Claims & Disputes

Arbitration

Arbitration is a more formal alternative to mediation in which a neutral arbitrator (or panel) hears evidence from both sides and renders a decision—which may be final and binding.

Last reviewed: May 2026 · Editorial methodology

Definition

Arbitration is an alternative dispute resolution (ADR) process used in insurance disputes where a neutral third party—the arbitrator or a panel of arbitrators—reviews evidence, hears arguments from both the policyholder and the insurer, and issues a decision on the disputed matter. Arbitration can be binding (the decision is final and enforceable in court, with very limited grounds for appeal) or non-binding (either party may reject the decision and pursue other remedies). Many auto insurance policies include mandatory binding arbitration clauses for uninsured/underinsured motorist (UM/UIM) disputes, and numerous commercial policies require arbitration for coverage disagreements. Consumer advocates have raised concerns about mandatory binding arbitration clauses in personal lines policies, arguing they disadvantage policyholders who lack legal representation. Some states—including California and New Jersey—have enacted laws restricting the enforceability of mandatory arbitration clauses in insurance contracts. The Federal Arbitration Act (FAA) generally preempts state laws that categorically prohibit arbitration, creating ongoing legal tension. Unlike mediation, arbitration produces a decision rather than a negotiated settlement, and the process more closely resembles a streamlined legal proceeding.

Where this term matters

Claims Help Center →/claims/claim-denied →/claims/bad-faith-insurance →/claims/auto-insurance-claim →

Tip

Glossary definitions are educational. Always check your own policy language — insurers can define common terms differently from one another. When in doubt, request a written explanation from your agent.

Related terms

MediationMediation in insurance claims involves a neutral third party facilitating negotiation between the policyholder and insurer to resolve a dispute without litigation or binding arbitration.Appraisal ClauseThe appraisal clause provides an alternative dispute resolution mechanism for disagreements about the dollar value of a loss—without going to court.Bad Faith InsuranceInsurance bad faith occurs when a carrier fails to investigate promptly, unreasonably delays or denies a valid claim, or fails to communicate claim decisions—potentially exposing the insurer to damages beyond the policy limits.Claim DenialA claim denial is the insurer's written notification that it will not pay a claim, citing specific policy provisions, exclusions, or conditions as the basis for the denial.
Source: Cover Forge USA editorial team|Last verified: May 2026|Methodology
Definitions are educational and may be simplified. Always refer to your policy contract and consult a licensed agent for terms that affect coverage decisions.
CF

Cover Forge USA Editorial Team

Editorial Lead

This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.

Reviewed June 2026

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