A Florida based insurance agent educator asked me for my thoughts about how arbitration clauses harm policyholders and provide less coverage. He was referencing my earlier post this week, Arbitration Clause Requiring New York Law and New York Arbitration Cited as Avoidance of Florida Lawsuit—Another Instance of Surplus Lines Insurer Abuse in Florida.

Off the top of my head, I noted some pretty obvious examples of how these clauses give a lot of practical leverage to the insurer:

  1. Arbitration in New York is a lot more expensive for the policyholder. It is not an appraisal.
  2. Arbitration is a formal process requirement which includes attorneys. In this case, attorneys which will have to be licensed in New York rather than Florida.
  3. Since the policyholder has to prove the damage, all the witnesses will have to attend the arbitration trial in New York or have their depositions taken in Florida. This is a cost and strategic advantage for the insurer.
  4. The ability to show the Umpire the damaged property is not available since the arbitration is in New York.
  5. New York law is generally a lot more conservative and less policyholder friendly. I cannot think of one area of property insurance law which is more favorable in New York than Florida law as I write this.

For example, a policyholder may find that there is a loss of coverage for “late notice.” New York law is much more insurer favorable on this issue as noted in New York Notice of Claim Requirements.
We noted:

I can’t tell you how often cases arise where a small water spot is seen inside, and then months later, when it’s discovered there was damage to the roof, and significant repair is needed, the insurer disclaims coverage claiming that the insured waited months to report the claim.

Under Florida law, an insurer cannot simply allege a factual late notice of claim and avoid coverage. The insurer can only escape coverage if it has been prejudiced by the late notice, as noted in Policy Conditions and Substantial Compliance in Florida—There is a Pulse!

Statute of limitations can be much shorter in New York than Florida. We noted that New York will uphold a one-year limitation clause in New York Statute of Limitations Can Be Contractually Shortened to as Little as One Year From Date of Loss. Florida generally has a five year limitation period regardless of what the insurance policy says as noted in Another Case on Florida’s Statute of Limitations for Property Insurance Claims.

Florida has a much better coverage analysis when concurrent causes of loss are cited by insurers as a reason for coverage exclusion, as noted in The Florida Supreme Court Clarifies What Rule to Apply When There Are Multiple Causes of Loss Under an All-Risk Policy.

Joshua Gold wrote an excellent article on this exact topic, Insurance Policy Arbitration Clauses: Perils And Considerations For Policyholders. His article was targeted at corporate general counsel warning them that these clauses are usually not favorable and should be avoided. This article supports the view that the surplus lines insurance industry is harming commercial businesses through such acts.

He has been a witness to insurance company lawyers claiming that policyholders can expect less coverage when these clauses are written into policies:

We have experienced first-hand occasions where insurance company attorneys at claim meetings have expressly admonished that the policyholder can expect less coverage because the policies require arbitration of the coverage dispute. This is something that a policyholder will never hear during a meeting with the underwriter and insurance broker at the point of purchase.

There is nothing favorable for a non-New York policyholder to have an arbitration clause requiring arbitration in New York. It is even worse for coverage when New York is the designated law to be applied. This is the type of “cheap” insurance professional insurance agents should refuse to sell and strongly advise against purchasing if they are looking out for their customer.

Thought For The Day

I know it was all a bit of a sham. But I know that Mickey Dolenz sang. And Davy Jones sang. And Mike Nesmith sang. And Peter Tork did something.
—Ronnie James Dio