What is FINRA arbitration?

FINRA arbitration is a method of resolving disputes between investors and brokerage firms or financial advisors outside the court system. It involves a neutral third party, an arbitrator, who reviews the case and makes a binding decision.

Why choose arbitration over litigation?

Arbitration is typically faster, less formal, and more cost-effective than litigation. It also provides a final resolution to disputes, with limited grounds for appeal. Most relationships with financial advisors are formalized by entering into a contract which contains a dispute resolution clause. Nationally, most dispute resolution clauses provide for FINRA arbitration.

Who can file a FINRA arbitration claim?

Investors, brokerage firms, and financial advisors can file a FINRA arbitration claim if they have a dispute related to securities or investment activities. FINRA arbitration is normally the forum for disputes among registered persons, brokerage firms and the public customer clients of the firms.

How do I start the FINRA arbitration process?

To start the arbitration process, Bakhtiari & Harrison will file a Statement of Claim with FINRA, detailing the nature of the dispute, the parties involved, and the relief sought.

What is a Statement of Claim?

A Statement of Claim is a written document submitted by the claimant outlining the facts of the dispute, legal claims, and the desired outcome.

What happens after filing the Statement of Claim?

After filing, the respondent has 45 days to answer the Statement of Claim. The answer must address the claims and may include counterclaims or other relief sought.

What fees are involved in FINRA arbitration?

Fees include filing fees, hearing session fees, and possibly member surcharges or process fees, depending on the specifics of the case.

Can I represent myself in FINRA arbitration?

Yes, you can represent yourself, but many choose to hire an attorney with experience in securities arbitration due to the complexity of the process. Investors and industry professionals who choose to represent themselves do so at a substantial disadvantage, Wall Street firms typically retain experienced professional counsel to represent their interests.

How are arbitrators selected?

Arbitrators are selected through the Neutral List Selection System (NLSS), which provides a list of potential arbitrators. Both parties rank and strike names to agree on a panel.

What qualifications do FINRA arbitrators have?

FINRA arbitrators include attorneys, accountants, financial professionals, and public members who have undergone training and meet FINRA’s qualification standards.

How long does the arbitration process take?

The process typically takes 12-18 months from filing to the final award, but this can vary based on case complexity and scheduling. Preference may be given to investors that are seriously ill or elderly.

What is a prehearing conference?

A prehearing conference is a meeting between the parties and the arbitrators to discuss procedural issues, set a schedule, and address preliminary matters including final FINRA arbitration hearing dates.

What is discovery in arbitration?

Discovery is the exchange of documents and information between the parties to prepare for the hearing. It is more limited than in litigation.

What happens during the arbitration hearing?

During the hearing, both sides present evidence, call witnesses, and make arguments. The arbitrators then deliberate and render a decision.

Is the arbitration hearing open to the public?

No, arbitration hearings are private and confidential. Only the parties, their representatives, and the arbitrators may attend.

Can I settle my case before the hearing?

Yes, parties can settle at any time before the arbitrators render a decision, often through negotiation or mediation.

What is mediation in the context of FINRA arbitration?

Mediation is a voluntary process where a neutral mediator helps the parties negotiate a settlement. It is separate from arbitration and non-binding.

What happens if I lose in arbitration?

If you lose, the arbitrator’s decision is final and binding. There are limited grounds for challenging the award in court.

Can I appeal an arbitration decision?

Generally, you cannot appeal an arbitration decision. However, you can seek to vacate the award on very narrow grounds, such as arbitrator misconduct.

What types of disputes are resolved through FINRA arbitration?

Disputes include claims of fraud, breach of fiduciary duty, negligence, breach of contract, and other issues related to securities and investments.

How are damages determined in arbitration?

Damages are determined based on the evidence presented, including financial records, expert testimony, and the specifics of the case.

Can arbitrators award attorney’s fees?

Arbitrators can award attorney’s fees if provided for by law, contract, or if both parties request it.

How do I enforce an arbitration award?

An arbitration award can be enforced in court through a confirmation process, making it a judgment that can be collected.

What is expungement in FINRA arbitration?

Expungement is the process of removing information from a broker’s record on the Central Registration Depository (CRD) system. It is only granted under specific conditions.

What are the grounds for vacating an arbitration award?

Grounds for vacating an award include arbitrator bias, fraud, corruption, or misconduct, as well as exceeding their powers.

Are arbitration awards public?

Yes, arbitration awards are published on FINRA’s website, providing transparency and access to past decisions.

What is the role of the Office of Dispute Resolution?

The Office of Dispute Resolution administers arbitration and mediation cases, ensuring that the process runs smoothly and efficiently.

What is a Simplified Arbitration?

Simplified Arbitration is for cases involving claims of $50,000 or less, allowing for a quicker and less expensive resolution without a hearing.

Can I request an expedited hearing?

Yes, in certain circumstances, such as elderly or seriously ill parties, you can request an expedited hearing.

What is the role of an arbitrator?

An arbitrator acts as a neutral decision-maker, reviewing evidence, hearing testimony, and issuing a binding decision on the dispute.

How do I prepare for an arbitration hearing?

Preparation involves gathering evidence, preparing witnesses, and developing a clear case strategy to present to the arbitrators.

What types of evidence are admissible in arbitration?

Evidence can include documents, emails, financial records, expert reports, and witness testimony, subject to the arbitrators’ discretion.

Can I request documents from the other party?

Yes, through the discovery process, you can request relevant documents and information from the other party to support your case.

How does FINRA handle conflicts of interest with arbitrators?

FINRA requires arbitrators to disclose any potential conflicts of interest, and parties can object to arbitrators they believe are biased.

What happens if a party does not comply with discovery?

If a party does not comply, the other party can file a motion to compel, asking the arbitrators to order compliance and possibly impose sanctions.

What is a motion in arbitration?

A motion is a formal request for the arbitrators to make a ruling on a specific issue, such as compelling discovery or dismissing a claim.

Can I request interim relief in arbitration?

Yes, you can request interim relief, such as temporary restraining orders or injunctions, to preserve the status quo pending the final decision.

How are hearing locations determined?

Hearing locations are typically determined by the location of the claimant unless both parties agree to a different venue.

What is a telephonic or virtual hearing?

Telephonic or virtual hearings are conducted via phone or video conference, allowing parties to participate remotely.

How are arbitration awards paid?

Awards are typically paid by the losing party within 30 days of the decision, unless otherwise specified by the arbitrators.

What if the losing party does not pay the award?

If the losing party does not pay, you can seek enforcement through the courts, turning the award into a legally enforceable judgment.

Are there any limits on the types of claims I can bring in arbitration?

FINRA arbitration covers a broad range of claims related to securities, but there are some statutory and regulatory limits on certain types of claims.

Can I bring a class action in FINRA arbitration?

No, class actions are not permitted in FINRA arbitration. However, you can join other claimants in a single arbitration if the claims are similar.

What is the role of expert witnesses in arbitration?

Expert witnesses can provide specialized knowledge and opinions to help explain complex financial issues to the arbitrators.

How are hearing dates scheduled?

Hearing dates are scheduled based on availability of the parties and arbitrators, with consideration for the complexity of the case.

Can I request a different arbitrator if I believe one is biased?

Yes, you can challenge an arbitrator if you believe they have a conflict of interest or bias that affects their impartiality.

What is a “chairperson” in a FINRA arbitration panel?

The chairperson is the lead arbitrator who manages the procedural aspects of the case and ensures the hearing runs smoothly.

How does FINRA ensure fairness in arbitration?

FINRA has rules and procedures in place to ensure a fair and impartial process, including arbitrator training and disclosure requirements.

How do I learn more about the FINRA arbitration process?

For more information, you can visit FINRA’s website, contact their Office of Dispute Resolution, or consult with experienced attorneys like those at Bakhtiari & Harrison.

How can Bakhtiari & Harrison help with FINRA arbitration?

Bakhtiari & Harrison can assist with filing claims, responding, selecting arbitrators, discovery, hearings, and ensuring the best possible outcome through skilled representation and strategic advice.

Premium Financing and Misreprsentation: 4 Ways to Protect Your Investment

If you believe you are a victim of a premium financing insurance fraud, continue reading. Bakhtiari & Harrison recover losses on behalf of individuals defrauded by financial professionals.

Misrepresentation of Premium Financing by Insurance Firms: A Closer Look

Insurance is a vital financial tool that offers protection against various risks, providing peace of mind to individuals, families, and businesses alike. It plays a significant role in protecting assets, health, and future financial stability. However, insurance companies, like any other business, can sometimes engage in deceptive practices or mishandle aspects of a policy, leading to significant losses for the insured. When this occurs, policyholders need to know their legal rights and the steps they can take to seek recourse.

At Bakhtiari & Harrison, we have represented many clients in disputes against insurance companies, particularly where misrepresentations and issues related to premium financing are involved. In this blog, we will explore in detail the legal avenues available to policyholders who feel wronged by their insurance providers and highlight the importance of understanding both misrepresentation and premium financing in the insurance landscape.

What is Misrepresentation in Insurance?

Misrepresentation in insurance occurs when an insurance company or its agent provides false, incomplete, or misleading information to a prospective policyholder. This misrepresentation can relate to the terms of the policy, the coverage, the benefits, or the risks involved. There are three primary types of misrepresentation:

Fraudulent Misrepresentation: This occurs when the insurer knowingly makes false statements with the intent to deceive the policyholder. For example, if an insurance agent promises that a health insurance policy covers all pre-existing conditions when it explicitly excludes them, the agent may be guilty of fraudulent misrepresentation.
Negligent Misrepresentation: In this case, the insurer or agent does not intend to deceive, but the information provided is incorrect due to carelessness or a failure to verify the facts. An example of this could be an agent incorrectly stating the premium amount or deductibles because they failed to properly review the policy details.
Innocent Misrepresentation: This type of misrepresentation occurs when the insurer unknowingly provides inaccurate information. Although there may not be any malicious intent, it can still have serious consequences for the policyholder if they were misled into purchasing a policy based on incorrect details.

The Consequences of Misrepresentation for Policyholders

Misrepresentation can have a wide range of consequences, depending on the nature of the false or misleading information provided. These consequences often include:

Denial of Claims: Policyholders may find that when they file a claim, the insurer refuses to cover the damages or losses due to terms that were not properly disclosed.
Higher Premiums: In some cases, the insurer may have misrepresented the cost of the policy, leading to unexpected premium increases.
Policy Voiding: If the misrepresentation is discovered, particularly in cases of fraudulent or negligent misrepresentation, the insurer may void the policy entirely. This means the policyholder may lose all coverage and potentially all premiums paid.

Legal Implications of Misrepresentation

Policyholders who discover that they have been misled by an insurer have several potential legal options. Depending on the type and severity of the misrepresentation, they may be entitled to:

Rescission of the Policy: If a policyholder was misled into signing a contract, they may have the right to rescind (cancel) the policy. In such cases, they may also be able to recover premiums paid under the policy, especially if the misrepresentation was material to the decision to purchase the insurance.
Damages: In cases where the misrepresentation caused financial harm, the policyholder may be entitled to compensatory damages. For example, if a life insurance policyholder was promised certain benefits but those benefits were not delivered, the policyholder or their beneficiaries may be able to recover the value of the lost benefits.
Punitive Damages: If the misrepresentation was particularly egregious—such as in cases of fraud—policyholders may also be entitled to punitive damages, which are intended to punish the insurer for its wrongful actions and to deter similar behavior in the future.

Real-Life Examples of Insurance Misrepresentation

Misrepresentation is more common than many people realize, and it can happen across all types of insurance. Here are some real-life scenarios where misrepresentation played a role:

Case Study 1: A couple was sold a whole life insurance policy under the impression that the policy would generate sufficient cash value to cover premium payments after ten years. However, the cash value built up much slower than promised due to misrepresentations made by the insurance agent, leaving the couple with unexpectedly high premium payments after the ten-year period. This resulted in a lawsuit, and the couple successfully rescinded the policy and recovered damages.
Case Study 2: An elderly man purchased long-term care insurance based on assurances from his insurance provider that his coverage would remain in place without any increases in premiums. However, several years later, his premiums began to rise dramatically. After an investigation, it was revealed that the agent had misrepresented the terms of the premium schedule. The man was able to pursue legal action, rescind the policy, and recover a portion of his premiums.

Understanding Premium Financing in Insurance

What is Premium Financing?

Premium financing is a financial arrangement where a third party (usually a bank or financing company) loans money to an individual to cover the cost of their insurance premiums. This is often used for high-value insurance policies, such as life insurance or property insurance, where the premiums are substantial, and the policyholder may not want to tie up their liquid assets.

In a typical premium financing arrangement, the loan is structured so that the policyholder pays interest on the loan and, in some cases, part of the premiums themselves. The insurance policy is often used as collateral for the loan, meaning that if the policyholder defaults on the loan, the financing company has a claim on the policy’s benefits.

Benefits of Premium Financing

Premium financing can be a useful tool for individuals who want to maintain liquidity or who have other investment opportunities for their capital. The main benefits of premium financing include:

Preservation of Cash Flow: Policyholders can maintain their cash reserves or invest in higher-return assets while still enjoying the protection of an insurance policy.

Leverage: By borrowing to pay for premiums, policyholders can leverage their assets, potentially increasing their wealth if their investments outperform the cost of the loan.

Tax Benefits: In some cases, the interest paid on a premium financing loan may be tax-deductible, further enhancing the financial appeal of the arrangement.

Risks and Pitfalls of Premium Financing

While premium financing has its advantages, it also carries several risks, particularly if the policyholder is not fully aware of the terms or if the financing is mismanaged by the insurer or the third-party financing company.

Rising Interest Rates: Many premium financing agreements have variable interest rates, which means that if interest rates rise, the cost of financing can increase dramatically. Policyholders may find themselves facing unexpected and unsustainable costs.

Policy Lapse: If the financing company or insurer fails to make timely payments on the premiums, the policy can lapse, leaving the policyholder without coverage. This can have devastating consequences, particularly in cases involving life insurance or high-value property insurance.

Complexity: Premium financing agreements are often complex and require careful understanding of both the insurance policy and the loan terms. Misunderstanding these terms can lead to financial strain and loss of coverage.

Legal Recourse for Issues with Premium Financing

Policyholders who find themselves in trouble due to misrepresentation or mishandling of premium financing may have several legal options:

Breach of Contract: If the financing company or insurer fails to adhere to the terms of the financing agreement, the policyholder may sue for breach of contract. This could involve recovering damages for lost coverage, increased costs, or other financial harm.

Negligence: In cases where the insurer or financing company was negligent in managing the premium payments or in explaining the terms of the agreement, the policyholder may have a claim for negligence. This can lead to compensation for any losses suffered.

Fraud: If the insurer or financing company deliberately misrepresented the terms of the financing agreement, the policyholder may be able to pursue a claim for fraud. This could result in the policy being rescinded and the recovery of damages, including punitive damages.

Case Study: Premium Financing Gone Wrong

Case Study 3: A business owner took out a large life insurance policy through premium financing, relying on assurances from the insurer that the cost of financing would remain stable over the life of the policy. However, when interest rates began to rise, the financing costs escalated dramatically. The business owner was unable to keep up with the payments, and the policy lapsed. The business owner sued both the insurer and the financing company for misrepresentation and breach of contract. The court ruled in favor of the plaintiff, awarding damages for the lost coverage and the financial losses incurred due to the policy lapse.

Protecting Yourself from Misrepresentation and Premium Financing Issues

How Policyholders Can Protect Themselves

There are several steps policyholders can take to protect themselves from misrepresentation and issues related to premium financing:

Review the Policy in Detail: Before signing any insurance contract, it’s important to thoroughly review the terms, conditions, and exclusions of the policy. Don’t rely solely on the agent’s verbal assurances.
Ask Questions: Don’t hesitate to ask the insurance agent or company representative for clarification on any terms you don’t understand. Make sure you fully understand what is covered, the premium structure, and any potential increases in cost.
Get Everything in Writing: If an agent makes promises about the policy—such as guaranteed benefits or stable premiums—make sure these promises are in writing in the policy itself. Verbal assurances may not be enforceable if they contradict the written terms of the policy.
Seek Legal or Financial Advice: Premium financing agreements can be complex, and it’s often worth seeking the advice of a legal or financial professional before entering into such an arrangement. They can help you understand the risks and ensure that the terms are favorable.

How Insurers Can Avoid Misrepresentation Claims

Insurance companies can take several proactive steps to avoid being accused of misrepresentation:

Training Agents: Ensuring that agents are fully trained on the policies they sell and on the legal requirements for disclosure can help prevent misrepresentation.
Clear Communication: Providing clear, concise, and accurate information to policyholders is essential. Insurers should avoid using confusing or ambiguous language in policy documents and marketing materials.
Monitoring Compliance: Insurance companies should regularly audit their agents and policies to ensure compliance with legal and ethical standards. This can help catch potential misrepresentation issues before they become legal disputes.

Insurance is meant to provide protection and peace of mind, but when insurance companies engage in misrepresentation or mishandle premium financing arrangements, it can lead to significant financial harm for policyholders. Knowing your rights and understanding the legal recourse available can help you protect yourself from such issues.

The firm’s partners have extensive experience representing clients in disputes with insurance companies, whether it’s for misrepresentation, premium financing issues, or other forms of misconduct. If you believe your insurance company has misled you or are facing issues with your premium financing, don’t hesitate to reach out to us for a consultation.

Bakhtiari & Harrison is an AV-rated law firm focused on the worldwide representation of clients in complex arbitration, litigation, and related legal services in securities industry matters.

We represent high net-worth individuals, institutions, and hedge funds in securities arbitration and litigation claims before FINRA (Financial Industry Regulatory Authority), AAA (American Arbitration Association), other arbitration providers, and state and federal courts.