Contractually mandated arbitration is a commonplace in the business world, including the insurance industry. Insurance companies in many areas of the industry, including workers’ compensation insurance, are increasingly making use of compulsory arbitration agreements to help ensure a more efficient resolution of disputes than would be possible through the adversarial process.
Given its efficiency in resolving disputes, arbitration is good for businesses because it allows them to cut costs defending against liabilities. In most cases, as well, business control the terms of arbitration since they have more bargaining power when negotiating these agreements. For those, however, on the other end of these agreements, the efficiency of arbitration is often outweighed by the imbalances of power inherent in their use. For employers, who are required to purchase workers’ compensation insurance, some of the same issues can arise when there are disputes with a workers’ compensation insurer.
Employers received a blow last week when the New York Supreme Court ruled that three employers were bound by arbitration clauses and the Federal Arbitration Act. The employers, who opposed arbitration, had argued that the federal McCarran-Ferguson Act, which was passed in 1945 as a way to protect the ability of states to continue regulating the insurance industry rather than ceding that power to the federal government, invalidated the application of the Federal Arbitration Act in the case. At issue was a California statute which required insurers to file copies of its policies and endorsements with the state’s rating bureau before they are issued. There was apparently a wrinkle in this case with the insurer’s compliance with this law.
Without getting too much into the details of the case, the end result was that court ruled that the Federal Arbitration Act did apply in the case because it didn’t have any harmful impact on the application of the California statute, and the arbitration clauses allowed for the resolution of the issues in dispute. The case is likely to prompt employers to be more cautious with any arbitration agreements they strike with the insurers they work with.
Arbitration is a tool that is sometimes used in workers’ compensation disputes here in the state of New York. In our next post, we’ll take a closer look at this issue.
Claims Journal, “Federal Law Requires Disputes Over Workers’ Comp Insurance Payment Agreements be Decided by Arbitration,” Richard Wolf, April 1, 2016.
Blogs.orrick.com, “Closing the Courthouse Door to Insurance Disputes: Mandatory Arbitration Clauses in Insurance Policies Gain Traction,” Darren S. Teshima & Harry Moren, May 27, 2016.