What is Arbitration?

Arbitration is a dispute resolution process where a neutral third party (arbitrator) hears both sides and makes a legally binding decision, avoiding courtroom litigation.

What you need to know

Many insurance policies include arbitration clauses requiring disputes to be settled this way rather than through lawsuits. It’s typically faster and less expensive than going to court.

How arbitration works:

1. Dispute arises – You and your insurer disagree on coverage, claim value, or policy interpretation
2. Arbitration is invoked – Either party triggers the arbitration clause in the policy
3. Arbitrator selection – Parties agree on a neutral arbitrator or use a selection process
4. Discovery phase – Both sides exchange relevant documents and information (limited compared to litigation)
5. Hearing scheduled – Arbitrator sets date for formal hearing (typically 3-6 months out)
6. Both sides present evidence – Each party presents their case, witnesses, and expert testimony
7. Arbitrator deliberates – Review of evidence and legal arguments
8. Award issued – Arbitrator’s decision is delivered in writing
9. Decision is binding – Award is final and enforceable in court with very limited appeal rights

Key differences from litigation:

Arbitration:

• Faster resolution – Typically 6-12 months vs. 2-4 years for trial
• Lower costs – $15,000-$50,000 vs. $50,000-$200,000+ for litigation
• Private process – Proceedings are confidential, not public record
• Limited discovery – Streamlined document exchange reduces time and expense
• Single hearing – One concentrated session vs. multiple court appearances
• Expert arbitrator – Often industry specialists who understand insurance
• Limited appeals – Decisions are final except in extreme circumstances
• Less formal – Relaxed rules of evidence and procedure

Litigation:

• Lengthy timeline – 2-4 years from filing to trial, sometimes longer
• High costs – Attorney fees, expert witnesses, depositions accumulate
• Public record – Court filings and proceedings are accessible to anyone
• Extensive discovery – Depositions, interrogatories, document requests drag on
• Multiple court dates – Hearings, motions, status conferences require repeated appearances
• Judge or jury – May lack insurance industry expertise
• Appeal options – Can appeal unfavorable decisions through multiple levels
• Strict procedures – Formal rules of evidence and courtroom protocol

Types of arbitration:

Binding arbitration:

• Most common in insurance policies
• Decision is final and enforceable
• Very limited grounds for appeal (fraud, arbitrator misconduct, exceeding authority)
• Both parties must comply with the award

Non-binding arbitration:

• Rare in insurance contexts
• Arbitrator issues advisory opinion
• Parties can reject decision and proceed to litigation
• Often used as settlement negotiation tool

What arbitration can resolve:

• Coverage disputes – Whether policy covers the claimed loss
• Policy interpretation – What specific policy language means
• Bad faith claims – Whether insurer acted improperly in handling your claim
• Claim valuation – Amount owed for covered losses (though appraisal may be used instead)
• Duty to defend – Whether insurer must provide legal defense

Arbitration costs:

• Arbitrator fees: $3,000-$10,000 (typically split between parties)
• Your attorney fees: $10,000-$40,000 depending on complexity
• Expert witnesses: $2,000-$15,000 if needed
• Filing and administrative fees: $1,000-$3,000
• Total typical range: $15,000-$50,000 for moderately complex disputes

Critical limitations:

• Nearly impossible to appeal – Even if you believe the arbitrator made an error
• No jury trial – You give up right to jury consideration
• Discovery limitations – May not get access to all insurer documents
• Arbitrator selection matters – The wrong arbitrator can significantly impact your outcome

Why it matters for restaurant owners

Arbitration gets disputes resolved in months instead of years, which means you can focus on running your restaurant rather than dealing with prolonged legal battles. Time spent in litigation means time away from your business and mounting legal fees.

Common restaurant insurance disputes resolved through arbitration:

• Business interruption claims – Disagreements over lost income calculations
• Property damage valuations – Disputes over repair/replacement costs
• Coverage denials – Insurer refuses to cover claimed loss
• Liquor liability claims – Disagreements over alcohol-related incident coverage
• Workers compensation disputes – Conflicts over injury claims or premiums
• Policy interpretation – What’s covered under ambiguous policy language

The time value for restaurants: A two-year lawsuit while fighting over a $200,000 claim means:

• Two years of uncertainty about whether you’ll recover the funds
• Ongoing legal distractions during critical business periods
• Mounting legal bills that may exceed $100,000
• Management time diverted from operations
• Potential cash flow problems if you can’t access claim funds

With arbitration resolving in 6-12 months, you get answers faster and can move forward with rebuilding, replacing equipment, or resolving the business impact.

When arbitration may not be ideal:

• Complex coverage disputes needing extensive discovery
• Cases requiring jury sympathy (arbitrators tend to split differences)
• Situations needing legal precedent (arbitration awards don’t create case law)
• Bad faith claims with punitive damages potential (arbitrators less likely to award punitive damages than juries)

Understanding your policy’s arbitration clause: However, arbitration decisions are usually final with limited appeal options, so make sure you fully understand your policy’s arbitration requirements and prepare your case thoroughly.

Essential practices:

• Read your policy’s arbitration clause – Know what disputes must be arbitrated
• Understand the selection process – How arbitrators are chosen matters significantly
• Prepare thoroughly – You typically get one shot; no appeals if it goes wrong
• Hire experienced counsel – Attorney expertise in arbitration is different from trial work
• Gather strong evidence early – Limited discovery means you need your case ready
• Consider settlement first – Arbitration is faster than court but still costly and risky
• Document everything – Thorough records strengthen your arbitration position
• Know the timeline – Understand when you must invoke arbitration rights

Arbitration clauses are standard in most business insurance policies. They’re designed to reduce costs and speed resolution, which generally benefits both parties. However, the lack of appeal rights means choosing the right arbitrator and preparing meticulously are critical to achieving a favorable outcome.