Court Gives States Say Over Arbitration Clauses In Policies

Arbitration is a process for resolving commercial disputes and other civil disputes out of court.

Supporters say arbitration is cheaper, faster and easier for consumers than going to court, but critics say the arbitration system can be more expensive, more complicated and less fair to consumers than the court system.

Some states, including Arkansas, explicitly allow insurers to include mandatory arbitration clauses in policies, but others forbid policy arbitration clauses or make no mention of them, according to an analysis by Citizens for Corporate Accountability & Individual Rights, Santa Monica, Calif., that was published on the Arkansas Trial Lawyers Association web site.

The plaintiff in the West case, Devin West, was a running back on the University of Missouri football team. He bought a Standard Security disability insurance policy in 1998. The policy was supposed to protect him against a permanent, total disability that would keep him from playing professional football, according to the appellate court opinion.

West notified Standard Security in June 1999 that a stress fracture on his right foot would keep him from playing professional football.

Standard Security denied the claim, contending that the fracture was the result of a cumulative injury, not the kind of sudden or accidental event that the policy was supposed to cover. It pointed out that a policy clause required West to resolve the dispute through arbitration, according to court documents.

West sued in state court, and Standard Security responded by suing in federal court. Standard Security also asked the federal court to compel arbitration under the Federal Arbitration Act.

A judge in the U.S. District Court in Kansas City, Mo., sided with West on the arbitration issue.

The appellate court is supporting the argument of the lower court judge.

The lower court judge wrote that, according to earlier Supreme Court decisions, a state law dealing specifically with insurance trumps a federal law that makes no mention of insurance if: the state law has the effect of spreading or transferring risk; the state law is a key part of the insurer-insured relationship; and the state law is limited to entities within the insurance industry.

A state law that forbids mandatory policy arbitration clauses transfers risk to the insurer by “introducing the possibility of jury verdicts into the process for resolving disputed claims,” the appellate court writes in its opinion.

A state law forbidding mandatory policy arbitration clauses is also an “integral part of the insurer-insured relationship,” because it “subjects all policy disputes to the possibility of a jury trial,” the court writes.

The appellate court adds that a state law that “clearly and directly” excepts insurance can be treated as a law that is “limited to entities within the insurance industry,” even if it is not officially part of the insurance code.

A ruling on a similar case in the 10th Circuit, which includes Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming, held that a Kansas arbitration statute that “clearly and directly excepted insurance” related to insurance.

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 12, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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