Texas Public Insurance Counsel: Deny Texas Homeowner Policy Arbitration Endorsement

A Texas insurance company has filed to offer an optional endorsement to its homeowners insurance policy that would require mandatory arbitration in claims disputes in exchange for a premium discount, and the head of the Office of the Texas Public Insurance Counsel is adamantly opposed to it.

In a letter to Texas Insurance Commissioner David Mattax, Public Counsel and OPIC Executive Director Deeia Beck said the endorsement proposed by the Farm Bureau Insurance Co. would be unfair to consumers.

Mattax has scheduled a public meeting for July 6 on the Farm Bureau proposal. Such endorsements to residential policies have traditionally not been permitted in Texas, and Beck said that allowing one now is not a “policy bridge” that Texas insurance regulators should cross.

In the May 24 letter, Beck noted that arbitration may be useful in resolving disputes between equal parties. However, when parties are not equal with respect to power, money and sophistication, “arbitration proceedings place the less powerful at an extreme disadvantage,” she said.

Beck said while she was tempted to use the “David versus Goliath” analogy, the comparison doesn’t really apply in this case because consumers don’t even have tools analogous to David’s “sling and five smooth stones” to use in an arbitration against an insurance company.

“The reasons for this disadvantage are obvious,” she said. “The insurance company has set the terms of the arbitration, selected the entity that will select the arbitrator, and pays the arbitrator. Thus, the insurance company controls all facets of the arbitration.”

According to the proposal submitted by the Farm Bureau, policyholder disputes must first undergo an appraisal process. If a dispute continues to exist following appraisal, the dispute must go to mediation. All mediation proceedings would be managed by Conflict Solutions of Texas (CSOT). If mediation fails, then the dispute would be subject to arbitration, which would be managed by CSOT, as well.

In addition, the “endorsement does not allow for an appeal, review, or even disclosure of the final arbitration decision,” Beck said. Such limitations “will severely reduce the transparency of insurance law decisions” and negatively affect the evolution of Texas law “to meet future needs.”

Beck said she is concerned that consumers may opt for the “yet unspecified premium discount” being offered in exchange for adding the proposed endorsement without being aware of the ramifications of that decision. Consumers may not be “fully aware of the arbitration process” and may not understand “the constitutional rights they would be forfeiting.”

The consumer advocacy group, Texas Watch, has urged Commissioner Mattax to reject the proposal, as well.

In a letter dated May 20, the group’s leadership stated: “Approval of such an endorsement would inevitably lead to a race to the bottom, stripping millions of people of their constitutional right to trial by jury, the most important consumer protection available to them.”

Texas Watch Executive Director Alex Winslow and Deputy Director Ware Wendell, who co-authored the letter to the commissioner, urged Mattax to “follow the long-standing policy of TDI and continue to prohibit the inclusion of mandatory binding pre-dispute arbitration clauses in residential contracts.”

The Texas Department of Insurance is accepting written and oral comments relating to homeowners endorsements that require arbitration. The hearing for Docket No. 2788 will be held on July 6 beginning at 9:30 a.m. in Austin.