SCHOOL OF LAW

THE UNIVERSITY OF TEXAS AT AUSTIN

727 East Dean Keeton Street Austin, Texas 78705 (512) 471-5151 Facsimile (512) 471-6988

July 1, 2016
Ms. Marilyn Hamilton
Texas Dept. oflnsurance
Property and Casualty Lines Office
Mail Code 104-PC
P.O. Box 149104
Austin, Texas 78714-9104

via email: marilyn.hamilton@tdi.texas.gov

and U.S. Mail

Dear Ms. Hamilton:

We urge the Department to reject the addition of an arbitration provision in standard
insurance contracts.
The fact that the insurance companies select which arbitration associations to include in
the contracts creates an inherent conflict of interest. The associations and their arbiters know that
decisions in favor of the insurance companies could lead to additional employment and that
decisions in favor of consumers could have the opposite effect. This framework gives arbiters
incentives to favor companies. Although the contracts allow consumers to choose between two
arbitration associations, this feature does not balance arbiters' incentives. Unlike the insurance
companies, which will appear before the arbitration associations regularly and therefore have the
ability to track dispute outcomes, consumers have information only about their own disputes, not
those of other consumers. Thus, a favorable decision for one consumer will not increase the
likelihood that the next consumer will choose that arbitration association.
The confidential nature of arbitration exacerbates these concerns because public scrutiny
could otherwise serve as a check on arbiters' conflict of interest. In addition, if systemic problems
do arise, the public will not know about them and thus will be unable to address them.
One of the most important effects of consumer arbitration is that arbitration associations
tend to bar class actions, making it financially infeasible for a consumer to assert any but the largest
claims against a business. For most such claims, the amount of any single claim is too small to
justify employing an attorney; only a class action combining many similar claims will attract
competent lawyers to go up against well-lawyered corporations.
The Consumer Financial Protection Bureau ("Bureau") was charged by statute with
investigating the effect of arbitration clauses in barring class actions. The study found that the
adverse effects of this result seriously harmed the interests of consumers and the Bureau has now
proposed a regulation that would require that arbitration clauses in many consumer contacts
explicitly disclaim any attempt to bar class action relief.
The Protection Bureau study also made a more general finding: arbitration is simply
unused by consumers. In the consumer finance markets studied by the Bureau, only a handful of

Ms. Marilyn Hamilton

July 1, 2016
Page2

consumers nationwide seek relief through arbitration despite the presence of arbitration clauses in
millions of consumer contracts. The reason is that arbitration is not a practical remedy for a
consumer. On the other hand, millions of consumers are eligible for relief each year through class
settlements.
The fact that the arbitration clause is offered with a small reduction in premium does not
justify its inclusion. Because consumers do not have information about the problems associated
with arbitration or the likelihood that a dispute will arise, they cannot possibly estimate the value
of the rights they are waiving. As an economist would say, they cannot price arbitration.
Sincerely,

Angela K. Littwin
Professor of Law
alittwin@law.texas.edu
(512)-232-5561

Thomas 0. McGarity
Joe R. & Teresa Lozano Long Endowed Chair in
Administrative Law
tmcgarity@law. utexas .edu
512-232-1384

Charles M. Silver
Roy W. & Eugenia C. McDonald Endowed Chair in
Civil Procedure
csil ver@law. utexas. edu
512-232-1337

Ms. Marilyn Hamilton

July 1, 2016
Page 3

Jay L. Westbrook
Benno C. Schmidt Chair of Business Law
jwestbrook@law.utexas.edu
512-232-1303

A. Mechele Dickerson
Arthur L. Moller Chair in Bankruptcy Law
and Practice
University Distinguished Teaching Professor
512-232-1311
mdickerson@law.utexas.edu