Sometimes, two parties want to settle a claim outside of the courtroom. One way they do so is through arbitration, which is a process that brings in a neutral third party to settle a dispute. Insurance arbitration relies upon an arbitrator (the neutral third party) to make an appropriate decision based on the specifics of a claim or case.

But how does insurance arbitration work? Who is this arbitrator? And what does the process look like? Below, we’ll answer all that and more. Let’s do this.

What is insurance arbitration?

Insurance arbitration occurs when an arbitrator—either a person or organization—steps in to settle a case and make a decision about how it’s going to be resolved. The decision, called the arbitration award, then (typically) rules in one party’s favor.

Yet, if a party isn’t satisfied with the arbitration award, they might still be able to resolve the issue in court. This is because there are two types of arbitration agreements.

Arbitration: Non-binding vs. binding

Non-binding arbitration

Non-binding arbitration is a more casual process used to minimize court costs and delays, often a good choice for petty disputes. It typically involves a panel of three arbitrators, one each chosen by the opposing parties and a third chosen by the first two arbitrators. With non-binding arbitration, either party can still take their case to court if dissatisfied with the arbitration decision.

Binding arbitration

In a binding arbitration agreement, both parties agree—by contract—that the matter will be resolved by an arbitrator. This means that both parties have agreed to using arbitration should an insurance dispute arise. And, once the arbitrator makes a decision, this is the final judgment that will stand.

What kind of contracts use binding arbitration?

Binding arbitration is often used in relation to solving a claim between a policyholder and an insurance company. They’re often included in:

  • Auto insurance policies
  • Workers’ compensation insurance
  • General liability insurance

If, for example, the insurance company denies a claim, or the insured disputes the amount of the claim payout, binding arbitration will resolve the dispute.

Why use arbitration instead of court?

There are a number of reasons why people choose to use arbitration instead of going to court. Both parties can still rely on a neutral third-party (the arbitrator) to resolve the case, without having to pay the costly legal fees to have their case heard before a judge. In addition to typically being more affordable, arbitration also moves more quickly and allows for more flexibility than going to court.

The streamlined nature of arbitration makes it a good option for situations where:

  • Going to court would be too time-consuming or expensive
  • Privacy is a concern, as with divorce proceedings and confidential matters
  • An arbitrator with more specialized expertise than a judge is needed to resolve the dispute
  • Either or both parties wants to resolve the issue once and for all, with no option to appeal (binding arbitration)
  • The parties cannot agree on where to resolve the dispute

Arbitration example

Let’s use a small business as an example. Let’s say you hired an artisan contractor to provide 100 specialty hand-made products for sale at an upcoming event for your small business. However, they only produced 50, causing your sales estimates to miss the mark. You’ve tried to resolve the matter directly but couldn’t.

Thankfully, you have a contract with the vendor that requires arbitration so the matter can be resolved promptly.

If the arbitrator awards you, as the insurance policyholder, the claim is recognized. If the arbitrator awards the vendor, the claim is denied.

Insurance arbitration timeline

Arbitration moves more quickly than a trial, but how quickly, exactly? While the timeline can differ from case to case, here’s what you can expect during an average arbitration process.

Step 1: Filing for arbitration (1 to 3 weeks)

First, you’ll write a request for an arbitration letter. In it, you’ll recap the facts of your claim and tell your insurance company you want to refer your claim to arbitration.

Step 2: Selecting an arbitrator (3 to 4 weeks)

Next, you’ll choose an arbitrator. Arbitrators are usually retired judges or lawyers with specialized expertise. There may also be limitations on the selection process, depending on your insurance policy or state laws. Once you are presented with the options, research the candidates before making your final choice.

Step 3: Sharing documentation (4 weeks)

Once you have an arbitrator, a date will be set for the arbitration hearing. The arbitrator will also set a deadline for you and the insurance company to share documentation with each other.

Step 4: The arbitration hearing (1 day)

The arbitration hearing itself may only last a handful of hours. Typically, you, your insurance company, and the arbitrator will all meet in the same room. Both parties will present their side of the case. The arbitration process often resembles a trial and includes:

  • Opening statements
  • Calling and cross-examining witnesses
  • Presenting evidence
  • Responding to opposition and questions
  • Closing statements

Step 5: The arbitration award (1 to 2 weeks)

The arbitrator will review everything and issue an award up to two weeks later. In the award statement, they will explain the decision in brief. Remember, their decision is legally binding and can’t be appealed.

Benefits of arbitration (for both parties)

In essence, arbitration (typically) benefits both parties. Why? Because it’s a mutually agreed-upon decision-making process before an incident arises. In the arbitration process, when there’s a dispute, it doesn’t have to get messy or costly in court. A few of the main benefits of arbitration include but are not limited to:

  • It removes hostility: During the arbitration process, both parties are often encouraged to help with the decision-making process. The arbitrator can act as a mediator, helping guide both sides to a resolution. The winner-take-all nature of litigation falls to the wayside and a healthier, less-emotional resolution can occur.
  • It’s quicker: Lawsuits can get drawn out. At times, they go on for years. Given the nature of insurance arbitration and the ease of the process, (typically) it’s quicker and less stressful.
  • It’s cheaper: Arbitration is also (typically) cheaper than the fees associated with a legal team and litigation. Why? Given that there’s a significant time reduction and that legal teams are paid hourly, it cuts down on costs for both parties.
  • Increased flexibility: In court, a judge’s decision is governed by the established rules, law, and evidence. On the other hand, an arbitrator has more flexibility to decide what type of evidence they deem relevant and appropriate to the case. Most argue that this creates fairer “rulings.”
  • Privacy: Normally, arbitration proceedings are a private affair. They aren’t publicized, nor is the information displayed outright. This can act as a safeguard if the material in the case could cause either party embarrassment or reveal information they would otherwise want to keep to themselves.

The reality is that insurance arbitration is typically a less strenuous and costly affair than a litigation. For this reason, many insurance contracts make it mandatory.

Potential downsides of arbitration

There are instances where arbitration may not be the best option. For example, arbitration doesn’t work when multiple parties are involved, or if the case is particularly complex.

Also, the end goal of arbitration is compromise, not to decide who is 100% right or wrong. As a result, some parties to an arbitration may feel it is not 100% fair. There may be limits on whether additional damages or attorney’s fees can be awarded.

Arbitration is designed to be a streamlined process, and discovery may be limited or denied. If lengthy discovery would be helpful to the case, arbitration may not be the best option.

Finally, the arbitration award may be final if the contract stipulates that it is binding. There is no ability to appeal the arbitrator’s decision, and the arbitrator can decide to what extent they want to explain it. While this can be seen as a benefit in some cases, it can be a disadvantage in others.

Mandatory vs. voluntary arbitration

What are the differences between mandatory and voluntary arbitration?

  • Mandatory arbitration cases are when a contract specifically states that arbitration is going to be used to resolve a dispute.
  • Voluntary arbitration is when a contract states that the parties can opt-in to arbitration if they want to settle it outside of court.

Simplifying business insurance

Whether it’s explaining complex insurance topics or covering small businesses—here at Thimble, our aim is to make things simple. We offer both general liability insurance and professional liability insurance to help protect small businesses from third-party claims of:

  • Non-employee bodily injury
  • Personal injury
  • Advertising injury
  • Professional negligence

You can purchase a business insurance policy that goes by the hour, day, or month, tailored specifically to when you need it. It’s insurance that works when you do. With Thimble you can purchase coverage in less than 60 seconds. It’s revolutionary small business insurance, plain and simple.

The bottom line: Not only do we want to make insurance easy to understand, we want to ensure every process is painless and hassle-free. That’s why our policies include insurance arbitration, ensuring that claim disputes never result in costly legal fees.

As a small business owner, you’re constantly looking for ways to reduce your overhead and cut costs. With Thimble, you can insure your business affordably today and far into the future.