Sightings from The Catbird Seat

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February 24, 2005

Groups Launch Nationwide Effort
to Stop Use of Binding
Mandatory Arbitration Clauses

Campaign Includes Educational Web Sites, Call for State
and Federal Legislation, Tools to Empower Consumers

From Public Citizen

WASHINGTON, D.C. – More than two dozen public interest organizations on Thursday launched a nationwide effort to stop the corporate use of binding mandatory arbitration (BMA) clauses, those insidious paragraphs that are tucked in the fine print of an array of contracts and through which millions of consumers unwittingly waive their right to access the courts….

There is probably not a single adult in the United States who is not subject to at least one binding mandatory arbitration clause – and most are subject to many. Buried in the fine print of credit card billing inserts, health insurance plans, employee handbooks and even standard purchase contracts, the clauses require consumers to waive their right to go to court if a dispute arises with the company involved in the transaction.

Cases are funneled to a costly private legal system that favors companies and operates outside the law; arbitrators are not bound to use legal precedent or even good sense in making their rulings, and an arbitrator’s rulings can’t be appealed.

This means that homeowners ripped off by a shady mortgage broker, patients denied medical coverage by an HMO, employees victimized by discrimination, and consumers caught in credit card billing scams cannot take their claims to court. The result is the undermining of consumer protection, civil rights and other laws that level the playing field.

“We are starting a campaign to stop the use of binding mandatory arbitration clauses, which Big Business is now forcing on unknowing consumers in billions of pre-printed, take-it-or-leave-it contracts, as part of its larger push to avoid oversight and accountability for fraud and deception,” said Joan Claybrook, president of Public Citizen.

“It is galling that corporations are systematically denying individuals their right to go to court.”

“At Trial Lawyers for Public Justice, we have been repeatedly asked for help by consumers and employees who had strong legal claims, but were being forced into arbitration systems badly tilted in favor of corporate defendants,” said Paul Bland, staff attorney with Trial Lawyers for Public Justice.

“These persons find it hard to believe that something so unfair could happen to them in America, but it happens to people every day. Under our current system, the fine print of BMA provisions in corporate contracts can and does hurt people who have been ripped off by corporate wrongdoing.”…

Tom Greene, of Enterprise, Ala., is a former poultry farmer and a Vietnam veteran. In 1990, Greene built a poultry farm in which he invested heavily. When the poultry processor attempted to force binding arbitration on him, he refused. Greene was forced out of business and suffered substantial losses.

He described these events at the press conference, noting, “Arbitration violates the fundamental liberties our Constitution extends to us as free citizens in this great republic. … As a soldier, a war veteran who has drawn blood in defense of those principles, I could not sign that contract.”…

“Arbitration was conceived as an informal, expedited process for resolving routine disputes between businesses,” said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. “But when used against consumers, arbitration becomes a tool to block consumers from exercising their rights.” Consumers often pay steep filing fees to initiate a case (fees can run up $750 or more) in addition to half of an arbitrator’s hefty hourly charge. Fees often must be deposited up front and can run into the tens of thousands of dollars, he added.

Arbitration panels consist primarily of attorneys who represent or have represented corporations. Because only businesses are repeat users of arbitration, arbitrators have an incentive to rule for the business and against the consumer.

Arbitrators have a tendency to split the difference between two parties’ positions, so awards tend to be lower than those from judges and juries. And while judges are accountable to higher courts and the public, arbitrators are not legally accountable for errors and are not subject to oversight and are not required to take legal precedent into account when rendering their decisions.

Arbitration clauses almost always prohibit class actions and often require that hearings be held in locations inconvenient to consumers making the claims. And in a shocking display of hypocrisy, many arbitration clauses allow companies to take consumers to court, even though those individuals cannot sue the companies.

Finally, arbitration proceedings are kept confidential, and no legal precedents are set to guide companies’ future behavior. Parties are allowed only limited judicial review, if any.

“Consumers Union finds ominous the growing prevalence of fine print clauses in consumer contracts that have the effect of blocking consumers’ access to the courts,” said Sally Greenburg, senior counsel for Consumers Union.

“These binding mandatory arbitration clauses are the stealth weapon of corporations that seek to escape being held accountable in a neutral forum – a court of law – by giving themselves the advantage of binding mandatory arbitration – often with the consumer even knowing she or he has no right to go to court.”…

Added Linda Sherry, Consumer Action’s editorial director, “Consumers are often unaware that they have agreed to binding arbitration. We suggest that you read the fine print of all contracts and service agreements. If you find a BMA clause, vote with your feet and walk away. No deal is worth giving up your right to your day in court.”

“Through the cynical use of BMA clauses, corporations are systematically stripping the fundamental right of American consumers to seek justice,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

“This blatant attempt to avoid corporate accountability must be stopped before the American marketplace is overrun with corporate fraud and abuse that make Enron and Worldcom the rule, not the exception.”…

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Mandatory Arbitration Clauses: Undermining the Rights of
Consumers, Employees, and Small Businesses

From Public Citizen

Today most Americans are bound by at least one mandatory, pre-dispute arbitration clause. Buried in the fine print of a billing insert, employee handbook, health insurance plan, or dealership or franchise agreement, these clauses waive one’s right to access the courts, diverting cases to a costly private legal system that favors defendants. Arbitration clauses are achieving their intended purpose – undermining consumer protection, civil rights, and other laws that level the playing field between big businesses and individuals. The individual is left with no choice but to waive these rights, because arbitration clauses are presented on a take-it-or-leave-it basis.

How Individuals Are Disadvantaged by Arbitration:

Arbitration was conceived as an informal, expedited process for resolving routine disputes between businesses. But when it is imposed on a weaker party, such as a consumer, arbitration can be used to defeat valid claims. Arbitration has several unique characteristics that make it harder for individuals to prevail in a dispute with a business:

High costs: A claimant must pay steep filing fees just to initiate a case – seldom less than $750. These fees do not cover the arbitrator’s hourly charges, which are generally in the range of $200 to $300 per hour, split between the parties. All these fees must be deposited in advance, and almost always amount to thousands of dollars. Because the claimant has usually sustained a serious loss in the dispute with the business – foreclosure on a home, firing from a job, termination of a franchise or dealership – most individuals covered by an arbitration clause cannot afford these costs and are forced to drop their cases.

Bias: Arbitration providers are organized to serve businesses, not consumers. Their marketing is targeted entirely at businesses, and their panels of arbitrators consist primarily of corporate executives and their lawyers. Since only businesses will be repeat users of an arbitrator, there is a disincentive for an arbitrator to rule in favor of a consumer or employee if he expects further retentions. There is also a long-standing custom among arbitrators to “split the difference” between two sides’ positions. The result is that arbitration awards to consumers and employees are substantially lower than court awards. Comparisons of average awards by arbitrators and courts in employment cases and medical malpractice cases show that arbitration claimants receive only about 20 percent of the damages that they would have received in court.

Limited discovery: Discovery is the process by which litigants obtain information and evidence in the possession of their opponent or third parties. In arbitration, discovery is a privilege, not a right, and many businesses draft arbitration clauses to severely restrict the claimant s ability to obtain necessary evidence. Moreover, since arbitrators do not have the power to enforce subpoenas, claimants must sometimes file lawsuits to get compliance defeating the purpose of arbitration.

Prohibition of class actions. Nearly every arbitration clause prohibits participation in class action lawsuits. Class actions are the only effective remedy for wide-scale scams that rip off individual consumers or farmers in small amounts. Individuals do not have the time or resources to recognize, investigate, or prove the existence of such fraudulent practices.

Inconvenient venue. Arbitration clauses often require that hearings be held in a location inconvenient to the claimant. Individuals may have to bear the cost of long-distance travel to have their case heard. For example, the Internet auction site e-Bay requires its customers to travel to its home turf of San Jose, California, to arbitrate any dispute.

One-way requirements. Most arbitration clauses require only the weaker party (the consumer, employee, or franchisee) to arbitrate its claims, while allowing the dominant party (the corporation) to sue in court on its claims. Thus, a sexual harassment victim can be forced to arbitrate a discrimination claim against a former employer while litigating identical issues in court if the employer sues to stop her from joining a competitor.

No public record. While proceedings and records of the courts are open to the public, most arbitration clauses and provider organizations require that proceedings be kept confidential. As a result, only the businesses that impose arbitration can track past decisions and know which arbitrators have ruled for them. Public discussion of the fairness of an arbitration ruling is discouraged, even if the case raises policy issues of wide concern. Moreover, arbitration sets no legal precedents to guide a company s future conduct.

Limited judicial review. Parties are allowed only limited judicial review of an arbitration award. A decision may only be overturned when there is fraud or “manifest disregard of the law.” This is a high hurdle, because arbitrators need not issue written findings of fact or legal conclusions. Oddly enough, courts will refuse to hear appeals of arbitration decisions even when both sides have agreed to let a court do so! . . .

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The Kaiser Permanente Money Trail

Corporate Healthcare – For Profit, Not for Profit, or Not for Patients: Kaiser Permanente

From Kaiser Papers Hawaii

Kaiser Permanente: Not-for-Profit or “Not for Patients”?

Nearly 1 in 3 persons in the nation is now dependent upon an HMO for their health care needs. Health care mergers and acquisitions over the last five years total nearly $200 billion and health care CEO compensation continues to set historic highs….

The leader among the nation’s 765 HMOs is $13.5 billion Kaiser Permanente with nine million members, $3.3 billion in profits in the past five years, 12% of the current national HMO membership, 36% of the California HMO market, and the subject of numerous federal and state quality care investigations both in and out of California.

Kaiser has taken advantage of a legal technicality to attain market dominance – it is a non-profit corporation – which means it is exempt from paying any federal income taxes.

The Internal Revenue Service requires a non-profit organization to contribute services to a community as a condition of its non-profit status. Kaiser’s corporate bylaws reflect those requirements:

This corporation’s principal purpose is to provide hospital, medical and surgical care, including emergency services, extended care and home health care, for members of the public, without regard to sex, race, religion or national origin, or physical or mental handicap or to the individual’s ability to pay.

Kaiser lives up to none of these requirements.

Meaningful distinctions between private non-profits like Kaiser and for-profit health care corporations have all but disappeared. Kaiser uses the same management consultants as the largest for-profit corporations, the same economic advisors, adopts the same downsizing strategies, utilizes the same care denial and standard of care lowering programs as the for-profit health care sector, and dwarfs the financial empires of almost all other U.S. health care corporations.

Kaiser has abused its tax exempt non-profit status and used it to fuel its market expansion program while providing minimal community service. This report reveals a Kaiser radically different from the public service image it portrays in its bylaws and details how Kaiser is:

          >        Accumulating wealth and resources that make it one of the richest and most powerful medical corporations in the world.

          >        Launching a major expansion program focused on enhancing its managed care market dominance by draining resources from patient services.

          >        Lowering the standards of care by displacing its highest skilled caregivers and downgrading the skills of those who remain.

          >        Placing seniors and low-income populations at risk through a practice of Medical Redlining.

This net effect of these policies have combined to allow Kaiser to erode the standard of care and to misuse its non-profit status to portray itself as victimized by for-profit health care while diverting attention from the real victims – patients and their families….

Read the full story at:

For more non-profit abuses, GO TO > > > How To Pluck A Non-Profit!

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June, 2002

First Business, Now Health Care:
Signing Away One’s Right To Sue

More and more, mandatory arbitration clauses are surfacing in
agreements between businesses and individuals.
Will the line be drawn at managed care?

By Bob Carlson, Managed Care Magazine

In 1996, a radiologist reported that a CT scan of 6-year-old Zakary Ostertag’s head was “clear.” Two years later, after Zakary suffered a concussion, another scan showed a brain tumor.

That tumor, it turned out, was clearly evident on the first scan. Obviously, a mistake had been made. In June of 1998, Zakary underwent a resection of a benign meningioma at another facility.

The Ostertags’ ordeal didn’t end there. They later discovered that they are among the 80 percent of HMO members in California who have no right to a jury trial because of a “predispute mandatory arbitration” clause in the contract between their HMO and their employer. With this, a member’s only recourse in a fight with an HMO is binding arbitration.

In financial industries, giving up one’s right to sue and accepting mandatory arbitration is not unusual. With respect to managed health care companies – whose absolute protection from liability has been shorn in five states – a battle over mandatory arbitration is shaping up in the one place that historically has set the trend for managed care – California.

The Ostertags’ full story is one of 25 “HMO arbitration abuse reports” on The Foundation for Taxpayer & Consumer Rights web site. The foundation, a not-for-profit educational and advocacy organization, initiated California Senate Bill 458, written by Sen. Martha Escutia.

SB 458 would end mandatory binding arbitration clauses in contracts between employers and HMOs, and would give consumers a choice of court or arbitration under California’s 1999 right-to-sue law….

Kaiser Permanente – which leads the effort to kill SB 458 – hotly disputes Court’s characterization of the issue as “populist discontent.”

“I challenge that – this is all about him coming after arbitration,” says J. Michael Hawkins, a lawyer who is Kaiser’s lead lobbyist on arbitration and SB 458. He says that special-interest groups – trial lawyers, some trade unions, advocates for the elderly, and the California Nurses Association among them – constitute the core support for the bill.

No Choice

As proponents see it, though, the problem with arbitration is that most consumers don’t have a choice. This, for instance, is the clause that a new enrollee would find under “binding arbitration” in Kaiser Foundation Health Plan’s Combined Evidence of Coverage and Disclosure Form for Basic Plan and the Managed Medicare Health Plan:

“By enrolling in this plan, you are agreeing to have certain disputes decided by neutral binding arbitration. Both health plan and health plan members waive their right to a jury or court trial for these disputes.”…

An analysis of SB 458 by the Senate Judiciary Committee cited several conclusions by the California Research Bureau, a nonpartisan research arm for the governor, legislature, and other state officials. In its December 2000 report, “Arbitration in California Health Care Systems,” the CRB said that:

HMOs choose “friendly” arbitrators. HMOs tend to select arbitrators who have ruled in the HMO’s favor. Arbitrators, who can charge $100 to $400 an hour, have an incentive to rule in the HMO’s favor to get repeat business.

Arbitration costs consumers more than court. A typical arbitration case costs $4,500 to $5,000, usually split between health plan and enrollee.

Arbitrator competence varies. Many arbitrators are former judges and lawyers, but anyone can be one. A 2001 series on arbitration in the San Francisco Chronicle reported instances of arbitrators falling asleep or unable to understand the arguments presented.

Arbitration is private and there is no appeal. Evidence presented in arbitration remains confidential and is not subject to scrutiny by the public or the news media. Unless corruption or fraud can be proven, a decision cannot be appealed.

This last finding by the CRB elicits strong debate. Mark Hiepler, the California lawyer perhaps best know for the $89 million verdict he won for his late sister in the highly publicized case of Nelene Fox v. Health Net*, believes that plans are most concerned about losing the confidentiality that arbitration proceedings confer if SB 458 becomes law.

“They refuse to shine the bright lights that a jury trial would bring into the dark corners of their companies’ practices,” says Hiepler. “Remember, the plaintiff has the burden of proof, and in AAA [American Arbitration Association] arbitration, you only get one deposition and no discovery – so the insurance company has effectively hidden the whole rationale or lack of it for their decision.

“That’s misleading,” asserts Hawkins, who points out that in medical and personal-injury cases, the defendant is required by law to allow full discovery.

“I bristle at the suggestion that the arbitration process is secret,” says Hawkins. “It’s not a secret process – it’s a private process, and the parties can go public with information from that process or with independent information that they have.”

Arbitration or court settlements, he notes, must be reported to the California Department of Managed Health Care, and arbitration or court settlements of $30,000 or more must be reported to the state’s medical licensing board.

But health plans routinely include confidentiality provisions in settlement documents expressly precluding enrollees or subscribers from discussing the facts publicly. That practice not only prevents the Department of Managed Health Care from fulfilling its regulatory responsibilities, but may also hide quality-of-care violations from public view….

Lots to lose

Opponents of SB 458 include the California Chamber of Commerce, the Civil Justice Association of California, and the Los Angeles County Federation of Labor. The California Medical Association, Health Net*, and the California Association of Health Plans (CAHP) also have joined Kaiser Permanente* to kill the bill.

It’s no coincidence that Kaiser is out front against SB 458. Because Kaiser Foundation Health Plans, Permanente Medical Groups and Kaiser hospitals and clinics are integrated, Kaiser has much to lose if binding arbitration vs. law court becomes a choice that enrollees can make after a dispute arises.

Hawkins says Kaiser’s liability risk would increase dramatically under SB 458, which forbids arbitration in cases filed under California’s right-to-sue law. For one, he says, medical malpractice suits against it – which have been subject to arbitration since the 1970s – would probably be filed to include a cause for action under the state’s HMO liability law, thus turning them into “managed care” cases that sidestep arbitration. Second, he says, the state’s $250,00 cap on pain and suffering does not apply under California’s HMO liability law, which has not been tested yet….

California case law hasn’t offered opponents of mandatory arbitration a clear line of sight. In Madden v. Kaiser, the California Supreme Court decided that a predispute mandatory arbitration clause is not a contract of adhesion (which says “If you want my services, you agree to arbitrationand is illegal), as long as the employer and the health plan that negotiated the deal have comparable bargaining power, information, and ability, and as long as the employer offers other plans that don’t include the clause.

However, Kmiec adds, other cases since Madden have found mandatory arbitration provisions to be contracts of adhesion.

“Keep in mind that Madden was decided in 1976, before any concern about managed care organizations and their pervasiveness,” says Kmiec. “The court’s decision might come out differently today.”…

* For more on an individual that was involved with both the Kaiser and Health Net operations, see Dee Jay Mailer at Dirty Money, Dirty Politics & Bishop Estate-Part IV. 

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August, 1997

California Supreme Court invalidates Kaiser arbitration award for fraud

From Appellate Decisions Noted

The California Supreme Court, usually a hospitable forum for those seeking enforcement of arbitration clauses, has explained when revocation and waiver may justify denying an enforcement petition. It ruled that evidence of knowing failure to live up to the promises of an arbitration clause, and dilatory conduct during the arbitration process raised a factual issue as to both grounds.

When he enrolled in a Kaiser health plan, Wilfredo Engalla signed an application form acknowledging that claims against Kaiser “must be submitted to binding arbitration instead of a court trial.” Kaiser’s materials about its arbitration program promised that claims would be heard within several months’ time, and that members would find the process a “fair approach to protecting their rights.”

Engalla and his immediate family demanded arbitration of a claim from belated diagnosis of Engalla’s cancer. Even though Engalla and his family told Kaiser that his condition was terminal, the arbitrator-selection process lasted five months.

A statistical study showed that delays occur in 99 percent of all Kaiser arbitrations. The average time to appointment of a neutral arbitrator was 674 days. The average time to get to a hearing was 863 days.

Engalla died the day after the arbitrator was selected. Before his death, both Engalla and his wife had separate malpractice claims worth up to $250,000 each in noneconomic damages. Upon his death, those claims merged into a single claim limited to a total of $250,000 in noneconomic damages….

Engalla’s survivors abandoned the arbitration process and filed a lawsuit in Superior Court, which granted Kaiser’s petition to compel arbitration. The Supreme Court ruled that the Superior Court should have resolved conflicting factual evidence as to fraud and waiver.

When measured against its statements about the process, Kaiser’s conduct during the proceedings raised an inference that it had deliberately misled the Engallas. Such fraud would establish a ground for revocation of the arbitration agreement. If the factfinder believed that Kaiser was responsible for a substantial, unreasonable delay, that would also support a finding of waiver.

Engalla v. Permanente Medical Group, Inc., 64 Cal. Rptr. 2d 843 (1997)

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July 4, 1997

Court gives HMOs a healthy
dose of reality

San Francisco Business Times


California’s Supreme Court injected some fairness and justice into one of the darkest corners of the health-care industry this week. Like most shots, this may hurt a bit, but it’s for the industry’s own long-term good.

At issue was the now-frequent requirement by HMOs that members arbitrate, rather than litigate, even life-and-death disputes with their insurer. Companies outside the health-care industry and tort reformers are also enthusiastically grabbing onto arbitration as a means to curb the tide of lawsuits.

But a basic question of fairness has dogged arbitration from the start: Is it anything more than a means for the powerful to dodge the consequences of their actions?

In ruling that a sham arbitration operated by Kaiser Permanente is so flawed and deceitful that it might constitute fraud, the justices have given companies a powerful reason to toughen their arbitration procedures: self interest.

The court delivered a stinging rebuke to Kaiser, following a lower court who had called the health-care giant’s conduct “morally reprehensible.”

Indeed, the case casts Kaiser in a lurid light. It concerns Wilfred Engalla, a Hayward accountant whose persistent cough was allegedly misdiagnosed as colds and allergies by Kaiser doctors for several years. By the time lung cancer was spotted, it was terminal.

As required by their insurance, he and the family took malpractice claims to Kaiser’s arbitration system.

Despite a promise to appoint a neutral arbitrator within 60 days, Kaiser failed to do so for nearly five months, until the day before Engala’s death. Then it slashed the claim in half on the grounds that Engalla himself no longer could collect.

The family sued, arguing that Kaiser’s conduct and failure to honor the terms of its own arbitration procedure released them from the requirement to arbitrate. Two lower courts couldn’t agree on the issue.

In sending the case back to Alameda Superior Court to decide if Kaiser acted in fraud or bad faith, which would release the Engallas from the arbitration requirement, the court wisely walked a fine line.

It could have thrown out Kaiser’s arbitration procedure entirely, casting doubt over the survival of a procedure that elsewhere is capable of offering fast, fair resolution of disputes.

Instead, the court left arbitration intact by gave its adherents a stern warning to put some teeth in their arbitration policies:

See that your procedure is truly fair and impartial, the justices said, or we’ll see you in court.

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Letter to Insurance Commissioner J.P. Schmidt in response to 2004 Kaiser premium increase:

March 17, 2004

Mr. J.P. Schmidt
Insurance Commissioner
State of Hawaii, Insurance Division
P.O. Box 3614
Honolulu, Hawaii 96811

Dear Mr. Schmidt:

Although Kaiser’s requested 14.5% rate hike was denied, according to newspaper reports they will be getting between an 11.5% and 11.7% increase. Kristen Sawada of Pacific Business News reports: “After investments and other gains, the state’s largest HMO posted $10.8 million in net income – or 1.6 percent of revenue in 2003 – reversing a $2.8 million net loss in 2002.”

In an age when more and more Americans are unable to afford health insurance at all, it is abhorrent that Kaiser Hawaii should be granted a 20%+ increase in two years!…

As an attorney you are fully aware that just because Kaiser Permanente wears its “non-profit” status like a badge of honor, by no means does this mean no one is profiting. Not even close. Their most egregious and underhanded ploy is to hide behind their contracts with the FOR PROFIT corporations, also Kaiser entities, which employ their physicians and run their clinics.

In Hawaii this entity is known as the Hawaii Permanente Medical Group, and its shareholders are profiting all over the place….

Even more disturbing is how Kaiser has been spending premium dollars to defeat consumer protection laws in California. In just one example, Kaiser spent $40,000 this past year to defeat the Voluntary Health Plan Arbitration Act of 2004, which would have given consumers a choice about how to resolve disputes with HMOs. Binding arbitration clauses were created with the specific purpose of benefitting the HMOs to the detriment of the patient. Now Kaiser has made sure it will stay that way, and with OUR MONEY….

So not only is Kaiser committing the unconscionable act of using our premium dollars to fight against patient rights, but the State of Hawaii Division of Insurance will be awarding them 11.5% or more to do it with. There is something very wrong with this picture!

My question for you is when will it end? Thousands of people in Hawaii are already uninsured because they are employed part-time or are self-employed. Children are going without coverage because their parents make too much money to qualify for Quest, but they don’t come even close to being able to afford the outrageous premiums for family coverage offered through their employer group plans. Small businesses are struggling to pay insurance costs that are rising annually at over three times the rate of inflation.

Hawaii’s supposedly excellent insurance laws have backfired for many, including my family and me, and every time you approve a new rate hike you put another nail in our coffins.


Cristy Wolf
Kaiser Victim and Concerned Citizen
Administrator –

– Read the complete letter at

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– For another interesting case, where the lawyers representing Hawaii Permanente Medical Group, Inc. are Clyde Umebayashi and Muriel Taira (of Kessner Duca Umebayashi Bain & Matsunaga), see RICHARD J. KORSAK vs. HAWAII PERMANENTE MEDICAL GROUP, Case No. AB 96-050, in the Supreme Court of the State of Hawaii.

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August 19, 2004

State Insurance Chief Orders Inquiry of
Warranty Company

By John Accola, Rocky Mountain News

Colorado’s insurance commissioner has ordered an investigation of one of the nation’s largest providers of home warranties following allegations of a sham claims process.

Public Citizen, a consumer advocacy group founded by Ralph Nader, charges that a group of companies operated by Home Buyers Warranty of Aurora has improperly shielded home builders from liability for construction defects through a biased arbitration system.

On Tuesday, at the Insurance Regulatory Examiners Society’s annual conference in Denver, Public Citizen said its investigation of Home Buyers revealed “suspicious ties” between a Dallas-based arbitration service run by a disbarred attorney.

“I can tell you we are taking (the allegations) seriously,” Insurance Commissioner Doug Dean said Wednesday.

Dean said insurance commissioners in Hawaii, Virginia and Nevada – all states where Home Buyers has domiciled companies – may be asked to join the Colorado Division of Insurance probe….

Home Buyers Warranty* – doing business under various sister company names that include National Home Insurance Co., Home Buyers Resale Warranty Corp. and 2-10 HBW – is headquartered at 2675 S. Abilene St., [Aurora, Colorado 80014] …

A business directory lists Emory “Em” Fluhr as president and states that the privately held company was bought two years ago by the investment firm of Brera Capital Partners.

Although the company has written tens of thousands of home warranty policies throughout the nation, Public Citizen attorney Jackson Williams said the policies provide minimal protection for homeowners. Home Buyers’ rate of claim payouts over the premium it takes in is well under 40 percent, he said. In comparison, auto insurers typically reserve 90 percent of their premiums for claims.

“If the rate of loss payouts is less than 60 percent, that’s a rotten deal for consumers,” Williams said.

Most troubling, Williams said, is Home Buyers’ requirement for home-owners with construction defect claims to privately arbitrate their cases using Construction Arbitration Services. The Texas firm, co-owned by former attorney Marshall Lippman, was “apparently formed with the specific purpose of catering to the needs of home builders and their insurers,” Williams said.

“It is our suspicion that because of its mandatory arbitration system, HBW is able to consistently deny or underpay valid claims,” Williams wrote in a July 12 letter to the state’s insurance commissioner.

A check with the Denver-Boulder Better Business Bureau showed Home Buyers has an “unsatisfactory record … due to unanswered complaints.” The BBB’s Web site lists 198 complaints brought against the company in 36 months, half of them in the past year. Only four have been resolved, according to the site.

Denver attorney Scott Sullan, who represents homeowners in disputes with home builders, cites his own “horrible” experiences with Home Buyers’ claims process.

Major builders such as US Homes use th low-priced policies, which usually cost under $400, to market their homes, he said.

“You have a warranty that is hardly worth the paper it’s printed on,” said Sullan, noting the “sweetheart” relationship Home Buyers has with Construction Arbitration.

Sullan welcomed a Colorado investigation but with a degree of skepticism.

“(Public Citizen) is right on the money,” he said.

“I’d be fascinated to learn whether an aggressive investigation will be undertaken. Most of these things are swept under the rug.

Copyright 2004, Rocky Mountain News. All Rights Reserved.

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* From State of Hawaii Dept. of Commerce & Consumer Affairs, 9/15/04:


General Information


Record Type:                   Master Name for a Domestic Profit Corporation

File Number:                    105803 D1

Status:                            Active

Incorporation Date:         09/11/1996

Mailing Address:              2675 S ABILENE STREET, AURORA Colorado 80014

Consent Name:                 INSURANCE DIVISION

Agent Info

Agent Name:                    BECHER & CARLSON RISK MANAGEMENT, INC.

Agent Address:               STE 2788 PACIFIC TOWER
HONOLULU, Hawaii 96813

Officer Information

Name                                                            Office                 Date

FLUHR, W E (EM)                                        C/D                       07/01/2003

SVOBODA, JOHN F                                      P/D                        07/01/2003

JONG, WANDA L.                               V                           07/01/2003

SHIMOMOTO, PAUL B                       S/D                       07/01/2003

FISHER, WENDY S                                       AS                         07/01/2003

CHAFFEE, STEPHEN P                                  T                           07/01/2003

ZUBRETSKY, JOSEPH M                               D                           07/01/2003

SHORT, ALISON M                                      D                           07/01/2003

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More on Marshall E. Lippman…

January 22, 2004

New Jersey Buyers of ‘Dream Homes’
Relate Their Nightmares

By Richard Cowen, The Record, Hackensack,
N.J. Knight Ridder/Tribune Business News

For some homeowners, New Jersey’s housing boom has been a bust – and some of them went to Trenton on Wednesday with tales of new homes filled with cracked walls, flooding basements, and broken dreams.

The citizens who testified before the State Commission of Investigations said they had been burned not once, but twice – first by greedy builders who did shoddy work and refused to make repairs, and then by the state’s own clumsy bureaucracy, which failed to come to their rescue.

By the end of the day, SCI Chairman Francis E. Schiller was shaking his head in disbelief.

“It is unconscionable that in this, the 21st century – an era in which the mere flick of a switch brings us crystal-clear, close-up images of Mars – that hardworking, law-abiding citizens here at home are victimized by a system that often cannot decipher and implement the simplest features of a warranty,” Schiller said.

“Something must be done, and through this process, by publicly exposing and examining the extensive flaws of that system, we have taken an important first step.”

The warranty on newly constructed homes is one of many documents a buyer picks up at the closing – and is so thick with legal terminology that many people don’t know where they stand until something goes wrong with the house.

And as the SCI investigation found, the warranty system is both confusing to homeowners and fraught with abuse by builders.

“A nightmare” is the way Graham Fill of Butler described his life since January 2001, when he bought a new house in the Hemlock Estates development. Shortly after moving in, Fill noticed water running down the walls of his basement.

Fill figured his warranty was strong enough to force the builder, Majestic Homes of Boonton, to fix the problem. But despite the warranty, the builder refused, Fill said.

Fil had hired his own engineer, who determined that a 30-foot patch of brick facade would have to be removed to install flashing to protect the inner walls. When the builder refused to do the work, Fill had two choices: sue the builder in state Superior Court, or submit to binding arbitration, a system run by the state Department of Community Affairs.

He chose arbitration.

“I thought it would be quicker and cheaper,” Fill said. Three years later, the repair hasn’t been made, Fill testified before the SCI on Wednesday.

Fill said he made a videotape of the damage and submitted other documents to the arbitrator, Steven Rapp, appointed by Construction Arbitration Services Inc. of Dallas, Texas. Fill told the SCI he got the immediate impression that Rapp wasn’t impartial. He said Rapp didn’t think the submitted evidence was enough to warrant replacing the brick facade.

Fill then hired as attorney and threatened to sue. It was only after Rapp agreed to review his own arbitration decision that he made a startling admission, Fill testified.

“He came by [the house] and said that he had a business relationship with the builder,” Fill told the SCI. “He said he and the builder had done some land acquisition.”

Neither Rapp nor anyone from Majestic Homes could be reached for comment Wednesday. But a lawyer for Construction Arbitration Services, Marshall Lippman, said Rapp should have disclosed that information to the company, which would have recused him from the case.

“That was information that should have been disclosed before he took the case,” Lippman said.

Fill said he lost all faith in the arbitration process at that point.

“I just about exploded,” he said. After waiting three years and spending thousands of dollars on legal and expert fees, Fill said, he appealed the initial arbitration ruling and won. Majestic Homes is supposed to replace the facade when the weather warms up, he said.

The SCI plans to hold more hearings in coming months. Homeowners who have had problems with their warranties can contact the SCI at (609) 202-6767 or online at

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In the Matter of:


Bar Docket No. 240-01


            Respondent is a member of the District of Columbia Bar, having been admitted by motion on July 9, 1993. Respondent was also admitted to practice in New York. On July 17, 1997, the Appellate Division of the First Department of the New York Supreme Court disbarred Respondent. That discipline was based on a determination that Respondent had committed misconduct in five matters, including, in two matters, intentional misappropriation of client funds. Bar Counsel argues, and we agree, that the identical reciprocal discipline of disbarment should be imposed here….

For more on Marshall E. Lippman, GO TO > > > Paradise Paved

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Date: 06-20-04

Dear Honorable Secretary Norm Mineta and all Honorable Senators and Congresspersons,

My name is Eric Shine and I’m an Officer in the U.S. Merchant Marine and graduate of the United States Merchant Marine Academy at Kings Point. I am contacting each of you individually, and also all of you collectively herein and many yet again, due to your own respective positions as Secretary of Transportation, or respective positions on either Senate Commerce, Judiciary, Ethics and Governmental Reform Committees or House Transportation Committee. This continued contact relates to serious concerns for Federal Maritime Officers and corruptions within the United States Merchant Marine.

The matters I request to present as a Federal Officer affect and bear directly upon matters of National Security and Civil Defense that have been blocked from being heard for several years now by various and concerted individuals and overwhelming directed and collective forces. Many of these forces or individuals rest within positions of authority in both Federal Agencies and in all three branches of the Federal Government, within public corporations, and even within our own representative Federal Employees Labor Union.

These individuals are stealing from and misappropriating Federal and State Transportation Programs and Funds of which I again complain of and about, herein and hereby, and who work in unison to cover up the thefts, dereliction of duty, misconduct, abuses of authority, violation of fiduciary responsibilities and positions of trust….

… Continued at The Torch of Eric Shine!

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Panacea to an Overburdened Court System or an Unconstitutional Fraud on the American Businessman?

On the Matter of Wand Electric, Inc. V. Clinton County Highway Department

The American Arbitration Association has been touted by many as a cure for the justice system by relieving the courts of some of its burden. Indeed, the courts, in their zeal to relieve the growing case load, have given arbitrators near godlike powers in passing judgment. For example, an arbitrator need not give any reason for his decision and he does not have to follow the law in arriving at a verdict.

Their decisions are not generally appealable unless a very narrow criteria is met, such as evidence of fraud, new issues have occurred, proper procedures have not been followed, or they have made irrational decisions against public policy.

Supposed benefits include less cost, faster processing, and impartiality. The truth is, in some instances, just the opposite. The fees of the AAA in the Wand Electric case mentioned above, exceeded $30,000 between the parties and took eleven days stretched out over six months. It took the AAA nearly one year to the day to appoint a panel of three arbitrators and set an arbitration date. It took another year to render a verdict.

Meanwhile, the contractor is without work during this time because his money is being held hostage by the owner and his surety has dropped his bonding until settlement of the case. Finally, because of apparent personal bias and prejudice (an arbitrator that is an engineer is reluctant to find against a fellow professional just as doctors protect doctors, lawyers protect lawyers, etc.), political maneuvering and perhaps complete ignorance of the law and ethics, arbitrators may do irreparable harm to an innocent party.

As it stands now, in most states, arbitration is mandated by local contract provisions. The courts have said that this is a VOLUNTARY process. The states by themselves do not mandate arbitration leaving it instead to the localities or individual owner whether or not to include and arbitration provision. This, then, in the courts infinite wisdom, makes it a VOLUNTARY inclusion. It is voluntary because one does not have to sign the contract. I fail to see what is voluntary about this whatsoever. If you object to the arbitration provision and refuse to sign the contract with said provision in it, you lose the job as the next low bidder will gladly accept. What this means to the aggrieved part when an unjust verdict has been rendered is that on appeal the appellate court is simply going to say, “It was a VOLUNTARY arbitration, the arbitrators can do as they please, they do not have to follow the contract and they do not have to tell you why. You lose. (NYS Third Department decision dated December 31, 1997)

In a jury trial, you’re being heard by your peers, where it is much more unlikely that 12 jurors will be biased and prejudiced. Secondly, if an unjust verdict is rendered, the aggrieved party has the benefit of an appeals process that supposedly will follow contract law and give reason as to why the contract was breached, not so with arbitration.

At the very least, a choice between arbitration and a jury trial should be mandated, not arbitration by itself as is mandated in most construction contracts today. Arbitrators should be compelled to give reasons for their justification, and there should be an appeals process.

One may argue that is exactly why arbitration was implemented, to eliminate the cost and lengthy trial process with its appeals. As witnessed by the Wand Electric arbitration, this was not the case.

The unfortunate result is that in many cases, arbitrators have too much power and too little accountability for their decision.

I would hazard to say this is unconstitutional. Whatever happened to fairness, justice, and due process? How is it constitutional when arbitrators do not have to give reasons for their decisions? How is it constitutional that arbitrators do not have to follow the contract that was signed in good faith and provides for contractor’s rights?

America On Line’s legal forum on the American Arbitration Association contains numerous complaints from individuals who have had less than satisfactory results as a result of an arbitration hearing. The common thread is that arbitrators seem to take a middle ground in determining awards whereby neither part will be severely hurt.

This is all good and fine in some cases of small merit, however, when one party loses his entire source of income and a business of nearly twenty years good standing, a platonic middle-ground award just doesn’t cut it, not when the evidence clearly shows otherwise.

Not when an arbitrator states during a hearing that, “Aren’t you supposed to have the money to withstand a two year long hearing?” This statement was made after the contractor had lost his bonding capacity and hence his business and had no income for two years.

Not when the arbitrator(s) had to deliberately ignore so many breaches of contract by the other party that it rendered the contract meaningless.

Not when the other party is a government agency and therefore has unlimited staying power and money to burn.

Ultimately, what this means, is that a contract is not worth the paper upon which it is printed. In arbitration, the contract is unenforceable and may be completely repudiated without justification and the courts will condone this.

Large contractors rarely face this problem because they have the money, the staying power, and the backing of a quality surety that the smaller contractors lack. Government entities shy away from suing these big boys for this very reason, they prefer to pick on the little guys that they can intimidate.

Little is being done to address this grievous situation. There is no sex, abuse, violence or other politically correct issue involved. The public is apathetic because it doesn’t concern them. The few contractor’s organizations such as the American Subcontractors Association, the Associated Builders and Contractors, and the Associated General Contractors don’t care. They’re more concerned with getting the contractor’s dues so they can go to the next state and national convention parties with their wives, girlfriends, and cronies free of charge.

Letters to each of these organizations asking for help were unanswered. The state legislature, forget about it. Of over one hundred assemblymen and state senators that were contacted, four replied. One referred it to the local state senator who promptly filed it in his circular file. Two more expressed interest and said they would follow through and never did. And the last actually obtained a legal opinion, asked what he could do to help and never followed through.

The last resort is media attention and a lawsuit, hence this Internet website for the former and stay tuned for the latter….

For more, GO TO >>>

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July 21, 2004

Three Big Banks Agree to Top-Level
Monitoring of Arbitration Cases

By Justin Kelly,

In response to fines leveled by the National Association of Securities Dealers (NASD) for failures to comply with arbitration proceeding discovery orders, financial industry giants Citigroup, Merrill Lynch and Morgan Stanley have agreed to senior management-level review of sanctions issued by arbitration panels for discovery violations.

In settlement agreements, each company also agreed to notify legal counsel handling arbitration cases of their intent to fully comply with discovery orders issued by arbitration panels in customer and securities cases.

NASD leveled fines of $250,000 against the three companies for failing to comply in a number of cases over the past two years. Citigroup was fined for violations in six cases while Merrill Lynch and Morgan Stanley were each fined for violations in seven cases.

Under Rule 10321 of the NASD Code of Arbitration Procedure, parties must cooperate in the exchange of discovery information and follow the timelines established for responding to document requests.

Robert Glauber, NASD Chairman and CEO said in a statement that “[w]e cannot deliver on this commitment if firms fail to produce all required documents in a timely manner to opposing parties. We will not tolerate any failure by NASD-regulated firms to cooperate fully in the arbitration process and we will bring enforcement actions as necessary to assure full compliance with our arbitration code.”…

Under the settlement agreements, each firm is required to begin implementing procedures for high-level management review of sanctions issued for discovery abuse….

Firms also will establish written procedures for review by senior legal staff of any arbitration panel order to compel or produce documents. Any written procedure must require that appropriate steps are taken to comply with discovery orders, the settlements say….

NASD will investigate whether the firms are in compliance with the above requirements in six months and again in a year, the settlements say.

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A Catbird Note: You’ll find more information regarding arbitration abuse at the following sites:

The Foundation for Taxpayer & Consumer Rights

Find Justice: Mehri & Skalet, PLLC

The Kaiser Papers

Rescue Health Care Day

Rip Off Report

Texans for Builder Reform



And, if you have silently suffered at the talons of an abusive arbitrator, you are welcome to come out of your cage and sing your song here:


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For some more “birds of a feather” that you’ll also find building nests in this tree…

ACT 221























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The Catbird Seat

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Latest update March 11, 2005, by The Catbird