Insurance arbitration 101

insurance arbitration

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.

Insurance arbitration, explained

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: binding vs. non-binding

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 default to an arbitrator should an insurance dispute arise. And, once the arbitrator makes a decision, this is the final judgement that will stand.

Non-binding arbitration – In a non-binding arbitration agreement, both parties want to have control over how the insurance dispute is going to be resolved. This means that, once the arbitrator gives their award, the opposing party can appeal the decision and take the case to court. This would occur after the case has been finalized in arbitration.

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
  • In which case, if the insurance company decides to deny a claim, an arbitrator can solve the dispute.

Arbitration example between policyholder and an insurer

Let’s take an auto policy, for instance. Let’s say a policyholder suffers an accident and is struck by another car making an unprotected left. Should there be no traffic cameras or witnesses, the police officers might declare it a “no-fault accident.”

Because there’s no fault, the insurance company reimburses the policyholder for the base expenses.

Yet, the policyholder learns that in California, “no-fault contests” in an unprotected left favor the car in oncoming traffic, not the one making the left turn. Should this new information lead them to file a bigger claim, asking for more compensation because they’re not at-fault, their insurance company (if their contract has a binding arbitration clause) would take it to arbitration to let an arbitrator decide.

If the arbitrator awards the insurance policyholder, the claim is recognized. If the arbitrator awards the insurance company, the claim is denied.

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. Arbitration, on the other hand, expedites the process because there’s fewer moving parts. 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.

When is insurance arbitration mandatory and when is it voluntary?

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 if they want to settle it outside of court.

Simplifying business insurance

Whether it’s explaining complex insurance topics or covering small business—here at Thimble, our aim is to make things simple.

We offer both general liability and professional liability insurance to help protect small business from third-party claims of:

  • 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.

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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