There are many complexities and nuances included within insurance policies. While every insurance policy is unique to the needs of the policyholder, disputes can still arise between policyholders and their insurers for many reasons. When a disagreement over a claim arises, arbitration is often utilized to resolve the conflict without having to go through the litigation process. Understanding what can happen when a commercial property damage claim goes to arbitration can help increase business owners’ awareness of their options in the event a claims dispute arises.
The results of an insurance claim can be disputed for a variety of reasons. In most instances, claim disputes occur due to the awarded amount being much lower than what it should be or a valid claim being denied. These situations can put a heavy strain on commercial property owners, as their business expenses will only continue to rise the longer the property is inoperable or requires repairs.
To resolve these disputes, arbitration is a favored medium among insurance companies. While litigation can be effective in certain situations, it may take longer to resolve a claim and it is often more expensive. However, some commercial policies require mandatory arbitration, meaning that if a dispute arises, arbitration is the only means for resolving it.
Because of the complexities involved with arbitrating commercial property damage claims, it’s important to know what happens when an insurance claim goes to arbitration. In most cases, the process of arbitration includes:
One of the first things commercial policyholders should do after disagreeing with the assessment of their claim is to notify the carrier of the issue. Once the insurer is made aware of the disagreement, both parties will need to agree to pursue arbitration for the process to begin, unless arbitration is already mandated in the terms of the policy.
As some policies require mandatory arbitration, policyholders should take the time to thoroughly review the policy’s terms to determine if arbitration is indeed mandatory. In the event a policy does require mandatory arbitration, litigation cannot be pursued and both parties must pursue arbitration as the means to resolve their issues.
Once both parties have agreed to arbitration, the policyholder should collect all documents, photos, videos, and statements regarding the disputed claim. These will be used in the arbitrator’s investigation, so the policyholder must provide as much information on the damage, and the event that caused it, as possible. The insured should also explain why they are not satisfied with the insurer’s findings so the arbitrator is aware of the issues.
Both the insurance company and the policyholder are required to select an independent individual or arbitrator to make a decision based on the facts of the claim. The arbitrator must be an unbiased individual with no affiliation to either side. The arbitrator can be a retired judge, an experienced lawyer, or any other qualified professional the policyholder and insurance company agree on. There are also arbitration groups, such as the American Arbitration Association (AAA), that can recommend an arbitrator. Some policies require the arbitrator to have experience in a senior-level position of insurance claims or underwriting.
The arbitrator will review the facts of the case as presented by both sides and come to an appropriate decision on the result of the claim. Both the insurer and the insured have the option to represent themselves or to hire legal counsel to represent them throughout this process.
Once the arbitrator has reviewed the evidence surrounding the claim as presented by both sides, they will make a decision or arbitration award. The award includes all the information on the case, along with the arbitrator’s final decision on fees, damages, and/or any disciplinary actions, if needed. It’s important to note that the arbitrator’s award can be either binding or non-binding.
If arbitration is binding, the arbitration award cannot be appealed at a later date regardless of the circumstances. Essentially, this means a court cannot overturn the arbitrator’s decision since both sides have agreed to accept it as final ahead of time. This ultimately leaves further disputes and litigation off the table for policyholders and insurers alike if they do not agree with the arbitrator’s findings.
Non-binding arbitration is used in the event both parties want to retain control over the resolution of the dispute. This allows either party to appeal the arbitration award in court if they are dissatisfied with the outcome.
There are several reasons why arbitration is utilized instead of litigation. For instance, arbitration is often less costly and the process is typically faster and more flexible than litigation. Another reason is that arbitrations are private, which means the dispute and resolution are kept out of the public eye.
There are two main costs associated with arbitration—administrative fees and arbitrator compensation and expenses—the payment of which depend on several factors, such as:
When it comes to the expenses associated with arbitration, it’s important to reiterate that arbitrators are independent individuals, whether or not they are hired independently or through an organization like the AAA. When working with an organization like the AAA to hire an arbitrator, there is an additional administrative fee paid on top of the compensation and expenses paid directly to the arbitrator who handles the case. These administrative fees include filing fees and final / hearing fees. Filing fees are paid out once the claim dispute has been filed, triggering the arbitration process. This fee can be a fixed amount or it can be based on the amount of money at stake in the claim. The final / hearing fees are paid in cases that proceed to further legal action or litigation.
Though parties’ responsibilities for arbitration costs are specified within the policy terms, often the insurance company and the policyholder split the costs associated with hiring the arbitrator and any costs related to the arbitrator’s work or travel. The amount of compensation the arbitrator receives depends on how much work must be done on the case. Arbitrators are paid based on their rate of compensation. Depending on the rules associated with the arbitration and the uniqueness of the case, the rate may be set by a fee schedule or at a per-hour or per-day rate.
Further, in the event an arbitrator must travel a long distance, both parties are responsible for paying for their travel time, hotel, and other associated expenses. Essentially, if the arbitrator has paid or is required to pay an expense, the parties must reimburse them for these costs.
Subject to the terms of the policy and in addition to administrative fees and arbitrator compensation, the parties usually are responsible for their costs to prepare and present their case in arbitration. These costs may include attorneys’ fees, costs for expert witnesses, travel costs, and any expenses associated with conducting their case, like copying documents.
Some of the most commonly asked questions regarding the insurance arbitration process include:
Is there a time limit to choose to pursue arbitration for a commercial property damage claim?
In Texas, there are time limitations in place for filing any lawsuit or legal action seeking the repair or replacement of damaged or destroyed property. The case must be filed within two years from the date the property was damaged or destroyed. In the event the two-year deadline has passed before the affected party files suit, the insurer can file a motion to dismiss the case. If the dismissal is granted, the policyholder has lost the right to any legal remedy, including arbitration, against the carrier to recover compensation for the damaged property. However, the terms of the policy often place time limitations on the ability to file a claim—sometimes these timeframes vary depending on the cause of damage—so it is important to review the policy and not delay in seeking legal counsel if there is a claims dispute.
When is mandatory arbitration most commonly used?
Mandatory arbitration can be found in a variety of commercial property insurance policies and its inclusion is quickly becoming a trend in many other types of policies as well. Mandatory arbitration means that under no circumstances can litigation be used to resolve insurance claims disputes. This often leaves arbitration as the only way to resolve a disputed claim.
Are arbitration clauses easy to find in insurance policies?
Arbitration clauses and other policy specifications, like exclusions, may be difficult to find in insurance policies. Insurance policies tend to contain specific language and jargon that is not easily recognizable to the average consumer or business owner. Because each insurance policy is unique and contains nuanced language largely drafted in favor of the carrier, business owners should take the time to thoroughly review all insurance policy provisions with an experienced insurance claims attorney to better understand what clauses and stipulations exist.
When handled properly, arbitration can be a fast and efficient way to resolve complex insurance disputes, but the outcome can often turn on the quality and experience of a policyholder’s legal team. At Raizner Slania, our experienced insurance coverage attorneys are well-versed in the ins and outs of the arbitration process and have successfully represented countless commercial policyholders who have been taken advantage of by their insurers.