Arbitration Well-Suited for Resolving Construction Defect Disputes

June 2, 2009

Insurers should overcome their reluctance to use alternative dispute resolution programs to resolve inter-insurer disputes over construction defects, say experts. And they should take advantage of the savings and speed of a unique arbitration program specifically designed for these cases.

That’s according to Geoff Engert, director at Arbitration Forums Inc. (AF), an arbitration service organization. At the Construction Defects Conference in Tampa, Fla., Engert said that “inter-carrier disputes are too often the cause of a failure to settle a construction defect case.”

Engert added, “If carriers can resolve the underlying case, taking their insureds out of harm’s way and agreeing to arbitrate—rather than litigate—their differences, then the time, effort, and expenses associated with these cases could be significantly reduced.”

He noted that AF’s Special Arbitration Program—which resolves disputes between insurers, self-insureds, and commercial insureds with retentions for claims involving third-party liability and/or disputes regarding concurrent, overlapping, or excess/primary coverage—was refined to address the unique needs of construction defect disputes.

Recognizing that lawsuits involving construction defect disputes often exceed the three-year life expectancy of the average lawsuit, the Construction Defect Claims Managers Association (CDCMA) undertook a joint project with AF to increase the acceptance and use of inter-company arbitration in construction defect disputes.

“Inter-carrier disputes that occur during underlying construction defect litigation can add months, if not longer, to the life of a claim,” said Lee Wright, construction defect litigation manager at Harleysville Insurance. “For example, even though we may agree on the indemnity amount, we may not be able to agree on time on risk or how many policies apply.”

Observing that 97 percent of lawsuits are resolved prior to trial, Karen Rice, construction defects claim manager at OneBeacon Insurance noted that, “We should be asking what is the most timely and cost-effective way of resolving cases? In essence, is there a better way?”

Wright said the program AF and CDCMA developed jointly is a step in the right direction because it addresses insurer concerns that a program tailored to the needs of construction defect disputes should include both the right people and the right process.

The new program requires arbitrators to be highly knowledgeable of general liability and construction defect claims, general insurance coverage, and applicable case law as well as possess a working knowledge of construction practices and nomenclature.

In addition, the process was revised to best suit construction defect disputes by using three-person panels instead of a single arbitrator, creating a limited appeals process to safeguard against poor decisions, explaining decisions in writing, and assuring that decisions not be precedential.

“We are confident this joint effort will produce an increase in the use of arbitration in construction defect cases, saving time and expense dollars for participating insurers,” said Engert.

Source: Arbitration Forums Inc.

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