Arbitration in Insurance Claims: Is It Better Than Court?

What Is Arbitration in Insurance Claims?

Arbitration is an alternative dispute resolution process conducted outside the court system. Instead of a state judge, the parties choose a private arbitrator — usually an experienced attorney or a retired judge — who hears both sides and issues a ruling. The arbitration award is binding and generally enforceable. In insurance claims, this process has become very common, and not without reason: insurance companies are the ones who pushed to include it in their policies, and there are good reasons to understand why.

The Real Reason Insurance Companies Love Arbitration

When a policyholder wins in court and the verdict is published, precedents are created. Other policyholders’ attorneys learn from them, and more insurers can rely on similar precedents in the future. Insurance companies have no interest in creating precedents that obligate them to pay in the future.

In arbitration, by contrast, the decision is not published. The proceedings are conducted in confidentiality. There is no public record and no decision that others can learn from. Beyond this, researchers and field practitioners show that arbitration awards in insurance claims are on average lower than court verdicts, because the arbitrator typically seeks a “middle way” to be acceptable to both sides. A court, by contrast, is bound by law and precedent alone. Additionally, the appointed arbitrator relies on repeat business from insurance companies, and this has an influence — even if unintentional — on their rulings.

The Arbitration Clause in the Policy: Is It Always Valid?

Many policies contain a clause requiring referral to arbitration before going to court. Under the Insurance Contract Law 5741–1981, clauses limiting rights in the policy must be clear and highlighted. An arbitration clause must meet the disclosure requirements of the Insurance Services Supervision Regulations (disclosure of conditions), 5750–1990.

The clause can be challenged in the following situations: when it is not clearly highlighted in the policy, when the insurance is mandatory by law (such as group life insurance at the workplace), when the clause creates inequality between the parties, and when the proposed arbitrator is not neutral. In Israeli court rulings it has been established that in certain circumstances one can go directly to court even if an arbitration clause exists in the contract, if it is a contract that restricts one party.

Appealing an Arbitration Award

This is one of arbitration’s major problems: under the Arbitration Law 5728–1968, the grounds for setting aside an arbitration award are very limited. Section 24 of the law defines the recognized grounds for cancellation: the arbitration agreement was not validly concluded, the arbitrator exceeded his authority, the arbitrator did not give a party a proper opportunity to be heard, the award was given through bribery or fraud, the award contradicts public policy.

A legal error by the arbitrator, even a serious one, is not a ground for cancellation of the award. The court will not re-examine the facts or substitute its own judgment for the arbitrator’s. In practice, appeals against arbitration awards are accepted very rarely. Once arbitration is concluded, it is almost always final.

Arbitration Costs: Who Pays and How Much Does It Cost?

Arbitration is not cheap. The arbitrator’s fee, which is usually between 10,000 and 30,000 NIS and more, depending on the complexity of the case and the duration of the hearings, is borne by the parties. In addition to the arbitrator’s fee there are room rental costs, transcription costs, and the fees of your own attorney.

In general, the arbitrator’s decision on legal costs divides them between the parties or places them on the losing side. But unlike in court, the arbitrator has no obligation to apply the “loser pays” rule at all, and acts according to their own judgment. In small insurance claims relatively, arbitration costs may be disproportionately high.

Advantages of Arbitration for the Policyholder

Despite the above, there are situations where arbitration is indeed appropriate. The process is faster than court — it could be completed within a few months compared to years. The hearings are confidential, which suits someone who does not want their medical claim to become public. The arbitrator can have specific expertise in insurance, while a judge may not be familiar with the field. When both parties agree on the arbitrator and one side brings the proceedings, there is an advantage in judicial flexibility.

What to Check Before Agreeing to Arbitration

Before signing an arbitration agreement, it is worth examining five things. First, who is the proposed arbitrator and what is their background: do they mostly work for insurance companies? Second, how much will the process cost and who bears the costs. Third, does the arbitration agreement limit your right to appeal. Fourth, what evidence is available to you and whether it supports a quick resolution. Fifth, would the court be likely to award you enhanced compensation under Section 28a of the Insurance Contract Law, which arbitration usually does not award?

Life Insurance and Arbitration: Special Considerations

In life insurance claims there are unique aspects. When dealing with a group policy purchased through a workplace, the terms may differ from personal insurance. In addition, when the question is an exemption from liability, such as whether the insured had a pre-existing condition that the company could raise to reject the claim, these questions are suitable for litigation before a court that has enforcement power and clear rules of evidence. Field experience shows that in large life insurance claims, courts tend to rule in favor of the policyholder in cases of doubt, while arbitration may produce a compromise solution that does not fully protect the legal right.

When Is Arbitration Worth Considering?

Arbitration is worthwhile when the dispute is legally less complex, when both parties agree on a single arbitrator they trust, and when speed is more important than procedural protection. In large and complex disputes, the court is generally preferable.

Common Questions

Am I obligated to go to arbitration if it is written in the policy?

Not always. An arbitration clause in an insurance policy is a contractual condition and can be challenged if it is coercive. It is advisable to consult with an attorney before agreeing to proceed with arbitration.

How long does arbitration in an insurance claim take?

Quick arbitration can be completed within three to six months. If there are disputes about evidence and expert witnesses, it could take a year or more.

Can an arbitration award that can be enforced against me be appealed?

Appeal against an arbitration award is only possible on the grounds specified in the Arbitration Law 5728–1968. A legal error by the arbitrator on its own is not sufficient to cancel the award.

Who chooses the arbitrator in an insurance claim?

Usually the parties try to agree on a joint arbitrator. If they do not reach agreement, they apply to the court that appoints an arbitrator. The policy may contain specific instructions on the matter.

Can the insurance company force me into arbitration?

If there is a valid arbitration clause in the policy, the company may demand that it be enforced before going to court. But in certain circumstances, including when the clause is coercive, one can seek direct recourse to court.

Is arbitration cheaper than court?

Not necessarily. Arbitration saves court filing fees, but the arbitrator’s fee, usually between 10,000 and 30,000 NIS and more, is borne by the parties. In small claims, arbitration may be relatively expensive.

For advice on arbitration or the legal process in an insurance claim, contact the insurance claims attorney at Lev-Taieb Law Firm: 072-2428822.