
This is the sixth in a series of insurance myths, published by the consumer group Texas Watch.
Pre-dispute Binding Mandatory Arbitration (PBMA) is a secret, unappealable process that is frequently more costly than the traditional legal process and is biased against individuals. Insurance companies routinely bury PBMA clauses deep in the fine print of insurance policies, eliminating the ability of policyholders to exercise their basic legal rights when their insurance company tries to take advantage of them by unfairly denying, delaying, or underpaying their valid claim.
Insurance policyholders are vulnerable consumers. Texans are a proud people, and no one likes to think of themselves that way, but economic forces make it an inescapable truth. Insurance – unlike most other products – is mandatory if you drive on our roads or have a mortgage. You simply can’t walk away. And the insurance policies that are presented to you are done so on a take-it-or-leave-it basis. You cannot negotiate to rewrite the terms to make them more balanced. Because bargaining power is slanted so heavily in favor of the insurance companies, our laws must take extra care to protect policyholders from being taken advantage of.
Insurance and other corporate interests like the secretive nature of arbitration because it allows them to escape the public accountability they would be held to in a court of law. Problems may be swept under the rug. Other consumers are kept in the dark about the business’s illegal practices and legal rules that would deter harmful acts in the future are not developed or strengthened because no case law is made at the conclusion of the arbitration.
Policyholders and other consumers, however, are endangered by this process. Perils of Pre-dispute Binding Mandatory Arbitration include:
- More Costly. PBMA relies on judges-for-hire who can easily cost thousands of dollars (as compared to a filing fee of just several hundred dollars in court). Additionally, PBMA clauses may force policyholders to incur hefty travel costs by requiring them to travel to a far-away venue.
- Not Like Going to Court. PBMA differs significantly from a traditional legal proceeding. PBMA is typically unappealable. Discovery may be limited, preventing an individual from learning about a company’s pattern of abusive conduct. The rules of evidence and procedure, which provide litigants with an equal footing in court, may – or may not – be applied. There is no public record to guide future disputes or to ensure basic fairness. Most alarmingly, the law itself may not be applied strictly during the arbitrator’s deliberations.
- Biased. PBMA has a built-in structural bias because the insurance carrier stands to be a “repeat player” in many disputes involving the arbitrator – providing him/her with a hefty paycheck each time – while the arbitrator will likely only see the policyholder once. If an arbitrator is seen as too “consumer-friendly,” regardless of the merits, they may not be selected by the insurance company to hear future disputes.
- Secret. PBMA clauses are buried in the fine print in non-negotiable insurance policies. So, policyholders likely don’t know they have signed away their legal rights until it’s too late. Additionally, there is no public record of the PBMA proceeding.
While two legally sophisticated businesses of equal size and bargaining power may choose to use Pre-dispute Binding Mandatory Arbitration to resolve their disputes, it is not an appropriate forum for consumer disputes given the disparity in knowledge and strength between consumers and business.
The Federal Arbitration Act typically casts a long shadow over this area of the law, but there is a ray of light here in terms of public policy because the business of insurance is regulated at the state level (PDF). Accordingly, our state legislature must take steps to ensure Texas policyholders are protected from being forced into Pre-dispute Binding Mandatory Arbitration by their insurance companies. If a policyholder and an insurance carrier have a dispute, it is only fair that they resolve it in the light of day within the dispute resolution system we have already paid for – our courts.