Definition of Arbitration & Insurance Considerations

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Small business owners don’t open their doors planning to face a lawsuit or be held liable for damage or injury to another party. But accidents happen and many business owners buy insurance to protect their assets and financial well-being. Whether you have already had to file a claim with your insurance carrier or are just educating yourself in case, some insurance policies include an arbitration clause you need to understand.

What is an Arbitration Clause?

Arbitration clauses are often found in business insurance policies including commercial auto, general liability, and worker’s compensation. An arbitration clause is a paragraph within an insurance policy that states both parties, the insured and the insurance company or the insured and the third party filing the claim, will settle their differences outside of the courtroom via arbitration.

Does Every Insurance Policy Have an Arbitration Clause?

No, every insurance company includes different language in their policies. Some states, like Washington, Virginia, and Kentucky, prohibit insurance companies from including binding arbitration clauses in their policies.

What is Arbitration?

Arbitration is a meeting between two parties involved in the claim. Both sides meet with a third party, the arbitrator, to review the facts and scenario. There are two types of arbitration, binding and non-binding.

  • Binding Arbitration: Both parties agree on an arbitrator before the meeting and agree to accept the decision made. The arbitrator listens to both the claim and defense and makes a decision on who is at fault and how much is owed. The arbitrator’s decision is final, and neither party can file an appeal.

  • Non-Binding Arbitration: Both parties agree to meet with an arbitrator to review the case and provide testimony. The arbitrator reviews the facts and makes a decision on who is liable and for how much. In this case, the parties can either accept or reject the decision. If they reject it, they can take the case to court for a trial.

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Who Does an Arbitration Clause Protect?

While arbitration is not always widely accepted, it does generally protect both you and the insurance company.

The arbitration clause is often used to reduce high claim costs associated with long trials. By keeping costs at a minimum, insurance companies aren’t forced to increase their rates year after year.

Arbitration also minimizes the amount of publicity associated with the claim. Some businesses would rather keep the negative spotlight off of them, so it doesn’t negatively impact revenue.

Review your business insurance policy today to determine if there is an arbitration clause. This way you know what to expect when you need to file a claim. In addition, check with your state laws to find out how the courts view arbitration clauses and know your rights.