Discovery of Insurance Information in Arbitration

Summary

SIFMA provided comments to FINRA on a proposal that would amend the Discovery Guide’s Firm/Associated Person Document Production List to require firms and associated persons, upon request, to produce documents concerning third-party insurance coverage in a customer arbitration proceeding.

See also:

Regulatory Notice 18-22 (Discovery of Insurance Information in Arbitration)

Excerpt

Via E-Mail to pubcom@finra.org

Jennifer Piorko Mitchell

Office of the Corporate Secretary

FINRA

1735 K Street, NW

Washington, DC 20006-1506

Re: Regulatory Notice 18-22 (Discovery of Insurance Information in Arbitration)

Dear Ms. Mitchell:

The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to comment on Notice 18-22 (the “Notice” or the “Proposal”). 2 the Proposal would amend the Discovery Guide’s Firm/Associated Person Document Production List to require firms and associated persons, upon request, to produce documents concerning third-party insurance coverage in a customer arbitration proceeding. We respectfully submit the following comments and recommendations for your consideration.

Insurance information generally has no relevance or probative value to the case. As a general matter, insurance policies and coverage have no relevance or probative value to the issue of liability or the appropriate amount of damages in any given case. They are merely an internal risk transfer mechanism purchased by the firm. As the Notice correctly points out, insurance information is generally only useful for purposes that have nothing to do with the merits of the case itself.

The Notice identifies two such purposes: to allow a claimant to assess a respondent’s ability to pay the highest possible settlement amount or prospective arbitration award; and to allow a claimant to amend his or her claim to fit within the insurance coverage. The latter practice is questionable at best and abusive at worst, certainly from an insurance company’s perspective, particularly where the actual facts of the case become distorted or lost in the exercise of reframing objective reality to meet the requirements of an insurance policy.

Moreover, the existence of potentially applicable insurance coverage is not probative of issues of liability on the part of respondent, even if the adequacy of the capitalization of the respondent to satisfy an award may be at issue. As discussed below, the panel gaining awareness of such coverage can be highly prejudicial to an insured respondent, and such prejudice may infiltrate later hearings of similar claims against even uninsured respondents.

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