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.
There are two basic types of arbitration: binding and non-binding.
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:
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."
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|
Insurance company's name
Insurance company's address
||Your name and the insured's name
Date of the injury
|REQUEST TO SUBMIT CLAIM TO BINDING ARBITRATION|
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.
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...
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