Basics of Using Arbitration to Resolve Personal Injury Disputes

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Arbitration is a method of alternative dispute resolution, used to settle disputes between two parties outside a court of law. Both parties agree on an independent third party, called an arbitrator, to hear their dispute and decide the outcome. In most instances, both sides are bound by the arbitrator's decision.

The arbitrator's fee is commonly split evenly between both parties. In complicated matters, or when a substantial amount of money is at stake, there can be more than one arbitrator. This is known as a tribunal.

Insurance companies use arbitration to avoid lawsuits whenever possible. With the high cost of litigation, many companies view arbitration as an effective way to avoid the courtroom. They can settle personal injury claims at a fraction of what those claims might cost if they were litigated.

Types of Arbitration

There are two basic types of arbitration: binding and non-binding.

  1. Binding arbitration means the decision of the arbitrator is final and cannot be appealed to a court of law.

  2. Non-binding arbitration means the parties can accept the decision of the arbitrator as final, but if one party chooses not to accept it, they have the right to file a lawsuit (or propose some other means of setting the dispute).

High-low Agreements

When using binding arbitration to resolve a personal injury dispute, most insurance companies require a high-low agreement. They often won't submit to binding arbitration without one.

A high-low agreement is a written contract between the claimant (known as the petitioner) and the insurance company (known as the respondent). Before arbitration begins, both sides agree to accept whatever amount the arbitrator finally decides, as long as it falls somewhere between the high and low amounts agreed to by both sides beforehand.

High-low agreements have advantages for both parties. They protect insurance companies from outrageously high awards, and claimants are guaranteed a minimum amount of compensation. Typically, an arbitrator does not know the high-low amounts before the arbitration begins.

Example: High-low Agreement

John was injured in a car accident and couldn't negotiate a settlement with the at-fault driver's insurance company. He requested arbitration and the company agreed. They had a high-low agreement, with the lowest acceptable amount $7,500 and the highest $20,000.

Some of the possible outcomes of the arbitration are:

  1. The arbitrator decides John should receive $15,000. That amount falls within the high-low agreement range, so the insurance company must pay $15,000.

  2. The arbitrator decides the insurance company must pay $35,000. Because of the high-low agreement, John will only receive $20,000, which is the upper limit.

  3. The arbitrator decides John should only get $1,000. Because of the high-low agreement, John will receive $7,500, which is the lower limit.

When Arbitration Applies

No-fault Claims

If you carry no-fault insurance and your claim can't be settled, you may have no choice but to arbitrate the dispute. Although you may want to file a lawsuit, your insurance policy probably has a clause requiring you to submit to binding arbitration (most policies do).

The actual wording of arbitration clauses varies from one insurance company to another, but they all basically say the same thing. Read your insurance policy carefully.

Example of a Binding Arbitration Clause

Any controversy or claim arising out of, or in any way relating to this insurance contract between the insured and the insurance company, which can't be settled between the parties, must be submitted to binding arbitration. The costs of arbitration shall be shared equally between the insured and the insurance company. Both parties agree the arbitrator's decision will be final and binding, and cannot be appealed."

Third-party Claims

A personal injury claim against a negligent person or entity is known as a third-party claim. If you were injured in a car accident, you'd file a third-party claim against the driver who caused the accident. You could also file a third-party claim if you fell and were injured on business property. A third-party is often represented by their insurance company.

You can't force a third-party's insurance company to submit to binding arbitration (although some states have laws that require non-binding arbitration before you can file a lawsuit). That's not to say the company won't agree to it. Most insurance companies prefer binding arbitration over a lawsuit.

Convincing the insurance company

If you and the claims adjuster can't negotiate a settlement, you can tell her you want your claim submitted to binding arbitration. If the insurance company believes you have some basis of a claim, even though you couldn't reach a settlement, they may agree.

If the company won't agree to arbitration, you can tell them your next step will be to file a lawsuit. But only say it if that's really your intention.

Threatening a lawsuit will have no effect if your case is weak. Regardless of the litigation costs, insurance companies won't bow to baseless threats from a claimant. But if your case has a good chance of winning at trial, the insurance company will likely agree to binding arbitration. You won't know unless you ask.

It's rare for a third-party insurance company to suggest arbitration. The claimant usually has to request it. So if you can't settle your injury claim and believe you have a reasonable basis for a lawsuit, go ahead and request binding arbitration. You have nothing to lose and everything to gain. Be sure to put your request in writing.

Template of Request for Arbitration

Date of the letter
Your name
Your address
Adjuster's name
Insurance company's name
Insurance company's address

Your name and the insured's name
Claim number
Date of the injury

Dear Ms. (adjuster's last name):

Although I have made repeated attempts to settle the above claim, those attempts have been futile. In the interest of justice and the spirit of compromise, I propose we submit the claim to binding arbitration.

In an effort to settle this claim amicably and with all hope of avoiding litigation, I look forward to hearing from you at the earliest possible time.

Yours truly,

Your name/signature

Arbitration and Small Claims Court

It's tough to say whether your chances of success will be better in small claims court or binding arbitration. Every case is unique, and by understanding both processes you'll be able to make an informed decision given your situation. Here's a few points to consider when weighing arbitration vs. small claims court...

  • Both are relatively informal.

  • The cost of filing a small claims lawsuit is often less than the shared cost of hiring an arbitrator. (In small claims court, the party who loses is sometimes required to reimburse the winning party for the filing fee.)

  • Both offer relatively prompt hearings.

  • Both allow the decision maker, the judge or arbitrator, to compromise or settle the claim somewhere in between what both parties demand.

  • If you're not satisfied with the verdict in small claims court, you can appeal your case to a higher court. If you're not satisfied with the decision in a binding arbitration, you won't have the right to appeal.

  • There's a maximum monetary limit that small claims court can award. It varies from state to state. If your demand for compensation exceeds your court's limit, binding arbitration may be the better option.

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