Lieff Cabraser Civil Justice Blog
Mandatory Arbitration Clauses Should Be Banned From Insurance Policies

Mandatory Arbitration Clauses Should Be Banned From Insurance Policies

Formal amendment to the Model Unfair Trade Practices Act seeks to prohibit pre-dispute forced arbitration provisions

According to Insurance Business America, pretty much everyone except big business hates forced dispute arbitration, a diversion of adjudication from open courts to closed, one-sided panels that has been shoved down the throats of consumers across nearly every industry. “Over the last 10 to 15 years, the practice of requiring individuals to agree to arbitrate rather than litigate any future disputes (or forgo the product, service or employment altogether) has been heavily criticized by government agencies, the media, academics and consumer groups.”

This is why a formal amendment has been proposed to the Model Unfair Trade Practices Act that would prohibit pre-dispute forced arbitration clauses. Such mandatory arbitration clauses are routinely buried in contracts for transactions involving child care, credit cards, cellphones, car loans, home construction, student loans, payday loans, health insurance policies, and hospital and nursing home admissions. These types of agreements deprive consumers of their basic constitutional rights to justice when something goes wrong, allowing corporations to take extreme advantage of consumers and effectively avoid all accountability for fraud.

“Arbitration, it turns out, is not always faster and cheaper (the two major benefits claimed), and it can suppress the number of consumers pursuing legal remedies, the likelihood of success and the amount of damages,” reports Insurance Business America. “These concerns are why NAIC consumer representatives have requested the NAIC amend the Model Unfair Trade Practices Act to prohibit mandatory pre-dispute arbitration clauses in insurance policies sold to individuals, and ideally small businesses.”

Placing mandatory arbitration clauses within insurance policies would fundamentally restructure the insurer-insured relationship. Since people buy insurance for financial security and protection, the presence of arbitration provisions would “contractually limit remedies and damages policyholders would otherwise have under their state law. Manipulating the dispute resolution process in this manner in insurance is in conflict with the duties insurers owe their policyholders and is not holding their policyholders’ interests ‘at least equal to their own.’”

There is no good public-policy reason to force the use of arbitration, so this request “should not be a difficult one, because it is actually ‘arbitration neutral.’ If arbitration is truly as advantageous to consumers as proponents assert – i.e., a neutral forum rather than one favoring the entity that drafts the contracts – then insurers should have no need to insist on its use before a dispute has even arisen.”

Read the full article on the Insurance Business Magazine site.

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