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policyholders choice would be made when acquiring the policy and not at the point
of a disputed claim, which is the only time when the costs and benefits of arbitration
versus litigation become real to the policyholder and an informed decision
potentially possible and likely the first time a consumer considers consulting an
attorney. In contrast, the insurer has the information and ability to make actuarial
and statistical assumptions as to which dispute mechanism it prefers in advance of a
specific claim dispute. Financial services providers that utilize pre-dispute
mandatory arbitration clauses in their form contracts have presumably done so
because this forum is more advantageous to them than the court system would be.
However, this determination should underscore the need for close regulatory
scrutiny of a term that is not negotiated and one reason regulators should reject
pre-dispute mandatory arbitration clauses in insurance policies. The federal
government has already taken action on arbitration agreements in consumer
contracts. Congress has forbidden the use of these clauses in most residential
mortgage transactions and the Consumer Financial Protection Bureau has filed rulemaking that would prevent the use of class-action waivers in most consumer
contracts.2
These asymmetries in information, experience, access to expertise and
bargaining power poses special problems in insurance and insurance claim
handling. As the Department fully recognizes, consumers purchase insurance for
economic security rather than economic gain and the money for a promise nature
of insurance contracts means that policyholders are vulnerable to improper claims
behavior because after a loss occurs the policyholder can only look to its insurer,
and cannot purchase another policy that would cover its claim even if she could
afford the premium. Insurers fulfill their side of the insurance bargain only if they
adjust claims appropriately and these concerns are primary reasons why states
regulate market conduct in insurance so closely, and why all states require insurers
to handle claims in good faith, with enhanced penalties when they do not. Texas has
long recognized these factors and in a precedential case frequently cited in other
jurisdictions, the Texas Supreme Court stated:
In the insurance context a special relationship arises out of the parties' unequal
bargaining power and the nature of insurance contracts which would allow
unscrupulous insurers to take advantage of their insureds' misfortunes in
bargaining for settlement or resolution of claims. In addition, without such a cause
of action insurers can arbitrarily deny coverage and delay payment of a claim with
no more penalty than interest on the amount owed. An insurance company has
exclusive control over the evaluation, processing and denial of claims. Arnold v.
Natl County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987).
15 U.S.C.S. 1639. The docket number for CFPBs proposed rule is CFPB-2016-0020. The CFPB does
not have regulatory authority over most insurance lines.
Peter Kochenburger
2016 NAIC Consumer Representative
Unless required by law, neither party nor the arbitrator may disclose the results of any arbitration without
the agreement of both parties. Endorsement No. HO-802, eight paragraphs down.
3
SCHOOL OF LAW
July 1, 2016
Ms. Marilyn Hamilton
Texas Dept. oflnsurance
Property and Casualty Lines Office
Mail Code 104-PC
P.O. Box 149104
Austin, Texas 78714-9104
consumers nationwide seek relief through arbitration despite the presence of arbitration clauses in
millions of consumer contracts. The reason is that arbitration is not a practical remedy for a
consumer. On the other hand, millions of consumers are eligible for relief each year through class
settlements.
The fact that the arbitration clause is offered with a small reduction in premium does not
justify its inclusion. Because consumers do not have information about the problems associated
with arbitration or the likelihood that a dispute will arise, they cannot possibly estimate the value
of the rights they are waiving. As an economist would say, they cannot price arbitration.
Sincerely,
Angela K. Littwin
Professor of Law
alittwin@law.texas.edu
(512)-232-5561
Thomas 0. McGarity
Joe R. & Teresa Lozano Long Endowed Chair in
Administrative Law
tmcgarity@law. utexas .edu
512-232-1384
Charles M. Silver
Roy W. & Eugenia C. McDonald Endowed Chair in
Civil Procedure
csil ver@law. utexas. edu
512-232-1337
Jay L. Westbrook
Benno C. Schmidt Chair of Business Law
jwestbrook@law.utexas.edu
512-232-1303
A. Mechele Dickerson
Arthur L. Moller Chair in Bankruptcy Law
and Practice
University Distinguished Teaching Professor
512-232-1311
mdickerson@law.utexas.edu