Alternative Dispute Resolution for Claims: Lessons from Three Storms

Alternative dispute resolution (ADR) includes various forms of dispute resolution that do not involve the court system at the local, state, or federal levels. As a process, ADR usually includes several elements, such as neutral third-party evaluation, negotiation, resolution meetings, mediation, and binding arbitration.

During the period from 2005 to 2008, Crawford & Company analyzed its ADR activities and outcomes focusing specifically on disputes arising from the damage caused by three successive weather-related events in a single year—Hurricanes Katrina, Rita, and Wilma, which all occurred in 2005. Collectively, it is estimated that these three storms were responsible for more than $150 billion in economic damages.

Based on the analysis, a current (but still evolving) model has emerged that frames the timing, sets out the logistics, and defines the roles of the professionals in the selection and mediation phases of the ADR process.

A key initial lesson learned from the cases involved is that an ADR process should be implemented as quickly as possible to resolve disputed covered losses. Early intervention is necessary to reduce the growth of disputed claims, with its resultant increase in indemnity and expense payments.

While the aspect of logistics may seem somewhat simplistic in light of the complexity of disputes, the appropriate venue can be critical since it assists with physically framing the discussions. Dedicated office space and personnel need to be identified in advance and secured as soon as a decision is made to implement the ADR process. All resources are strained in a catastrophe situation; it may be difficult to find essential, qualified individuals to devote time to the process when veteran supervisors, adjusters, and support people are deployed in the field. It is highly recommended that both neutral office space and experienced, professional independent adjusters/mediators be engaged, not only to present and maintain an independent perspective to the insured, their attorneys, and governmental agencies, but to distance the program from the regular claims handling environment.

In the event a client lives a considerable distance from the meeting site, remote visits to the insured by the entire ADR team are preferred. Traveling several hours into a major city creates additional strain on a client, and the increased stress can only hamper the goal of resolution.

Depending on the type of claim, it is recommended that a variety of dedicated individuals with highly specific roles be present to work through the dispute and, ultimately, effect a settlement at the session. Each professional plays a crucial role in their respective field, and collaboration is needed to present a unified and professional viewpoint. (See bottom, “At the Table”)

As the process comes together, a crucial component is identifying those claims that are appropriate ADR candidates. Agents and brokers, on behalf of policyholders, may submit requests for claims to be considered for ADR. Companies that are focused on managing catastrophic claims should direct their professionals to identify these case files. It is suggested that a dedicated claims management team with full authority be tasked with the assignment to review, manage, and share files. While it is natural for the initial claim handler to be hesitant to offer files to the team, especially those that have not been investigated fully, sharing is essential to determine if ADR is the best path. The team can then handle scheduling to coordinate meeting planning, agendas, and attendance—and thoughtful team scheduling also can reduce costs.

In the meetings stage, the ADR team gets together with the insured and their representatives, if any; no mediator is present. Efforts should be made to establish an informal atmosphere and assure the customer of the insurer’s positive, pragmatic intentions to arrive at a mutually beneficial resolution and remove the aspect of confrontation. These sessions may be as brief as two hours or as long as several days—depending on the complexity of the claim. The vast majority of all claims are settled in this phase. If a final agreement is not reached, the customer will be invited to attend the second phase, non-binding mediation.

In non-binding mediation, the program administrator should have selected a panel of independent mediators who, preferably, are locally recognized and authoritatively credentialed. Unlike a court setting, the mediation will be voluntary and confidential. After opening remarks by the mediator, the insured or his representatives will be asked to present their position. The insurer will ask questions to clarify or support the demand. The two parties then retire to separate caucuses while the mediator communicates between them to present summaries of their differing viewpoints on the claim.

In binding arbitration, when all discussion is complete and each side has finalized its perspective on the dispute, the mediator submits the case to a single arbitrator whose judgment is final.

In a recent engagement with a major commercial insurer, we handled more than 1,100 claims in five states using ADR. The success rate (or resolution rate) of the alternative dispute process was greater than 95 percent. These claims comprised a very broad financial range; some were as small as $20,000 and others as large as $20 million. They involved builder’s risk and commercial package policies for small, medium, and large markets. In a majority of the resolution meetings, it was found that clients needed the opportunity to express their frustration and to believe that someone was listening to them. An in-person, open dialogue fostering a non-adversarial environment often dissolved the anger and fear that festered in the catastrophic events. If this discussion opportunity was offered, it was generally likely that the two parties were able to reasonably find a solution. In total, only 10 percent of the disputes had to transition to non-binding mediation.

Use of ADR continues to increase and evolve, and it has been very successful. We will continue to review and refine our ADR process to further streamline the time, effort, and cost required to manage claims for our clients and arrive at solutions that all parties believe are in their best interests.  

At the Table

The following guide illustrates the core roles and attendant responsibilities of the ADR team:

Technical Consultant: Leads the meeting, provides coverage interpretation and damage assessment. Engages the insured in discussing disputed items, presents insurer position, and listens to customer response. The technical consultant attempts to find a common resolution area.

Building Consultant: Inspects locations as needed, prepares estimates. Reviews materials given by insured regarding building damage. Proposes alternative solutions to building repairs for both insured and insurer.

Accountant: Used for business income claims. Secures prior financial information and calculations in advance and works with the insured, the insured’s accountant, public adjuster, and attorney to establish initial estimations.

Engineer: Engineers should be brought in when there has been no prior engineering inspection or when the complexity of the claim requires further investigation.

Insurer Representative: It was found that casualty adjusters work well in this environment. Not only do they bring negotiation skills, but their perspective often is rooted more in resolution of a disputed claim rather than a property adjuster’s customary coverage and damage evaluation.