Steering Clear of Court.

Perhaps it's time for first-party direct insurance contracts to include alternative dispute resolution clauses.

Everyone in the insurance industry would agree that an essential feature of a risk manager's job is to make certain that his company has appropriate and adequate property insurance coverage. A conscientious risk manager will review the policies himself--even if the coverage is placed through a totally dependable broker--with particular attention to the coverage language and the exclusions.

But is equal attention devoted to the specifics of those policy provisions that are generally considered to be boilerplate: time for suit, other insurance, sue and labor, proof of loss, examination under oath, subrogation and so on? And is sufficient attention always paid to the scenario that will be triggered when an irreconcilable difference with the insurer surfaces over a particular claim?

The way the industry is structured, one of the first things that happens when a serious coverage issue arises between a significant insured and its insurer is that the broker brings pressure to bear on the underwriter to pay the claim as a matter of good business. Frequently, the risk manager participates in this discussion. If the effort fails, however, and the dispute seems headed for litigation, the risk manager's role is--for practical purposes--moot, or at least seriously diminished. It becomes a matter "for the lawyers," with all the concomitant baggage: time, expense, inconvenience and uncertainty.

There's not much the risk manager can do at that stage. But there was something he could have done, back when the coverage was being placed, to minimize the difficulties in any coverage disputes if and when they arose. The magic words are "alternative dispute resolution," a means of solving conflicts through arbitration or mediation.

The many advantages of alternative dispute resolution are significant, namely, major savings of time and expense. What creates a dispute is that each party believes its position is right, or at least that it has a likely chance of convincing the ultimate decision maker that its position is right. That truism still holds in alternative dispute resolution, although the element of total unpredictability is somewhat reduced before an arbitrator or mediator.

With so much to be said for out-of-court dispute settlement, why isn't it used more often to resolve coverage disputes over property insurance policies? One possibility is that the decision to go to alternative dispute resolution instead of to the courthouse is now made after the controversy has arisen. It happens only if both sides agree to it after their positions have congealed, which means that each party--and in most cases its lawyers as well--must perceive an advantage to alternative dispute resolution over litigation in resolving that particular dispute. The decision, therefore, is made on an ad-hoc basis and is really part of the strategy to fashion the most likely means to a favorable determination of that case.

This is clearly a different situation from the one that applies when alternative dispute resolution is already ordained before the dispute surfaces, indeed before the loss that generates the dispute. In other words, the picture would be dramatically altered if there were an alternative dispute resolution provision written into the policy.

Arbitration clauses are commonplace in reinsurance contracts, but are virtually unheard of in direct first-party policies. Such provisions are certainly not part of any standard form--that provided by Insurance Services Office Inc., or otherwise--in current use or of any familiar boilerplate that comes to mind. But does that necessarily mean it can never come to pass?

This brings us back to the risk manager instructing the broker and reviewing the coverage. The policy probably will include an appraisal clause, but that kicks in only when coverage is accepted and when the only disagreement is over the amount of the loss. This can generate its own disputes: For example, is the question of how many occurrences there were and, therefore, how many deductibles apply one of coverage or of quantum? Is there any reason why this hypothetical risk manager could not, if so inclined, instruct the broker to include an arbitration clause?

Most commercial lines property insurance policies, or at least those procured by major brokers on behalf of important insureds, are manuscript forms put together by the broker from an inventory of clauses and wordings. There's no reason why that stock could not include an arbitration clause, available if the risk manager asks for it. The underwriter may or may not be willing to accept it or may or may not wish to discuss it. But isn't it important to keep in mind that old saying about nothing ventured?

Eugene Wollan is an attorney with Mound, Cotton, Wollan and Greengrass, New York. He is also a certified arbitrator.