Arbitration Clauses In Stop Loss Contracts

stoplosslawMany, but by no means all, carriers subscribe to the conventional wisdom that having a stop loss policy form clause requiring that all disputes between the insured group and the carrier be arbitrated and therefore not litigated in the courts is a distinct and near-universal advantage for the carrier. 

By Thomas Croft (

The thinking is that the playing field is tilted in favor of the carrier by such clauses, that arbitration is a superior and much more cost-effective means of resolving disputes, and that it results in quicker outcomes than the traditional means of dispute resolution in the U.S. court system. Well, maybe yes, maybe no.

In my anecdotal experience, there are several reasons why including standard stop loss policy arbitration clauses is not necessarily such an unequivocal “no-brainer.” 


As an initial matter, such clauses are simply unenforceable in a significant number of states.  One might think that the overriding policy favoring arbitration expressed in the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (“FAA”) would pre-empt or “trump” any state statute restricting the enforceability of agreements to arbitrate, at least insofar as the transaction involves “interstate commerce,” which most every stop loss contractual arrangement would.

But not so fast. Several reported decisions have upheld anti-arbitration acts in the face of challenges under the FAA. The rationale of these cases is that, while the FAA clearly mandates arbitration in most instances and would otherwise pre-empt the state law, the McCarran-Ferguson Act “reverse pre-empts” the FAA in the insurance context.  In essence, McCarran-Ferguson says that no federal law—unless it relates specifically to the business of insurance—can pre-empt a state law that does. These cases hold that the FAA does not specifically relate to the business of insurance (it doesn’t—it applies to arbitration agreements generally in all aspects of interstate commerce), but that the state anti-insurance arbitration statues do, and thus control over the FAA.  The bottom line for our purposes is that a stop loss policy arbitration clause may not be enforceable in many states.[1]

I should note that some the state anti-insurance arbitration statutes contain exceptions for “contracts between insurance companies.” See, e.g., Kan. Stat, § 5-401(c). This begs the obvious question in the stop loss context:  are employers sponsoring self-insured ERISA plans “insurance companies” for purposes of such statutes, such that a stop loss contract is exempt from the state’s anti-arbitration statute? ERISA’s renowned “deemer clause,” 29 U.S.C. § 1144(b)(2)(B), states that “Neither an employee benefit plan . . . nor any trust established under such a plan, shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company or to be engaged in the business of insurance or banking for purposes of any law of any State purporting to regulate insurance companies, insurance contracts, banks, trust companies, or investment companies.” No cases I have seen have considered whether the deemer clause operates to render a self-insured ERISA plan exempt from an exception under a state anti-insurance arbitration statute for “contracts between insurance companies.” Compare Scott v. Louisville Bedding Co. (Ky. App. 2013), available at, at pages 13-14 of the Court’s opinion (linked at the end of my write-up), where the court essentially punted on the even more basic issue of whether the stop-loss insured was an insurer at all).

Wolves in the Thicket

In any event, enough esoterica, and back to some more musings. Most every (and I think actually every) stop loss policy form I have seen states somewhere that the law of the state of the insured’s principal place of business or state of incorporation controls. I suspect that this is a regulatory requirement imposed by the various state DOIs, as it seems odd that a carrier would choose to subject itself to the vagaries of the laws of whatever state its insured happened to reside in voluntarily. The validity of an arbitration clause will, therefore, depend on the law of the jurisdiction in which the policy is issued.

Wholly apart from the issue of whether the state involved has an anti-insurance arbitration statute, there is another wolf lurking in the thicket that could threaten the enforceability of the stop loss arbitration clause in many states—including those without any restrictions on arbitration of insurance disputes.  A goodly number of states have deceptive trade practice, unfair settlement practice, bad faith or other statutorily based remedies that can be invoked in the insurance context, often providing for double or treble damages in an appropriate case. Cases from the U.S. Supreme Court and several of the federal Courts of Appeal have cast considerable doubt on the enforceability of arbitration agreements that limit an arbitrator’s ability to award other than “compensatory damages” or “contractual damages.”[2] Such language very commonly appears in one form or another in many stop loss contract arbitration clauses, and may affect statutory rights, either expressly or by implication.
The “hot” issue in these cases seems to be not whether the limitation clause on remedies in the arbitration clause is per se unenforceable, but rather whether the entire arbitration agreement should be voided because it operates to nullify specific statutory rights under the guise of procedure (the arbitration).  See, e.g., Paladino v. Avnet Computer Technologies, Inc., 134 F.3d 1054 (11th Cir. 1998)(nullification of rights to damages under Title VII, motion to compel arbitration denied). Similarly, in Pacificare Health Systems, Inc. v. Book, 538 U.S. 401 (2003), the U.S. Supreme Court considered whether arbitration clauses limiting the arbitrators’ ability to award “punitive or exemplary damages” or “extra-contractual damages of any kind” were enforceable where the group of plaintiffs asserted various claims, including claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (“RICO”). The Supreme Court concluded that the matter of the enforceability of the arbitration clause under these circumstances was for the arbitrator in the first instance, and thus ordered the case to arbitration for a decision on the issue of arbitrability itself. See Suskin & Badnya article, below at note 2, for further details on the splits among the federal circuits on these types of issues generally.

To return to the “wolf” in the stop loss context, because many states have statutorily based remedies for a variety of insurer misconduct, even an otherwise valid arbitration clause might well be subject to attack on the grounds that it unconscionably interferes with important state public policy.  This kind of assault might be particularly problematic where the state has a separate “bad faith” statute directed at insurers providing for other than contractual damages, as opposed to a simple common law doctrine supporting bad faith damages under certain circumstances.

If you’ve read to this point, the appropriate question is “So What?”

If the arbitration clause in the policy form is unenforceable for some reason, then so be it. If we don’t include one at all, we lose the “advantage” of arbitrating (no jury, limitation of remedies, unlevel playing field) for sure.  The simple and short answer:  the existence of an unenforceable arbitration clauseis itself grounds for more complicated and expensive litigation/arbitration. Indeed, an aggressive/creative plaintiff’s lawyer might file a pre-emptive strike in court for a declaration that a particular arbitration clause is invalid, causing the carrier to litigate (or at least force arbitration of the threshold question of arbitrability) before starting the process of addressing the dispute on the merits. This just adds another lawyer of issues to litigate or arbitrate about.

Concluding Musings

And now my closing editorial thoughts, based on my anecdotal and hearsay experience in the stop loss world over the years:

  • Most arbitrators only rarely seriously consider granting summary judgment/motions to dismiss thereby obviating the need for a formal arbitration hearing, which may well take days or even weeks.  Unlike federal or state court judges, arbitrators get paid by the hour.  Their economic incentive is to keep cases on their dockets, ultimately requiring a hearing. State and federal judges have exactly the opposite incentive—getting unmeritorious cases off their dockets as soon as possible. My experience is that most stop loss cases are won or lost at the pretrial motion stage. Moreover, even if the motion is non-dispositive, in the sense that it does not decide all the issues in the case, even limited rulings have an uncanny way of readjusting the parties’ relative assessments of the strength of their cases, and quite often lead to successful mediation or outright direct settlement of the dispute.  As noted above, arbitrators are generally not prone to provide such kind of pre-trial guidance to the parties.


  • Judges, especially federal judges, have more sophistication with legal principles than most arbitrators, as well as law clerks to assist with the legal research and analysis necessary to come to a proper decision.


  • Discovery is severely limited under the rules of most of the major arbitration service providers.  It may be limited to an exchange of a narrow class of documents (thus effectively excluding important and relevant evidence from the decision-making process), and depositions, if permitted at all, are limited to a very few key witnesses. The discovery rules of the several states and the Federal Rules of Civil Procedure are premised on the notion that broad discovery leads to the truth. The scope and extent of such discovery can be limited by either party upon motion for cause shown.  An arbitration without adequate pre-hearing discovery is a “trial by ambush.” And the ambushing party can easily be as often the plaintiff, rather than the defendant carrier.


  • The rules of evidence generally do not apply.  This means all manner of hearsay, otherwise inadmissible “expert” opinion, and other improper evidence can and usually is admitted and considered by the arbitrators.


  • Arbitration proceedings are typically confidential, not of public record like court proceedings. As a result, the development of the law relating to stop loss and other arbitrated insurance proceedings remains hidden from public view, and there is no foundation to establish precedent for future cases. Thus, arbitration deprives the entire industry and the public from legal evolution.  The very same issues may get re-arbitrated over and over between different parties without good reason.


  • As a practical matter, THERE IS NO APPEAL from an arbitration award.  The grounds for getting a court to set aside an arbitration award are so severely circumscribed, that they can only be invoked in egregious circumstances. While any judicial process can be fairly characterized as a “dice roll,” an arbitration only provides a single throw.  In court, errors can be corrected on appeal.  There is a second chance for a party where error by the trial court harmfully affected the outcome.

I am not opposed to arbitration generally. It is often a superior means of dispute resolution.  What I am opposed to is the knee-jerk preference that many insurance executives (and not necessarily their in-house counsel) have for the inclusion of arbitration clauses in their policies—a preference that seems more informed by myth than fact.

[1] For a discussion of this reverse pre-emption issue, see § 5.02[C] of “Arbitration Clauses in Insurance Policies”, pp. 231-233 by E. Kneisel and R. Dolder, available at For an undated list of state-by-state restrictions on arbitration provisions in insurance policies, see The author has not verified the accuracy or completeness of the latter-cited article, and therefore cannot vouch for it.
[2] See H. Suskin & M. Badyna, “Enforceability of Arbitration Agreements that Restrict Statutorily-Mandated Rights: the Sharpening Split Among the Circuits,” available at