There are three basic ways to legally resolve a dispute: mediation, arbitration and litigation. Each of these types of dispute resolution has unique benefits and drawbacks and, depending on the situation, could be useful in resolving claim and coverage disputes between businesses and their commercial insurance carriers.
Mediation and arbitration are considered forms of alternative dispute resolution, or ADR, since they do not involve the courts. Insurance contracts may contain a clause requiring that the parties engage in ADR either before or instead of going to court. Below is a closer look at the differences between mediation, arbitration and litigation.
Mediation is a voluntary, non-binding process in which a neutral third party guides negotiations between two parties. Mediation is less formal than arbitration or litigation, and either party can walk away from the proceedings at any time. The mediator does not render a decision, but will use proven techniques to help you reach an agreement that is satisfactory to both sides. Generally speaking, mediation communications are privileged and are not admissible as evidence in any future legal proceedings.
First, you and the insurance company will have to agree on a mediator and/or a mediation forum such as JAMS or NAMS. The skills and experience of the mediator can play an important role in whether the proceeding is successful. Many but not all mediators are attorneys. It’s important to work with one that has experience resolving insurance disputes and that has a track record of success in helping parties reach a settlement.
In a mediation, the two parties have control over the outcome and, when it is successful, mediation can be a fast and inexpensive way to resolve various kinds of disputes. But there are fees involved, and if negotiations fail, you will be back to square one with nothing to show for your investment.
While it is not necessary to hire an attorney for mediation, it is often advisable to do so, especially if the insurer will bring an attorney.
More formal than mediation, arbitration is a quasi-judicial proceeding in which both sides present their arguments and evidence before a neutral third party known as an arbitrator, who then renders a decision. Arbitration can be binding or non-binding and voluntary or involuntary, and both parties must agree on the arbitrator. Non-binding arbitration is similar to mediation in that a party dissatisfied with the outcome can walk away. However, with binding arbitration, the arbitrator renders a legally enforceable decision including payment amounts that both parties must abide by. While not required for arbitration, it is advisable to hire an attorney who is experienced in insurance law to prepare and present your case in order to level the playing field with the insurance company.
Mandatory arbitration clauses, which require any disputes to be resolved through binding arbitration, are becoming more common in insurance contracts. Relative to litigation, binding arbitration offers benefits for both sides, including confidentiality, a faster resolution and, usually, lower costs. However, as mandatory arbitration clauses disproportionately favor the insurance company, more than a dozen states prohibit their enforcement in insurance contracts.
Some arbitration clauses may disadvantage policyholders by mandating that the proceedings take place in a more insurance carrier-friendly forum, potentially piling on travel expenses for the policyholder. And policyholders who do not like the result have very limited appeal options and cannot pursue further litigation.
Unlike ADR, litigation takes place in court, with a decision made by a judge and sometimes a jury, and the proceedings are almost always public. As the progress of the case is tied to court schedules and there are extra steps, including discovery and pre-trial depositions, litigation generally takes longer and can cost significantly more than ADR.
Policyholders can bring a lawsuit against the insurer to challenge its basis for insurance claim denial. Most insurance claim lawsuits include allegations of breach of contract and, in more egregious cases, breach of the duty of good faith and fair dealing. Over the course of litigation, the insurance carrier will respond to the complaint, sit for a deposition, produce documents and information and try to justify its denial of coverage.
Unlike binding arbitration, litigation provides you with appeal options if you are unhappy with the result. It also provides you with the ability to bring bad faith allegations, where appropriate, against the insurance company. As bad faith liability carries significant damages, potential bad faith exposure may compel insurers to try to reach a settlement.
Generally speaking, you and the insurance carrier can decide to settle at any time before the final verdict is issued. The vast majority of civil lawsuits are settled before a full trial, saving time and costs while allowing the parties to avoid the unknown result at the end.
If you are involved in a dispute with your business insurance company, contact us. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business.