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More foreign insurers are insisting on arbitration provisions in their insurance contracts rather than taking the risk of facing U.S. juries, say experts.
Non-U.S. insurers often propose arbitration, which can frequently be utilized more quickly and cheaply, for cyber and representation and warranties policies as well as directors and officers liability and professional liability policies, they say.
Policyholders may be concerned, though, about the arbitrators’ objectivity and the inability to appeal their rulings, and believe a jury would be more inclined to view their positions sympathetically. They may, however, be able to negotiate arbitration provisions (see related story).
The Bermuda insurance policy form has always required London-based arbitrations that follow New York law, and it is commonly used in reinsurer-insurer disputes, experts say.
But there is more of a push for similar provisions among other non-U.S. insurers.
“They are being used more frequently in London and continental placements,” said Stephen Fraser, San Francisco-based managing director with Marsh LLC’s U.S. claims practice.
Policyholder attorney Scott N. Godes, a partner with Barnes & Thornburg LLP in Washington, said, “I’m seeing a lot of cyber insurance policies” from insurers outside the United States that have alternative dispute resolution language.
Jeremy M. King, a policyholder attorney with Olshan Frome Wolosky LLP in New York, said he also sees it in arbitration provisions frequently in reps and warranties deals, which involve complex transactions.
“Insurers would rather have arbitrators address their dispute rather than put it to a jury,” said policyholder attorney Michael F. Sharkey, a partner with Perkins Coie LLP in Washington.
“It’s probably a feeling that juries don’t like insurance companies, which is probably why insurance companies don’t like juries. It’s probably mutual,” said policyholder attorney Vincent E. Morgan, a partner with Pillsbury Winthrop Shaw Pittman LLP in Houston.
“Certainly, you can see non-U.S. insurers for large policyholders” seeking arbitration provisions because “they’re constantly scared about the U.S. legal system and the ‘judicial hellholes,’’’ said Larry P. Schiffer, a partner with Squire Patton Boggs in New York.
Mr. King said he believes the appeal of arbitration provisions is that arbitration is cheaper and faster, and gives access to the equivalent of judges who “have expertise in the subject matters” and “know the issues going in, and can do sophisticated dispute resolution,” rather than a trial court judge who deals with a “whole range of things.”
Observers also say an arbitrator will seldom award bad-faith damages.
But policyholders and their representatives are not always happy with the idea.
“As a policyholder attorney, I always want to be able to enforce my rights in court and make the decision whether arbitration is the right move,” Mr. Godes said.
Donna Ferrara, Chicago-based senior vice president and managing director at Arthur J. Gallagher & Co., said, “I’m a little jaded on the whole concept of arbitration because the ones I’ve been involved with,” directly or tangentially, “took forever, they cost a fortune and the resolutions were not all that favorable.”
“At bottom, there’s a fundamental belief in the jury system, and if you have a claim that needed to be decided on facts, then a lot of companies trust juries,” said Mr. Morgan.
Michael Gallagher, senior vice president and general counsel at New York-based Corporate Risk Solutions LLC, a consulting firm, said in arbitration, rules may be set up so “you don’t get the same level of discovery you get in a judicial proceeding,” and the number of documents submitted may be limited.
And while an arbitrator may make a decision “on the fly,” Mr. Gallagher said he has also been involved in arbitrations that have taken three years.
One issue policyholders may face is a preponderance of arbitrators who are former claims executives, which creates concern about their objectivity, experts say.
As a policyholder advocate, “it was always a concern that the policyholder had access to both a group of potential arbitrators that weren’t preinclined to go the insurer’s route, and that they weren’t current or former insurance executives,” and that “in essence” there would be a balanced panel and a fair hearing, said Peter Rosen, a former policyholder attorney who now works as an arbitrator with Irvine, California-based JAMS, which provides mediation services.
The other concern is an inability to appeal an arbitration ruling, said Mr. King. “If you’re stuck with somebody whom you feel may not be completely neutral on the issues, you’re bound by that decision and have very little recourse in having someone else look at that decision,” he said.
Insurers contacted on this issue either had no comment or did not respond to queries.
Although non-U.S. insurers are seeking arbitration provisions in their policies more frequently, policyholders may still be able to negotiate for better terms, say observers.