Arbitration

Arbitration is a private process used to resolve disputes outside of a courtroom. Instead of going before a judge, both sides present their case to a neutral third party called an "arbitrator." The arbitrator reviews the evidence and makes a decision about the dispute.

The resulting judgement is called an arbitration award. It is legally binding and includes all of the information about the case, along with the arbitrator’s decision regarding fees, damages, or disciplinary actions to resolve the case.

Arbitration is typically quicker and less formal than traditional litigation. Many insurance companies use arbitration to settle claim disagreements with policyholders.

Arbitration is a simpler process and it’s less expensive than going to court. Since it doesn’t go on the public record, it’s often used in cases where privacy is desired, such as divorce settlements or other confidential matters.

Because arbitration is a private process, unlike court cases which become part of the public record, this can help protect your reputation and keep sensitive financial details out of public view.

The downside: because decisions are private, you won’t get the benefit of legal precedents that might support your position.

The arbitrator can be an independent arbitrator who is unaffiliated with either side or any group that provides arbitration services, or the involved parties can choose to designate an organization such as the American Arbitration Association, JAMS, or the National Arbitration Forum.

Arbitrators are usually selected from a list provided by an arbitration organization. They may have backgrounds in law, insurance, or industry-specific fields.

Whether you are considering an arbitrator or arbitration organization, it's important to note that:

• Arbitrators set their own rates, which can be high for complex cases.
• Both parties often split the arbitrator’s fees.
• The organization’s rules typically guide how the arbitrator is selected.

Arbitration is often less expensive than going to court, but it’s not free. Small business owners may need to pay:

• Filing fees to start the case
• Administrative fees charged by arbitration organizations like AAA or JAMS
• Arbitrator compensation, which can be billed hourly

Depending on the complexity of the dispute, these costs can add up. In some cases, the insurance company covers certain fees, but that depends on your policy's language.

Insurance disputes typically use binding arbitration, which means the arbitrator’s decision is final. Once a ruling is made, there’s usually no right to appeal, even if you believe the arbitrator made the wrong call.

In non-binding arbitration, both parties can reject the decision and move forward to court—but this is far less common with insurance disputes.

Some insurance policies include a mandatory arbitration clause, meaning you agree to use arbitration instead of going to court if a dispute comes up. These clauses are usually part of standard policy wording, so many small business owners accept them without realizing it.

Voluntary arbitration only happens if both sides choose it after a dispute arises.

Arbitration may be used to settle an insurance dispute between an insurance provider and a policyholder. Instead of filing a lawsuit, the insurer and the policyholder both present their case to the arbitrator.

The arbitrator reviews the facts and comes to a decision about how to resolve the dispute. This could result in the provider having to pay for damages it tried to deny coverage, or a policyholder might have to pay for damages that the arbitrator ruled were not included in the insurance policy.

During hurricane season, a tree falls on a policyholder’s dentist office, breaking the front window. The policyholder believes the cost of a new window should be covered by the business’s general liability policy. However, the insurer denies the claim, saying that hurricane damage was not included in the policy.

The policyholder’s contract states that arbitration is mandatory in the event of a disagreement, and the policyholder and insurer agree to a binding arbitration by the American Arbitration Association. The arbitrator rules that the insurer was not responsible for paying for the damages. Because the decision was binding, the policyholder is obligated to pay for the expense of repairing the window.

You’re allowed to bring legal representation to arbitration, and many small business owners do. An attorney can help you navigate the process, understand your policy language, and prepare your case.

Because arbitration moves quickly and has limited opportunities for appeal, having legal support can be important for protecting your business’s interests.

In general, arbitration benefits both parties. Federal courts can take years to resolve a case; court delays can take a huge toll on a business in terms of legal fees and the time commitment. According to the American Arbitration Association, U.S. district court cases typically take about a year longer to go to trial than cases designated for arbitration. If a case goes through the court’s appeal process, it can take almost two years longer than it would in arbitration.

For insurance providers and policyholders, arbitration can provide a quicker method than litigation to reach an agreement that satisfies both parties—and save money, as well. When signing a contract with an insurance provider, look for a clause about arbitration to find out how any potential disagreement would be resolved.

Insurance companies sometimes prefer arbitration because it’s faster, private, and predictable. For policyholders, arbitration can mean a quicker resolution, but it also limits your options if you disagree with the result.

You’ll often find arbitration clauses in the following policies:

• Professional liability insurance
• Cyber insurance
• Commercial property insurance
• Business owner’s policies (BOPs)

Before choosing a policy, it’s helpful to check whether arbitration is required and what rules apply.

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