Alternative Dispute Resolutions to the Courts

Alternative Dispute Resolutions 16 years on…

It’s been 16 years since the Federal Government designed and implemented Alternative Dispute Resolutions (ADRs), a move which has had a lasting effect on the Australian insurance industry. But how is it fairing now?

In 2001 the Federal Government introduced new financial services regulatory regime which required financial service providers, such as insurers, to release their internal and external dispute resolution process. Following these changes, a new national ombudsman for insurance disputes was formed – the Financial Ombudsman Service (FOS). The introduction of this body, and its mandate to resolve disputes between insurers, insured and injured parties, provided a signpost to the formalisation of Alternative Dispute Resolution processes in the Australian insurance industry.

This shift showed a desire within the industry to capture some of the proposed benefits of the ADR, compared to the alternative – the current court-based legal system. However, the move away from the traditional court-based system naturally begs the question: is the right tool is being used for the right job?

Let’s start by taking a closer look at the Internal Dispute Resolution (IDR) process. The IDR process commences when an insured initially lodges a dispute. Once received the insurer and insured attempt to resolve their dispute through negotiation. This negotiation can involve the insured either dealing with an insurer’s call centre claims consultant or in the event of an escalation, by a member of the insurer’s dedicated (IDR) team. The insured also has the choice to engage their own legal counsel in representing them during this process.

In the event the dispute is unable to be resolved at this level, the insurer is required to provide the insured with an IDR letter containing the reasons for its decision along with details on how the insured may access an external dispute resolution. Now, the purpose of this IDR process is to encourage the parties to realise the potential benefits of ADR by allowing them to negotiate the terms of their own resolution.

If at the end of the IDR process, the insured is unhappy with the IDR decision, the insured may escalate the dispute to the external dispute resolution stage of the process. This involves the insured lodging a dispute form with the Financial Ombudsman Service (FOS).

The Federal Government’s logic for formalising the ADR process makes sense when you look at a report by the Victorian Department of Justice, which found that the major of all disputes (2 million or 65%) were resolved without obtaining help from a third party.

By formalising the process, the government was attempting to maximise the opportunities for a dispute to be resolved in the most cost-effective way. An additional advantage is that it allows the parties to capture some of the key ADR benefits endorsed by some academics, which include: enhancing consumers’ access to dispute resolution processes enhancing consumer’ participation in dispute resolution processes reducing costs and delays in the court system other social policy objectives, such as facilitating cost effective redress of disputes facilitating access to dispute resolution services for vulnerable and disadvantaged citizens

Despite ASIC’s efforts to foster best practice ADR processes, the industry-based schemes have not been without criticism. For example, some service providers have complained the schemes are too heavily weighted in favour of consumers due to decisions being binding on the service providers but not consumers. They argue that as a result, service providers incur unnecessary time and expense by being forced to participant in a dual dispute resolution process i.e. external ADR followed by an appeal through the court system.

Consumer groups, on the other hand, consider this simply reflects good public policy by providing consumers with a low-cost and binding ADR process while preserving a consumer’s right to access the formal justice system via an appeal to the courts.

It is likely this fear of power imbalances has prompted some industry-based ombudsmen to adopt internal policies that require it to deal with disputes in a fair and reasonable way, having regard to good industry practice, relevant industry codes and the law. ASIC has endorsed this flexible approach by making it clear that an approved scheme can set its own internal governance rules and that it does not have to deal with all customer disputes about a particular financial service or financial service provider. This means some type of complaints, for example, may be excluded and is the reason why the schemes have been formed along industry lines.

The Financial Ombudsman Service: In light of FOS’ incorporation of some of the most common types of alternative dispute resolution—negotiation, mediation, conciliation and arbitration— it is safe to say these ADR processes have been firmly and formally entrenched in the context of insurance disputes.

The prime example is a dispute between insurers and reinsurers which remain the responsibility of the respective parties to resolve. This may take the form of self-imposed dispute resolution clauses which are typically included in most commercial contracts or legal action pursued through the formal court system. One suspects that the logic behind this omission is that insurers and reinsurers are sophisticated parties capable of resolving disputes through self-determined means. This also reflects that the public policy concerns around power imbalances experiences do not exist between two corporate stakeholders.

While some dispute resolution challenges still remain, the systemic shift towards using formalised ADR mechanisms seems to have been largely successful. It is also pleasing to see that the Federal Government has not applied a one size fits all approach, which suggests the right tool is being used for the right job.

 

Jason Maywald is a highly experienced legal and transactional advisor in the insurance and medical assistance sectors. He holds a Bachelor of Laws from the Queensland University of Technology, and has significant experience in competitive corporate acquisitions, IPOs, commercial property acquisitions and disposals, corporate restructures, and hostile and friendly takeovers.

7,391 thoughts on “Alternative Dispute Resolutions 16 years on…

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