It is the business of insurance companies to handle insurance claims and litigation. While litigation may be rare in other businesses, disputed claims are common in the insurance industry.
Such disputes arise when the insurance company and the policyholder disagree on a settlement. The disagreement occurs if the company refuses to pay a settlement, delays payment without reason, or offers to pay less than the claimant claims.
Resolving coverage disputes can be costly and time-consuming. However, the cost and efficiency of alternative dispute resolution make it an extremely attractive option.
What is Alternative Dispute Resolution?
Alternative dispute resolution (ADR) refers to any procedure agreed upon to resolve contractual disputes and claims. To avoid litigation, the parties utilize the services of a neutral third party to reach an agreement.
The role of ADR is to provide a platform for the parties to resolve the dispute through voluntary, consensual agreement. Thus, there’s no need for a judge or other arbiter to decide the case.
Alternative Dispute Resolution Examples
The types of ADR include the following:
Whenever a dispute or claim arises, the parties involved will likely attempt to solve it through negotiation. Negotiation allows the insurance company and the policyholder to meet to settle the claim.
The key benefit of this technique is that it allows the parties to control the process and the solution. Moreover, it is less formal and thus allows for more flexibility.
However, the parties may lack legal protection and balance of power, leading to non-settlement.
In mediation, an impartial third party helps the insurer and the claimant mutually agree on an acceptable outcome. The neutral party, or “mediator,” does not decide who is right but provides structure to the communication between the parties.
The main benefit of mediation is that the parties have full control over the process and settlement. This procedure is quicker and often avoids damaging the parties’ relationship.
However, this process relies entirely on mutual agreement and may not reach settlement if the parties fail to agree. There also lacks procedural formality and judicial authority support.
This ADR process involves a neutral party, known as an arbitrator, who listens to arguments, collects evidence, and decides on the outcome.
Arbitration can be mandatory or voluntary. Under mandatory arbitration, the parties enter into arbitration under a court order, statute, or a specific clause in the contractual agreement. On the other hand, it is upon the parties to agree on voluntary arbitration.
Key advantages of arbitration are that it is less time-consuming than litigation, participating parties may choose the arbitrator, and the dispute will remain confidential.
But arbitration does not come without its drawbacks. If arbitration is compulsory per the contractual agreement, the right to move to court is waived. There are also limited appeal avenues.
Benefits of Alternative Dispute Resolution in Coverage Disputes
The American Bar Association says most parties settle disputes by mutual agreement, as ADR boasts the following advantages.
- More cost-effective than litigation: Going to trial can lead to high costs including attorney fees, court reporter fees, and expenses relating to printing and mailing documents. Longer, drawn-out trials may also need witnesses and jurors, and the parties may remain off work during the processes.
- Faster resolution of disputes: With an overloaded judicial system, holding trials and delivering timely judgments have become more challenging and ADR offers a faster resolution.
- Parties have more control over the outcome: Some ADR processes, like negotiation and mediation, allow the parties to use creative resolutions unavailable in trials. Parties may also choose the mediator or arbitrator in arbitration.
- Can preserve business relationships between parties: Unlike a court process, ADR involves less aggressive, more relaxed discussions. This less “heavy-handed” approach helps maintain good relationships between parties.
The Role of ADR in Insurance Policies
Many insurance policies have a clause that requires the parties to attempt compulsory ADR before moving to court. Understanding these clauses is vital, especially regarding arbitration.
Some policies contain strict clauses with limitations for policyholders. While the initial purpose of ADR was to provide faster resolution, the clause can be damaging to the policyholder. The insurance company can use the clause to gain an unfair advantage in disputes.
Moreover, some providers use the cause to immunize their companies from bad faith claim allegations. This occurs when the insurer attempts to back out on its obligation to the client.
Examples of ADR in Coverage Disputes
ADR has seen a lot of success in coverage disputes. For instance, in a dispute at Chevron, ADR-based mediation resulted in massive cost reductions: the process cost $25,000, but would have cost $2.5MM in court.
At Toyota’s subsidiary in the U.S., ADR gradually reduced the number of disputes with dealers to three in 1992, from 178 in 1985.
Richmond’s Expert in Alternative Dispute Resolution
Experts have hailed ADR as a fast and cost-effective way of resolving coverage disputes. Insurers and policyholders should consider these out-of-court dispute resolution techniques. However, it is important to engage a lawyer before starting with ADR to explain relevant clauses and their impact on coverage disputes.
Whether in or out of the courtroom, our attorneys are ready to protect you. Get the defense you deserve and contact us to schedule a consultation.