TDI mulls mandatory mediation-arbitration endorsements

On July 6, the Texas Department of Insurance will consider whether to allow Texas Farm Bureau to offer a mandatory mediation-arbitration endorsement with its homeowner’s policies. The insured would give up their right to sue Farm Bureau in court in exchange for an unknown reduction in premium.

Under the endorsement, the insured and Farm Bureau must attempt mediation first ( I always appreciate the opportunity for more mediation business!) and go to arbitration if they do not settle at mediation.The arbitration clause limits discovery to the sharing of certain documents related to the claim. No depositions unless the arbitrator permits them. Farm Bureau pays the fees for mediators and arbitrators. An arbitrator’s award would be confidential unless both sides agree to disclose. I don’t read the endorsement as limiting the types of damages an arbitrator can award. The endorsement does not provide for an award of attorney’s fees.

I don’t like arbitration for most consumer transactions, particularly those involving adhesion contracts. Experience shows arbitration isn’t an effective or practical mechanism for most consumers to enforce their rights. (I have no qualms about two parties in relatively comparable bargaining positions agreeing to arbitrate their disputes). Heck, I typically work on the defense side of the bar, and I don’t typically prefer arbitration as lawyer. I suppose I prefer the structure provided by court rules and procedures instead of the unpredictable flexible rules of arbitration. At least Farm Bureau offers to mitigate certain barriers associated with arbitration in other fields, such as paying administrative fees.

I think TDI will bless then endorsement. I fear most policyholders won’t understand what rights they will relinquish in exchange for a lower premium. Most insureds will agree to the endorsement because their agent will tell the insured he or she will save some dough in the short-term and it’s rare whenever a dispute arises out of a claim. Notwithstanding my doubts, I don’t think TDI should prohibit Farm Bureau from offering the endorsement. It’s not my place to mandate whether certain people voluntarily give up certain rights in exchange for money, especially when other safeguards exist.

I suspect TDI will allow Farm Bureau to offer the endorsement, as long as the insured receives a tangible break on policy premiums. If the consumer gets no real benefit, forget it. Having to front arbitration and mediation fees can make it difficult for an insured to pursue a remedy against a carrier. It helps that Farm Bureau will bear most of the administrative fees and costs for mediators and arbitrators. Also, for it to work for me, policyholders have to be able to obtain policies from admitted carriers which do not require the endorsement. Otherwise, arbitration will become the norm.

Will we see mandatory mediation-arbitration endorsement as a matter of course?  That’s the big question. I anticipate most other HO carriers will follow suit if TDI allows Farm Bureau to offer this endorsement. I imagine most carriers see this as an opportunity for carriers to lower claim costs and potential exposure. Carriers may have to offer the endorsement to compete with Farm Bureau on premium price. The problem arises if and when each carrier offers the endorsement and policyholders have to pay significantly more to remove it. What if carriers may refuse to write policies without the endorsement. That result would be terrible for Texas consumers.

FTR, I wouldn’t personally agree to the endorsement if I was a Farm Bureau insured.

 

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