Florida’s insurance market is in critical condition. Carriers are going insolvent, refusing to write new business, or leaving Florida entirely. Essential reinsurers are investing their capital in less volatile risks. Those carriers who remain here seek reduced consumer protections every year evidenced by their filings to the OIR and their proposed legislative changes. Using Hurricane Ian as a catalyst, insurance carriers would overreach during this December special session by proposing mandatory arbitration of all disputes that relate to the policies of insurance they sell to Florida homeowners and small businesses.
Carriers advertise that arbitration can save consumers premiums and time. According to American Integrity Insurance Company’s website advertisement, consumers already use arbitration for many of their everyday services. However, by mandating arbitration of insurance disputes specifically, legislators will divest the State executive branch of its traditional authority to regulate insurance carrier conduct. State regulation is necessary to preserve the statutory and constitutional protections afforded to Floridians that mandatory arbitration would eliminate. These include civil remedy laws, the substantive right to recover attorneys’ fees, protections against unfair trade practices, and the right to a jury trial. If the circumstances that are present when purchasing insurance were present in any other commercial context involving an arbitration provision, Florida courts would hold such provision to be unenforceable as procedurally and substantively unconscionable. Indeed, many states choose, instead, to include anti-arbitration provisions.
Two principles and a characteristic of insurance contracts and transactions guide substantive analysis of the enforceability of a mandatory arbitration statutory scheme. First, each party has the duty of utmost good faith and fair dealing. For the carrier, this means that they must give at least equal consideration to the interests of their policyholder as they do their own. Second, insurance policies are contracts of adhesion, and the carrier does not provide the consumer the terms before purchasing. Third, arbitration presents a tremendous imbalance of knowledge and experience when contrasting the carriers with consumers.
Considering these, mandatory arbitration clauses contained within residential property insurance policies are unconscionable. “Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” Basulto v. Hialeah Automotive, 141 So. 3d 1145, 1157 (Fla. 2014). Mandatory arbitration is unreasonably favorable to carriers because it divests the consumer of other legal remedies. See Powertel, Inc. v. Bexley, 743 So. 2d 570, 576 (Fla. 1st DCA 1999). For example, if mandatory arbitration is the only remedy for any dispute arising out of the insurance policy, then the consumer gives up their statutory right to protections from unfair trade practices during claims handling. Due to the gross inequity of bargaining power at the time the parties entered into the contract, these necessary protections compel carriers to abide by their promises or face extra-contractual damages.
Florida courts considered the following when invalidating arbitration agreements in commercial contexts other than insurance: (1) whether there was a deprivation or diminution of statutory rights; (2) prohibition of reimbursement of attorneys’ fees; (3) prohibition of punitive or extra-contractual damages; (4) a restriction on discovery needed to prove statutory violations; (5) whether the signatory was given a copy prior to signing; and (6) whether the arbitration provision was presented with other documents. See generally, Basulto v. Hialeah Automotive, 141 So. 3d 1145 (Fla. 2014); Prieto v. Healthcare and Retirement Corp. of America, 919 So. 2d 531 (Fla. 3d DCA 2005); Woebse v. Health Care and Retirement Corp. of America, 977 So. 2d 630 (Fla. 2d DCA 2008); Powertel, Inc. v. Bexley, 743 So. 2d 570, (Fla. 1st DCA 1999); Romano ex rel. Romano v. Manor Care, Inc., 861 So. 2d 59 (Fla. 4th DCA 2003).
All these factors are present when contemplating mandatory arbitration of insurance disputes. Foremost, mandatory arbitration strips consumers of statutory and constitutional rights. These include the substantive right to attorney’s fees pursuant to F.S. 627.428, the civil remedy provided by F.S. 624.155, the unfair trade practice protections under F.S. 626.9541, the right to assign benefits under F.S. 627.7152, and keeping unearned premiums under F.S. 627.7283. Even if not the exclusive remedy, arbitration restricts discovery to prove violations of those statutory provisions through its confidentiality requirements. The imbalance over power created by the threat of attorneys’ fees or extra-contractual damages being eliminated gives the carrier a massive advantage. Citizens has proven that carriers already obtain legal services with volume discounts. Further underscoring the fundamental unfairness is that no carrier will produce the policy terms to a consumer before purchase. After purchasing the policy, the consumer would need to read dozens of pages that judges have described as a “virtually impenetrable thicket of incomprehensible verbosity” to find the arbitration clause. Universal Underwriters Ins. Co. v. Travelers Ins. Co., 451 S.W. 2d 616, 22-23 (Ky. 1970). Who are arbitrators more likely to side with: the carrier with 100 more claims up next for arbitration, or the first-and-only time individual policyholder?
As of July 2016, any agreement to arbitrate is subject to the Revised Florida Arbitration Code (“Code”). The code allows for the parties to choose the arbitrator. Insurance companies will end up having a list of repeat arbitrators that they use, and policyholders won’t have an opportunity to influence in the same economic manner. Florida’s Office of Insurance Regulation already approved a mandatory arbitration endorsement filed by American Integrity Insurance Company that incorporates the Code. That endorsement says that, after mediation, arbitration is the “exclusive process for resolving any dispute…between [the carrier] and all persons making a claim of any kind…arising from, through, or by this policy.” This means that even a simple residential property loss may include several potential claims and beneficiaries.
In other words, if the goal is to eliminate insurance disputes from civil court, the Code is not the vehicle to do so. It allows for parties to seek interim awards upon a showing of urgency, and that an arbitrator could not act timely or provide an adequate remedy. Surely, when dealing with losses to large dollar assets, homeowners have a reasonable basis to argue urgency for nearly every loss. Further civil matters include judicial enforcement of an interim or pre-award, a petition for judicial relief, motions to compel or stay arbitration, and vacating or modifying an arbitration order.
Confidentiality of arbitration results is also paramount. It restricts consumers’ ability to prove statutory violations, including torts, by restricting the discovery process through confidentiality. Practically speaking, without the data on claims and dispute resolution, lawmakers and the newly created Property Insurance Stability Unit will not know whether the changes are effective, beneficial, or detrimental. Carriers will be able to aggregate their data, but individual consumers will not. Florida trends towards open government, and the recent changes in SB76 allow for greater data collection about claims and carrier financials. Mandatory arbitration would frustrate the disclosure of this data to lawmakers and the Property Insurance Stability Unit. More broadly, because different law applies in each of Florida’s now six district courts of appeal, the limited appellate review of binding arbitration will prevent important and unsettled questions of law from being developed in this critical industry.
Other potential complications exist. Mortgage companies may be subject to mandatory arbitration of certain disputes as intended third-party beneficiaries. Hickman v. SAFECO Ins. Co. of Am., 695 N.W.2d 365 (Minn. 2005). For example, the specific language of a policy’s loss payment provision may indicate that the mortgage company is paid before the policyholder or that the policyholder under receives the excess payment. Mandatory arbitration would reach beyond just the immediate consumer’s dispute, to all involved persons and entities, including mortgage companies, general contractors, persons injured on a homeowner’s property, and insurance professionals.
As Florida stakeholders and policymakers debate the solutions to consumer insurance woes this month, mandatory arbitration should have no place at the table.