TDI: Pre-Dispute Binding Arbitration Clauses Unfair to Policyholders

Pre-dispute mandatory binding arbitration provisions in insurance policies may be on their way out in Texas if state insurance regulators proceed with a plan to ban them.

The Texas Department of Insurance has informed lawmakers that it is considering a proposal to prohibit insurance carriers’ use of pre-dispute mandatory binding arbitration provisions in personal insurance line contracts, such as homeowners or auto insurance policies.

In its biennial report to the Legislature, published in late December 2012, TDI noted that post-dispute arbitration can be an effective remedy for settling disagreements between insurers and insureds that can be beneficial to both parties.

On the other hand, regulators say, pre-dispute binding arbitration provisions in insurance contracts may contain “negative consequences for policyholders” as they are required to enter into a contract dispute under terms pre-determined by the carrier.

“When parties enter into pre-dispute binding arbitration, neither party knows what kind of dispute may arise, how much money a dispute may involve, or the extent of resources necessary for resolution of the dispute. Accordingly, there is an inherent degree of uncertainty involved in pre-dispute arbitrations,” TDI noted in the report.

The provisions are apparently popular with insurance carriers and state insurance regulators are concerned that insurers increasingly are “proposing to limit covered individuals to pre-dispute mandatory binding arbitration as the sole means to resolve all disputes that arise between them.”

The problem, according to TDI, “is the extent to which carriers are utilizing a tool that binds the contracting parties to a very limited set of rights once a dispute arises, but unlike other contract negotiations, one party, the policyholder, does not have the ability to negotiate the terms of the contract.”

TDI said its proposed prohibition of pre-dispute mandatory binding arbitration clauses, stems from that fact that such provisions preclude “covered persons, who are not able to negotiate the terms of their contract with the carrier in the same way that other contracting parties are able to negotiate their contract terms, from exercising substantive rights provided by the Texas Insurance Code.”

The proposed ban would apply to group or individual policies that provide “coverage in life, accident, and health; annuity; credit; and property and casualty products.”