The state of Maryland has taken some badly-needed action concerning the inclusion of arbitration clauses in insurance policies. Governor Martin O’Malley recently signed new legislation prohibiting the enforcement of pre-dispute mandatory arbitration clauses in insurance agreements entered into by consumers, such as those involving life, property and health care coverage. The sponsor of the bill, Representative Luiz Simmons, said there has been “an explosion” in the use of pre-dispute mandatory arbitration clauses, which require consumers to waive their right to a trial. The new law was designed to address the increasing use of these clauses in the insurance field, according to Representative Simmons. This is a noteworthy act on behalf of the citizens of Maryland and one that will prove to be of benefit to all concerned.
The states have a duty to regulate insurance companies and to protect the public. The McCarran-Ferguson Act, passed by Congress, enables states to regulate the business of insurance. As a result, the states can bar the use of pre-dispute arbitration clauses in consumer insurance contracts. It should be noted, however, the new law in Maryland does not prohibit the use of post-dispute arbitration agreements and I have no problem with that. Interestingly, the bill passed without opposition from the insurance companies. It was signed by Governor O’Malley and became law on May 22nd. The new law provides that with one exception, “any provision in an insurance contract with a consumer that requires arbitration is void and unenforceable.” The exception is for an arbitration agreement that is part of a process for determining the appraisal value of a property. The legislation applies only to individuals who seek or acquire “any goods or services primarily for personal, family, or household purposes including financial services, health care services, or real property.” It will become effective January 1, 2009 and apply prospectively.
Maryland is not the only place where arbitration in consumer contracts is being questioned. Other proposed legislation is pending before Congress that would affect consumer and other types of arbitration agreements. For example, S.B. 1782, introduced July 12, 2007, in the Senate by Sen. Russ Feingold (D-WI) proposes to amend the Federal Arbitration Act to invalidate pre-dispute agreements that would require arbitration of employment, consumer, or franchise disputes, and disputes arising under statutes that protect civil rights or regulate contracts between parties of unequal bargaining power. The Judiciary Committee held a hearing on the Feingold bill on December 12, 2007, but I don’t believe it has reached the Senate floor for debate.
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