Alternative Dispute Resolution (ADR): Definition and Meaning

Alternative Dispute Resolution

Investopedia / Michela Buttignol

What Is Alternative Dispute Resolution (ADR)?

Alternative dispute resolution (ADR) is, in an insurance sense, a number of disparate processes used by companies to resolve claims and contractual disputes. Insured clients who are denied a claim are offered this course of action as a form of recourse. It is employed to avoid expensive and time-consuming litigation and arbitration.

Key Takeaways

  • Alternative dispute resolution (ADR) is, in an insurance sense, a number of disparate processes used to resolve disputes.
  • Insured clients who are denied a claim are offered this path as an alternative to expensive and time-consuming litigation.
  • Alternative dispute resolution (ADR) offers to settle disputes outside of the courtroom with the help of an impartial third party.
  • Outcomes may be non-binding and advisory in nature or enforceable without the right to appeal.
  • ADR is not advised in situations of criminal law or situations where one party has excessive power over the other party.

How Alternative Dispute Resolution (ADR) Works

Alternative dispute resolution (ADR) is designed to settle disputes outside of the courtroom with the help of an impartial third party. This path is generally accessible after efforts between the client and the insurer to resolve any differences between themselves fails and reaches an impasse.

When the disputing parties agree to try alternative dispute resolution procedures, the ADR process starts. This understanding could be imposed by a court order, a contract clause, or both. It could also be voluntary. The parties select the most effective ADR strategy for their dispute, frequently with the help of legal counsel. The strategies or types are discussed in the following section.

Preliminary negotiations to set the procedure's structure and regulations typically kick off the next stage of the ADR process. This entails creating confidentiality agreements, describing the timetable and expectations for the ADR process, and determining the roles and obligations of the parties. The parties may exchange pertinent information, documents, and evidence at this point as well.

During the final stages of the ADR process, the parties negotiate a settlement to the conflict. If a settlement is reached through negotiation, the parties will create a settlement agreement outlining the details of their arrangement. The parties must then work to put the provisions into effect and carry out their respective commitments (i.e. make settlement payment should that party be found liable).

ADR is inadvisable where one party has inherent power over the other; in this case, it may be more difficult for each party to appropriate approach the ADR process.

Types of Alternative Dispute Resolution

Many insurance policies contain mandatory alternative dispute resolution clauses, depending on the state. The two most common forms of alternative dispute resolution are mediation and arbitration, though there are other types as well.


Mediation occurs when an independent third party steps in to try and find a way for the insured and the insurer to agree on a mutually acceptable outcome. The mediator is not called upon to decide who is right but rather to add structure to communication between the disputing parties, so that they can, hopefully, eventually reach a resolution between themselves.


Arbitration occurs when a neutral independent party called an arbitrator listens to arguments from both sides, collects evidence, and then decides on the outcome of the dispute, similar to a court ruling. Arbitration can either be non-binding or binding. The latter means the decision is final and enforceable, while the former implies that the arbitrator’s ruling is advisory and only set in stone if both parties agree to it.


Negotiation occurs when there is direct contact between the parties to a dispute. In order to arrive at a solution that is acceptable to both parties, it enables the parties to debate their views, interests, and prospective solutions. The parties may choose to negotiate informally amongst themselves or with the aid of lawyers or other representatives.

Collaborative Law

In a collaborative law process, the parties and their separate attorneys agree to settle their differences without going to court by negotiating and coming up with solutions. The emphasis is on collaboration and coming up with original solutions that satisfy the requirements of all parties. In many ways, collaborative law may be seen as negotiation as long as the parties seem to be in stronger correlation to how resolution is to be met.


In a mini-trial, each party's representatives present their case to an impartial third party. That third party is usually a senior executive or an impartial advisor, and this presentation is part of a structured negotiating process. In order to assist the parties in reaching a settlement, the third party offers an assessment or opinion on the likely course of the case. Though this may mirror a formal court proceeding, it is done in a much more private setting with many fewer parties.


Arbitration is more formal than mediation and resembles a trial, albeit with greater flexibility and the ability to act outside of federal rules.

Advantages and Disadvantages of Alternative Dispute Resolution (ADR)

Pros of Alternative Dispute Resolution

Alternative dispute resolution (ADR) is billed as time- and money-saving for consumers. Civil suits are expensive to pursue and if you can get an attorney to take your case on a contingency basis, you'll typically give up at least a third of any money you are awarded.

Cons of Alternative Dispute Resolution

Alternative dispute resolution (ADR) doesn’t always deliver on its promise, though. Sometimes this path can be just as expensive and stressful as the litigation journey it’s supposed to replace, especially when a substantial and complex claim is under dispute and there are widely differing views of how the facts are interpreted.

Mandatory arbitration is only as good as the mediator or mediators who hear the case. Many mediators come from the insurance industry, so there may be a built-in tilt toward the insurers' point of view. They might interpret clauses in the policy by the norms and standards of the industry, which could be quite different from what a policyholder or typical consumer might read into a clause in the boilerplate.

Because alternative dispute resolution (ADR) is not always straightforward, aggrieved parties are advised to first exhaust all appeals within the insurance company and/or hire a public adjuster to represent them before considering dispute resolution. Public adjusters investigate insurance claims and then make their own assessment of the case with a report you can then submit to your insurance company. They are paid on commission, too, meaning you only have to pay them if your complaint is successful. 

An example of ADR may be Goldman Sachs' $215 million settlement regarding a gender bias settlement.

Appropriate and Inappropriate Uses of ADR

Though ADR may sound favorable in many cases, there are numerous situations in which it not advised or an appropriate litigation option. At its core, ADR can be used to settle civil law difficulties involving your neighbors, an insurance claim, a landlord and tenant, or a construction contract.

ADR is also frequently employed to settle problems involving child support, visitation rights, spousal support, the division of marital property, or eldercare issues. It is also an appropriate option when considering employment disputes. Conflicts including workplace discrimination, pay disputes, breaches of employment contracts, or workplace grievances may be resolved using ADR techniques like mediation or arbitration.

In other cases, ADR just doesn't make sense as an option. In general, ADR is not appropriate for resolving criminal matters involving grave violations, such as murder, assault, or significant fraud charges. It is also not typically acceptable in circumstances involving domestic abuse, sexual harassment, or where one side has a lot of negotiating power over the other.

In certain situations, ADR may not be appropriate for resolving disputes concerning topics of public concern. For example, consider constitutional questions, environmental laws, or policy choices requiring a more comprehensive look at society in which the general public would benefit by the issue at hand being fully investigated. This may also include situations where there have been violations of human rights, illegal detentions, or constitutional rights.

What Are the Most Common Forms of ADR?

When people resort to ADR methods, they typically use arbitration or mediation. In both situations, negotiation may be an underlying factor to resolve the dispute, though the other two methods are the inherent primary types.

When Should You Not Use ADR?

ADR should not be used in criminal cases, when there is a significant power imbalance, for complex public policy issues, or in cases involving clear violations of legal rights.

What is the Negotiation Process in ADR?

The ADR negotiation process involves preparation, information exchange, discussion and exploration, option generation, bargaining, and closure. Parties gather information, exchange views, generate options, and negotiate terms to reach a mutually acceptable agreement. The process varies based on the chosen ADR method and the involvement of a neutral third party.

What Is the Primary Criticism of ADR?

The primary criticism of ADR is situations where one party has more power than the other which can result in an unfair negotiation process and outcome. The power imbalance can lead to coercion, intimidation, or the disadvantaged party feeling compelled to accept unfavorable terms. This undermines the principles of fairness, equality, and informed consent, which are crucial for a just resolution of disputes.

The Bottom Line

ADR refers to techniques for settling disputes that are not handled through traditional litigation. It gives parties a flexible and cooperative method to arrive at agreements that are agreeable to both parties. Mediation, arbitration, and negotiation are the main forms of ADR, and ADR strives to expedite resolutions, cut expenses, and encourage more agreeable agreements. It can be used in a variety of issues, though there are many cases where it is not necessarily appropriate.

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  1. Casetext. "Chen-Oster v. Goldman, Sachs & Co."

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