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Witnesses Clash Over Mandatory Arbitration Clauses

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A financial services lawyer appeared today at a hearing on Capitol Hill to defend contract provisions that require consumers to take disputes to arbitration, but other witnesses blasted the provisions.

The House Judiciary Committee’s commercial and administrative law subcommittee organized the hearing to review complaints about the clauses, which are used in many insurance industry contracts, including contracts between insurers and brokers and between insurers and reinsurers, as well as between insurers and policyholders.

One witness, Mark Levin, a partner in the Philadelphia office of Ballard Spahr Andrews & Ingersoll L.L.P. who has helped write financial services companies’ arbitration clauses, said studies show that the arbitration system is working well.

When an arm of the U.S. Chamber of Commerce commissioned a survey of 609 arbitration participants, researchers found that 74% believed arbitration was faster than going to court and 51% thought it was cheaper; that 66% would use arbitration again; and that 40% of the consumers who lost were moderately to highly satisfied with the fairness of the process, Levin said, according to a written version of his testimony posted on the Judiciary Committee Web site.

Another witness said mandatory arbitration clauses in mortgage loan documents are hurting Texas home buyers, and a third witness, a Wisconsin law school professor, reviewed research suggesting that consumers and other individuals often fare poorly in arbitration.

F. Paul Bland Jr., a staff attorney for Public Justice, Washington, a group backed by trial lawyers, said many managed care companies, doctors and nursing homes require patients to agree to mandatory arbitration clauses.

“I even recently saw such a clause in a contract providing for an organ transplant,” Bland said.

Bland said the current arbitration system is unfair to consumers, because most individuals use the system only once, while insurers and other financial services companies use arbitration services often.

Financial services companies know how to choose sympathetic arbitrators, and “private arbitration companies are under great pressure to devise systems that favor the corporate repeat players who draft the arbitration clauses (and thus decide which arbitration companies will receive their lucrative business),” Bland testified.

A review of California managed care arbitration cases “found a small number of cases in which an arbitrator awarded a plaintiff more than $1 million against a health maintenance organization,” Bland testified. “In each instance, that was the only HMO case that the arbitrator ever handled, suggesting that every time an arbitrator entered a substantial verdict against an HMO, the arbitrator was unable to get any further work from an HMO in the state.”

One arbitration organization often gives parties involved in insurance cases lists of potential arbitrators consisting entirely of arbitrators who work directly or indirectly for the insurance industry, Bland said.

When lawyers who represent consumers ask to become arbitrators for that organization, the organization says the arbitrator lists in the lawyers’ states are filled, but the consumer lawyers later find that the organization has added more corporate defense lawyers to its list of arbitrators for their states, Bland said.

Links to the hearing testimony are on the Web


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