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Arbitrary in Alabama.

In 1995, a part-time actuary for the Alabama Insurance Department achieved what, for 15 years, the tobacco, insurance, pharmaceutical, chemical, oil and auto companies have been trying to accomplish in Congress and state legislatures around the country.

With the simple stroke of a pen, Alabama became the first state in the nation to approve mandatory binding arbitration clauses for insurance policies in the state, abolishing policyholders' rights to a civil jury trial.

Plaintiffs' lawyers immediately challenged the decision on state and federal constitutional grounds.

But if the challenges do not succeed, Alabama citizens face extinction of their rights to go to court against insurance companies or insurance agents for payment of their claims - even if the agent stoic the policyholder's money.

Some fear that the Alabama rule has set in motion a process that could virtually eliminate the U.S. public's right to sue and hold accountable corporations that cause injuries.

Under mandatory binding arbitration, access to the courthouse door is blocked.

Disputes must be resolved by arbitrators. Arbitrators are not required to have any legal training, and they may be biased, or even under contract with an insurance company. The civil justice system's discovery process, whereby parties obtain information from one another, is extremely limited. The courts' rules of evidence do not apply. Arbitrators issue no written legal opinions, so no legal precedent or rules for future conduct can be established.

Costs must generally be split between the injured victim and the insurance company. These include arbitrator's fees, which can range between $200 and thousands of dollars per hour.

In Alabama, a policyholder who loses arbitration must pay all arbitration costs. And there is no right to appeal.


It is the binding nature of Alabama's arbitration that led former Alabama Insurance Commissioner Mickey DeBellis to speak out.

After 25 years with the Alabama insurance department, having been appointed commissioner by both Governor Fob James and former Governor George Wallace, DeBellis resigned in January 1998, he says, "mainly because of the arbitration issue."

"Everybody's entitled to their day in court, and binding arbitration takes that day away from you," says DeBellis. "I did not feel it was in the best interest of the consumers in this state."

Adding to DeBellis's anger was the fact that approval for these clauses took place in secret, with no public notice, in fact, without notice even to him - the insurance commissioner.

"Nobody said anything about it, nobody knew anything about it," he says.

Finally, sometime in mid-1997, he received in the mail a copy of a life insurance policy with an approved arbitration clause. "It was," he says, "one of the worst I'd ever seen in my life. It took every right away from the policyholder. I blew my top."

DeBellis immediately placed a moratorium on approval of mandatory binding arbitration clauses, but was quickly overruled by his boss, Governor James.

"I'm sure there was pressure put on him by insurance companies," says DeBellis.

Governor James instructed DeBellis to start approving these clauses, while issuing arbitration guidelines for insurers.

Current guidelines require agents to disclose arbitration mandates to prospective policyholders during the application stage.

"Part of our guidelines are a separate signed disclosure at the time of sale, that the policy they're purchasing or applying for is going to contain a mandatory arbitration clause," says Michael Bownes, current general counsel of the Alabama Insurance Department. "They sign a separate piece of paper that contains a description of what arbitration is, and that they fully understand the rights that they are giving up."

But DeBellis believes that is not enough. "The average consumer does not understand their insurance policy. You sign anything that's put in front of you. You have faith in your agent," he says.

Guidelines he had proposed required that disclosure take place not just during the application phase. In addition, he says policyholders should be required to sign a separate endorsement, to be attached to the policy, "where a person knows he's signing binding arbitration, rather than just signing an application."

He also wanted an arbitrator to have the same right as a judge to set punitive damages when an agent has defrauded a policyholder. But, he says, "They took that out. So a company can do anything they want to and you cannot punish them under binding arbitration. Whatever the agent does, whether he misleads you, lies to you, it goes to binding arbitration. I saw that I could not operate under those conditions."


The Alabama law firm of Beasley, Wilson, Allen, Crow & Methvin is challenging the state's mandatory binding arbitration rule on constitutional grounds. Like most states, Alabama has a strong state constitutional right to trial by jury in civil cases. There are also similar guarantees in the Seventh Amendment to the U.S. Constitution.

That right is waived too easily under Alabama's law, the Beasley suit contends.

"People who can't read or write are being bound by these things," notes lead attorney Jere Beasley.

Support for Beasley's position has come from a wide assortment of organizations and individuals, including Mothers Against Drunk Driving (MADD), Alabama Victims of Crime and Leniency, the Alabama Education Association, the AFL-CIO and Democrats for Christian Values.

Christopher Reeve, who has been paralyzed since May 1995 after falling from a horse in a riding accident, filed an amicus brief in support of Beasley's case.

"One of the hardest things I have had to do since my disability is to deal with insurance companies," Reeve said in his pleading. "I found them to be callous and to try to set up any roadblocks they can to keep from paying legitimate claims. I am totally against binding, mandatory arbitration in insurance policies."


What may happen if Beasley loses and the Alabama arbitration policy is upheld is anyone's guess. Bownes of the Alabama Insurance Department does not expect many companies to adopt mandatory binding arbitration. "There are some companies that don't like arbitration because they may end up generating higher costs. Whereas a $500 or $1,500 claim might not go to litigation, it's going to go to arbitration," he says.

Currently, Bownes believes, "only 12 percent of 1,500 insurance companies licensed to do business in the state now have approved mandatory binding arbitration clauses," although he has no idea how many policyholders that represents, and some insurers may be waiting to see the outcome of the litigation.

On the other hand, many believe that insurance companies do not like to go before juries. Arbitration is a system they can more carefully control. In general, arbitration leads to smaller awards against insurance companies. A spokesman for Beasley's firm says if they lose, "our feeling is this would fully blossom to other policies" besides life insurance, where most of the mandatory arbitration clauses have appeared so far.

Former insurance commissioners DeBellis says his legal division told him, "the policyholder's going to get screwed in binding arbitration. Oh, if I was a company, I'd want it in there. Jere Beasley, he's put the fear of god in these companies' heart."

One more factor may influence the future of mandatory binding arbitration in Alabama. In November 1998, a new Democratic governor, Don Siegelman, was elected to office. Attorney Beasley says, "With a new governor elected, hopefully a new insurance commissioner will revoke the rule." All it takes, he says, "is the stroke of a pen, just like it came into being."
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Title Annotation:Alabama approves arbitration clauses for insurance policies
Author:Doroshow, Joanne
Publication:Multinational Monitor
Date:Nov 1, 1998
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