Arbitration or Litigation of Your Insurance Dispute?

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Conventional wisdom among litigants is that arbitration is superior to court litigation because it is quicker, less expensive, confidential, and generally more flexible. But is that really the case? Below, we explore some of the factors a party should consider before opting for arbitration over litigation.

Time: Arbitration usually provides for faster resolution than a court proceeding. Typically, court cases can take years to resolve, while arbitration cases can be completed in months. However, this may not always be the case.  In complex cases, for example, a party may drag out the arbitration proceeding through motion and discovery hearings. When a panel of arbitrators is required or in multi-party cases, scheduling and coordination may become difficult and cause delays.  Depending on the circumstances, speed also may not be your ally. For example, a party may wish to delay payment of an expected adverse monetary award or, conversely, reap the advantage of a favorable pre-judgment interest rate. Thus, while arbitration usually offers a shorter timeline, myriad factors specific to your case may delay the arbitration and a speedier result may not necessarily be your goal.

Cost: As arbitration is generally faster, parties assume it is less expensive. Sometimes this is true, but not always. In either forum, both sides will likely have experienced lawyers representing them. Therefore, a quicker timeline for resolution and limitations on discovery generally reduce attorneys’ fees in arbitration.  This factor may weigh in favor of arbitration, especially in a case where attorneys’ fees are recoverable by the prevailing party. Yet, the filing fees in arbitration can be significantly higher than court filing and motion fees and usually increase (sometimes arbitrarily) with the dollar value of the case. The fees for the arbitration hearing can be quite hefty these days, particularly when multiple hearing dates are necessary or if the parties use a panel of three private arbitrators.  Private arbitration, like private mediation, is increasingly expensive.  While arbitration may still be cheaper than litigation, it appears the gap is closing.

Rules of Law and Evidence:  A party must consider whether the strict rule of law helps or hurts its cause. In a court trial, a judge’s rulings are governed by the applicable statutes, case law and the rules of evidence, and the jury is instructed to follow the law in the form of specific jury instructions. These limitations do not apply to arbitrations. See, Sapp v. Barenfield (1949) 34 Cal.2d 515, 523 (arbitrators may base decision upon “broad principles of justice and equity”). Arbitrators have considerable discretion in following the law and the formal rules of evidence do not apply unless the parties agree to apply them. An arbitrator may even consider evidence that would be inadmissible at trial. The legitimate concern is that the more informal process allows an arbitrator to reach a “gut feeling” result or “split the baby” even if it is inconsistent with the law. Plus, in an ever increasingly competitive pool for private neutrals, some arbitrators may be reluctant to rule fully for one side or the other for fear of being labeled “pro-plaintiff” or “pro-defense.” Despite these potential drawbacks, probably the most important advantages of arbitration are elimination of the risk of a run-away jury verdict and reduced exposure to punitive damages.

Appeal: An arbitration award is usually final and binding. The grounds for  vacating or correcting an arbitration award are very limited.  Cal. Code Civ. Proc. §§ 1286.2 and 1286.6. Thus, if the arbitrator makes a mistake of law or fact, there is usually little recourse. See, Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11-12 (disapproving of any cases suggesting that judicial review is available on any grounds other than the statutory grounds to vacate or correct an arbitration award). Alternatively, a trial court judgment is subject to full appellate review, which presumably safeguards the correct outcome.

Confidentiality: One of the advantages of arbitration is confidentiality. There are no public hearings and documents are not filed as part of a public record. This allows a party to avoid publicity, prevent the public disclosure of unflattering documents or “bad facts,” or even take a position inconsistent with one it has taken in other cases.

Other Considerations: Several other factors should be considered. An arbitrator, usually with the parties’ input, establishes the rules and limits for pre-hearing exchange of documents and depositions and the manner in which the hearing will be conducted.  Limited discovery is a two-edged sword. You may be able to avoid extensive and perhaps expensive discovery (such as e-discovery), but you may have difficulty obtaining the information you need to fully support your case that you would otherwise be able to obtain in a litigated case.  Another consideration is joinder of parties.  While two parties to a contract may be required to participate in in arbitration proceeding, additional necessary parties who are not parties to the contract may not be compelled to do so. Absent their consent, dual proceedings will be necessary, making complete dispute resolution more expensive and creating the possibility of inconsistent results. In addition to the foregoing, the parties usually select the arbitrator of their choosing and an arbitrator may be able to spend more time on a case than an overburdened trial judge.  These two factors may be especially important in complex insurance or reinsurance cases.

So, how does one decide whether to litigate or arbitrate? First, is time on your side or not? Consider whether you will need full discovery from the other side to prove or defend your case. Is your adversary a “sympathetic” plaintiff who might expose you to a run-away jury or punitive damages? Is the rule of law clearly in your favor and, if so, do you wish to preserve the right to appeal an incorrect outcome? Is transparency important to you or would you prefer confidentiality?  Is your case straightforward or complex? These are some of the factors to consider. Obviously, dispute resolution decisions will depend on context and a variety of factors. There is no “one size fits all” answer.  In some cases, the better choice will be court adjudication and in others it will be arbitration.

Concerned about some of the downsides of arbitration?  An alternative available in California to consider: a consensual judicial reference under Code of Civil Procedure section 638. This statute allows parties to a lawsuit to stipulate to a judicial referee for decision of some or all issues of fact or law.  Consensual judicial reference has two important advantages over arbitration.  First, the California Rules of Evidence and Rules of Civil Procedure apply.  Second, at the conclusion of a consensual reference hearing, a judgment is entered in the same manner as if the action had been tried by the court and may thus be appealed as a court judgment. Judicial references share many of the advantages of arbitration, such as speed and scheduling.  One important dissimilarity, however, is lack of confidentiality. Even if held at a private facility, public notice of the hearing must be given by the Clerk of the Court to allow interested persons to make arrangements to attend the proceeding that would be open to the public if held in a courthouse.  Cal. Rules of Court, Rule 244.1, subd. (e).  Further, the statement of decision and any judgment would be public records.

Larry Tabb is a partner with Musick, Peeler & Garrett in its Los Angeles office.