In our last post, I talked a bit about the dangers of arbitration clauses in insurance policies. I wanted to continue to develop that topic. Joseph Stalin supposedly once said: “Those who vote decide nothing. Those who count the vote decide everything.” He was talking about manipulated voting, Soviet-style, not insurance. But one thing’s for sure: Control the procedural “rules” in any endeavor, and you have much more control over the outcome (fairly or unfairly).
That’s why, when reviewing any contract – including, but not limited to, an insurance policy – you should pay particular attention to arbitration clauses, alternative dispute resolution clauses, choice-of-law clauses, and choice-of-forum clauses. So many risk managers and executives focus only on the main points of a proposed contract, and not what happens if there’s a dispute. Mistake. You could end up with a prohibitively expensive three-arbitrator war on your hands, or a requirement to litigate disputes in a galaxy far, far away (figuratively speaking).
Let’s take a look at a few recent cases in which people learned harsh lessons.
Fin Associates, LP v. Hudson Specialty Insurance Co., from the Third Circuit, involved a land developer that was unhappy with the way the insurance company had adjusted Hurricane Sandy claims. The policy contained a New York choice-of-law clause, and an arbitration clause. The damaged properties were in New Jersey, and the policyholder wanted to litigate on its home turf. The policyholder tried to argue that the language of the arbitration clause did not specifically waive the right to litigate a dispute in Court. Unfortunately, New York law requires no such waiver. So, the District Court, seeing an opportunity to punt a case from its crowded docket, did so.
In affirming the District Court’s decision to compel arbitration, the Third Circuit wrote: “The District Court properly found that Appellants are owned and managed by ‘a sophisticated commercial entity with insurable interests in over 20 different properties,’ one of which…was valued at $9 million. The Insureds obtained their policies…by employing the use of a commercial insurance broker. While the insured properties were primarily located in New Jersey, a provision designating a governing body of law was reasonable given that the policy also insured property in Pennsylvania and potentially insured mortgages originating in other states as well… Given that the terms of the policy were negotiated by a policyholder with relatively equal bargaining power, the District Court correctly found the policy’s choice of law provision [and arbitration provision] enforceable.”
You can read the Third Circuit decision here.
Having represented many entities of all sizes in disputed insurance claims over the years, I always think it’s funny when a court refers to the “equal bargaining power” of any person or company and a large insurance company. That’s just malarkey. But, so be it.
VVG Real Estate Investments v. Underwriters at Lloyd’s, London is a hurricane Irma case. The policyholder argued that, due to wind damage, he had suffered about $250,000 in lost income, which was continuing to accrue. The carrier disagreed. Unfortunately for the policyholder, the insurance policy contained a three-arbitrator dispute resolution clause, which, of course, can be prohibitively expensive. The Court, given the chance to punt, grabbed the football and sent it as far downfield as possible. The interesting argument in the case involved the policyholder’s assertion that Lloyd’s had waived the right to arbitrate by basically ignoring the claim for months. Nah, said the Court: “A motion to stay filed several months after the original suit was filed should not be grounds for a waiver of right to arbitration.” Bye-bye.
Since my firm represents policyholders against insurance companies, and we primarily deal with large insurance defense law firms, I often worry about going to arbitration or mediation for another reason. Arbitrators and mediators know that they’re far more likely to get substantial repeat business from a large defense firm then they are from me. Honeycutt v. J.P. Morgan, a non-insurance-coverage case out of California that you can read here, shows that my paranoia is not without foundation. (Hey, just because I’m paranoid doesn’t mean everyone isn’t against me…)
Honeycutt involved an employment discrimination case against J.P. Morgan Chase that went to arbitration before a retired judge. (It’s interesting that the opinion doesn’t name the retired judge. If a mere lawyer had fouled up this badly, you can bet his or her name would be in the opinion.) The arbitrator conducted a six-day arbitration, ruling in favor of the employer on all counts. Honeycutt’s lawyer was surprised at the bad loss, because she had gone into the arbitration thinking she had a decent case. She then asked AAA whether the arbitrator had ever handled cases for J.P. Morgan before. The answer came back “yes.” In fact, the arbitrator had handled eight other employment cases in which J.P. Morgan’s lawyers were involved, and two other cases (one of which was an employment case) involving J.P. Morgan itself. He had not properly disclosed this on the pre-arbitration questionnaire.
Presented with this information, plaintiff’s counsel was, how shall I put it…perturbed. She was even more perturbed when AAA refused to disqualify the arbitrator and re-do the arbitration. Fortunately, a California appeals court found that the arbitrator had violated the ethics rules by failing to make full disclosure of potential conflicts. Now the case is back at Square One. Oof.
And, let’s face it: Given the whims of judges exercising their discretion, that decision could’ve gone either way.
So let me end where I started. When you’re presented with an insurance policy (or contract), don’t just review the “main” provisions and ignore the “boilerplate” (like dispute resolution clauses). If there’s an arbitration clause, you’d better make sure you’re OK with it before you sign on the dotted line.