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Claims disputes take alternate path in search of resolution

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SCHAUMBURG, Ill.—Disputes over claims sometimes are unavoidable, but that doesn't necessarily mean such disputes have only one place to end up—in court.

For Zurich Financial Services Group, a way to settle potentially contentious claims arising from the unusually destructive U.S. hurricane season in 2005 meant turning to alternative dispute resolution, said James Engel, executive vp customer services and chief claims officer for North America in Schaumburg, Ill.

The ADR effort, called the Gulf Coast Alternative Dispute Resolution Program, applies only to claim disputes stemming from hurricanes Katrina, Rita and Wilma.

Zurich has been the only commercial U.S. insurer to use ADR in handling its 2005 Gulf Coast hurricane claims.

"We've actually resolved about 650 cases through that program," Mr. Engel said. "We think that's allowed us to avoid disputes that probably would have led to litigation. We just think that's been a tremendously successful program."

The destruction wrought by Hurricane Katrina presented particular claims challenges, Mr. Engel said. Zurich faced "the issue of whether the damage was generally uncovered water damage or generally covered wind damage. That issue created the potential for dispute."

Although some ADR techniques have been used in handling claims previously, Zurich's team of claims handlers wondered "shouldn't we set up some overall mechanism that deals with this on a much larger scale?" he said.

Zurich turned to an expert in the field—Kenneth Feinberg, who received national recognition as special master of the Victims Compensation Fund set up by Congress to deal with claims from the Sept. 11, 2001, terrorist attacks.

Zurich hired Mr. Feinberg—managing partner and founder of The Feinberg Group L.L.P., a law firm that specializes in resolving legal disputes—"to work on the program with us, to help us pick arbitrators, help work out some of the protocols," Mr. Engel said.

All of Zurich's claims involved commercial lines, and larger customers tended to "understand mediation or arbitration better," he said. But there also were small commercial claims that entered the ADR process.

Zurich was able to use people in the hurricane-stricken Gulf Coast to run its ADR program.

"We asked Ken to access those accredited organizations" that would know accredited mediators and arbitrators, which led to the "creation of lists of qualified people," Mr. Engel said.

Policyholders could choose anyone from the lists, he said. If policyholders chose someone not on the list, the choice was accepted if vetted by Mr. Feinberg.

Three-stage process

The process has involved three stages. The first is a resolution meeting at which the claim is paid immediately if the parties reach agreement. The second stage is a nonbinding mediation, which—if unsuccessful—leads to the final stage, binding arbitration.

A Zurich policyholder called the process "very workable."

"Honestly, I didn't see any negatives about it," said Bill Roberts, who with wife Linda owns the Ocean Springs, Miss., building where she has offices as a certified public accountant.

"There wasn't really any dispute—it was more or less just getting the paperwork together to settle it," said Mr. Roberts. While Zurich wished to get the claim settled quickly, Mr. Roberts said he and his wife delayed compiling information for their claim as she concentrated in meeting clients' needs. "Effectively, we carved out a couple or three days" to put information such as bank statements together. The actual meeting with Zurich lasted a couple hours and the couple left with a check, he said.

"I felt it would have been very workable" even if there had been a dispute, Mr. Roberts said.

"Relatively few cases have come out of ADR unsuccessfully," probably in the low single digits, Zurich's Mr. Engel said. In addition to the 650 cases resolved, an additional 200 or so remain in the process.

"All litigation does is cost both parties, delays the outcome and our objective is to get our customers back in business," he said.