Arbitration in insurance policies is hardly a new concept. In fact, its lineage can be traced to the Standard Fire Policy of Massachusetts, dating back to 1873—a historical detail explored in The First Standard Fire Policy—Did It Contain an Arbitration Clause Rather Than an Appraisal Clause? Yet, as that article confirms, the “arbitration” of that era more closely resembled today’s appraisal process than what we now consider true arbitration.
Fast-forward to the present, and arbitration clauses are once again surfacing—this time not as relics of early insurance law, but as strategic instruments used by insurers to circumvent state-level restrictions on arbitration. The mechanism empowering this resurgence is the Federal Arbitration Act (FAA), enacted by Congress in 1925 to ensure that contractual agreements to arbitrate disputes would be “valid, irrevocable, and enforceable.” (9 U.S.C. § 2).
However, while the FAA establishes the enforceability of arbitration clauses, it is silent on procedure. That procedural vacuum is left to the contract itself—and, in insurance policies, that silence speaks volumes. Most modern arbitration clauses in insurance contracts identify when and where arbitration applies and outline the composition of the arbitral panel. But beyond that, they are strikingly vague. They rarely identify which rules—AAA, JAMS, or otherwise—will govern the process.
In practice, this means that the so-called “arbitration” often devolves into litigation without a jury, guided by the same procedural formality and expense that arbitration was supposed to avoid. The arbitrators—typically lawyers or retired judges—recreate the courtroom environment under the guise of informality, relying on the familiar “rules of civil procedure” and transforming what should be an efficient, equitable forum into a drawn-out ordeal.
The result is an arbitration process that favors insurers, not insureds. Panels are reluctant to enforce principles of good faith or to penalize unreasonable claim handling. In effect, arbitration becomes litigation stripped of its key safeguard: the jury.
Reclaiming Arbitration for Policyholders
Until policyholder-appointed arbitrators insist that arbitration clauses operate as intended—streamlined, focused, and equitable—this imbalance will persist to the benefit of insurance companies. Properly understood, these clauses should function as a form of appraisal—a forum for resolving disputes over causation, coverage, and valuation—not as a license for insurers to relitigate their own investigation.
An insurer should never invoke or agree to arbitration before making a coverage determination. By the time an arbitration is requested, the insurer should have gathered and reviewed all the documents necessary to reach its decision. Arbitration should not serve as the insurer’s first opportunity to adjust the claim or demand decades of historical records. Such tactics serve only to delay resolution, drive up costs, and exhaust policyholders.
If an insurer’s coverage decision was made hastily or without full investigation, that failure lies with them. Arbitrators should not afford insurers a second chance to “redo” their claim handling under the pretext of fairness.
A Call for Procedural Discipline
To restore balance, arbitrators and advocates alike must enforce discipline in the process. A proper arbitration should proceed as follows:
- Statement of Claim: Clearly outline the cause of loss, coverage position, and valuation dispute.
- Focused Discovery: Limit discovery strictly to these issues—cause, coverage, and value.
- Expert Preparation: Allow each side to present expert opinions supporting their position.
- Limited Depositions: Permit depositions only upon a showing of good cause and relevance to narrow issues.
- Prompt Final Hearing: Conduct the hearing expeditiously, ensuring that both sides focus on the evidence already in hand.
Arbitrators should manage the proceedings actively, intervening when parties stray beyond the central dispute. The final decision should emerge from an informed dialogue among the panel members—party-appointed arbitrators resolving where they can, and the umpire stepping in only as needed.
The Principle of the Non-Drafter
Ultimately, arbitration clauses drafted by insurers must be interpreted against them. If no procedural rules are specified, the default should favor the policyholder—the party who did not write the contract. Policyholder advocates must refuse to consent to rules that mimic civil procedure or that open the door to the same drawn-out, costly process that arbitration was designed to avoid.
Until that mindset takes hold, arbitration in insurance disputes will remain little more than litigation in disguise, serving the insurer’s interests under the pretense of efficiency. The task, then, falls to policyholder counsel and their chosen arbitrators to reclaim arbitration as a forum for fairness, not fatigue.