Avoiding and Resolving Disputes in Outsourcing Arrangements
Lisa Renee Pomerantz, Attorney at Law
Outsourcing arrangements have become increasingly common. Companies prefer to focus on their core businesses and outsource more peripheral functions to vendors that specialize in those services. At the same time, technology has permitted more efficient outsourcing.
The customer’s relative lack of knowledge about the services to be outsourced lead to disputes in a number of ways:
- The customer may lack the information necessary to make the best selection of vendor or solution;
- The parties may not know the precise nature of the services to be delivered;
- The vendor may propose solutions that are easiest or most profitable for rather than most suited to the customer's needs and priorities; and
- The vendor may over-promise in order to win the bid.
To counteract these risks, the customer can ensure that it makes an informed decision. Options for doing so include obtaining proposals from multiple vendors and hiring a consultant to conduct a needs assessment and to assist in evaluating vendors and proposals.
Disputes can also arise during the implementation phase, in part because of inherent uncertainty about the nature and scope of deliverables. These can be manifested in:
• Internal confusion or dissension within the customer and/or vendor organizations;
• Difficulties measuring progress;
• Lack of customer cooperation and commitment of resources to the project; and
• Unanticipated changes in circumstances.
The parties can plan the engagement to minimize such disputes, by:
- Identifying milestones and deliverables;
- Defining standards and procedures for acceptance of the work;
- Specifying change order procedures; and
- Structuring compensation arrangements, including progress payments, holdbacks, bonus provisions and liquidated damages, to encourage efficient, timely and full performance.
Communication mechanisms should also be specified. For example,
- Authorized decision-makers and liaisons for both parties should be identified;
- Methods for tracking and communicating progress should be specified; and
- Regular project meetings should be scheduled.
Finally, methods for resolving disputes should be identified. The parties may designate a neutral subject matter expert to resolve questions about whether deliverables meet specifications. They may also call for escalation of disputes to senior management or the use of a standby mediator or arbitrator to resolve disputes as they arise.
Voluntary mediation offers speedy resolution when insurers and homeowners can’t agree.
(Long Island, NY) Governor Andrew M. Cuomo today announced that the Department of Financial Services has established a voluntary mediation process for homeowners disputing their insurance claims or dissatisfied with denials of their claims arising from Storm Sandy.
“Mediation offers a speedy, low-cost resolution of insurance claims for homeowners who are unable to reach agreement with their homeowners’ insurance companies on claims from Storm Sandy,” Governor Cuomo said. “It is also much less expensive for insurers than litigation, so it’s a win for everyone.”
Superintendent of Financial Services Benjamin M. Lawsky said, “Most non-flood insurance claims have already been resolved by insurance companies. But we know from past storms that some claims are difficult to resolve. We also know that after other major storms, mediation was extremely successful in other states. So the Department of Financial Services has issued an emergency regulation directing insurers to offer and pay for voluntary mediation for open and denied insurance claims from Storm Sandy.”
Most non-flood insurance claims have already been resolved, and most of those unresolved are still in process. As of February 8, insurers representing 90 percent of the market in Sandy-affected areas reported to the Department that, with respect to all claims other than flood, they have received 432,000 claims and had fully resolved 87 percent. These insurers have paid $3.6 billion of the $4.6 billion that they expect to pay. With regard to residential property insurance, there have been 287,000 claims, and 94 percent have been fully resolved, with carriers paying $1.5 billion of the $1.7 billion that they expect to pay.
Under the new regulation, homeowners may seek mediation for claims that are disputed or if they disagree with the insurance company’s denial of a claim.
In the aftermath of Hurricanes Andrew, Katrina, and Rita, Florida, Mississippi and Louisiana instituted nonbinding mediation programs, administered by the American Arbitration Association, aimed at bringing prompt closure to disputed insurance claims.
Both consumers and insurers have found the programs beneficial. After Hurricane Andrew, a program sponsored by the Florida Department of Insurance handled 2,400 claims and achieved a settlement rate of 92 percent. In Louisiana, 15,000 cases were filed after Katrina, with a settlement rate of 74 percent. In Mississippi, 5,000 cases yielded settlements 82 percent of the time.
The emergency amendment to Regulation 64 establishes a similar mediation program in New York, to be administered by the AAA pursuant to procedures and standards approved by the Department.
The program would handle disputed real and personal property claims, other than those regarding damage to motor vehicles, which arose between October 26, 2012 and November 15, 2012 in the counties of Bronx, Kings, Nassau, New York, Orange, Queens, Richmond, Rockland, Suffolk or Westchester. Claims made under the National Flood Insurance Program, which is administered by the federal government, are not eligible.
The emergency amendment obligates insurers to notify their homeowners of the right to mediate eligible claims. Insurers will have to participate in mediations in good faith and foot the bill for the AAA’s costs.
The mediation is not binding on the homeowner and will not affect the homeowner’s other legal rights, such as a right to request an appraisal, the right to file a civil suit, and any other rights provided by law.
The mediation can be conducted face to face, by video conference, or telephone conference, depending upon what is agreed between the insurer and homeowner.
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