My contract required “Binding Arbitration” for all disputes. When the client demanded $50,000, my insurance adjuster was furious. “We can’t defend you properly in arbitration,” they said. “Arbitrators don’t follow legal precedents, and there’s no appeal.” They threatened to deny coverage because I had prejudiced their ability to defend the claim.
Key Takeaways
- Insurers prefer Litigation: Courts have rules. Judges follow the law. Appeals are possible. Insurers know how to win in court.
- Arbitration is a Wild Card: Arbitrators often split the baby (give everyone half). There is rarely an appeal. Insurers hate this unpredictability.
- “Consent to Settle”: In arbitration, the insurer loses control. If the arbitrator awards punitive damages (which might be uninsurable), you are stuck.
- Policy Conditions: Some policies explicitly state you cannot agree to binding arbitration without their consent before a claim arises.
The “Why”: The Right to Defend
The Trap: Your policy says: “The Insured shall not assume any obligation… without our consent.”
By signing a contract that forces Binding Arbitration, you have stripped the insurer of their right to a jury trial.
While most modern carriers will defend arbitration, they often have a “Hammer Clause”—if you agreed to arbitration and the award is higher than what they could have settled for, you pay the difference.
The Investigation: I Quoted 3 Major Carriers
1. Victor (Schinnerer)
- My Analysis: They advise against arbitration clauses in their risk management guides. However, their policy definition of “Claim” includes “Arbitration proceedings,” so they will show up. But they warn that deductibles might be higher for arbitration due to defense costs.
2. Markel
- My Analysis: They are neutral. They treat arbitration as a lawsuit. But they emphasized that “Mediation” is preferred. They will often pay 50% of your deductible if you settle via Mediation instead of Arbitration.
3. BiBERK
- My Analysis: Their automated policy is standard. It covers arbitration, but their adjusters are less experienced in high-stakes arbitration compared to the big specialized carriers.
[IMAGE: Flowchart showing “Mediation (Good)” -> “Litigation (Okay)” -> “Binding Arbitration (Risky)”]
Comparison Table: Dispute Resolution Incentives
| Carrier | Covers Arbitration? | Mediation Incentive? | Best For… |
| Markel | Yes | Deductible Credit | Consultants |
| Victor | Yes | Risk Mgmt Advice | Architects/Engineers |
| BiBERK | Yes | None | Small Biz |
Step-by-Step Action Plan
- Edit the Contract: Change “Binding Arbitration” to “Non-Binding Mediation as a prerequisite to Litigation.”
- Why Mediation? It’s non-binding. If you don’t like the result, you can still go to court (and let insurance fight).
- Check Policy Definition of “Claim”: Ensure it specifically lists “Arbitration or other Alternative Dispute Resolution.”
- Notify Carrier: If you get an arbitration demand, send it instantly. Deadlines are shorter than courts.
FAQ
Why do clients want arbitration?
It’s private (no public record) and usually faster.
Is Mediation covered?
Yes. In fact, insurers love it. It’s cheap and settles claims fast.
What if the arbitrator awards punitive damages?
Most policies exclude punitive damages. You pay those yourself.