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