potential compensation obligations.
Arbitration costs can be broken down into two categories: administrative fees and arbitrator compensation and expenses.
- Responsibility for payments, as stated in the insurance policy or contract
- Relevant arbitration procedures
- The specifics of the claims disagreement
- How quickly the case is progressed by the parties
- Cost per hour or day of the arbitrator
Whether they are retained privately or through a service like the American Arbitration Association (AAA), arbitrators are free agents who must be compensated as such when it comes to the costs of arbitration. In addition to the compensation and expenses paid directly to the arbitrator who handles the case, an additional administrative fee is paid when using an organization like the AAA to hire an arbitrator. Filing and final/hearing costs are included in these administrative costs. When a claim dispute is submitted to an arbitration service, the filing fee is paid. This payment may be a flat rate or a percentage of the total claim. In cases that go to trial or a final hearing, the parties involved must pay the associated costs.
The insurance provider and the policyholder will typically share the cost of the arbitrator’s services and any expenses related to the arbitrator’s time and travel, unless otherwise stated in the policy. The arbitrator’s fee is determined by the amount of time and effort put into the case. Each arbitrator sets his or her own rate of pay. The rate could be determined by a fee schedule, or it could be determined on a per-hour/per-day basis, depending on the arbitration rules and the specifics of the case.
In addition, if the arbitrator is required to travel a long distance, the costs of his or her time and lodging must be split evenly between the two parties. The parties are responsible for reimbursing the arbitrator for any costs that the arbitrator has incurred or is obligated to pay.
The parties are typically responsible for their own costs to prepare and present their case in arbitration, subject to the terms of the policy and in addition to administrative fees and arbitrator compensation. Fees for legal representation, expert witnesses, travel, and other case-related expenses (such as the cost of copies) may be included here.
Arbitration Can Work Against Policyholders
The arbitration process can go against policyholders and their interests, despite the benefits often associated with choosing arbitration over litigation when a claims dispute arises. The list of drawbacks includes:
Arbitration may place more of an emphasis on compromise than litigation does because of this. This can be used by insurance companies as a loophole to avoid paying a claim in full. A commercial policyholder who loses money due to an accident shouldn’t be held responsible for the loss. This might lead policyholders to believe that they will be fully compensated in the event of a covered loss; however, many claims disputes that end up in arbitration follow a more secretive process that is designed to compromise in favor of the insurer.
Bias on the part of arbitrators: despite the fact that arbitrators are supposed to have no personal interest in the outcome of the case, arbitration is still a business. Since arbitrators are unlikely to come across policyholders again as a revenue source, they have little to no incentive to rule in favor of policyholders. Insurance companies, on the other hand, can provide arbitrators with opportunities for future work. This may cause the arbitrator to rule in favor of the insurer rather than the policyholder.
Most arbitration clauses do not require any explanation or justification for the arbitrator’s award or decision. The arbitrator has final say on the reasoning behind their ruling. When an arbitrator’s decision rests solely on the arbitrator’s unarticulated or nebulous reasoning, appealing the decision can be a futile exercise.
Those are the three rules for understanding insurance arbitration. Disputes are inevitable in the insurance industry, especially when a policyholder receives a lower settlement from their insurer than they were anticipating. Arbitration is the most practical option for resolving this type of dispute because it can be completed rapidly and at a low cost.
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