Homeowners Hung Out To Dry By Arbitration Clauses

August 20, 2004

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A national consumer group charges Colorado homeowners are at a distinct disadvantage when they try to settle disputes over defects in their houses.

Public Citizen has asked Colorado insurance commissioners to investigate whether insurance companies have been improperly requiring homebuyers to arbitrate disputes using Construction Arbitration Services (CAS), a private firm that hears cases over defects in new homes.

In letters to state officials, Public Citizen describes how CAS is co-owned by a former lawyer who was disbarred for stealing client funds and operates in apparent violation of 12 states' laws.

The letters also request investigations of the Home Buyers Warranty (HBW) companies, which insure many homebuilders and have designated CAS as the sole legal forum available to tens of thousands of Americans who buy new homes each year.

Arbitration is a private legal system that is usually less favorable to consumers than the court system. The HBW companies have selected CAS to arbitrate cases filed against them, despite CAS's co-ownership by Marshall Lippman, who Public Citizen says was disbarred by the state of New York in 1997. Lippman has reportedly told a Texas state legislator that CAS arbitrates such disputes in all 50 states - even though 11 states prohibit arbitration clauses in insurance contracts.

In addition, Public Citizen says it has received a letter, signed by CAS's other owner, Lester Wolff, refusing to comply with California's law requiring disclosure of all arbitration outcomes.

"When arbitrators are selected by the business defending the lawsuit, the arbitrator's bias will be to rule in the business's favor or award less than full damages. In this instance, we see that the HBW companies have very low loss ratios, indicating that CAS may allow them to systematically deny or underpay valid claims from homeowners," said Jackson Williams, legislative counsel for Public Citizen.

Public Citizen's letter to the commissioners in the four states where HBW companies are domiciled-Colorado (where HBW is headquartered), Hawaii, Nevada and Virginia-asks that HBW's claims procedures be scrutinized for patterns of unfair practices.

The letter tells commissioners that "Lippman's position in CAS is analogous to that of a supervisory judge in a court system. If you are one of the many thousands of Americans who buy newly constructed homes each year, Mr. Lippman wields more influence over your life than the Chief Justice of the United States. It is simply shocking that someone with this record of dishonesty has been entrusted by insurers with so much power."

Additional letters to commissioners in 11 states where arbitration clauses are banned from insurance contracts - Arkansas, Georgia, Hawaii, Kentucky, Louisiana, Nebraska, Oklahoma, South Carolina, South Dakota, Virginia and Washington - ask that those laws be enforced against HBW and CAS. Another letter asks California's commissioner to order HBW and CAS to comply with that state's disclosure law.

Another way that CAS arbitration is uniquely disadvantageous to consumers is CAS's policy of making consumers pay the entire cost of the arbitration process - $500 or more. All other major arbitration providers limit the consumer's filing fee to $375 or less, making the business that selects arbitration pay the biggest share of the cost.

The letters were made public at today's session of the Insurance Regulatory Examiners Society (IRES) annual conference, held in Denver. One of the IRES conference workshops is devoted to the issue of mandatory arbitration. IRES members, who staff the various state insurance departments, are in the front lines of insurance regulation and have authority to conduct the investigations requested by Public Citizen.

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