26
Apr
2010

Recovery of Attorney's Fees and Arbitral Clauses: Ask to Opt In!

Policyholder Advisor & Alert

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PUBLISHED ON: April 26, 2010

The inclusion of arbitration provisions in insurance policies is on the rise. When buying or renewing liability coverage, it is important for risk managers to determine what aspects need revision or where additional risk protection is necessary. One clause to focus on is the arbitration clause ? which all too frequently, if it is read at all, is unscrutinized. Specifically, policyholder's need to check whether the arbitration provision allows the awarding of attorney's fees to prevailing policyholders.

Arbitration was designed to provide an alternative forum for dispute resolution that would be faster and cheaper than traditional litigation. In recent years, however, arbitration has been under attack because it can be just as slow and costly as the traditional litigation it sought to help parties avoid.

In the field of insurance, the presence of an arbitration clause in an insurance policy has become commonplace as insurance companies attempt to escape what they perceive to be a more hostile judicial environment for the relative comfort of an arbitral forum. An arbitral forum provides insurance companies with an arena in which precedent may be less rigorously applied, discovery is more restricted and there can be a disincentive for arbitrators to lose business by siding too often with policyholders. The latter is a well-documented phenomenon in finance. For example, a 2007 Public Citizen study found that consumers lost nearly 94% of credit card disputes administered by the National Arbitration Forum. All too often, the party that more frequently makes repeated use of an arbitral forum will generally prevail.

Another reason that arbitration is beneficial to insurance companies is that the terms set forth in arbitration clauses can operate to take away some common law protections for policyholders. For example, most jurisdictions follow the rule of contra proferentum, where ambiguous contractual terms are construed against the drafter of the contract language at issue. Insurance companies frequently attempt to contract around the rule by drafting arbitration clauses rendering that doctrine inapplicable.

Perhaps the most inequitable provision in an arbitration clause, however, is one that denies prevailing policyholders any award of attorney's fees. In many jurisdictions, a policyholder's best offense against improper conduct or bad faith on the part of the insurance company is the sword of attorney's fees (as well as punitive damages). Arbitration clauses that shield the insurance company and disarm the policyholder often make the pursuit of an arbitration award an unaffordable proposition, as the inability to recover attorney's fees may nullify the advantage of obtaining coverage when costly proceedings are drawn out or delayed.

In a recent Illinois decision, Amerisure Mutual Ins. Co. v. Global Reins. Corp. of America, the First District Appellate Court encountered a case in which an insurance company and a reinsurance company were in a dispute over coverage regarding attorney fees to be awarded in the underlying action. The insurance company prevailed in the lower courts, which affirmed an arbitration award, including attorney's fees, in its favor.

The case is notable for several reasons. First, and this is quite rare, the Appellate Court found that the arbitration panel had "exceeded its authority." Second, the section of Illinois' Uniform Arbitration Act relied upon specifically provides that "unless otherwise provided in the agreement to arbitrate, the arbitrators' expenses and fees, together with other expenses, not including attorney's fees , incurred in the conduct of the arbitration, shall be provided in the award." See 710 ILCS 5/10 (West 2006). Although this section of the Act was interpreted to allow for fees where provided for in an arbitration agreement, the failure to address the recovery of attorney's fees in the arbitration clause at issue, ultimately proved fatal to the insurance company's recovery.

Given the ruling in Global Reinsurance , risk managers and other purchasers of insurance need to be even more careful in scrutinizing all aspects of an arbitration clause. Risk managers should attempt, where possible, to remove disadvantageous arbitration clauses or at least negotiate the express inclusion of an award of prevailing party attorney's fees. Ensuring that attorney's fees may be recovered by the policyholder in any coverage dispute with an insurance company may serve to dissuade insurance companies from improperly denying a claim. Ironically, "a stitch in time may save nine." In other words, leveling the arbitration playing field when purchasing or renewing coverage may be the best way to avoid disputes and thereby obviate the need for paying the costly fees potentially associated with them.