Understanding the Compulsory Arbitration System in Personal Injury Cases From Both Perspectives

Like many states, Arizona has a compulsory arbitration system in place for “smaller” disputes. Depending upon the County where the action is brought and the amount sought (e.g., less than $50,000 in Maricopa County), these matters are subject to mandatory court-annexed arbitration.

Such claims are supposed to be conducted on an accelerated schedule and decided by a court-appointed arbitrator using a relatively informal and inexpensive procedure. The arbitrator’s award becomes final and binding as a judgment unless it is “appealed” by one of the parties, in which case the trial court must then hold a trial de novo — i.e., such appeals are not really appeals at all, but are mere “do overs” for someone unhappy with the result.

The stated purpose of this compulsory arbitration procedure is to cost-effectively resolve smaller claims. Significantly, the procedure provides a potential penalty for an “appealing” party to discourage such appeals (which, as a practical matter, actually raises the cost of being subject to such a procedure due to the multiple proceedings).

Initially, the rules required the “appealing party” to improve its position by 15% at the trial de novo, which percentage was later raised to 25%. The consequence of such a party’s failing to “improve its position” by the applicable percentage on appeal is that such party becomes liable for the other party’s post-appeal attorneys’ fees and expert witness fees. This penalty can, and often does, exceed the amount of the initial dispute.

Need an example of how this works? Say you have a personal injury claim and you are seeking $20,000. After a compulsory arbitration hearing, the court-appointed arbitrator awards you $19,000. If you appeal, you must get at least 25% more than the $19,000 award at the conclusion of the trial de novo. If the defendant appeals, they must get a result that is at least 25% less than the award at the conclusion of the trial de novo.

Since you are unlikely to risk the substantial exposure to attorneys’ and expert witness fees simply for an additional $1,000, you are not likely to appeal. Thus, as a practical matter, plaintiffs tend to pursue reasonable arbitration awards and rarely, if ever, appeal.

Defendants, on the other hand, frequently appeal these awards. Why do you suppose that is? There’s a one-word answer: insurance. Insurance companies are obviously less concerned about these appeal penalties, but is that all? No.

Many, if not all, insurers have an institutionalized policy of appealing these awards since, by the numbers, they believe they do better (i.e., they pay less money). The reason is because many people just get “worn out” by the process and become willing to throw in the towel for less than what they were awarded at arbitration. Likewise, juries are fickle and have a hard time understanding injuries they cannot “see,” which tend to be the kinds of injuries that predominate smaller claims (e.g., strained necks or backs). Further, as an added bonus, these companies figure that, by appealing almost all of these cases they make the process so tedious and expensive that attorneys, as a group, will refrain from accepting clients with these types of claims regardless of their merit.