Why would any insurance agent sell a customer an insurance policy that allows the insurance company to low-ball, delay payment, and otherwise not pay, and then force the insurance customer to obtain justice through an arbitration in a far-away jurisdiction applying foreign law? That is exactly what many commercial policyholders are being sold in Texas and Florida. Insurance agents are supposed to sell insurance that protects policyholders, and these types of policies sold by the surplus lines insurance industry should be banned and not sold. The above image of Timbuktu is appropriate because that is where policyholders could be forced to arbitrate.

Here is a typical surplus lines arbitration clause that was recently the subject of a motion to compel in Texas federal court and involving Texas property:

ARBITRATION CLAUSE: All matters in difference between the Insured and the Companies (hereinafter referred to as “the parties”) in relation to this insurance, including its formation and validity, and whether arising during or after the period of this insurance, shall be referred to an Arbitration Tribunal in the manner hereinafter set out.

Unless the parties agree upon a single Arbitrator within thirty days of one receiving a written request from the other for Arbitration, the Claimant (the party requesting Arbitration) shall appoint his Arbitrator and give written notice thereof to the Respondent. Within thirty days of receiving such notice, the Respondent shall appoint his Arbitrator and give written notice thereof to the Claimant, failing which the Claimant may nominate an Arbitrator on behalf of the Respondent.

Should the Arbitrators fail to agree, they shall appoint, by mutual agreement only, an Umpire to whom the matter in difference shall be referred.

Unless the parties otherwise agree, the Arbitration Tribunal shall consist of persons employed or engaged in a senior position in Insurance underwriting or claims.

The Arbitration Tribunal shall have power to fix all procedural rules for the holding of the Arbitration including discretionary power to make orders as to any matters which it may consider proper in the circumstances of the case with regard to pleadings, discovery, inspection of documents, examination of witnesses and any other matter whatsoever relating to the conduct of the Arbitration and may receive and act upon such evidence whether oral or written strictly admissible or not as it shall in its discretion think fit.

All costs of the Arbitration shall be in the discretion of the Arbitration Tribunal who may direct to and by whom and in what manner they shall be paid.

The seat of the Arbitration shall be in New York and the Arbitration Tribunal shall apply the law of New York as the proper law of this insurance.

The Arbitration Tribunal may not award exemplary, punitive, multiple or other damages of a similar nature.

The award of the Arbitration Tribunal shall be in writing and binding upon the parties who covenant to carry out the same. If either of the parties should fail to carry out any award the other may apply for its enforcement to a court of competent jurisdiction in any territory in which the party in default is domiciled or has assets or carries on business.

Agents that sell these policies are negligent. The product is substandard. The product does not protect the customer because the cost to enforce the terms is a lot more expensive in New York where the law is not so favorable. Indeed, New York will allow a one-year statute of limitation. It also begs for poor and shabby treatment because the insurance company adjusters and their attorneys simply threaten to use the arbitration clause as a costly method to get payment. Unless the agent warns the customer of this terrible clause, the agent should be held responsible for selling such a defective product.

I am not going to win many insurance agent friends with this post, but I challenge one of them to explain why they would knowingly sell such a policy to a customer unless it was the last policy on Earth that could be bought or sold.

Thought For The Day

You can’t do a good deal with bad people, and you can’t do a bad deal with good people. I often use that as my compass.
—Christina Tosi

  • shirley heflin

    Dear Chip:

    So the way I’m interpreting this is that the Arbitration for this TX Insured must occur in New York, but:

    “… If either of the parties should fail to carry out any award the other
    may apply
    for its enforcement to a court of competent jurisdiction in
    any territory in
    which the party in default is domiciled or has assets
    or carries on business..”

    That’s ludicrous to expect any Insured to leave it’s home state, travel to a foreign jurisdiction, incur the traveling costs for same, obtain an appraisal award and then – if the Award is not paid – the Insured can return “home” and file suit. I’m assuming they can return to their home state since that’s where their assets are and their business is (or was) conducted.

    I definitely feel that Insurance Agents should be sued for selling their customers policies like this. They’re supposed to be INSURED FRIENDLY…..not INSURER friendly.

    Respectfully,
    SHIRLEY HEFLIN
    Tampa, FL

  • Jim Johnson

    While I am definitely not a legal scholar as your most certainly are Chip, I might be considered as an experienced layman.

    My take on this is, the culpability of the insurance agent would partly depend on the experience or naivety of the policyholder. Certainly, someone writing a business policy should have more understanding of consequences than someone writing a homeowner’s policy. Also, I would presume that these types of surplus policies are written for hard or expensive to insure properties. Because of the implications, if I were an agent, I would want to clearly explain the arbitration clause and possibly have a separate addendum signed by the policyholder that this was fully explained when writing the policy.

    On the other hand, I do have to wonder how the state of Florida or Texas would allow a policy to be written with an arbitration clause to be settled under the laws of the former Union State of New York!

    • Fred Fisher

      I doubt any reasonable reader would pick up on it…

  • Edward Fako

    Wouldn’t Choice Of Law still need to be enforced if the primary location of the business operated in that State, such as Texas and they file a Declaratory Judgment to be followed through the Texas Federal District Courts following whichever Texas Arbitration Rules are enforced?

    Is the Surplus Lines Insurer’s Home Base out of New York? That seems to be the only wiggle room allowed, although I understand it might generally be regarded as a non-ambiguous clause that contractually defined where the laws shall be applied and by acceptance of the Policy implies that they agreed to it.

    At what point is this financially exhaustive option considered Unconscionable?

    Does that violate a Constitutional right to litigate where your place of business is located and the covered peril allegedly occurred?

    I don’t know the answers, but the CFPB seems to have broad arms that encompasses many acts and now Federal laws might apply to the hearings.

  • Veronica

    Hi Chip – I am from Spokane, Washington. I have worked in E & S for over 30 years.
    Is this arbitration clause that you are referring to a manuscript endorsement? Can you tell if the forms on the policy are ISO or are they all manuscript forms?
    Thank you. This is a very interesting topic!

    • Thanks for your questions.

      It is not ISO and it is not manuscript.

  • Fred Fisher

    Absolutely- anytime substandard provisions are provided they should be disclosed. I’d have no problem being an expert on such a case. That said, it seems to me it could be challenged as against public policy as violating many provisions of the Fair Claims Practice Regulations adopted by most States including Florida