Arbitration is commonly used to resolve disputes that arise between an insurer and insured. Arbitration, along with mediation, is a form of Alternative Dispute Resolution (ADR). When parties disagree about some aspect of their car insurance plan they agree to submit the issues to the judgment of a private third party neutral judge, called an arbitrator. The arbitrator reviews the evidence in a hearing similar to the kind of civil law hearings that take place in courtrooms. The difference with arbitration is that it is much faster, less expensive, and more informal than courtroom litigation.

Because automobile insurance claims are made in great numbers every day, the number of disputes that will arise is also naturally high. Arbitration gives policy holders a way to resolve their disputes without having to clog up the courts with thousands of cases that could be more easily resolved through ADR. For these reasons arbitration clauses are standard in most motor vehicle insurance policies.

Arbitration is not perfect though. Because it is less formal it does not allow the same kind of fact finding that smaller parties need to engage in to pull all of the relevant evidence from the insurance company. Additionally, arbiters can sometimes be biased in the favor of insurance companies. A well known arbiter will hear dozens of cases each year, with only a handful of the same insurance companies again and again. The policy holder on the other hand will probably only see the arbiter once in their entire life. As a result aribtrators feel pressure to make decisions that the insurance company finds fair in order to make sure they continue to get hear cases. If an arbiter appears to be biased, either party can request a new arbiter to take his or her place.