Draft Pending Adoption

Transcription

1 Draft: 4/3/18 Draft Pending Adoption Attachment 1 Attachment Nine Market Regulation and Consumer Affairs (D) Committee 3/25/18 Pre-Dispute Mandatory Arbitration Clauses (D) Working Group Milwaukee, Wisconsin March 25, 2018 The Pre-Dispute Mandatory Arbitration Clauses (D) Working Group of the Market Regulation and Consumer Affairs (D) Committee met in Milwaukee, WI, March 25, The following Working Group members participated: Susan Stapp, Co- Chair (CA); TK Keen, Co-Chair (OR); Allen W. Kerr (AR); Kurt Swan (CT); Anoush Brangaccio (FL); Kathleen Nakasone (HI); Warren Byrd (LA); Chris Joyce (MA); Robert Doucette (NM); Martha Lees (NY); Sean Sheridan (OH); Michael Nored (TX); and Jeff Rude (WY). Also participating were: Robert Wake (ME); and Paula Pallozzi (RI). 1. Adopted its March 8 Minutes Ms. Stapp said the Working Group met March 8. During this meeting, the Working Group discussed the draft Pre-Dispute Mandatory Arbitration Clauses Bulletin. Ms. Stapp said Paul Tetrault (National Association of Mutual Insurance Companies NAMIC) requested that one comment he made during the meeting, which inadvertently did not make it into the minutes, be added to the minutes. She said the minutes should be amended to add, he also questioned whether there was sufficient statutory authority for the bulletin. Mr. Doucette made a motion, seconded by Mr. Byrd, to adopt the Working Group s March 8 minutes, with the addition of Mr. Tetrault s comment (Attachment Nine-A). The motion passed unanimously. 2. Discussed the Pre-Dispute Mandatory Arbitration Clauses Bulletin Ms. Stapp said, on the Working Group s March 8 conference call, it seemed all participants desired additional time to read through the proposed Arbitration Clauses and Choice of Law/Venue Provisions in Personal Lines Insurance Bulletin (Pre- Dispute Mandatory Arbitration Clauses Bulletin) before expressing opinions. She said, however, there seemed to be a consensus among regulators, consumer representatives and industry representatives that Section 5 Permissible Post-Dispute Arbitration Clauses, which provides guidance on disclosure requirements for post-dispute arbitration clauses, should be reconsidered or removed. Ms. Stapp said, in addition to the written comments received on the draft bulletin, verbal comments were received from Bruce Wells (NY), who was unable to attend the Spring National Meeting. She said Mr. Wells expressed reservations about Section 5 and questioned whether it needed to be included in the bulletin. He said guidance on permissible arbitration clauses are better addressed separately from the prohibition of pre-dispute mandatory arbitration clauses. She said Mr. Wells also noted the bulletin contains a definition for arbitration provision and a definition for pre-dispute mandatory arbitration clause. He said both definitions are similar and they should be written more distinctly from each other. Ms. Stapp said the purpose of the two different definitions is to distinguish prohibited pre-dispute mandatory arbitration clauses from permissible arbitration provisions. She said two definitions are needed because of the inclusion of Section 5, which discusses permissible arbitration provisions. She said if the Working Group decides to remove Section 5, the need for a separate definition for arbitration provision might be eliminated. Ms. Stapp also noted the term arbitration provision is used in Section 2 Purpose of this Bulletin. She said if the Working Group removes Section 5, then Section 2 might also need redrafting. A large part of Section 2 notes that the bulletin is intended to provide parameters around using arbitration provision in insurance contracts. Peter Kochenburger (University of Connecticut School of Law) said the bulletin is useful but, if relied upon as the only statement of the intent of the state to prohibit pre-dispute mandatory arbitration clauses, it is vulnerable to a Federal Arbitration Act (FAA) preemption. He said it may serve, however, to discourage companies from inserting pre-dispute mandatory arbitration clauses in policies. He said a reverse preemption of the FAA is more certain by adopting revisions to the Unfair Trade Practices Act (#880). Mr. Kochenburger said the bulletin is not anti-arbitration. He said it would just move the decision to arbitrate from before a dispute arises to after a dispute arises. If arbitration is in the best interest of the consumer, the consumer can just as well decide to arbitrate after a dispute arises. Pre-dispute mandatory arbitration clauses, however, require a consumer to waive a constitutional right to trial. 1

2 Draft Pending Adoption Attachment Nine Market Regulation and Consumer Affairs (D) Committee 3/25/18 Mr. Byrd asked Mr. Kochenburger if by arbitration he meant binding arbitration or non-binding arbitration with the ability to appeal the decision. Mr. Kochenburger said arbitration by definition is binding, as opposed to mediation in which either party can walk away. Mr. Byrd said Louisiana has a statute that states no contract of insurance can divest Louisiana courts of jurisdiction and asked if that was enough to reverse-preempt the FAA. Mr. Kochenburger said the results are mixed. One court has ruled that it does reverse-preempt the FAA, while another court has ruled the language is too general to reversepreempt the FAA. Mr. Wake said non-binding arbitration is not an oxymoron because there are arbitrations that are binding on the insurer but not the consumer. Jackson Williams (Dialysis Patient Citizens) said he has served as an arbitrator for mandatory arbitrations in which neither party is bound by the decision. He said, however, he has never seen a company promulgate an arbitration clause that was not for binding arbitration. David Snyder (Property Casualty Insurers Association of America PCI) said he understood the desire to prohibit predispute mandatory arbitration clauses in personal lines. He said these clauses do not occur in personal lines property/casualty products. He said the PCI would have concerns if a prohibition of their use were to occur in commercial lines. Mr. Snyder said arbitration provisions for uninsured/underinsured coverages and appraisal provisions are well established and should not be part of the bulletin. Mr. Snyder also said Section 5 of the bulletin lacks clarity and should be removed. Mr. Byrd asked Mr. Snyder how PCI members would feel about a provision in commercial lines that would allow the consumer to require the insurer to go to arbitration, but the insurer could not make the consumer go to arbitration. Mr. Snyder said in the commercial setting there has been no demonstration of a need to limit arbitration provisions. Amy Bach (United Policyholders) said, in California, there was a law that provided a one-sided right to compel appraisals. Either the insurer or the insured could compel an appraisal of damage. It did not bar litigation, but the appraisal would have to occur first. She said after the Northridge earthquake, the law was exploited and the cost of appraisal was becoming more expensive than litigation. In response, the state legislature amended the law to allow the consumer to decline an appraisal for damages incurred in a declared catastrophe. Lisa Brown (American Insurance Association AIA) agreed with Mr. Snyder and suggested that uninsured/underinsured coverages and appraisal provisions be expressly exempted from the bulletin. She said Section 5 should be removed. Mr. Tetrault said pre-dispute mandatory arbitration clauses are not prevalent in personal lines coverages. He said it is not a good idea to create a bulletin prohibiting pre-dispute mandatory arbitration clauses. He said the Working Group is attempting to make a policy decision, even though there are two different views on the use of arbitration. He said the Working Group has done a good job of publicizing the issues and, if a jurisdiction is inclined to issue its own bulletin as a result of the discussion, the jurisdiction can do so. He said there is no statutory authority to support the bulletin s position. Mr. Keen said Section 5 not only creates confusion but is also out of the Working Group s scope. Attachment 1 Mr. Wake said the Section 5 seems to have arisen from the idea that post-dispute arbitration provisions are permissible. But, in the language of Section 5, post-dispute arbitration provisions became defined as pre-dispute mandatory arbitration provisions with disclosures. He said it should be removed or should better clarify post-dispute arbitration clauses or identify procedures where an insured can opt out of an arbitration provision. Mr. Wake said if regulators want to prohibit pre-dispute mandatory arbitration provisions in personal lines, and industry is in general agreement, then it would be cleaner to do so by revising Model #880. Mr. Williams agreed with Mr. Kochenburger that regulation is preferable to a bulletin. He said, however, the FAA is only applicable after a written arbitration provision is in place. He said if a regulator strikes an arbitration provision in a form filing before it is issued, then, because no written arbitration provision is in the policy, the FAA does not apply. He said he does not believe the FAA allows an insurer to argue there is a generalized right to put an arbitration provision in an insurance policy. He said the reason pre-dispute mandatory arbitration clauses are not prevalent in personal lines contracts is because they have been properly stricken by state insurance regulators from filed forms. He said it is better to have a policy of prohibiting pre-dispute mandatory arbitration clauses in a bulletin instead of an undisclosed rule. Commissioner Kerr said the last paragraph of Section 6 Choice-of-Venue and Choice-of-Law Provisions states that unless mutually agreed upon by both the policyholder and the insurer, choice-of-venue clauses are prohibited. He said it would be 2

3 Draft Pending Adoption Attachment Nine Market Regulation and Consumer Affairs (D) Committee 3/25/18 helpful to identify the way mutually agreed upon would be determined. He suggested adding by way of endorsement. Mr. Keen suggested the section should be more prescriptive and not allow for choice-of-law provisions under any circumstances. Mr. Byrd said an endorsement may not be known by a consumer unless there is a requirement to sign off on the endorsement. Commissioner Kerr then suggested requiring a written waiver as an indication on mutual agreement. Ms. Pallozzi agreed that Section 6 provides good consumer protection from choice-of-law and choice-of-venue provisions, but she also noted that mutually agreed upon is not defined. Ms. Stapp said Section 6 may not have had enough attention because of the focus on Section 5. Commissioner Kerr made a motion, seconded by Mr. Doucette, to strike Section 5 Permissible Post-Dispute Arbitration Clauses from the Pre-Dispute Mandatory Arbitration Clauses Bulletin and send it back to the drafting group to revise the language of the draft to reflect the discussions of this meeting. The motion passed unanimously. Having no further business, the Pre-dispute Mandatory Arbitration Clauses (D) Working Group adjourned. W:\National Meetings\2018\Spring\Cmte\D\PDMAC\0324-PDMACmin.docx Attachment 1 3

4 DRAFT BULLETIN TO: SUBJECT: Section 1. ALL PROPERTY AND CASUALTY INSURERS WRITING PERSONAL LINES INSURANCE PRODUCTS IN [STATE] ARBITRATION CLAUSES AND CHOICE OF LAW/VENUE PROVISIONS IN PERSONAL LINES INSURANCE Authority This bulletin is adopted by [title of supervisory authority] pursuant to Section [insert applicable section] of the [insert state] insurance code. Section 2. Purpose of this Bulletin The purpose of this bulletin is to provide guidance to insurers with regard to provisions within personal lines policies that limit or impose unreasonable preconditions on a consumer s ability to adjudicate their disputes in court. Pre-dispute mandatory arbitration clauses, choice of law provisions, and choice of venue provisions unfairly limit or impose unreasonable preconditions on individual consumers ability to adjudicate their disputes in [state] courts under the protection of [state] law. These provisions are prohibited in personal lines policies. establish standards for arbitration clauses contained in the forms reviewed and approved by the [title of supervisory authority]. To ensure that consumers entering into insurance contracts containing binding arbitration provisions are protected, the [title of supervisory authority] is providing guidance to insurers concerning the parameters of those provisions typically included in mandatory arbitration provisions. These suggested guidelines are intended to balance the goal of ensuring consumer protection while providing insurers with some flexibility when using mandatory arbitration provisions in personal insurance contracts. Section 3. Definitions Arbitration Disclosure means the process, as further set forth in Section 5 below, by which the insured is informed that disputes arising under the policy of insurance will be resolved by the alternative dispute mechanism of arbitration in which one or more neutral third parties (arbitrators) renders a decision after a hearing at which both parties have an opportunity to be heard. Arbitration Provision means a clause in the insurance contract that requires the parties to resolve disputes as to their rights or liabilities arising out of or concerning the contract through arbitration. The purpose of such a provision is to avoid having to litigate disputes that might arise.

5 Choice of Law Provision means a contractual provision in which the parties specify the state whose law will govern disputes arising under the insurance contract. Choice of Venue Provision means a contractual provision in which the parties establish the location where either party may require the dispute to be tried or arbitrated. Commercial Lines Insurance means insurance within the scope of [state s] commercial lines rating statutes that is not personal lines insurance insurance. Personal Lines Insurance means homeowners, tenants, private passenger non-fleet automobile, mobile manufactured home and other property and casualty insurance for personal, family or household needs except workers compensation insurance.[property and casualty state-specific definition]. Pre-dispute mandatory arbitration clause means a provision in an insurance policy, rider, endorsement, or any other part of the contract requiring that future disputes involving the insurance policy or claims thereunder must be resolved through arbitration by allowing one party to the dispute to so require when the dispute arises. Section 4. Pre-dispute Mandatory Arbitration Clauses The Insurance Code was enacted to regulate the business of insurance and for the protection of the insurance-buying public. 1 Under [Forms Review Statute, e.g. Oregon Revised Statutes ] the [insurance commissioner] shall disapprove any form if, in the [insurance commissioner s] judgment, its use would be prejudicial to the interests of the insurer s policyholders or if the [insurance commissioner] finds it contains provisions which are unjust, unfair, or inequitable. It is also unlawful to engage in this state in any trade practice that, although not expressly defined and prohibited in the Insurance Code, is found by the [commissioner] to be an unfair or deceptive act or practice in the transaction of insurance that is injurious to the insurance-buying public. 2 Pre-dispute mandatory arbitration clauses in personal lines insurance policies preclude policyholders from exercising their rights to a trial by jury. 3 Because these policies are contracts of adhesion, inclusion of a pre-dispute mandatory arbitration clause forces the consumer to waive a fundamental constitutional right without a meaningful opportunity to bargain for other benefits or consideration. Arbitration provisions also typically require confidentiality. This may unacceptably interfere with the [insurance department s] ability to regulate insurance claims handling by discouraging policyholders from seeking assistance with the [insurance department]. The [insurance commissioner] finds this practicethe inclusion of pre-dispute mandatory arbitration clauses in personal lines insurance policies to be unfair and injurious to the insurance buying 1 See [Cite to section of insurance code discussing purpose and effect of federal law. e.g., ORS , ORS ]. 2 See [Cite to relevant portion of Unfair Trade Practices Act. e.g., ORS See e.g., [Cite to relevant state court decision. e.g., Molodyh v. Truck Ins. Exchange, 714 P. 2d 992, 997 (1987).]

6 public. Pre-dispute mandatory arbitration clauses in personal lines insurance products are prohibited. The [insurance commissioner] recognizes that the use of arbitration and other alternative dispute resolution methods may be of great value in certain instances. For example, arbitration may be faster and less costly than court proceedings. Parties may still avail themselves of these benefits by electing to arbitrate after the dispute arises. Section 5. Permissible Post-Dispute Arbitration Clauses [Title of supervisory authority] may approve the use of arbitration agreements in connection with personal lines insurance insurance policy forms covering residents of [state] subject to the following requirements: 1. The arbitration provisions do not constitute pre-dispute mandatory arbitration clauses. 2. The terms and conditions of a policy of insurance that require the binding arbitration of disputes and prescribe the procedure for arbitration (hereinafter "arbitration provision") must be set forth in either the policy or on a separate endorsement. The "arbitration provision" must be displayed in at least 12 point type, capitalized and in bold print. 3. Whenever the policy contains an arbitration provision, at the time the application is taken, the policy application or a separate disclosure statement must contain an Arbitration Disclosure. The Arbitration Disclosure must be unambiguous, displayed in at least 12 point type, capitalized and in bold print, and must include the following disclosures if applicable: a. The policy includes a binding arbitration agreement. b. The arbitration agreement requires that any disagreement related to this policy must be resolved by arbitration and not in a court of law. c. The results of the arbitration are final and binding on the insured and the insurance company. d. In an arbitration, an arbitrator, who is an independent, neutral party, gives a decision after hearing the positions of the parties. e. When the insured accepts the insurance policy the insured agrees to resolve any disagreement related to the policy by binding arbitration instead of a trial in court including a trial by jury. 4. The arbitration provision must either set forth or reference the rules that will govern the arbitration proceedings.

7 5. The arbitration provision must clearly state whether or not, and if so, the extent to which the arbitration award is subject to court review. 6. The arbitration provision shall require that all arbitration proceedings shall be conducted in the [county,] of residence of the policy applicant/owner unless another location is mutually agreed upon by both parties. 7. The arbitration provision shall require that arbitration proceedings shall commence within a fixed time after the first notification of one party by the other as to their election to arbitrate a dispute regarding the policy. Section 65. Choice of Venue and Choice of Law Provisions Longstanding state and federal policy dictate that insurance transacted in this state shall be governed and interpreted under [jurisdiction] law. While businesses with operations across multiple states may find benefit in negotiating to have their commercial lines insurance contracts governed under the laws of another jurisdiction, consumers of personal lines insurance policies placed in [insurance commissionerjurisdiction] expect to be afforded the protections and benefits under the [jurisdiction] Insurance Code. Choice of law provisions in personal lines insurance policies that import foreign law upend consumer expectations, cause confusion among the insurance buying public, and may result in consumer harm. Similarly, choice of venue provisions that require the insured to travel out of state pose an unfair barrier to adjudicate their claims. The [insurance commissioner] finds the inclusion of choice of law provisions in personal lines insurance policies that import foreign law and venue selection provisions, or that require adjudication out-of-state in personal lines insurance policies to be unfair and injurious to the insurance buying public. Including such provisions in a personal lines insurance policy constitutes an unfair trade practice in violation of [Citation to state UTPA law. e.g., ORS ]. Choice of law provisions that import foreign law may not be included in personal lines insurance policies and will be disapproved. Unless mutually agreed by both the policyholder and the insurer, venue selection provisions that require adjudication out-of-state may not be included in personal lines insurance policies and will be disapproved.