Arbitrating Insurance Coverage Disputes and the New ARIAS Rules

This post first appeared on Risk Management Magazine. Read the original article.

In a seminal treatise on Bermuda Form arbitration, the authors explained that the liability crisis of the mid-1980s resulted in the shifting of the resolution of insurance coverage disputes from U.S. courts to London arbitration.[

In a similar vein, it is increasingly common to find that
policies written in the United States contain some form of alternative dispute
resolution clause, calling for the resolution of coverage disputes by
arbitration, mediation, or some combination of the two.

Of recent interest to risk management professionals is a new set of arbitration rules specifically designed to address insurance coverage disputes that were just released. Entitled, the “ARIAS-US Panel Rules for the Resolution of Insurance and Contract Disputes,” the new rules went into effect on September 16, 2019. 

The AIDA Reinsurance Insurance Arbitration Society (ARIAS-US) is a nonprofit corporation, per its website, “dedicated to improving the insurance and reinsurance arbitration process for the international and domestic markets.” ARIAS-US provides initial training and continuing education for arbitrators, and certifies a pool of qualified arbitrators. In addition, ARIAS has promulgated procedural rules for use in insurance and reinsurance arbitrations including the Insurance Rules. Because insurance policies often contain arbitration clauses, some of which require arbitration under ARIAS, it is important for risk professionals to be aware of the Insurance Rules.

This article addresses the nomenclature of dispute
resolution before reviewing the Insurance Rules.

Mediation, Litigation

The literature on dispute resolution includes both binding
mediation and non-binding arbitration, and arbitration can involve both
neutrals and non-neutrals. Before addressing the Insurance Rules, it is
therefore important to clarify some term:

Arbitration. According to the American Arbitration Association, arbitration is “a creature of contract; it involves one or more impartial persons to adjudicate the dispute; it is generally binding, and; it is generally private and confidential.”[

While policyholders have traditionally preferred litigation to arbitration, the above characteristics may explain why arbitration is suitable for resolving insurance disputes in particular cases, such as a cyber insurance dispute, where confidentiality may trump other process concerns.[

Mediation. Mediation is a meeting among disputants, their representatives and a mediator to discuss settlement. In distinguishing it from arbitration, it is important to note that mediation involves a neutral who is generally there to facilitate the parties’ resolution of their dispute. It is not generally binding. Parties can walk away from mediation if they do not like the deal that is being offered.

Negotiation. Negotiation
can take many forms. When found in an insurance policy, there is generally a
requirement that the negotiation be undertaken in good faith. A third-party
neutral is typically not involved as negotiation typically involves senior executive
officers of the two parties (e.g., the vice president of claims for an
insurance company and the head of risk management for the policyholder).  

Negotiation provisions, as with some mediation clauses, may include a “cooling-off period” whereby the parties are barred, for example, from filing suit until a set period of time has passed.[ Cooling-off periods are designed to permit the parties to reconsider their positions before moving ahead with an escalation of the dispute.

Multistep Provisions.
Multistep provisions generally involve some combination of the above. For
example, a three-part multistep clause might require the parties to first
negotiate in good faith. Then, if negotiations fail, mediate, and then, if
mediation fails, proceed with arbitration or litigation.

The Insurance Rules

In commenting on arbitrating under the prior version of the
ARIAS Arbitration Rules, a policyholder’s legal brief described the concern of
utilizing ARIAS arbitrators as follows:

To be eligible, one must have at least 10 years of experience in the insurance/reinsurance industry, and obtain three sponsor recommendations from individual ARIAS members that the candidate has known for at least five years. This, reasonably, leaves a small pool of potential candidates who are likely well-acquainted with one another through business dealings, prior arbitrations, and other contacts, which could lead to a situation where the “neutral” umpire would be tempted to be sympathetic to the insurance company.[

Considering this concern and the goal of making new rules
that would attract direct insurance disputes, the Insurance Rules were designed
to address these changes. This meant addressing concerns about the rules in
relation to who could serve as an arbitrator and what law might apply to the
dispute as well as the means by which the pool of arbitrators could be
expanded. In drafting the Insurance Rules, however, it became apparent that
other innovations might be layered on to the foundation of the existing neutral
rules including the resolution of arbitrator challenges and the use of
mediation while an arbitration was pending. 

While there are many nuances in the Insurance Rules worth discussing, this article focuses on three key changes—party-appointed arbitrators, the requirement that arbitrators follow applicable law, and the optional mediation procedure.[

Party-Appointed Arbitrators.Although the Insurance Rules do not expressly label party-appointed arbitrators as “non-neutral” or “partisans,” they reflect the concept that such arbitrators need not be considered neutral by background or general viewpoint. By this approach, and consistent with the Insurance Rules’ new challenge provisions, the intent is to avoid frivolous challenges questioning whether party-appointed arbitrators have a truly neutral background.

This change is intended to help expand the pool of potential arbitrators to brokers, consultants, risk managers and coverage counsel who have worked for policyholders. Having more diverse options will help make the process fairer while still ensuring that arbitrators continue to have the appropriate insurance expertise to adjudicate coverage disputes. In addition, the hope was that this approach would avoid frivolous challenges, as aforementioned, to reduce the time and cost associated with the resolution of coverage disputes. 

The Requirement that Arbitrators Follow Strict Rules of Law. Under Article 13.3 of the prior iteration of the ARIAS Rules, arbitrators were not obligated to follow strict rules of law or evidence. This presumption regarding arbitrator authority has been changed in the Insurance Rules so that, “The Panel is obligated to follow strict rules of law, unless otherwise agreed.” This rule change was designed to ensure that arbitrators follow applicable law in interpreting policy language to foster predictability and certainty in the process.

Optional Mediation Procedures.Rule 15.1 of the Insurance Rules provides as follows:

If at any point during the arbitration proceedings, the parties intend to mediate their dispute, the parties shall jointly inform the Panel in writing of their intentions (the “Intent to Mediate Letter”) and the arbitration shall be stayed from the date of the Intent to Mediate Letter until 30 days after the mediation is held. The mediation should take place before a Qualified Mediator, who is not a member of the Panel and shall be held within 60 days of the submission of the Intent to Mediate Letter. Should the parties require additional time to negotiate their differences with regard to the mediation, they must jointly request an extension of the automatic stay.

As noted in the first sentence of the Optional Mediation
Procedures, this provision may be invoked “at any point during the arbitration
proceedings.” The flexibility baked into the procedures is designed to allow
the parties to seek to temporarily remove themselves from arbitration
proceedings so that they might resolve their dispute through mediation. In
other words, it does not matter if the parties see an opportunity for
settlement following the constitution of the panel or after documents have been
exchanged. So long as there is a mutual desire to resolve the parties’ dispute,
as evidenced by the “Intent to Mediate Letter,” the parties can invoke the

Once the “Intent to Mediate Letter” is provided to the
Panel, the parties then have 60 days to hold a mediation. Once the mediation is
completed, assuming no resolution of the case, the stay will continue for an
additional 30 days before being lifted. The idea here is to give the parties a
chance to resolve their dispute while: 1) seeking to get the parties to move
ahead with mediation without delay; and 2) putting an automatic stay in place
to avoid causing the parties to incur arbitration costs while they focus on
mediation. The latter is time-limited to prevent a party acting in bad faith
from unduly delaying the arbitration. 

The last sentence of the Optional Mediation Procedures,
however, provides the parties with some flexibility regarding the timing of the
mediation as it permits the parties to jointly request an extension of the
automatic stay. If, for example, the parties are working diligently to resolve
their dispute but the jointly desired mediator is available on the 70th day
after the Intent to Mediate Letter was provided, the parties may jointly
petition the tribunal for additional time.

The Optional Mediation Procedures are aimed at facilitating
dispute resolution outside of arbitration, through mediation, while avoiding
attempts to delay proceedings. If mediation proves unsuccessful, the built-in
time limits and requirement of mutuality in seeking any additional time is
intended to quickly return the parties to the arbitral process.

Arbitration and Mediation Under the Insurance Rules

The development of the Insurance Rules was intended to make
insurance dispute resolution fairer, more efficient and predictable, and to
foster a more diverse pool of arbitrators. If the Insurance Rules can achieve
this aim in practice, they will serve as a valuable tool for the resolution of
direct insurance and insurance-related contract disputes.

The Optional Mediation Procedures in the Insurance Rules offers
parties an opportunity to take time out of their arbitration to resolve their
dispute with set rules designed to facilitate a mediated settlement, while
preventing gamesmanship. Risk professionals thinking about dispute resolution
provisions may want to consider adopting these or similar procedures that
provide them with a mediation “off-ramp” when navigating insurance claim

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