July 5, 2016

Commissioner David Mattax
Texas Department of Insurance
Austin, TX 78701
Via electronic mail to chiefclerk@tdi.texas.gov; marilyn.hamilton@tdi.texas.gov.
Re: Proposed Homeowners Endorsement/Mandatory Mediation
Dear Commissioner Mattax:
I am a 2016 Consumer Representative to the NAIC and write requesting that
the Department of Insurance (Department) not approve Texas Farm Bureau’s
proposed endorsement that would authorize pre-dispute mandatory arbitration
clauses in homeowners’ insurance policies (Endorsement HO-802, June 26, 2016
version).1 I spoke about the use of arbitration clauses in insurance contracts at the
Consumer Liaison session at the NAIC spring National Meeting in New Orleans and I
attach to this letter the short memorandum I included in that presentation. I agree
with the comments filed by the Texas Office of Public Insurance Counsel (dated May
24, 2016), Texas Watch (May 20) and United Policyholders, and will try to add to
them in this letter.
Although the presumed mutual benefits of arbitration – speed and cost – are
often questionable, arbitration agreements are certainly appropriate in some
contexts; for example, between sophisticated commercial entities where contractual
terms are actually negotiated and both parties have at least some rough parity in
industry knowledge and bargaining strength. However, this is clearly not the case in
consumer (and many small business) contracts, which for generations have been
classified as “contracts of adhesion,” meaning consumers have no realistic ability to
negotiate the terms of the contract and must accept it as is, or shop elsewhere.
Further, only a very small percentage of consumers ever read form contracts before
signing, and in personal lines insurance, often have no access to the contract itself
until after purchased. In brief, insurance consumers are rarely aware of the
contract terms other than the basic information provided on the declaration page
(e.g. policy period, premium, and limits), and cannot bargain over them in the
unlikely event they can and do read them in advance of purchase. Thus, regulatory
oversight is essential in maintaining a fair and efficient insurance market.
While the Texas Farm Bureau Endorsement might be “optional” in some
counties and offered in exchange for an unspecified “reduced premium,” the

I write in my capacity as a NAIC Consumer Representative. As way of background, I am the Executive
Director of the Insurance Law LL.M. Program and Associate Clinical Professor of Law at the University of
Connecticut School of Law, and I teach courses in insurance law and regulation.


policyholder’s choice would be made when acquiring the policy and not at the point
of a disputed claim, which is the only time when the costs and benefits of arbitration
versus litigation become real to the policyholder and an informed decision
potentially possible – and likely the first time a consumer considers consulting an
attorney. In contrast, the insurer has the information and ability to make actuarial
and statistical assumptions as to which dispute mechanism it prefers in advance of a
specific claim dispute. Financial services providers that utilize pre-dispute
mandatory arbitration clauses in their form contracts have presumably done so
because this forum is more advantageous to them than the court system would be.
However, this determination should underscore the need for close regulatory
scrutiny of a term that is not negotiated and one reason regulators should reject
pre-dispute mandatory arbitration clauses in insurance policies. The federal
government has already taken action on arbitration agreements in consumer
contracts. Congress has forbidden the use of these clauses in most residential
mortgage transactions and the Consumer Financial Protection Bureau has filed rulemaking that would prevent the use of class-action waivers in most consumer
These asymmetries in information, experience, access to expertise and
bargaining power poses special problems in insurance and insurance claim
handling. As the Department fully recognizes, consumers purchase insurance for
economic security rather than economic gain and the “money for a promise” nature
of insurance contracts means that policyholders are vulnerable to improper claims
behavior because after a loss occurs the policyholder can only look to its insurer,
and cannot purchase another policy that would cover its claim even if she could
afford the premium. Insurers fulfill their side of the insurance bargain only if they
adjust claims appropriately and these concerns are primary reasons why states
regulate market conduct in insurance so closely, and why all states require insurers
to handle claims in good faith, with enhanced penalties when they do not. Texas has
long recognized these factors and in a precedential case frequently cited in other
jurisdictions, the Texas Supreme Court stated:
In the insurance context a special relationship arises out of the parties' unequal
bargaining power and the nature of insurance contracts which would allow
unscrupulous insurers to take advantage of their insureds' misfortunes in
bargaining for settlement or resolution of claims. In addition, without such a cause
of action insurers can arbitrarily deny coverage and delay payment of a claim with
no more penalty than interest on the amount owed. An insurance company has
exclusive control over the evaluation, processing and denial of claims. Arnold v.
Nat’l County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987).

Pre-dispute mandatory arbitration clauses such as the one proposed by
Texas Farm Bureau can significantly hinder the two primary watchdogs of insurance
claim conduct, the state insurance regulator and the court system. Arbitration

15 U.S.C.S. § 1639. The docket number for CFPB’s proposed rule is CFPB-2016-0020. The CFPB does
not have regulatory authority over most insurance lines.


agreements are typically confidential, as would be Texas Farm Bureau’s,3 which
makes it difficult for the regulator to determine how insurers evaluated,
investigated and paid contested claims, and deprive policyholders from accessing
courts and juries to determine and enforce their legal rights, along with the right to
appeal. Arbitration by definition substitutes the arbitrator for a judge and jury in
determining liability and damages, and this Endorsement also allows the arbitrator
to reform the Endorsement to “express the meaning of the endorsement that you
and we intended,” and to broaden discovery beyond the documents specifically
described. While these modifications from Texas Farm Bureau’s original proposal
may be well intended, they highlight the problems with mandatory arbitration of
insurance claim handling disputes as they strip away traditional judicial and
regulatory functions and scrutiny, and place them in the hands of a private entity
selected in advance and paid for by the insurer.
While I urge the Department to reject the Texas Farm Bureau’s proposed
Endorsement outright, their proposal has a number of other problems. Texas Farm
Bureau correspondence with the Department says the arbitrator may award any
damages authorized by Texas law, but the proposed Endorsement is silent on this
issue. In addition, Texas Farm Bureau does not indicate whether “damages” would
include attorney’s fees. Provisions allowing consumers to recoup attorney’s fees are
essential for consumers to obtain legal representation, and are included in Texas
insurance law, as well as in the law of most other states. The Endorsement is also
silent on whether the consumer has waived the ability to participate in a class
action, though I assume Texas Farm Bureau would argue it does. While this issue
should be clarified, a class action prohibition is yet another reason why the
Department should reject this form.
I appreciate the Department’s willingness to consider these views and I
would be happy to answer any questions or to provide additional information.

Peter Kochenburger
2016 NAIC Consumer Representative

“Unless required by law, neither party nor the arbitrator may disclose the results of any arbitration without
the agreement of both parties.” Endorsement No. HO-802, eight paragraphs down.



727 East Dean Keeton Street· Austin, Texas 78705 · (512) 471-5151 ·Facsimile (512) 471-6988

July 1, 2016
Ms. Marilyn Hamilton
Texas Dept. oflnsurance
Property and Casualty Lines Office
Mail Code 104-PC
P.O. Box 149104
Austin, Texas 78714-9104

via email: marilyn.hamilton@tdi.texas.gov
and U.S. Mail

Dear Ms. Hamilton:
We urge the Department to reject the addition of an arbitration provision in standard
insurance contracts.
The fact that the insurance companies select which arbitration associations to include in
the contracts creates an inherent conflict of interest. The associations and their arbiters know that
decisions in favor of the insurance companies could lead to additional employment and that
decisions in favor of consumers could have the opposite effect. This framework gives arbiters
incentives to favor companies. Although the contracts allow consumers to choose between two
arbitration associations, this feature does not balance arbiters' incentives. Unlike the insurance
companies, which will appear before the arbitration associations regularly and therefore have the
ability to track dispute outcomes, consumers have information only about their own disputes, not
those of other consumers. Thus, a favorable decision for one consumer will not increase the
likelihood that the next consumer will choose that arbitration association.
The confidential nature of arbitration exacerbates these concerns because public scrutiny
could otherwise serve as a check on arbiters' conflict of interest. In addition, if systemic problems
do arise, the public will not know about them and thus will be unable to address them.
One of the most important effects of consumer arbitration is that arbitration associations
tend to bar class actions, making it financially infeasible for a consumer to assert any but the largest
claims against a business. For most such claims, the amount of any single claim is too small to
justify employing an attorney; only a class action combining many similar claims will attract
competent lawyers to go up against well-lawyered corporations.
The Consumer Financial Protection Bureau ("Bureau") was charged by statute with
investigating the effect of arbitration clauses in barring class actions. The study found that the
adverse effects of this result seriously harmed the interests of consumers and the Bureau has now
proposed a regulation that would require that arbitration clauses in many consumer contacts
explicitly disclaim any attempt to bar class action relief.
The Protection Bureau study also made a more general finding: arbitration is simply
unused by consumers. In the consumer finance markets studied by the Bureau, only a handful of

Ms. Marilyn Hamilton
July 1, 2016

consumers nationwide seek relief through arbitration despite the presence of arbitration clauses in
millions of consumer contracts. The reason is that arbitration is not a practical remedy for a
consumer. On the other hand, millions of consumers are eligible for relief each year through class
The fact that the arbitration clause is offered with a small reduction in premium does not
justify its inclusion. Because consumers do not have information about the problems associated
with arbitration or the likelihood that a dispute will arise, they cannot possibly estimate the value
of the rights they are waiving. As an economist would say, they cannot price arbitration.

Angela K. Littwin
Professor of Law

Thomas 0. McGarity
Joe R. & Teresa Lozano Long Endowed Chair in
Administrative Law
tmcgarity@law. utexas .edu

Charles M. Silver
Roy W. & Eugenia C. McDonald Endowed Chair in
Civil Procedure
csil ver@law. utexas. edu

Ms. Marilyn Hamilton
July 1, 2016
Page 3

Jay L. Westbrook
Benno C. Schmidt Chair of Business Law

A. Mechele Dickerson
Arthur L. Moller Chair in Bankruptcy Law
and Practice
University Distinguished Teaching Professor