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.

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.

Many insurance policies contain mandatory alternative dispute resolution (ADR) clauses, depending on the state. The two most common forms of alternative dispute resolution (ADR) are:

  • Mediation: 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: 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.

Important

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)

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.

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.