This article was originally published in the Policyholder Advisor, Volume 23, Issue 5 (November/December 2014)

Policyholders may be surprised to find that their insurance policies contain an arbitration provision. Deciding whether to proceed with arbitration, either after the denial of a claim or when procuring the placement of a policy, requires an understanding of the advantages and disadvantages of arbitration.

The Perceived Advantages of Arbitration

Although there are many definitions, arbitration has best been described as:

A process by which parties consensually submit a dispute to a non-governmental decision-maker, selected by or for the parties, to render a binding decision resolving a dispute in accordance with neutral, adjudicatory procedures affording each party an opportunity to present its case.*

Broadly stated, there are a number of perceived advantages to arbitration over litigation, which include finality, enforceability, party autonomy and procedural flexibility, and neutrality.

Finality: Finality refers to the general absence of extensive judicial review of arbitral awards. As a general rule, the decisions of arbitrators are final and binding. The benefit of limited appellate review is a reduction in litigation costs and delays.

Enforceability: This is particularly valuable in the context of international arbitration as it is generally easier to enforce foreign arbitral awards than foreign court judgments. This is due, in large part, to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which provides for mutual recognition and enforcement of arbitral awards by contracting states, and limits the defenses that may be raised in opposition to the confirmation of an award, the goal being to eliminate litigation following an arbitration.

Party Autonomy and Procedural Flexibility: Arbitration facilitates party autonomy in that it allows parArbitration facilitates party autonomy in that it allows parties broad freedom to agree on the laws, procedures and rules applicable to their disputes.

Neutrality: Party autonomy is understood to open a space for neutrality of venue. In arbitration, the parties can potentially avoid concerns about the potential biases associated the other party.

Additional perceived advantages of arbitration include the confidentiality of the procedure (depending on the jurisdiction and stage of the proceedings), the reduction of forum shopping and parallel lawsuits, maintenance of the parties' business relationship, and cost and speed.

The Perceived Disadvantages of Arbitration

The perceived disadvantages of arbitration represent the flipside of the advantages. Finality and enforceability can limit a party's recourse in the event of an unfair decision. Party autonomy and flexibility, as well as neutrality, may result in a lack of legal protections, which typically hurts the weaker party (which lacked the bargaining power to select the procedure applicable to the dispute when negotiating the agreement). Confidential proceedings limit a party's ability to obtain precedent from a favorable ruling and to use statements made in the arbitration against a party at a later date. As to cost and speed, these advantages may be limited in complex proceedings.

The disadvantages can be particularly pronounced for policyholders (see, "Arbitration of Insurance Coverage Disputes: A Policyholder's Definitive Survival Guide," The John Liner Review (Fall 2010)). In particular, arbitration clauses in insurance policies are often drafted to benefit the insurance company (see, "Arbitration Clauses Can Make Dispute Resolution Arbitrary," The Metropolitan Corporate Counsel (July/August 2014)). For example, some arbitration provisions in insurance policies eliminate contra proferentum, the principle that language deemed ambiguous should be construed against the drafter (generally the insurance company) and in favor of the policyholder.

Negotiating Arbitration Provisions

If policyholders prefer arbitration, or are unable to avoid it, they can take advantage of the perceived benefits. For example, if an arbitration clause permits the policyholder to select an arbitrator, the policyholder can get the benefits associated with the selection of a neutral party with subject matter expertise. This means that the outcome will be decided, at least in part, by someone with dispute-specific expertise, something that is not guaranteed in court.

As a result of the disadvantages described above, some policyholders find it prudent to avoid arbitration entirely. This is best achieved through the purchase of insurance that does not contain an arbitration clause. Waiting to challenge a clause until after a dispute arises is difficult, as courts favor arbitration and often look for ways to enforce such agreements.

*Gary B. Born, International Arbitration: Law and Practice, at 4 (Wolters Kluwer, 2012)


Peter A. Halprin is an attorney in Anderson Kill's New York office. His practice concentrates in commercial litigation and insurance recovery, exclusively on behalf of policyholders. Mr. Halprin also acts as counsel for U.S. and foreign companies in domestic and international arbitrations. He is a Member of the Chartered Institute of Arbitrators and earned a Postgraduate Diploma in International Commercial Arbitration at Queen Mary, University of London. | phalprin@andersonkill.com


About Anderson Kill

Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estate, Trusts and Tax Services, Corporate and Securities, Antitrust, Banking and Lending, Bankruptcy and Restructuring, Real Estate and Construction, Foreign Investment Recovery, Public Law, Government Affairs, Employment and Labor Law, Captive Insurance, Intellectual Property, Corporate Tax, Hospitality, and Health Reform. Recognized nationwide by Chambers USA for Client Service and Commercial Awareness, and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes - with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Ventura, CA, Philadelphia, PA, Stamford, CT, Washington, DC, Newark, NJ and Dallas, TX.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.