When an insurer and an insured disagree on the outcome of a claim under an insurance policy, a well-managed dispute resolution process can offer cost-efficient, impartial and quick resolution of coverage disputes.  Here are five different avenues for resolving indemnity disputes without protracted litigation:

1. Dispute resolution clauses 

A well-drafted dispute resolution clause in an insurance policy can be a cost-effective way for an insurer to resolve an indemnity dispute without litigation.  When drafting a dispute resolution clause in a policy, the insurer may nominate:

  • the jurisdiction and choice of law for the resolution of disputes under the policy
  • who may act as arbitrator or mediator, and
  • the procedural rules and timeframes which parties must adhere to.

2. Industry- led complaints resolution processes

Policy holders who disagree with an insurer’s decision may access the complaints resolution processes adopted by the insurance industry.

The General Insurance Code of Practice  voluntarily adopted by Australian insurers sets out a complaints resolution process which allows for internal review of complaints, and the option to refer coverage disputes to the Financial Ombudsman Service (FOS)[1] or external ADR in appropriate cases.

Similarly, Lloyd’s of London policyholders can access Lloyd’s complaints review process, with the first step being internal review of claims decisions. Australian policyholders who are not satisfied with the outcome of this review can pursue the complaint through Lloyd’s of London and/or FOS for investigation.

These industry-prescribed processes are free of charge for insureds and allow for the investigation of complaints in a short time. There are jurisdictional limitations to the processes – they are intended to apply to personal insurance lines, smaller corporate insureds and more straightforward claims.  Disputes concerning legal policy interpretation of high value claims may be better resolved by other avenues.

3. Financial Ombudsman Service (FOS)

If a coverage dispute cannot be resolved through the insurer’s internal complaints process, the policyholder may lodge a complaint with FOS.  FOS offers a free and independent review service and mediation of coverage disputes.  If mediation is unsuccessful, FOS can make a determination in relation to the dispute.  FOS determinations are legally binding on the insurer, but not the insured. There are limits to the FOS jurisdiction, which will not apply to claims by larger commercial insureds or beyond the monetary jurisdiction of FOS.

4. Court-based Alternative Dispute Resolution 

Even when an insured has commenced litigation to resolve a coverage dispute, there is still an opportunity to explore alternative dispute resolution (ADR).  Australian court procedure allows the court/the parties to refer disputes to court-annexed mediation or binding case appraisal. This allows a final opportunity for the insurer and the insured to resolve disputes quickly, confidentially and in a way that can preserve an ongoing relationship between the parties.

It is important to assess whether a coverage dispute is appropriate for ADR before proceeding with a referral.  Legal test cases and claims involving allegations of fraud may not be appropriate for ADR, and in those instances ADR can actually add to the expense and delay in resolving a matter.

5. Federal Court Insurance List

The Chief Justice of the Federal Court of Australia recently introduced an Insurance List for short matters.  The Insurance List is aimed to allow declaratory resolution of policy interpretation disputes, in an expedited manner.  The Insurance List allows insurers the chance to seek court guidance on matters of policy operation and interpretation in a forum with a specialist insurance focus.

More information about the Federal Court of Australia’s Insurance List can be found here.

One of Charles Dickens’ notable works, Bleak House, describes the case of Jarndyce v Jarndyce which was before the courts for decades only to be resolved after the costs of the litigation were more than double the sum in issue.  The beneficiary of the court’s judgment promptly died of disappointment.

When an insurer and their insured disagree on the interpretation of an insurance policy, their debate need not take on Dickensian tones.   Both parties may be motivated to limit the reputational, financial and time cost of protracted litigation.  In these situations, less formal dispute resolution mechanisms are a practical solution.

[1] When the dispute falls within the FOS terms of reference.