Like a triage nurse in an emergency room, claim professionals must evaluate the severity of each claim that comes their way and quickly identify the appropriate next step. The more options they have, the more likely they will be able to provide the best treatment for each claim. And for many insurers, litigation is the last remedy they want to pursue. But there are other options that minimize the risks associated with litigation in resolving disputes over coverage and claim value. By increasing the use of these alternative dispute resolution (ADR) processes, insurers can increase customer satisfaction and benefit financially.
"Litigation" is one of the property and casualty insurance industry's most alarming words. Other words about this process such as "treble damages" and "punitive damages" bring even more apprehension — a reasonable reaction considering the fact that litigation is an uncertain, costly, and economically inefficient means of resolving insurance claim disputes.
Insurers, as risk-managing organizations, dislike the uncertainty litigation promises, and therefore, must carefully pick and choose their battles. Yet aside from commonly used telephonic claim-settlement negotiations between claimants and adjusters, ADR processes have remained underutilized by the industry. There is a need to build awareness of how technology, dispute resolution proponents, and creative entrepreneurs have helped reduce the transaction costs involved in using ADR techniques to resolve the most common of claim disputes: losses that have relatively small monetary value, but are large in volume.
Using any form of ADR can lead to savings. Settling at the earliest possible point of disagreement yields minimal attorney fees and costs, and it also increases goodwill. The risk of an illogical or highly emotional jury verdict is taken away as a more informed claim expert is used to augment the settlement process. This expert, if properly trained, can better understand the coverage and economic issues than most jurors. That means the final settlement is more likely to be economically reasonable. Whatever the final result, participants are more likely to be satisfied with the process since it allows them to be fully heard. Sometimes this is all a claimant wants.
Damage Control
Another benefit to insurers is that a policyholder who feels heard — even if the underlying result is not what he sought — is much less likely to spread negative publicity or complain to regulators. While litigation allows for virtually no creative solutions, ADR processes — especially mediation — create the perfect environment for creative explorations of possible solutions that satisfy the interests of both parties. This creative exploration can also lead to a better way of doing things in the future.
To see how successful ADR procedures can be, insurers need only look to the success of mediation programs developed by the Gulf States in response to the flood of claims brought about by the hurricanes of 2004 and 2005. These programs were highly successful in Florida, Mississippi, and Louisiana. In most cases, they were so successful in resolving the nearly insurmountable number of claims that they were made permanent. Around 80 percent of claim disputes were successfully settled by these programs.
Technology also is impacting the way disputes are handled. One fairly new concept is online dispute resolution (ODR), which is basically the use of alternative dispute resolution carried out over the Internet. One of the first people to use this idea was Colin Rule, a highly visible proponent of ODR and the designer of eBay's successful online dispute resolution system.
Online dispute resolution capitalizes on the ability of the Internet to connect people together from anywhere in the world at a very low cost. It also allows the use of blind-bidding negotiations between claimants and insurers. This means that each side's bid can be kept secret from the other party unless the two offers are close and the difference is settled at the midpoint between the two.
Like private mediation sessions, ODR allows the parties to negotiate without the disadvantage of having to reveal their bottom lines in case a settlement is not reached. The Better Business Bureau and The American Arbitration Association are just two organizations equipped to offer ODR. While this can be used for disputes in a number of areas, insurers will find that in using ADR and ODR options together, they can handle claims in a more efficient manner.
Let's say you are a claim professional who is highly trained in both claim handling and dispute resolution procedures. You are responsible for determining the most suitable procedure to which a claim dispute will be referred based on such considerations as the possible monetary value of the claim, public relations ramifications, the level of emotions involved, the geographical distance between adjuster and claimant, and the computer acumen of the claimant. Using this triage-type process, an insurer can keep costs at bay by referring the low-monetary-amount claims to an online neutral for possible resolution and protection, while the high-amount claims — those heavy in emotions or those with potentially sensitive public relations issues — can be handled by the more costly, but more personal, in-person dispute resolution procedures.
ADR and ODR also may help reduce the risks associated with possible violations of Unfair Claim Settlement Practices (UCSP) statutes. This is important because violations of these laws can lead to the awarding of significant damages, hefty fines, and negative publicity. But in using two combination ADR/ODR procedures called arb-med and med-arb, insurers can help protect themselves against violation of these statutes. These procedures offer the best opportunity to settle creatively (via mediation) and the rendering of an expert evaluation (via arbitration).
To better understand the benefits of arb-med and med-arb, it is helpful to first look at a state such as Massachusetts, where the courts determined in Hartford Cas. Ins. Co. v. New Hampshire Ins. Co., 417 Mass. 115, 628 N.E.2d 14 (1994) that an insurer is held to an objective standard in denying coverage or offered amount to settle a claim. This means that an insurer will not violate the statute if any reasonable insurer would have either denied coverage of a given claim or would have settled the claim dispute at the amount offered by the insurer. Further, courts have held it is reasonable for an insurer to deny coverage or offer to settle at a certain value if it bases this denial or settlement offer on the advice of an expert in the claim handling process, such as former claim executives or adjusters. If an insurer willingly binds itself to the determination of this expert, one serving as both an expert in claims and in dispute resolution, a good argument can be made that this offers protection against any possible UCSP violation.
In those jurisdictions where permissible, insurers might consider offering policies with arbitration and mediation clauses. These options could result in reduced premium rates for those who agree to the policy language and contract to take part in this process as the first step in any claim dispute. This is somewhat analogous to the way insurers offer premium discounts to policyholders who choose limited tort option language in an auto policy. But for this to work, the policyholders need not agree to be bound to any determination by a dispute resolution professional. They can retain their rights to go to court. But an insurer bound by this process may protect itself from allegations of UCSP violation.
What combination processes provide the best support in this endeavor? It is in the combination of mediation and arbitration methods that provide the best environment for efficient settlement and, if no agreement is reached, provide protection against any charge of violating a UCSP statute. The key to this is that the advantages of both procedures can be realized. The creative search for solutions that satisfy both parties' interests made possible by mediation and the expert determination by a neutral claim professional given by arbitration can both emerge.
Benefits of Med-Arb, Arb-Med
Med-arb is a procedure where a third-party neutral first attempts to facilitate an agreement between disputants using the techniques of mediation. These include improving communication, offering possible creative solutions, or providing case evaluation by encouraging the disputants to reassess any outlandish demands being made. If this mediation process fails to find agreement, the mediator turns into an arbitrator and, in its simplest form, renders a decision on the case after hearing a relatively informal presentation of evidence by each party. While a claimant may still then pursue alternatives to this decision, such as with litigation or a complaint to the Department of Insurance, an insurer bound by the determination (except in cases of gross abuse of discretion by the arbitrator) will provide itself with protection against any unfair claim settlement charges since a neutral expert has determined what is an objectively reasonable settlement. As long as the insurer offers this at minimum, protection should exist. The claimant need not be bound by the decision for this to ensue.
The alternative to this process is arb-med, which involves a neutral expert first hearing each side's case in varying levels of formality, then rendering a sealed decision. The neutral then attempts to facilitate an agreement based on his training in mediation. By first arbitrating, parties are less reluctant to withhold information in the mediation since they have already gone through the adversarial process. As is the case with med-arb, this can be done either in person or online depending upon the underlying claim's potential value, among other things. Smaller valued claims may be more appropriately resolved via less costly ODR, while those larger in value may be better resolved by these procedures in person.
While alternative dispute resolution can take many forms, the common thread is that these various processes can help insurers in a number of areas, including customer relations, compliance, and financial savings. A well-trained claim triage professional can go a long way in maximizing the benefits, and minimizing the costs, of the available dispute resolution processes. Claim managers who understand both claim handling and dispute resolution procedures can provide insurers with the invaluable service of providing the most fitting path to claim dispute resolution.
Peter M. Blanciak, J.D., is an analyst for the Insurance Compliance Solutions group at Wolters Kluwer Financial Services. He has a certification in Conflict Resolution from the Pittsburgh Mediation Center, a certificate in Negotiation and Dispute Resolution from Harvard Law School's Program on Negotiation, and training in mediation from Framingham Court Mediation Services in Massachusetts.
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