FINRA Proposes To Require Disclosure Of Insurance Information In Arbitrations. Seriously.

From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper

Once upon a time, FINRA at least pretended that it was interested in maintaining a level playing field for claimants and respondents in the arbitrations it administers. Today, all that pretense has been jettisoned.  In Regulatory Notice 18-22, which seeks comments on FINRA’s proposal to require respondents to produce information relating to their insurance policies, FINRA unabashedly concedes that “[t]he benefits of the proposed amendments accrue primarily to claimants in arbitration cases.”  And by “primarily,” FINRA really means “entirely.”  So, if you’re a BD with insurance coverage, not sure you need to read any further; instead, head directly to your computer and let FINRA know you don’t appreciate any rule explicitly designed to favor one party over another.  For those of you who want to get even angrier, read on.

First, some background. The way discovery works in FINRA arbitrations, there are lists of documents, one for claimants, another for respondents, comprised of the things that FINRA believes are “presumptively discoverable.”  In other words, even without the other side asking for these documents, a party is required to produce them (unless the party objects to doing so, which is its right).  FINRA established this practice a long time ago in the hope of reducing disputes over discovery.  Given the number of cases I am personally involved in that include one side, or both, filing a motion to compel discovery, not sure how successful this has been.  Nevertheless, “list” discovery is the norm in FINRA arbitrations.

Today, FINRA has proposed to add to the list of documents respondents are required to produce – even without being asked – “documents sufficient to provide details concerning the coverage and limits of any insurance policy under which any third party insurance carrier might be liable to satisfy in whole or in part an award issued by an arbitrator in the subject arbitration proceeding or to indemnify or reimburse a party for payments made to satisfy an award.” Why has FINRA done so?  It’s all part of a theme, apparently, that FINRA is pursuing: what can it do to increase the likelihood that customers not only collect money when they file arbitrations, but that they collect as much as possible.  If you have any doubt about this, please see recent blog posts on efforts to create a fund from which unpaid arbitration awards can be satisfied.

If you want something more concrete concerning FINRA’s intent to put its thumb on the scale for the benefit of customers, look no further than the Reg Notice itself. FINRA flat out admits that this proposal helps customers at the expense of respondents.

FINRA writes that “[i]nsurance information can provide valuable information to a claimant when determining a litigation strategy.” “To a claimant,” not to a respondent.

FINRA continues: “By receiving details of the existence and scope of any third-party insurance coverage, a customer can decide whether to amend the statement of claim to fit within the coverage.”  In other words, if I know the limits of your coverage, I can be sure to sue you for at least that much.

Now, for my favorite part:

Insurance information can be particularly important during settlement discussions when the ability of a firm or an associated person to pay an award is otherwise less certain. For example, when the insurance coverage of a firm or an associated person is not known and their ability to pay an award is less certain, then a customer may have difficulty determining whether to settle a claim and for what amount.  In this instance, a customer may be more likely to settle a claim for a lesser amount to ensure some monetary compensation for damages. The discovery of insurance information, therefore, could increase the ability of customers to determine a litigation strategy to maximize the monetary compensation they could expect to receive.

That’s what we need, a rule designed expressly to “maximize” the amount of money a claimant could receive. I can only imagine the enthusiasm the securities industry will express for this proposal.

In an odd display of candor, FINRA admits several additional problems that its proposal presents to respondents: (1) “[u]nder the proposed amendments, firms and associated persons could incur additional costs associated with arbitration”; (2) “Firms and associated persons that would otherwise not have provided the information would now have exposure to the risk that the opposing party could leak the information and prejudice the arbitrators”; and (3) because “[t]he proposed amendments could also increase the use of policies by firms and associated persons when customers receive monetary compensation for damages,” this could result in “[a]n increase in payout by insurance companies [which] could result in an increase in premiums, reducing the incentive for firms and associated persons to purchase coverage.”

Gee, what selling points!

But, no worries, FINRA has thought this through. In response to its acknowledgement that “customers could also increase their claim amount in response to knowledge of insurance coverage,” FINRA says no big deal, as it “believes that arbitrators would continue to determine monetary awards based on actual damages.”  Right, like the amount claimed by a customer is irrelevant to a panel’s consideration of a complaint.

What about that problem with “prejudice [to] the arbitrators” if the fact/amount of insurance coverage gets “leaked” by a claimant? Pish posh, as “FINRA will train arbitrators to address potential prejudice by providing training materials on ODR’s webpage and publications including The Neutral Corner.”  Unless FINRA’s training materials teach arbitrators how to reverse the Earth’s rotation in order to go back in time – see the original Superman (the movie, not the TV show!) – there is just no way to successfully unring that bell.  Granted, the Reg Notice asks what sanctions ought to be imposed on a party who provides insurance information to an arbitration panel without first seeking authorization to do so, but, short of outright dismissal of the case, I don’t see how any sanction would be appropriately remedial.  And, frankly, I am rather pessimistic that FINRA would ever create a rule mandating dismissal of a claim, given how hard FINRA has worked in recent years to minimize the ability of a respondent to have a statement of claim dismissed prior to the conclusion of the claimant’s case-in-chief at the hearing.

Look, this whole proposal is driven by FINRA’s concern – and by FINRA I mean PIABA – that smaller, less capitalized firms may not have enough money to pay adverse arbitration awards. The Reg Notice is clear that if you’re a big firm, with enough capital on hand to pay an award without having to rely on a third-party insurer, FINRA doesn’t care.  It is only interested if an insurance policy is the only thing that stands between a prevailing customer and his payday.  I just don’t understand how FINRA can get away with being so transparent with its sentiments.  FINRA rules governing arbitrations should be neutral.  Even to request comment on proposed amendments so obviously tilted in favor of claimants represents a dereliction in FINRA’s obligations as the provider of this arbitral forum.