Insurance is a contract, represented by a policy, in which an individual receives financial payment or reimbursement from an insurance company for claims of specific insured/predefined losses.
There is a wide range of insurance policies, depending on the risk area against which an insurance company provides protection: car insurance, homeowners insurance, renters insurance, life insurance, health insurance, dental insurance, flood insurance, business insurance, commercial insurance and many others.
In some cases, however, an insurance company and a policyholder may not agree on the terms of their contract. The insurance company sometimes denies the insured claimant a required payment or reimbursement. It offers less than the claimant believes the damages are worth or unreasonably delays the payment without legal explanation. That is when an insurance dispute arises.
In such cases, an insurance company typically argues that the other party’s claims are not covered by the particular policy. The insurance company sometimes argues that the coverage has ended due to the insured’s behavior contrary to policy terms.
Insurance disputes divide into two categories: third-party claims and first-party claims. Third-party claims are claims by a third-party against a policyholder for damages caused by the policyholder. First-party claims, on the other hand, are claims by the insured against his or her own insurance company. In these first-party claims, the claimant seeks financial payment or reimbursement for expenses or damages covered by the insurance policy.
Apart from traditional litigation, alternative dispute resolution (“ADR”) procedures are becoming increasingly popular for resolving insurance disputes.
Mediation is an alternative dispute resolution (“ADR”) procedure dealing with insurance disputes.
Resolving insurance disputes through litigation sometimes requires years. Due to its nature, insurance disputes often involve a vast body of evidence, numerous pre-trial motions, complex discovery procedures, and sometimes exhausting witness testimonies. This naturally leads to a lengthy and expensive process, burdensome to all parties in an insurance dispute.
On the other hand, mediation allows the parties to entrust the resolution of their dispute to a neutral third person who generally has significant years of experience in the industry. The mediator is selected by the parties and is usually an experienced professional equipped with specific knowledge about insurance coverages.
Furthermore, due to the informality and flexibility of the mediation procedure, the parties are better able to set forth their specific claims and explain their respective positions. Presenting arguments to support insurance disputes is far easier in front of an experienced professional who understands the language of contracts and applicability of legal precedence to such insurance disputes.
Additionally, confidentiality applies to the mediation process which enables the free flow of information and protects the parties from undue publicity. All parties to the mediation are required to keep sensitive personal and business data within the confines of the mediation process.
In an insurance dispute, the parties choose the mediator and either agree to participate and/or be forced to mediate by the trial court – before a trial date will be given to the parties.
After a joint conference with all the mediation participants in attendance, the mediation procedure consists of separate discussions with each party privately. These private conversations are called caucuses. Before the mediation begins, the parties usually submit pre-mediation statements that help the mediator understand the subject disputes. Through such pre-mediation statements and the separate caucuses with each party, the mediator explores the possibility of settlement by focusing the parties on the applicable language of the contract and applicable case law, while making the parties aware of the consequences of not reaching a mutually-agreeable resolution.
If there is a settlement, both parties sign the agreement, which is enforceable by the courts as a binding contract.
In short, a successful mediation requires a real commitment by all parties to the process. Otherwise, it can turn out to be unsuccessful and a waste of time and money.
Arbitration is another alternative dispute resolution (“ADR”) procedure that is somewhat more formal than a mediation. However, it differs from a trial in several aspects. Probably the biggest difference is that, in an arbitration, the arbitrator(s) decide the dispute (as a jury would in traditional court litigation).
Depending on the type of arbitration, the decisions can be non-binding or binding. In non-binding arbitration, the parties can reject the arbitration decision/award and, instead, demand a trial de novo. In binding arbitration, the arbitrator(s)’s decision/award is generally final.
Unlike mediation, the arbitration procedure consists of opening statements, witness testimonies, including expert opinions, and closing arguments.
In an insurance dispute, the arbitrator(s) is/are skillful, albeit neutral, individual(s) experienced in the law of contracts and applicable case law. There can be one or three arbitrators.
The legal basis for arbitration is an agreement to arbitrate (contained in the insurance contract) or the trial court ordering (usually non-binding) arbitration. Due to its flexible and informal nature, the arbitration procedure can be done more quickly and is generally less expensive than a trial.
Both arbitration and mediation provide the parties with confidentiality, but, in arbitration, the arbitrator(s) decide the dispute(s) rather than depending on the parties (as in mediation) to agree to a mutually-agreeable resolution of the disputes.
Resolving insurance disputes through mediation and arbitration has numerous advantages over traditional litigation.
The relative informality and confidentiality of these ADR procedures provide the parties with various benefits while giving them the opportunity to get a timely resolution of the dispute(s). However, if not taken seriously by both parties, these alternative dispute resolution mechanisms can be of limited value, especially if the arbitration is non-binding (where the arbitrator(s)’s decision/award can be rejected and a motion for a trial de novo can be filed by the “losing” party).