Claims Arbitration

The Overseas Private Investment Corporation (OPIC) has long experience arbitrating PRI claims. We invited Robert O’Sullivan, OPIC’s Associate General Counsel, Insurance Claims, to discuss that experience and OPIC’s views of arbitration as a means of dealing with disputes with policyholders.

All insurance contracts issued by OPIC (and USAID before it) have provided for resolution of disputes by arbitration under American Arbitration Association (AAA) rules. Coverage and compensation disputes in the context of insurance claims account for all but two of the arbitrations in OPIC’s experience, although the arbitration clause extends to “any controversy or claim arising out of or relating to this contract.”

OPIC has paid over 90% of the claims that have been presented to it, and so arbitrations have been relatively few (14 in a 35 year period). In eight cases, the insured received nothing and in two cases was awarded considerately less than the amount claimed [see chart below]. Notwithstanding an overall favorable win/loss record that confirms OPIC’s confidence in its claims procedures, even the smallest of these controversies diverted resources from more productive activities, so winning did not lead to celebration.

Each case did cause OPIC to review its contracts and reconsider the use of arbitration as a means of resolving disputes. The drawbacks to arbitration include the lack of a right to appeal based on error of law and the difficulty of disposing meritless claims through the equivalent of motions to dismiss. On the positive side, two major advantages over litigation are the opportunity to select decision makers who are knowledgeable about the subject matter of the dispute and the autonomy of the parties to work with the arbitrators within the rules to present the case effectively and efficiently. Also, the case will proceed upon a timetable mutually agreed by the arbitrator and the parties, not one disrupted and dictated by a court calendar.

The major change that OPIC has made in its arbitration clause has been to shift from the AAA Commercial Rules, which disfavor reasoned awards, to the International Rules, which require them. One may hope that arbitrators who are required to explain their decisions will be somewhat deterred from imposing settlements in the guise of decisions. More importantly, an award that identifies and decides issues openly can provide guidance that may be useful in improving the insurance contract forms, underwriting practices, and contract origination.

Implicit in this discussion is rejection of litigation as an alternative. In court, the parties would lose the autonomy and flexibility that arbitration offers, would be unlikely to have a trier of fact familiar with international investment or political risk management and would be subject to the competing demands of a court calendar. Finally, considering that the most contentious claims tend to be expropriation claims, the court would be asked to pass judgment upon the propriety of acts of a foreign government, a subject that U.S. courts avoid.

From time to time, OPIC has also considered use of other arbitration institutions but, based on a sample of 14 cases in 30+ years, has decided to treat occasional unsatisfactory experiences as random incidents, not institutional weaknesses. Any system of rules that allows party autonomy and encourages efficient handling of the proceedings is acceptable in principle. ■