Policyholder Pulse
Considering the complex structure of commercial insurance programs—typically purchased in annual “towers” of insurance—risk managers and in-house counsel often do not pay sufficient attention to arbitration-related provisions, which the insurance industry is more frequently including in its policies. That’s like playing only one board in a game of three-dimensional chess. Discrepancies among such provisions can lead to obstacles policyholders later must surmount when coverage disputes arise. This article highlights critical issues to consider and offers recommendations to avoid these obstacles wherever possible.
As a threshold matter, policyholders should carefully weigh whether to agree to arbitration in lieu of litigation. The decision to arbitrate is a decision to waive the right to a jury trial, meaning that disputes will be resolved by arbitrators (and maybe ones from the insurance industry) rather than a jury of peers. While arbitration can offer benefits such as confidentiality, insurance expertise, and (sometimes) lower costs and the expedited timing of a final resolution, policyholders should be aware that they are relinquishing the opportunity for a jury to decide their case, bearing in mind that juries are wary of insurers and this drives settlement before trial.
Policyholders should carefully assess these implications when instructing their brokers regarding their dispute resolution preferences and should consult with legal counsel (in-house and external) to understand the potential impact of this decision on your rights and to determine whether arbitration is the most advantageous forum for resolving disputes.
Against this backdrop, and assuming your company has decided to arbitrate insurance disputes, we recommend you consider the following issues:
1. Harmonizing Arbitration-Related Clauses
Towers of insurance usually comprise multiple policies issued by different insurers, each potentially containing its own wording (at least in part), which may include arbitration and choice of law provisions. In a single tower (or among towers if multiple towers are implicated), this can lead to differences in process, choice of law, procedure and outcome. A policyholder may incur substantial additional expense if it has to engage with some insurers in arbitration and others in litigation, under different bodies of law, and—in the case of arbitration—under different regimes requiring different seats. These are real problems we deal with regularly. Apart from the substantial increase in cost to the policyholder, inconsistent requirements can result in different outcomes, resulting in potential gaps in coverage.
During policy negotiations, policyholders should align their pieces strategically. They should focus their brokers on working to align arbitration-related provisions across all layers (and years) to the extent possible. Establishing uniformity in governing law and designated forums can mitigate the risk of conflicting outcomes and ensure a more streamlined dispute resolution process. Moreover, avoiding unfavorable jurisdictions—such as England or Bermuda, which both tend to be more favorable to insurance carriers—can go a long way toward avoiding unfavorable outcomes.
2. Harmonizing Dispute Resolution Provisions
Inconsistent alternative dispute resolution (ADR) provisions within an insurance tower can introduce additional disputes at the onset of arbitration. These discrepancies often lead to preliminary legal battles over procedural matters, increasing both the time and costs associated with resolving the primary coverage issues.
Once again, policyholders should focus their brokers on proactively negotiating ADR provisions to ensure consistency. Alternatively, brokers should be asked to identify ADR-related inconsistencies in the program; there is nothing a General Counsel likes less than to be surprised by these types of inconsistencies. A cohesive set of rules governing arbitration across all policies can prevent procedural disputes and facilitate a more efficient resolution process.
3. Harmonizing Policy Construction Principles
Under the common law principle of contra proferentem, ambiguities in insurance policy language are construed in favor of coverage. Tired of having their policies construed against them under this or similar interpretive principles, some insurers now insert provisions into their policies waiving these nearly uniform common law protections for policyholders and requiring an “even-handed” construction of the policies. Wherever possible, policyholders should not agree to such provisions.
4. Arbitrator Qualifications
The expertise and impartiality of arbitrators are pivotal to a fair arbitration process. Policies may specify qualifications for arbitrators, such as insurance industry experience or legal backgrounds. Some insurance carriers may include arbitrator qualifications in the first instance that inevitably result in the selection of an arbitrator that only has insurer-side experience. As an example, one potential qualification might be that an arbitrator has direct experience working in the insurance industry, leading to a pool of candidates that is potentially sympathetic to insurers. Policyholders should carefully review arbitrator qualification requirements so that they capture a broader range of candidates that possess the necessary knowledge and impartiality to adjudicate complex insurance disputes effectively but are not so limiting that only a carrier-side arbitrator may be appointed.
Conclusion
A well-coordinated strategy at placement or renewal leads to a better endgame. Navigating dispute resolution provisions in commercial insurance towers requires proactive negotiation and attention to the details. Policyholders who understand the implications of waiving the right to a trial by jury, as well as the importance of harmonizing dispute resolution provisions and defining arbitrator qualifications, can position themselves to manage insurance disputes more effectively and to safeguard their coverage interests before disputes arise.