State Might Let Homeowners Sign Away Right to Sue Insurers

Justin Dunavant never thought much about homeowner’s insurance — not until January when an SUV ran three stop signs and barreled into his Alice home.  

Since then, the contractor and U.S. Army veteran has struggled to think of much else. Severe structural damage and harmful asbestos dust loosened by the crash left his red, one-story home unlivable. And months later, his family — a wife and three kids — is still living in a Holiday Inn due to a squabble over his insurance claim.

After his insurer rejected repair estimates from several adjusters it sent over to assess the damage, Dunavant hired his own adjuster, he said, and the insurer low-balled that estimate, too.

Now, the 39-year-old South Texan is taking his longtime insurer to court, seeking what he considers just compensation — including repayment for three-plus months in the hotel.

(The insurer did not immediately respond to a request for comment.)

On Wednesday, Dunavant was in Austin voicing his opposition to a proposal being floated at the state's insurance department that he fears would threaten the ability of Texas homeowners to sue their insurance carriers in situations like his.

“They’re trying to make me sign away my rights,” he said in an interview.

The proposition, discussed at a meeting called by the Texas Department of Insurance, is one of those complicated notions that can sound innocuous, but has concrete implications for Texas homeowners.

Essentially, the department is considering allowing insurance companies to offer lower rates to homeowners who agree to settle disputes through a mandatory mediation-arbitration process — effectively signing away their right to sue.

Commissioner David Mattax heard public testimony on the idea Wednesday at a meeting prompted by a specific request from the Texas Farm Bureau’s insurance division, which seeks to offer some of its policyholders discounts if they agree to mandatory arbitration and foreclose the option of going to court.

Arbitration is a way to settle disputes outside of the legal system. Arbitrators, often selected by companies involved in disputes, typically issue relatively swift rulings. Unlike lawsuits, the proceedings are private and the outcome cannot be appealed. Its use has spread nationwide. Tens of millions of Americans use financial products or services subject to such clauses, according to the U.S. Consumer Financial Protection Bureau. 

But Texas homeowners' insurance policies aren't among them — yet.

The Farm Bureau, the largest Texas-based insurer, says the move would help curb a surge in costly lawsuits that have pushed up homeowners' premiums in South Texas and particularly storm-prone Gulf Coast counties. 

Opponents say such a practice stacks the deck against consumers, who may not understand the consequences of giving up their right to sue. The trial lawyer-backed consumer group Texas Watch, the Texas Office of Public Insurance Counsel and other critics worry that approving the Farm Bureau proposal would prompt other insurers to follow their lead.

“This proposal does not protect consumers, and that’s the No. 1 job you have right here,” Joe Longley, a longtime Austin attorney and former head of the Texas Attorney General Office’s consumer protection division, told Mattax.

Texas is among 24 states that appear to have no statute or regulation prohibiting or restricting the use of arbitration in insurance contracts, according to the consumer group Public Citizen. Sixteen states have laws or rules that seem to prohibit any enforcement of such clauses, according to the group’s research.

Some Texas homeowner policies include voluntary arbitration clauses, but state regulators have not approved those that mandate kicking disputes to arbitration. 

• Read More Senate Bill Makes It Harder to Sue Insurers

The Texas Department of Insurance has approved a few mandatory arbitration policies in the commercial realm, spokeswoman Stephanie Goodman told The Texas Tribune, but that practice is not widespread.

On Wednesday, consumer advocates and insurance industry officials debated how the practice should apply to homeowners, and they disagreed on whether it fit within the spirit of Texas law.

Kicking off the meeting, Mattax said he wanted to hear comments about “fairness to consumers,” why insurers would need such a policy, the metrics behind potential discounts and how companies should disclose the complicated legal consequences.  

Mattax said he wanted broad input on arbitration policies — underscoring the broader implications of the Farm Bureau’s proposal.

Then he sat mostly in silence.

John Stephens, who drafted the Farm Bureau’s proposal, said it would only be offered in a list of “high-expense” South Texas counties, and along parts of the Gulf Coast.

Depending on the county, folks who chose arbitration would see discounts ranging from 10 to 25 percent. 

Disputes under that plan would first go through an appraisal process, with each party hiring and paying a professional to assess the claim. If the appraisers disagree, they would try to agree on an “umpire” to settle the matter. If they disagree on whom to appoint, the policyholder would choose between two specified firms.

Stephens said many unique factors prompted the Farm Bureau — which only serves Texas and is not publicly traded — to ask permission to “try something different” to help its bottom line.

That included a dramatic rise in lawsuits in South Texas and along the Gulf beginning in 2012. The rate of disputed claims in those regions, he said, outpaced the rest of the state by nearly 30-fold.

Stephens emphasized the voluntary nature of the Farm Bureau’s plan and said those who chose it would be required to sign a disclosure form, which would likely follow face-to-face interaction with an insurance agent — more transparent, he suggested, than credit card or cable companies that bury arbitration clauses deep in contracts that offer no opt-out.

“Our endorsement is not hidden,” Stephens said.

But critics worry that other insurers, if given permission to require arbitration, would intentionally keep consumers in the dark about what the legalese means.

And even if consumers are given the information, some suggested, they still might not understand.

“They’re not lawyers, like you and me, commissioner; they have other concerns in their life,” Ware Wendell, deputy director of Texas Watch, told Mattax. “The awards will be lower, and in many cases will be disposed of.”

Dunavant agreed, saying in years past he almost certainly would have opted for lower premiums. But now, amid the fight with his insurer, he wouldn’t trust arbitration. He believes those private judges “don’t bite the hand that feeds.”

Goodman said there is no deadline for the department to make a decision. 

Disclosure: The Texas Farm Bureau has been a financial supporter of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.