Car Insurance and Arbitration Clauses

Most car insurance policies have a provision that requires arbitration if the insurance company and policyholder cannot agree on a settlement amount. Arbitration is where a dispute is brought before an independent third party instead of settling the disagreement through litigation. The arbitrator is usually an experienced and neutral practicing attorney. Insurers include arbitration clauses in auto insurance policies in order to save time and money on legal expenses. With a binding arbitration clause, the decision of the arbitrator is final, or binding, for both parties, and the decision may not be disputed in court by either party. If your auto policy has a binding arbitration clause, you and your insurer must pursue arbitration and comply with the resulting final decision. Usually, arbitration is reserved for cases where damages are the sole issue.

How It Works

In car insurance policies, arbitration provisions are usually referred to as appraisal clauses. Both parties, the policyholder and the insurer, hire an appraiser to evaluate the claim and determine a fair settlement amount. If the two appraisers cannot agree on a settlement amount, a third neutral appraiser is hired to examine the claim. The decision of any two of the three hired appraisers is usually final for both parties. The policyholder and the insurer both have the ability to exercise the appraisal clause when they can’t reach a settlement figure. This process usually takes a few weeks but can take up to several months.

The Costs

Arbitration is substantially less expensive than litigation, but there are still costs associated with the process. The insurer and the policyholder must each pay for their own appraiser and split the cost of the third neutral appraiser. If the cost of arbitration would exceed the amount of the settlement a policyholder wishes to receive, the policyholder should not invoke the appraisal clause. Instead, the policyholder might pursue mediation, which is a professional form of dispute resolution that is usually not legally binding. With mediation, a trained, impartial facilitator meets with the involved parties to help them reach an agreement.

Alternatives to Arbitration

Small claims court is one way to resolve auto insurance disputes for small amounts of damages. Small claims court is usually faster and cheaper than arbitration, and you can usually file suit without the help of a lawyer. Policyholders might also consider filing a complaint against the auto insurer with their state’s insurance department. The insurance department most likely will not intervene on your behalf, but your auto insurer may change its tune if it finds out you are filing a formal complaint.

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Car Insurance and Arbitration Clauses

Chances are, your auto insurance policy contains a mandatory arbitration clause. This clause requires you to try to resolve your dispute with the insurer before an arbitrator instead of a jury. We’ll explain more about arbitration clauses and how they relate to car insurance in this post.