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When policyholders and underwriters find themselves at odds over an insurance matter, attorneys and insurance experts agree that alternative forms of dispute resolution can yield better results for all involved parties than traditional litigation.
Generally faster and almost always cheaper than prosecuting a civil suit, alternative dispute resolution mechanisms often guide companies and their insurers toward settlements acceptable to both sides of complex claims or contractual disagreements (see related story).
However, while avoiding litigation may save on legal costs, it is not always the best route. In particular, policyholders may give up significant advantages they hold over insurers by agreeing to arbitration, and they should think carefully before doing so.
“It's almost always an advantage to go through some form of alternative dispute resolution process before you go to litigation,” said Richard Morgan, senior vp of property claims for Zurich North America in Chicago. “It gives the two parties a chance to have a discussion removed from contentious litigation. There's every reason to expect a good outcome for both parties.”
By favoring mediation, arbitration and other ADR methods over litigation, both parties can limit the risk of exhausting their financial resources on legal fees, spending years in and out of courtrooms, and jeopardizing their business relationship with the opposing party or the long-term welfare of their organization, experts said.
“The reduction in cost doesn't just apply to the money that was or wasn't spent,” said William Shelley, chair of Cozen O'Connor P.C.'s global insurance group in Philadelphia. “There's the distraction of litigation and the drain on some of your people's time to consider. Also, an ADR process often provides the foundation for the two parties' continued business relationship in a way that would probably be impossible if they went through litigation.”
Most insurance disputes resolved outside the bounds of civil suits are done so through either mediation or arbitration, depending on the nature of the dispute and the policyholder's insurance contract.
Except where it is ordered by a judge in advance of a suit proceeding to trial, mediation is largely a voluntary exercise said. In most cases, mediation outcomes are treated as nonbinding arrangements. The feuding organizations jointly designate a neutral third party to umpire the proceedings, but any resolution reached must be agreed upon by the policyholder and the underwriter.
Mediation can be requested at any point during a dispute—before or after a civil complaint has been filed—and can vary greatly in terms of its formality. As long as both parties are reasonable and open to negotiation, experts said mediation usually ends in an amicable arrangement.
“It's typically better to go through mediation before you go to arbitration,” said Stephen Marcellino, a partner in the New York and White Plains, N.Y., offices of Wilson Elser Moskowitz Edelman & Dicker L.L.P. “Particularly if both parties have any interest in the commercial relationship continuing past the resolution of the conflict. The best way to do that is to reach a conclusion both parties agree to voluntarily.”
The most formal form of alternative dispute resolution, arbitration often is mandated by a policyholder's contract with its insurer as a precursor to litigation. Like mediation, one arbitrator or a three-person panel of arbitrators can provide a swift and likely less expensive resolution, particularly in cases of dense contractual disagreements.
By allowing insurers to include an automatic arbitration clause in their policies, companies can remove much of the uncertainty that can manifest during a dispute and begin planning their arguments that much sooner. However, experts warned, policyholders should consider carefully the potential drawbacks of arbitration before agreeing to it as a provision of their insurance contract.
“The threshold consideration companies need to take into account regarding arbitration is that you've got no right to appeal,” said Finley Harckham, a shareholder at Anderson Kill and Olick P.C. in New York. Assuming a policyholder can live with the finality of arbitration, he said there are other provisions of standard arbitration mandates they should evaluate before signing.
“They typically require the application of New York state laws to a particular dispute, even if New York has no direct tie to the case,” Mr. Harckham said, noting that, among other favorable legal conditions for underwriters, New York does not generally allow policyholders to sue their insurers for “bad faith” causes of action.
“The second thing to look for is that a lot of these standard-form clauses take away the advantage that the policyholder has under the law in terms of interpreting ambiguous policy provisions,” Mr. Harckham said. “Instead, the arbitrator is supposed to interpret the policy in an evenhanded manner in accordance with customs and practices in the industry, without regard to who drafted it. It's a big advantage that the policyholder is giving up.”
Though the specific permutations can be virtually limitless, most insurance disputes between a policyholder and an underwriter can be distilled down to one or more of a few core issues.