An
Introduction to The Use Of Alternative Dispute Resolution to Resolve Insurance
Disputes
Jay E. Grenig*
I.
Alternative dispute resolution
describes the techniques or procedures for resolving disputes short of trial in
the public courts. Alternatives to civil
litigation are not a new phenomenon.[1] However, in recent years the interest in
alternative dispute resolution has increased.[2] Non-judicial procedures may be superior in a
variety of disputes. They may be less expensive,
faster, less intimidating, more sensitive to the disputants’ concerns, and more
responsive to the underlying problems.
The first section of this article
provides an introduction to alternative dispute resolution. The second section discusses the Federal
Arbitration Act[3]
and the McCarran-Ferguson Act.[4] The third section examines the use of various
alternative dispute resolution processes in addressing different types of
insurance situations.
II.
Alternative Dispute Resolution
A. Generally
There
are a number of voluntary alternative dispute resolution methods available to
facilitate the settlement of disputes or to adjudicate disputes if settlement
cannot be reached. These methods can be
used separately or in combination, and their components can be modified and
mixed to suit the circumstances of the particular case.
Negotiation
normally should be considered the first step in attempting to resolve any
dispute.[5] It is probably the most frequently used
method of dispute resolution.
Negotiation implies joint responsibility and authority for making
certain decisions. Parties to a dispute
may utilize negotiation to solve their problems and disputes directly as
between themselves, without the involvement of a third party.
The
negotiation process is voluntary and non-binding. In negotiation, two or more disputing parties
meet together in good faith to identify and discuss the issues at hand, present
facts and supporting data, arrive at mutual solutions, and abide by the
outcome. Negotiation continues as long
as the parties are willing to exchange views on settlement.
Conciliation
is the process in which a third party brings the disputing parties together so
that the disputing parties can begin to discuss the issues. It involves the adjustment and settlement of
a dispute in a friendly, non-antagonistic manner. Conciliation may be used in the courts before
trial, with a view towards avoiding trial, and in labor disputes prior to
arbitration.
Conciliation
may be a particularly good choice when emotions are running high, or when
ongoing relationships are involved and the parties’ inability or unwillingness
to communicate is a major barrier to resolution. Conciliation also may be inappropriate where
one party has a clear legal entitlement or where the parties have unequal
bargaining power or sophistication.
The
term “conciliation” is frequently used interchangeably with “mediation.”[6] However, conciliation generally refers to a
process less structured than mediation.
In some forms of conciliation, a conciliator does not take active part
in the process or settlement discussions, while a mediator may actively promote
a mutually acceptable settlement. The
conciliator’s primary role is to reduce the parties’ inflammatory rhetoric and
tension, open channels of communication, and arrange for formal negotiations.
Unlike
a mediator, a conciliator sometimes is called upon to make non-binding
recommendations or findings that often concern the factual or legal issues in
dispute. The conciliator also may
recommend an appropriate resolution under the circumstances.[7] The finding or recommendation is made to the
parties jointly by the conciliator.
Mediation
introduces the assistance of a neutral third party -- the “mediator” -- in
attempting to resolve the dispute.[8] The mediator’s function is to assist the
parties in their negotiations by helping the parties to define the issues, to
overcome barriers to communication, and to explore alternative methods of resolving
their dispute.[9] Mediation enhances the parties’ ability to
communicate with each other. The mediation process is voluntary; either party
can reject further participation by the mediator at any time in the process. The mediator has no authority to impose a
settlement and does not render a binding decision. A mediator can clarify the parties’
expectations by focusing their needs and interests, attempting to diffuse
hostilities, and reducing the adverse impact of emotions. The parties retain complete control over the
process and make their own decisions about what solutions will work for them.
The
mediator usually deals directly with the parties or their representatives. The mediator endeavors to ensure that each party
is evaluating his or her position realistically. A mediator helps the parties appreciate the
difference between the best alternative to a negotiated agreement and the worst
alternative to a negotiated agreement.
A
mediator can facilitate the resolution of a dispute by suggesting non-monetary
benefits that cost the party providing the benefit less than the value of the
benefit to the other. A mediator also
can help parties overcome perceptive differences. By communicating directly with those persons
having settlement authority, a mediator can reduce the risk of a conflict of
interest between a party and its negotiating representatives. To be most successful in this regard, a
mediator should strive to appear fair and impartial. Furthermore, the mediator should analyze the
disputed issues and prioritize them in order to facilitate resolution of the
dispute.
Some
mediators favor party-generated settlement options and do not suggest
settlement terms. They see themselves
primarily as facilitators, digging deep into the interests and feelings
underlying the surface dispute.[10] Other mediators will propose settlement
options and attempt to persuade the parties to make concessions. In some cases, the mediator may be asked to
offer an assessment of the probable outcome of the case in order to facilitate
the parties’ more realistic evaluation of their respective positions.
In
evaluative mediation, the mediator decides what the case is worth and advises
how it should be settled. It can be
effective in a situation where the neutral has tried many similar cases or
otherwise knows the case well.
Appraisal
involves the valuation or estimation of the value of property by disinterested
persons of suitable qualifications.[11] It uses expert opinion, rather than explicit
market transactions, in order to ascertain the value of an asset or
liability. Appraisals usually relate to
leases, real estate, losses and damages under insurance policies or purchase
and sale agreements. Appraisals involve
questions of value, price, amounts, damages, and other similar areas of
dispute.
The
appraiser is selected or appointed by a competent authority to arrive at a just
and true valuation of property.
Appraisers are selected for their special knowledge of the subject
matter. An appraisal may be conducted
without formal hearings, and the appraiser is permitted to make his or her own
investigation and to establish his or her own procedures.
The
appraiser’s decision need not assume any particular form. However, an appraisal award may be invalid if
it is outside the scope of the issues submitted to the appraiser. An appraisal made within the scope of the
submission is not invalid because the appraiser was mistaken as to law or fact.[12]
Appraisal
differs from arbitration in that an arbitration award is the judgment of a
tribunal selected by the parties to determine matters actually in variance
between them, whereas an appraisal settles the price or value of property or a
claim.[13] In the appraisal, the appraiser is empowered
only to settle the price or value of the property or claim in issue.
Unless
express provision is made for a hearing, the method of determining the facts in
an appraisal is left to the appraiser.[14] The decision may be made without notice to
the parties and without a hearing, unless such notice or hearing is required by
an express provision in the agreement between the parties.[15] In addition, the appraisal may be made upon
such principles as the appraiser sees fit to adopt, or upon such evidence as
the appraiser chooses to receive.
Appraisers are not required to take an oath and are not obliged to
provide formal notice or to hear evidence.
They usually proceed by ex parte
investigation, so long as the parties are given an opportunity to furnish
information and explanation regarding the matters in issue.[16]
An
appraisal resolves only the specific issues of actual value or loss or
damages. All other issues are reserved
for determination in a more complete and formal hearing on the merits.[17] Generally, a dissatisfied party who
participates in the selection of an independent appraiser has no greater right
to challenge the appraiser’s valuations than that party would have to attack an
arbitrator’s award. However, notwithstanding that the award may be fair on its
face, a court may consider the method by which the appraiser reached his or her
decision.[18] Where the evidence shows that the appraisal
was the result of fraud, corruption, dishonesty or bad faith, a court is
justified in overturning the appraiser’s determination, even though the
appraiser was selected by agreement between the parties.[19]
It
should also be noted that a court is without power to enter a judgment upon an
appraisal report as if it were an arbitration award. The proper remedy is to
commence an action involving a complete and formal trial on the merits.[20]
Arbitration
is a method for dispute resolution in which the parties submit their dispute to
an impartial person selected by the parties.[21] The parties may use a single arbitrator to
hear a dispute or they may use an arbitration board or panel. The arbitrator makes a decision following a
hearing. In binding arbitration (usually
referred to simply as “arbitration”), the arbitrator’s decision is final and
binding on the parties.
The
arbitrator hears evidence from each side and renders a decision that is
normally binding on the parties, as noted above. The procedure is less formal than a judicial
trial. Unless the parties agree to the
contrary, the arbitrator is not bound to follow the law. Instead, the arbitrator may base the decision
on business custom and practice, technical insight, or broad principles of
equity and justice. Once confirmed, an arbitrator’s
award is enforceable in the same manner as a court judgment.[22]
The
process in non-binding arbitration is the same as binding arbitration, except
that the arbitrator’s decision is advisory only. If the parties do not accept the decision,
the advisory decision may be used as an aid to resolve the dispute through
negotiation or other means.[23] Incentive arbitration is a form of
non-binding arbitration in which the parties agree to the imposition of a
penalty on the party who rejects the arbitrator’s advisory decision and pursues
its claim in court, if that party does not improve its position by some
percentage or formula. The penalties may
include payment of attorney fees in the litigation or payment of the full cost
of arbitration.
Compulsory
arbitration results when a statute or administrative rule or regulation
requires certain types of disputes to be submitted to arbitration. In voluntary or contractual arbitration, the
parties mutually agree that an issue may be submitted to arbitration. The parties either contractually agree to
submit future disputes to arbitration or they agree to submit an existing
dispute to arbitration.
Mediation-arbitration,
sometimes referred to as “med-arb,” is a mixed process that begins as mediation
and ends with arbitration if the mediation is unsuccessful.[24] Mediation-arbitration is used most commonly
in labor-management disputes. It is
supported by the theory that, under the threat of arbitration, the participants
will try harder to achieve voluntary settlement of the dispute.
Mediation-arbitration
involves a two-step process. First, a
neutral third party mediates the dispute with the parties in an attempt to
reach a voluntary settlement. Subsequently, if the participants remain at
impasse, the neutral renders a binding decision on the unresolved issues following
an arbitration hearing.
Mediation-arbitration is particularly effective when the participants
are of relatively equal bargaining experience; the efficiency of a combined
procedure outweighs the inhibiting effect of the mediator’s anticipated role
change.[25]
The
arbitrator may be the person who conducts the mediation or the parties may
select one person to mediate and another person to arbitrate. A person who acts as mediator and then as
arbitrator is known as the mediator-arbitrator.
Some contend that using the same person to mediate and to arbitrate is
advantageous because the neutral has more leverage in the mediation process --
the parties know a solution will be imposed upon them if they do not arrive at
one of their own. Others assert that
mediation-arbitration compromises the integrity of the mediation process and
the arbitrator’s neutrality. The neutral
may have received confidential information relevant to the merits of the
dispute in the course of mediation before deciding the arbitration.
Because
of this concern about the integrity of the process, some agreements provide for
one person to mediate and a different person to arbitrate. However, this remedy
is more costly and time consuming than using the same person as both mediator
and arbitrator. In addition, it does not
allow for further attempts to mediate once the process reaches arbitration.[26] However, the use of different persons as the
mediator and the arbitrator is appropriate if the parties are concerned about the
perceived bias of the mediator-arbitrator.[27]
The
minitrial is not a trial, per se. It is
a structured dispute-resolution method in which senior executives of the parties
involved in a legal dispute meet in the presence of a neutral advisor. After
hearing presentations on the merits of each side, these representatives attempt
to formulate a voluntary settlement.[28] The minitrial is a form of facilitated
negotiation and includes elements of negotiation and adversarial case
presentation.
The
minitrial was developed in the corporate setting. Minitrials are usually employed to resolve
disputes that would otherwise involve lengthy litigation. The senior executives selected to participate
by the parties should hold no direct involvement in the dispute, lest they feel
a need to defend past actions. The more
senior the management representatives, the greater the range of options available
for a constructive solution.
The
parties should agree in writing that the minitrial proceedings are confidential
and that no written or oral statement made by any participant can be used as
evidence or an admission in other proceedings.
The fees and expenses of the neutral advisor are borne equally by the
parties. Each party normally is
responsible for its own costs, including legal fees, incurred by participation
in the minitrial. In their written
agreement, the parties may alter the allocation of fees and expenses.
Early
neutral evaluation is a court-annexed settlement program used to assist the
parties in developing an approach to the litigation that focuses on key issues
and necessary discovery.[29] The parties may hire, or the court may
appoint, a neutral evaluator (such as an attorney), who is highly experienced
with the subject to conduct a review of the matter in dispute.
The
evaluator appraises the merits of the dispute and makes suggestions for
conducting discovery and obtaining legal rulings to resolve the case
efficiently. The evaluator helps the
parties identify areas of agreement, assess the strengths and weaknesses of
their arguments and their evidence, and devise a plan for sharing important
information and conducting key discovery.
The neutral evaluator’s report may also aid the parties in reaching a
settlement. If the case does not settle,
the report remains confidential. The
evaluator then helps the parties to simplify and adapt the case for more
expeditious handling in trial.
III.
Federal Law
Traditionally,
courts refused to enforce agreements to arbitrate.[30] The Federal Arbitration Act of 1925[31]
(also referred to as the United States Arbitration Act)[32]
changed the common law rule. It made a
written agreement to arbitrate specifically enforceable in the federal courts,
so long as the agreement is connected with a maritime transaction or evidences
a transaction involving foreign or interstate commerce.[33] By adopting the Act, Congress intended to
create a new body of federal substantive law affecting the validity and
interpretation of arbitration agreements.
It also sought to exercise its full range of constitutional power under
the commerce clause in order to make the Act as widely effective as possible.[34] The Act applies in state courts as well as in
federal courts.[35]
The purpose of the Act is to relieve congestion in the
courts and to provide parties with an alternative method for dispute resolution
that would be more efficient and less costly than litigation.[36] It recognizes a strong public policy favoring
arbitration of maritime and commercial disputes.[37] The Act intends for the courts to enforce
arbitration agreements into which parties have entered[38]
and to place such agreements upon the same footing as other contracts.[39] All doubts as to arbitrability under the Act
are construed in favor of the liberal policy of promoting arbitration.[40]
Section 4 of the Act, allowing a party to petition the
district court for an order compelling arbitration, does not create independent
federal jurisdiction.[41] In order to establish federal jurisdiction,
the party seeking to compel arbitration must demonstrate that, if there were no
agreement to arbitrate, a federal court would have jurisdiction “of the subject
matter of a suit arising out of the controversy between the parties.”[42]
However,
Section 4 has been interpreted to mean that a federal court has subject matter
jurisdiction over an action to compel or stay arbitration merely because the
underlying claim raises a federal question.
A petition under Section 4 must be brought in state court unless some
other basis of federal jurisdiction exists, such as diversity of citizenship or
assertion of an admiralty claim.[43]
The Act applies to contracts “evidencing a transaction
involving [interstate] commerce.”[44] The Federal Arbitration Act is the only
federal statute using the phrase “involving” to represent an interstate
commerce relationship.[45] Since the enactment of the Act, federal and
state courts have differed as to when a transaction “involves” interstate
commerce to such an extent that the Act applies.[46]
In Allied-Bruce
Terminix Companies, Inc. v. Dobson,[47]
the United States Supreme Court held that the words, “involving commerce,” as
used in the Act, are the functional equivalent of “affecting commerce,” signaling
Congress’ intent to exercise its commerce power to the full. The Court rejected the “contemplation of the
parties” standard, which provides that the Act applies only if the parties
contemplated substantial interstate activity.
The Supreme Court applied a “commerce in fact” standard, noting that the
transaction must have involved interstate commerce, even if the parties did not
contemplate an interstate commerce connection.[48]
The United States Supreme Court added further
clarification in Prima Paint Corp. v.
Flood & Conklin Manufacturing Co.,[49]
declaring that the Federal Arbitration Act “is based upon and confined to the
incontestable federal foundations of ‘control over interstate commerce and over
admiralty.’”[50] The Court rejected the argument that the
transactions involving commerce covered by the Act are limited to contracts
between merchants for the interstate shipment of goods. Acknowledging that the Act articulates
substantive law, the Court determined that the Act applied in diversity cases
because Congress had intended that result.
The Court explained, “Congress may prescribe how federal courts are to
conduct themselves with respect to subject matter of which Congress plainly has
power to legislate.”[51]
In Southland Corp.
v. Keating,[52]
the United States Supreme Court addressed an additional question about whether
the Act preempts conflicting state anti-arbitration law, or whether state
courts could apply their own anti-arbitration statutes in pending cases,
thereby reaching results different from those reached in similar federal
diversity cases. Declaring that Congress
would not have wanted state and federal courts to reach different outcomes
about the validity of arbitration in similar cases, the Court concluded that
the Federal Arbitration Act preempts state law and is applicable in both state
and federal courts.[53]
Furthermore, although traditional state law contract
defenses, such as fraud, duress or unconscionability, may apply to invalidate
arbitration agreements without contravening the Act, a court may not invalidate
arbitration agreements under state laws applicable only to arbitration
provisions.[54] In Doctor’s
Associates, Inc., v. Casarotto, franchisees brought an action in state
court against a franchisor and its agent involving a dispute under a standard
form franchise agreement. The state
trial court stayed the action pending arbitration, and the franchisees
appealed. The Montana Supreme Court
reversed, finding that the arbitration clause was unenforceable under a state
statute that conditioned enforceability of arbitration agreements on compliance
with a special notice requirement not otherwise applicable to contracts
generally.[55]
The United States Supreme Court held that Montana’s
special notice requirement was preempted by the Federal Arbitration Act.[56] The Court explained that, by enacting Section
2 of the Federal Arbitration Act, Congress precluded states from singling out
arbitration provisions for suspect status, requiring instead that such
provisions maintain the same status as other contracts.[57]
The Court affirmed that the Montana provision directly conflicted with Section
2 of the Act because the Montana law conditioned the enforceability of
arbitration agreements on compliance with a special notice requirement not
applicable to contracts generally.[58]
The Federal Arbitration Act does not mandate arbitration
of all claims. Without an agreement to
arbitrate, the Act does not apply, and the parties are then entitled to a
judicial remedy.[59] Since arbitration arises through contract,
parties are essentially free to define for themselves what questions may be
arbitrated, the remedies an arbitrator may afford, and the extent to which the
decision must conform to general principles of law.[60] However, it has been held that arbitrators
are without authority to decide constitutional issues irrespective of the
contractual language.[61]
The McCarran-Ferguson Act[62]
exempts certain insurance practices from federal law (including the Federal
Arbitration Act),[63]
and makes state law supreme.[64] An agreement between an insurer and an
insured to arbitrate claims arising out of insurance coverage should be
considered as involving the “business of insurance,” as that term is used in
the Act.[65] However, there are few cases holding that the
arbitration of claims is or is not the business of insurance.[66]
There is little case law on the
applicability of the Federal Arbitration Act to individual insurance contracts.[67] In addition, much of the insurance business
is exempt from otherwise applicable federal law under the McCarran-Ferguson
Act.[68] In United
States v. South-Eastern Underwriters Association,[69]
the United States Supreme Court determined that, even if an individual
insurance contract could be seen as “local” rather than “interstate” commerce,
the broader business of insurance nonetheless was interstate commerce.[70]
Some courts have upheld the
application of the Federal Arbitration Act to reinsurance agreements.[71] Only a few cases involving individual
insurance policies have arisen under the Federal Arbitration Act. Hart v.
Orion Insurance Co.[72]
involved a disability insurance policy.
The insurance company had sought and obtained a court order compelling
arbitration. The insured appealed,
asserting that the arbitration agreement was unenforceable. On appeal to the Tenth Circuit, the court
held that the Federal Arbitration Act applies whenever interstate commerce is
involved. Such involvement existed in this case by virtue of an interstate
delivery of the insurance policy.[73]
Congress passed the McCarran-Ferguson
Act[74]
in response to South-Eastern Underwriters.[75] The Act is intended to exempt the insurance
industry from most federal antitrust laws and to return to the states some of
their regulatory authority prior to South-Eastern
Underwriters. How much authority
Congress intended to return to the states is still unclear.[76]
In the McCarran-Ferguson Act,
Congress ceded to the states the primary responsibility for regulating the
insurance business and it provided an exemption, under certain circumstances,
from application of federal law.[77] In order to establish that an activity is
exempt from a particular federal law, three conditions must be met: (1) the federal law in question does not
specifically relate to the business of insurance; (2) the activity in question
is the “business of insurance;”[78]
and (3) the application of federal law would invalidate, impair or supersede
state regulation of the activity.[79]
Since the Federal Arbitration Act
does not specifically relate to the business of insurance,[80]
the first criterion is readily satisfied in cases involving the Federal
Arbitration Act and insurance disputes.
Most controversies regarding application of the McCarran-Ferguson Act
involve the second and third criteria.[81]
In determining whether a particular
practice is part of the “business of insurance,” one court has suggested that
the following three factors should be considered:
IV.
A. Personal Injury Claims
Many personal injury claims are
suitable for alternative dispute resolution.[83] If utilized properly and with the right type
of claim, alternative dispute resolution can be important in securing the just,
speedy, and inexpensive determination of a claim. Mediation can be used to resolve personal
injury claims.[84] Mediated personal injury claims generally
have three characteristics:[85]
Liability is typically stipulated by
the parties before entering an agreement to mediate a personal injury claim.[87] In addition, the issue of who pays for any
alleged damages is usually established before mediation. Thus, the defendant
frequently is not present at the mediation session. The plaintiff, the plaintiff’s attorney, the
defendant’s attorney and an adjuster from the defendant’s insurer will focus on
the issue of damages.
Because the mediation involves a
claimant who is probably involved in a single lawsuit necessitating evaluation,
while the insurance representative may have handled hundreds of similar cases,
the mediator is challenged to bring some balance to the playing field. For this reason, it may benefit the plaintiff
to be represented by a lawyer.
The distributive nature of personal
injury disputes requires the mediator to determine how to facilitate
give-and-take when the claim involves only how much the defendant will pay and
how much the claimant will accept. The
subjective nature of the personal injury dispute involves the claimant’s pain
and suffering. The mediator is
challenged to find suitable criteria that will help the parties place an acceptable
value on pain and suffering.
The mediation session usually begins
with a joint session at which both parties provide a brief overview of their
issues and arguments.[88] The mediator may then caucus separately with
each party to discuss each side’s concerns.
At the mediation session, the plaintiff may present a settlement
package, including all medical records and billings as well as other records of
special damages to provide the mediator with access to the records as the case
is being discussed. It is important for
the mediator to establish communication and rapport as soon as possible.[89] Although distributive interests constitute a
large segment of personal injury mediation, the mediator should help the
parties identify the other interests involved.[90] These interests may include the desire for an
admission of fault or an apology.
An unresolved issue of liability
often precludes the use of mediation and requires the use of binding
arbitration.[91] Cases involving substantial medical expenses
with no objective findings of injury, and cases involving minor impacts, are
often more suitable to arbitration because the defendant is sometimes reluctant
to accept the claim or the extent of the claim.[92]
Initially, the parties enter into a
written arbitration agreement, establishing the procedural rules, rules for
conduct of the hearing, powers of the arbitrator, enforceability of the award,
method of selecting the arbitrator, and any other terms and conditions to
arbitration.[93] At the arbitration hearing, the parties
present material evidence and cross-examine opposing witnesses.[94]
Under the rules of the American
Arbitration Association, insurers or claimants start the process by sending the
following information to the nearest AAA office: