Winter, 2000
CLAIMS LAW UPDATE
UM/UIM ARBITRATION
[Ref: Law of Automobile Insurance: Liability and UM, Para. 748]
You are an adjuster handling an uninsured motorist claim. Because you have been unable to reach a settlement with the insured, the dispute is arbitrated and the insured is awarded $75,000 in damages. The insurance policy states that any award up to the statutory minimum for bodily injury liability coverage is binding upon the insured and insurer. The policy provides that only where the award is over the statutory minimum may either party request a trial de novo (to litigate the entire dispute, as if the arbitration had not occurred). The financial responsibility law of this state requires minimum liability limits of $15,000 per person and $30,000 per accident. If the insurer demands the right to a trial, will the dispute be subject to resolution through the courts or will the insurer be forced to accept the arbitration award, despite the policy language?
As is so often the case, the resolution of this dilemma will depend on the jurisdiction. Both the Uninsured (UM) and Underinsured (UIM) Motorists coverage contain an arbitration clause. The standard ISO clause (UM and UIM) states:
While the majority of jurisdictions find at least part of the arbitration clause unenforceable, they do so for a variety of reasons. Some courts consider public policy, some distinguish between UM and UIM coverage, and some look to either insurance or arbitration statutes for support. Note also, the fact that the de novo part of the clause is found unenforceable does not always mean that the UM or UIM claim cannot be brought to trial. This article will address the reasons for finding that the de novo clause is unenforceable, the effect of it being declared unenforceable, and the minority position which holds that the clause is valid.
UNENFORCEABLE – NO RIGHT TO TRIAL DE NOVO
The majority of jurisdictions which have addressed this issue have invalidated only the trial de novo provision of the UM/UIM arbitration clause. The balance of the arbitration clause remains valid and enforceable, with both the insured and the insurer bound by the arbitrators’ award regardless of the amount of that award.
Public policy has often been cited as the basis for this determination. Arbitration has become favored as a means of quickly and efficiently resolving disputes. It avoids the delays and expense of litigation, and relieves already overburdened court systems. An insurance policy provision which circumvents these goals, by allowing trial de novo of high awards, can be considered contrary to public policy and therefore invalid. Because public policy favors arbitration of disputes, the balance of the policy provision stands as valid in these jurisdictions.
The Supreme Court of Colorado addressed the trial de novo clause and public policy in Huizar v. Allstate Insurance Company, 952 P2d 342 (1998). This case involved an uninsured motorist claim and a policy provision allowing either party to request arbitration, but allowing for trial de novo of awards in excess of the minimum required by the financial responsibility law. An amount which was higher than the minimum required by the financial responsibility law was awarded to the insured in arbitration and Allstate filed a motion for trial de novo. The trial court found that the de novo clause was “patently unfair” to the insured because it allowed Allstate to litigate the issues of liability and damages twice, once during the arbitration and again at trial if it was unsatisfied with the arbitrator’s decision. On appeal by the insurer, a Colorado court of appeals found the clause to be valid because UM arbitration was not required by law and, thus, the clause did not violate public policy. The supreme court disagreed.
The Colorado Supreme Court found that the clause was contrary to public policy. Although, the court reasoned, the policy appeared to put the insured and insurer on an equal footing by allowing either the right to trial de novo of a high award, it may unfairly favor the insurer. The clause allowed the insurer to avoid a high award but bound the insured to a low award. Noting court decisions in other jurisdictions, the supreme court agreed that it was unlikely the insured would wish to appeal a high award due to the additional expense and the risk of failure in a subsequent trial. The insurer would not likely wish to appeal a low award, while an insured would. Allowing for trial de novo would also result in increased cost and delay which “are inconsistent with the public policy of providing an efficient procedure for court review of arbitration” as provided under the Uniform Arbitration Act adopted in Colorado. As a result, the de novo part of the arbitration clause was held to be unenforceable and neither the insured nor the insurer could demand a new trial after arbitration had been completed.
A state statute governing arbitration was cited as the basis for determining the invalidity of the de novo clause in Washington. In Peterson v. United Services Automobile Association, 955 P2d 852 (1998), the appellate court found that in a UIM claim, the de novo clause of the policy could not override Washington’s arbitration statute. The court noted “arbitration is a statutorily recognized special proceeding with the rights of the parties being controlled by the statute, RCW 7.04.” Arbitration may be agreed upon in an insurance contract but once there is an agreement to arbitrate, the arbitration and review thereof are governed by the statute. Additionally, the court said, the choice to submit the dispute to arbitration constituted a waiver of the right to a jury trial. The court concluded that the de novo clause was contrary to public policy and invalid.
ENTIRE ARBITRATION CLAUSE UNENFORCEABLE
The Ohio Supreme Court considered the validity of the trial de novo clause of the uninsured motorist coverage and determined that the entire arbitration clause is unenforceable. The court was asked to consider this policy language in a consolidated action (Schaefer v. Allstate Insurance Company, Nationwide Mutual Insurance Company v. Fallon-Murphy, 590 NE2d 1242 (1992)). In Schaefer the insureds submitted an uninsured motorist claim to arbitration and received an award which fell below the minimum amount of coverage mandated by statute. In Nationwide the insured received an arbitration award well in excess of the minimum limits required by statute. Thus, the court was asked to consider the effect of the de novo clause on both an insured’s and an insurer’s right to trial.
The court reasoned that for a dispute resolution to qualify as arbitration it must result in a decision which is “final, binding and without any qualification or condition as to the finality of an award whether or not agreed to by the parties.” The arbitrators’ decision is only subject to review based on the grounds enumerated in the arbitration statute (which does not provide for an appeal based solely on the award exceeding the statutory minimum coverage required under the financial responsibility law). Where the agreement to arbitrate makes an award subject to appeal, on grounds other than those enumerated in the arbitration statute, the proceeding cannot be considered an arbitration. Therefore, the policy language which provides that only an award below a designated amount would be binding could not be viewed as meeting the definition of arbitration as described in the statute. Such policy language, the court said, frustrates the purpose of arbitration and the public policy behind arbitration of disputes. Since the provision in the policy did not provide for true arbitration, it was held that the entire arbitration clause was unenforceable. The result is that both the insured and the insurer are entitled to their day in court.
ENFORCEABLE – THE MINORITY VIEW
A handful of jurisdictions (Arizona, Florida, Illinois, New Jersey, New Mexico, New York, and Oregon) have upheld the validity of the trial de novo provision in the automobile policy. Arizona joined the minority in Liberty Mutual Fire Insurance Co. v. Mandile, 963 P2d 295 (1997). While acknowledging that it was taking a minority position, the Arizona Court of Appeals found the de novo provision did not violate public policy and found the provision to be valid. The court reasoned that the arbitration provision is a means of resolving disputes in both UM and UIM claims in an expeditious and cost effective manner. The Arizona legislature provided for statewide compulsory arbitration of all civil claims with a value of $50,000 or less. While UM and UIM arbitration are contractual in nature and not compulsory, the legislature allowed for trial de novo review as part of the arbitration system, as evidenced by the monetary limit on compulsory arbitration. Therefore, the policy language allowing trial de novo based on the amount of the damage award did not subvert the benefit of arbitration and was not contrary to public policy.
The court also addressed the concern voiced by many courts, and noted in the preceding discussion, that the de novo clause unfairly favors the insurer. The argument was found to lack merit because this court felt that de novo review is “probably as important to plaintiffs as to defendants.” There would be plaintiffs who believe their case was worth far more than the arbitrators awarded, even if the award exceeded the minimum coverage required by statute. There would also be instances where an insurer would be bound to pay a low award when it believed there should have been no award. Since either party could be bound by a decision adverse to its position, there was nothing unfair about the de novo provision.
A New York court considered the type of arbitration in determining the right to a trial de novo. Where arbitration was entered into pursuant to the American Arbitration Association (AAA) rules, there is no right to a trial de novo. In Allstate Insurance Co. v. Edery, 639 NYS2d 444 (1996), the court held that by proceeding to arbitration under the AAA rules, the insurer waived the insurance contract provision allowing trial de novo. The AAA rules governed the arbitration and not the language of the automobile policy’s arbitration clause. The AAA rules do not allow for a trial de novo where the arbitration award exceeds the minimum amount required by statute and the insurer was bound by the arbitrator’s decision. However, in cases which were submitted to arbitration pursuant to the policy’s arbitration clause, the right to a trial de novo has been upheld.
The courts in New Jersey, as a result of enforcing the de novo provision, have had to consider two related concerns. Both of these concerns are also likely to arise in the other jurisdictions holding the de novo provision to be valid. The first involves the determination of the issues which are subject to litigation when a party invokes the right to a trial de novo. The second, which pertains only to UIM claims, involves that portion of the de novo provision addressing awards below the statutory minimum. On the first issue, in Derfuss v. New Jersey Manufacturers Insurance Co., 666 A2d 599 (1995), the court considered whether both liability and damages are subject to de novo review. In considering the scope of the de novo provision, the court reviewed the intent of the parties as evidenced by the language of the insurance policy. Where the trial de novo language appears in that portion of the clause addressing damages, and does not otherwise stipulate all issues are subject to trial de novo, it has been held that only damages are subject to de novo review. If the intent of the parties was to allow de novo review of the arbitrators’ finding on liability, in addition to damages, the policy language would need to indicate that all issues are subject to judicial review. Therefore, the arbitrators’ finding on liability is binding on the parties. Note that the scope of the de novo provision may vary from case to case, depending on the exact policy language at issue. Where the policy clearly evidences the intent for de novo review of all issues (liability and damages) the policy language will be given validity.
The second issue was addressed in D’Antonio v. State Farm Mutual Automobile Insurance Co., 620 A2d 1060 (1993). The insured, after settling with the underinsured tortfeasor for his $25,000 policy limit, was unable to reach agreement with her insurer as to the value of her underinsured motorist claim. Arbitration was filed and the arbitrators awarded the insured the gross sum of $40,000 in damages. With $25,000 having been paid by the tortfeasor, the insurer’s exposure was $15,000. Unhappy with the arbitration results, the insured filed for trial de novo based on the argument that her total damages exceeded the minimum limit for liability required by the New Jersey financial responsibility law ($15,000), thereby invoking the de novo provision of the UIM arbitration clause. The insurer, however, argued that only $15,000 in damages had been awarded against it and, as such, the statutory minimum had not been exceeded and there was no right to a trial de novo.
The court agreed with the insurer. As with the determination of the scope of a trial de novo, the outcome turned on the court’s determination of the intent of the parties as evidenced by the contract, the insurance policy. The intent of the UIM arbitration clause is to determine the insurer’s liability for the payment of UIM benefits. Any trial would also determine only the insurer’s UIM obligation. The proper measure of “damages” as used in the UIM arbitration clause is, therefore, the damages for which the UIM insurer is liable and not the damages for which the tortfeasor is liable. If the measure of damages were based on the tortfeasor’s liability there would never be a binding UIM arbitration award. The damages would exceed the minimum liability limits required whenever there was a UIM award, and all cases would be subject to trial de novo.
The Illinois Supreme Court held in Reed v. Farmers Insurance Group, 1999 WL 961388 (1999), that the arbitration clause and its de novo provision are valid and enforceable in UM claims. While decisions in other jurisdictions were cited which overturned the policy provisions as being contrary to public policy, the Illinois court distinguished those decisions. The court said that in Illinois, contrary to the other states, the UM arbitration provision was present in the policy because legislation required it. According to the court, public policy of the state is found in its constitution, its statutes, and its judicial decisions. Here, the court acquiesced to the legislature which it felt declared the public policy on this issue.
However, the Illinois Supreme Court distinguished UIM arbitration clauses and let stand a decision which held the de novo clause to be contrary to public policy (Fireman’s Fund Insurance Co. v. Bugailiskis, 662 NE2d 555 (1996)). In Bugailiskis the court described the de novo provision as an “escape hatch” for the insurance company. The court further pointed out that the de novo clause was particularly oppressive in underinsured motorist claims because a damage award under the minimum liability limits required by the financial responsibility law would be covered by the tortfeasor’s insurance policy. Thus, whenever the UIM insurer was required to make any payment as a result of UIM arbitration, the insurer could file for trial de novo. UIM arbitration would be non-binding every time there was an award against the UIM insurer. The Bugailiskis court found that non-binding arbitration frustrated the public policy goals of arbitration by creating the potential for costs and delay whenever an award is questioned. The supreme court in Reed said that Bugailiskis is distinguishable because the legislature does not require the arbitration clause in UIM coverage. Therefore, there is no conflict with public policy as there is with the required UM clause.
CONCLUSION
As one can see, in the majority of jurisdictions the insurer will be bound by the arbitrators’ decision despite the language of the insurance policy. Even under the minority view, which upholds the de novo clause, the insurer may be bound to the arbitrators’ determination of liability, with only the right to a trial de novo on the issue of damages. Consideration must be given, in evaluating a case for potential de novo review after arbitration, to the current status of the law in the applicable jurisdiction and, in some instances, the exact language of the insurance policy at issue.
SELF-PUBLISHED
STATEMENTS DO NOT SATISFY
PUBLICATION ELEMENT OF DEFAMATION
In Sullivan v. Baptist Memorial Hospital, 995 SW2d 569 (1999), the Supreme Court of Tennessee held that a former employee’s self-publication of the reason for her termination did not satisfy the publication element of defamation. Karen Sullivan was a nurse employed by Baptist Memorial and also performed temporary services at St. Francis Hospital. Baptist terminated her for misappropriating its property because Sullivan was taking neonatal IV catheters from Baptist for use at St. Francis. Although Sullivan denied the misappropriation, she was compelled to reveal the reason for her termination to two other hospitals where she sought employment and neither hired her. Sullivan sued Baptist for defamation. The trial court granted summary judgment to Baptist, and Sullivan appealed.
The appellate court reversed, adopting the self-publication doctrine, which is recognized by a minority of states. Under the doctrine, self-publication satisfies the publication element of defamation because a former employee is compelled to publish the defamatory information to prospective employers, and a former employer reasonably could foresee that a terminated employee would be required to com- municate the reason for termination to a third party.
The Supreme Court reversed, reinstating the order of summary judgment for Baptist, and joining a majority of states which have rejected the self- publication doctrine. The court held that the majority view recognizes that the public has an interest in open communication about job-related matters. Employers and employees also have such an interest, regarding both hiring practices and internal grievance procedures. The self-publication doctrine conflicts with Tennessee’s employment-at-will doctrine, in which an employer can terminate an at-will employee for any reason, good or bad, subject to a handful of exceptions. Also, liability for defamation potentially could be visited upon an employer many times over during a former employee’s lifetime. As long as the employee continued to publish the information and be refused employment, every publication would trigger a new statute of limitations. The self-publication doctrine would conflict with Tenn. Code Ann. § 50-1-105, which grants a qualified immunity to employers who are truthful in providing information about an employee’s past or current job performance. The code section contains a presumption of good faith which can be overcome with a showing of fault which must be more than mere negligence.
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