Binding arbitration of coverage and bad faith disputes: A way out of the thicket for the American insurance industry

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This article places forth a unique and intriguing idea: can an insurer insert a requirement in its policy that all disputes concerning coverage or bad faith be submitted to binding arbitration, and providing further that in the circumstance the arbitrator awards punitive damages, they be capped at no more than three times the amount of the compensatory award?

In the past thirty years at least ten states have witnessed very great (and often unwarranted) jury verdicts against insurers for bad faith and punitive damages. Juries have often run amok, and many of these verdicts have been reduc or modified by the agency of the trial judge or by dint of an appellate court. Nonetheless, of the like kind cases involve a huge expenditure of time, legal charge and delay in achieving a final follow Many of these expenses, smooth if the insurer prevails, are nonreimbursable because of the American domination that parties bear their hold legal fees.

Some of the same touchs apply to coverage litigation, particularly manifold coverage cases such as environmental, cropss advertising injury issues, and the like. These cases can drag on the outside and take years to separate leaving the parties in a state of uncertainty and, frankly, potentially creating greater in all senses for insurers by reason of the delay.

Arbitration has always had major advantages above litigation with respect to spe of follow simplicity of pleading and discovery. Moreover the finality of arbitration means virtual immunity from attack in further proceedings.

Litigants will always have to evaluate the central question of whether arbitration shows better results than litigation. on the other hand even if litigation is cogitation to produce lower indemnity awards or more defense verdicts, the take away from of producing those results, when combined with the springs themselves, may be greater than the total take away from and result of the arbitration.

There is significant support for a change away from litigation in the United States, because of the abuses of the a whole Tort reform efforts will probably gather steam again with a fresh administration in Washington. Courts, possibly for selfish reasons (les work, overburden dockets) have become increasingly sympathetic to arbitration agreements, smooth when they are somewhat stacked against the consumer and in favor of the party with the greater bargaining power. Therefore, the climate may well be ripe for a daring change in the way coverage and bad faith disputes are resolv - providing for binding arbitration of of the like kind disputes in the insurance contract.

This article goe beyond that: we also hint that the insurance contract could provide that the arbitrator is authorized to award compensatory and, if appropriate, punitive damages. The latter would probably single be awarded in a bad faith case. However, our proposal would contractually cap awards of punitive damages at no more than three times the compensatory award. of the like kind a provision would be real controversial, but it is a reasonable suggestion whose time has tend hitherward Some state supreme court justices have flat suggested as much. I

A. What mechanism to utilize?

A preliminary question is by what means to implement this concept. We diocese this concept as working with defer to to both personal lines and commercial policies, and with reverence to first party claims and third-party liability claims against the insured. Frankly, we would like to diocese an insurer implement this universal in all new policies issued to of recent origin insureds. Inserting the binding arbitration provision in "renewal" policies raises complicated questions of notice to the insured of a change in the coverage. Nevertheless, that onerous requirement could be met with careful draftsmanship.

A point in dispute associated with implementing the general [i]or[/i] abstract notion in new policies issued to fresh insureds has nothing to do with the law. It has a great deal to do with the business operations of insurers themselves. The sales or marketing department of an insurance company may well particular contending that it will make the insurance fruits less competitive.'

The magnitude of this article, however, deals with a more modified approach and individual that may find wider acceptance in the insurance community. We are suggesting that insurers proffer the policyholder a choice: take the standard policy which allows for litigation against the insurer and resolution of disputes in court; or, for a discounted price or premium, take the policy that contains the binding arbitration clause. Insurers might be surprised to diocese how many homeowners or businesses would opt for the cheaper policy, smooth though they are giving up their rights to jury trials and unlimited punitive damages. If that arises the insurer will be far ahead of the game financially for the reasons station forth above.

Finally, we propose that every insurance contract that contains of the like kind a binding arbitration clause should also contain a provision that it is the intent of the insurer and the insured that the binding arbitration provision is crafted below and pursuant to, the Federal Arbitration Act (FAA) and is to be interpreted according to that Act. This is important in light of the fact that there is a stupendous bias in the federal courts in favor of the FAA and in favor of enforcing arbitration agreements pursuant to that Act. This precedence for arbitration is much stronger in the federal courts, below the Act, than comparable state statutes. This also means that if a policyholder attempts to avoid binding arbitration, the insurer might well have a basis to transfer the action to federal court, cementing the insurer's right to coerce arbitration and avoid litigation.