Warning Against Mandatory Arbitration of Insurance Disputes in Florida

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.