Bulletin No. 1998-3

Kansas Insurance Department, Kathleen Sebelius,Commissioner of Insurance

TO: All Fire and Casualty Companies and Rating Organizations

SUBJECT: Arbitration/Appraisal Clauses

DATE: February 3, 1998

The Kansas Insurance Department has reviewed the use of arbitration clauses in insurance contracts based on the decision of the Kansas Supreme Court in Friday v. Trinity Universal of Kansas, (22 Kan App. 2d 935, 924, P. 2d 1284 1996). Based on that review, the Department believes that the use of voluntary arbitration clauses in insurance contracts is permissible.

If an insurance contract includes a provision for the arbitration of disputes, the language of the provision must clearly state that the procedure is voluntary and that both parties must mutually agree to the arbitration procedure. In addition, the language must clearly state whether the decision of the arbitrator is binding on the parties. The language stating that the arbitration procedure is voluntary and whether or not the decision of the arbitrator is binding must either be in bold print or underscored so that the insureds rights and responsibilities are highly visible.

The Friday case does not make a distinction between arbitration and appraisal. However, it is our understanding that some insurance companies use the term "arbitration" to specifically include coverage issues where the term "appraisal" is used to mean a determination of the amount of loss. The language of any arbitration/appraisal provision in an insurance contract must clearly state whether the procedure is going to determine coverage or the amount of loss or both issues.

Insurance companies and rating organizations which elect to use such clauses in their policies are free to develop their own language but the provision must be submitted to the Insurance Department for approval.

If an insurance company is a member of a rating organization or if forms are otherwise available to a company through a Reference Filing Agreement Form, the insurer may already have an arbitration/appraisal provision available for use in Kansas which has been approved by the Department. Arbitration/appraisal clauses already approved by my office may continue to be used but must be reviewed for compliance with this bulletin and amended and refiled as soon as possible if it does not comply with the bulletin.

If you have any questions regarding this Bulletin, please contact Bill Wempe at 420 S.W. 9th, Topeka, Kansas 66612, or phone: (785) 296-7845 or e-mail: bwempe@ins.wpo.state.ks.us.