For Insureds and Insurers, Complex Disputes Are Best Left to the Courts

While binding arbitration can provide a convenient forum for specific types of claims, within the ambit of insurance coverage litigation, there are significant pitfalls to both insureds and insurers when arbitration is chosen as the dispute resolution forum as opposed to nonbinding mediation or court proceedings. In this article, it is assumed that the parties have unsuccessfully attempted nonbinding mediation and are now faced with the decision of where to prosecute their claims. At least with respect to complex insurance coverage disputes, courts typically represent a superior choice in four key respects: lower comparative total costs; uncompromised resolution on the merits; predictability; and guaranteed appellate review.

Cost

Save for filing fees or the unlikely discovery sanction, courts do no charge litigants to resolve their disputes. Aside from each party’s respective litigation costs (e.g., attorneys and consultants fees), there is no added cost imposed upon litigants that correlates to the intensity with which they avail themselves of the court’s services. On the other hand, arbitration inherently has the potential to impose significant costs that are in addition to the insurer and insured’s legal fees depending on the litigants’ use of the arbitration panel. The typical arbitration panel routinely consists of between one and three members; each is being compensated for services at a substantial hourly billable rate that is split between the parties. It is not unusual for even an ordinary discovery dispute to cost the parties thousands of dollars of arbitrators’ fees. In a contentious or complex proceeding, the costs grow quickly as panel members spend additional time to resolve ongoing interlocutory disputes. Further, arbitration has a substantial initial filing fee that in some instances is derived from the amount at issue; the greater the amount at issue correlates to a larger the filing fee. Additionally, in the event a party wishes to file a counterclaim or amend its complaint to include an additional claim, each of these actions carries with it another filing fee to be paid before the new claims will be considered.