Michael J. Brady
Terry Anastassiou
I.
This article
sets forth a unique and intriguing idea: can an insurer insert a requirement in
its policy that all disputes concerning coverage or bad faith be submitted to binding arbitration, and providing
further that in the event the arbitrator awards punitive damages, they be
capped at no more than three times the amount of the compensatory award?
In the past
thirty years at least ten states have witnessed huge (and often unwarranted)
jury verdicts against insurers for bad faith and punitive damages. Juries have frequently run amok, and many of
these verdicts have been reduced or modified by the trial judge or by an
appellate court. Nonetheless, such cases
involve a huge expenditure of time, legal expense, and delay in achieving a
final result. Many of these expenses,
even if the insurer prevails, are non-reimbursable because of the American rule
that parties bear their own legal fees.
Some of the
same concerns apply to coverage litigation, particularly complex coverage cases
such as environmental, products, advertising injury issues, and the like. These cases can drag out and take years to resolve,
leaving the parties in a state of uncertainty and, frankly, potentially
creating greater exposure for insurers by reason of the delay.
Arbitration
has always had major advantages over litigation with respect to speed of
result, simplicity of pleading and discovery.
Moreover the finality of arbitration means virtual immunity from attack
in further proceedings.
Litigants
will always have to evaluate the central question of whether arbitration
produces better results than litigation.
But even if litigation is thought to produce lower indemnity awards or
more defense verdicts, the cost of producing those results, when combined with
the results themselves, may be greater than the total cost and result of the
arbitration.
There is
significant support for a movement away from litigation in the United States,
because of the abuses of the system.
Tort reform efforts will probably gather steam again with a new
administration in Washington. Courts,
possibly for selfish reasons (less work, overburdened dockets) have become
increasingly sympathetic to arbitration agreements, even when they are somewhat
stacked against the consumer and in favor of the party with the greater
bargaining power. Therefore, the climate
may well be ripe for a bold change in the way coverage and bad faith disputes
are resolved -- providing for binding arbitration of such disputes in the
insurance contract.
This article
goes beyond that: we also suggest that the insurance contract could provide
that the arbitrator is authorized to award compensatory and, if appropriate,
punitive damages. The latter would
probably only be awarded in a bad faith case.
However, our proposal would contractually cap awards of punitive damages
at no more than three times the compensatory award. Such a provision would be very controversial,
but it is a reasonable suggestion whose time has come. Some state supreme court justices have even
suggested as much. [1]
A. What mechanism to utilize?
A
preliminary question is how to implement this concept. We see this concept as
working with respect to both personal lines and commercial policies, and with
respect to first party claims and third-party liability claims against the
insured. Frankly, we would like to see
an insurer implement this concept in all new policies issued to new
insureds. Inserting the binding
arbitration provision in “renewal” policies raises complicated questions of
notice to the insured of a change in the coverage. Nevertheless, that burdensome requirement
could be met with careful draftsmanship.
A problem
associated with implementing the concept in new policies issued to new insureds
has nothing to do with the law. It has a
great deal to do with the business operations of insurers themselves. The sales
or marketing department of an insurance company may well object, contending
that it will make the insurance product less competitive.[2]
The bulk of
this article, however, deals with a more modified approach and one that may
find wider acceptance in the insurance community. We are suggesting that insurers offer the
policyholder a choice: take the standard policy which allows for litigation
against the insurer and resolution of disputes in court; or, for a discounted
price or premium, take the policy that contains the binding arbitration clause. Insurers might be surprised to see how many
homeowners or businesses would opt for the cheaper policy, even though they are
giving up their rights to jury trials and unlimited punitive damages. If that occurs, the insurer will be far ahead
of the game financially for the reasons set forth above.
Finally, we
suggest that every insurance contract that contains such a binding arbitration
clause should also contain a provision that it is the intent of the insurer and
the insured that the binding arbitration provision is crafted under, and
pursuant to, the Federal Arbitration Act (FAA) and is to be interpreted
according to that Act. This is important
in light of the fact that there is a huge bias in the federal courts in favor
of the FAA and in favor of enforcing arbitration agreements pursuant to that
Act. This preference for arbitration is
much stronger in the federal courts, under the Act, than comparable state
statutes. This also means that if a
policyholder attempts to avoid binding arbitration, the insurer might well have
a basis to remove the action to federal court, cementing the insurer's right to
compel arbitration and avoid litigation.
II.
Statutes and Pitfalls Related to
Arbitration Provisions In Insurance Contracts
Any
agreement to arbitrate future claims for breach of an insurance contract or the
covenant of good faith and fair dealing will be enforced (or not) according to
the terms of the statutory arbitration schemes enacted by the federal and state
governments.
A. Federal and State Arbitration Statutes
The
legislative embrace of arbitration as a means of resolving disputes, now
codified under the Federal Arbitration Act[3]
and the civil codes of forty-eight states and the District of Columbia,[4]
is now so widespread that it is possible to forget how universally agreements
by contracting parties to submit future disputes to arbitration were once
disfavored. For the first century and a
half of this country’s history, agreements to arbitrate future disputes were
generally held unenforceable because they were considered to “oust the court of
jurisdiction,” an unconstitutional deprivation of the right to access to the
courts.[5]
New York
State was the first to enact legislation permitting contracting parties to
agree in advance that future disputes would be resolved through arbitration.[6] The United States Congress then laid the
foundation for the near-universal acceptance of arbitration agreements in the
1920s when it enacted the United States Arbitration Act[7]
(also referred to as the “Federal Arbitration Act” or “FAA”).
The
legislative history of the FAA manifests the recognition by Congress that
parties choose arbitration in order to avoid the delay and expense of
litigation.[8] To that end, the FAA states that agreements
by contracting parties to submit future controversies arising from their
contract to arbitration are “valid, irrevocable, and enforceable, save upon
such grounds as exist at law or in equity for the revocation of the contract.”[9] Under the FAA, an arbitration clause will be
found valid and enforceable unless grounds for revocation appear on the face of
the arbitration clause itself.[10]
Congress’
desire that valid arbitration agreements be given effect also appears on the
face of the FAA’s enforcement provisions:
§4 Failure to arbitrate
under agreement …
A party aggrieved by the alleged failure, neglect, or refusal of
another to arbitrate under a written agreement for arbitration may petition any
United States district court which, save for such agreement, would have
jurisdiction under Title 28 . . . for an order directing that such arbitration
proceed in the manner provided for in such agreement. . . . [U]pon being
satisfied that the making of the agreement for arbitration or the failure to
comply therewith is not in issue, the court shall make an order
directing the parties to proceed to arbitration in accordance with the terms of
the agreement.”[11]
Federal
courts have held that the public policy expressed in the statute is so
important that this provision actually divests the district court of discretion
to decline to compel arbitration under a valid arbitration agreement.[12]
Since
enactment of the FAA, virtually every state[13]
has enacted its own statutory scheme permitting parties to contract for
arbitration of future disputes.[14] The majority of states have adopted versions
of the Uniform Arbitration Act (UAA), the language of which concerning the
validity and enforceability of agreements to arbitrate future disputes is
substantially similar to section 2 of the FAA.[15] Other states, without specifically mimicking
the language appearing in the FAA or UAA, have enacted statutes manifesting
their own legislature’s intent that agreements to arbitrate future disputes be
enforced.[16]
B. Potential Statutory Pitfalls for Insurance
Contract Arbitration Provisions
The
near-universal embrace of arbitration agreements as valid and enforceable has
not universally impacted insurance contracts.
The express terms of arbitration statutes of several states actually
exclude contracts between insurers and their insureds from their application.[17] Other states decline to apply their statutes
approving arbitration agreements to adhesion contracts.[18] The courts of some of these same states have
issued strongly-worded decisions finding that insurance policies are presumed
to be adhesion contracts[19]
which, at a minimum, raises a presumption that arbitration agreements in
insurance policies are unenforceable.
Even the
mandatory nature of an arbitration clause can render it unenforceable. For instance, in one decision the Court of
Appeal of Oregon declined to give effect to an arbitration provision in a fire
insurance policy despite strong statements regarding the state’s public policy
favoring arbitration and enforcement of arbitration provisions.[20] The court ruled that the arbitration
provision in question, even though
“statutorily mandated,”[21]
should not be enforced because the insured “did not have an opportunity to
enter into a valid fire insurance contract that did not include the statutorily mandated arbitration provision . . .”.[22] The court concluded that, because the insured
never had the option to choose not to arbitrate, “he did not voluntarily waive
his right to have the value of his fire loss determined by a jury” and was
therefore entitled to maintain a lawsuit on the issue.[23]
It must be
emphasized that the fact that the statutory scheme of a particular state bars
enforcement of arbitration agreements found in insurance policies or adhesion
contracts does not necessarily mean that an insurance policy arbitration clause
will not be enforced in that jurisdiction.
No prohibition against arbitration of insurance disputes is found in the
FAA. To the contrary, by its own terms
the FAA is intended to apply to contracts including those “evidencing . . .
commerce,”[24]
which the FAA defines in the arbitration context as “commerce among the several
States.”[25] On its face, therefore, the FAA would seem to
preempt state insurance law and therefore be the controlling statutory scheme
concerning arbitration affecting interstate commerce.[26]
Numerous
decisions have held that insurance policies can be found to affect interstate
commerce, even consumer policies issued in the same state as the property being
insured.[27] However, another Federal statute, the
McCarran-Ferguson Act, reserves to the several states “the regulation or
taxation” of “the business of insurance.”[28] The McCarran-Ferguson Act goes on to state:
“No Act of Congress shall be construed to invalidate, impair, or supersede any
law enacted by any State for the purpose of regulating the business of
insurance . . . unless such Act specifically relates to the business of
insurance . . . .”[29]
If a state
has an arbitration statute that is part of a statutory scheme regulating
insurance, the FAA does not supersede the state statute even if the insurance
policy at issue can be characterized as affecting interstate commerce.[30] However, when Congress stated that the
McCarran-Ferguson Act applies to regulation of “the business of insurance” it
meant the Act would apply to underwriting and spreading of risk, that is, to
“the relationship between insurer and insured, the type of policy which could
be issued, its reliability, interpretation, and enforcement . . . .”[31] Numerous decisions have found that ordinary
state arbitration schemes were not intended to regulate insurance, and
therefore the McCarran-Ferguson Act would not bar enforcement of an arbitration
clause in an insurance contract through application of the FAA.[32] In a state whose arbitration enforcement
statute purports to exclude insurance contracts from its scope, the question of
whether the FAA would supersede the statute to make an insurance policy
arbitration clause enforceable would depend upon whether the statute was found
to concern regulation of the “business of insurance.” That answer would vary from state to state.[33]
Regardless
of whether a state’s arbitration enforcement statute permits an insurance
arbitration clause, any insurer’s effort to so contract with an insured as to
future disputes must address specific concerns before the arbitration clause
can have a realistic hope of being enforced.
Those concerns deal with inequality of bargaining positions and
attendant findings of unconscionability.
The proposal set forth below, that of offering an insured the opportunity to add an arbitration
endorsement to a policy in exchange for specific consideration in the form of
reduced premiums, may address the issue of unconscionability. Therefore, it may result in enforcement of
arbitration clauses, at least in those states where insurance contracts are not
automatically excluded from enforcement of such clauses.
It should be
possible for an insurer to offer an insured, at the time an insurance policy is
entered into or renewed, the option of electing to refer all future disputes
arising from the insurance policy to arbitration in exchange for a specific
reduction in premium. For example, in
the context of homeowners insurance, that provides both first-party and
third-party (liability) coverages, such an endorsement might provide as
follows:
ARBITRATION ENDORSEMENT
YOU [i.e., the insured] and THE COMPANY hereby covenant and agree
that, at the election of either YOU or THE COMPANY, any disputes arising from
THE POLICY shall be submitted to binding arbitration. YOU acknowledge that, in exchange for
choosing to enter into this arbitration endorsement, THE COMPANY will apply and
you will receive a discount in your premium [as set forth in the declarations
page].
. . .
For purposes of this arbitration endorsement, “any disputes arising
from THE POLICY” includes, but is not limited to:
1. Any dispute concerning
whether this policy covers a claim YOU make for benefits under THE POLICY;
2. Any dispute concerning
the amount of benefits due on a claim YOU make for benefits under THE POLICY;
3. If THE POLICY includes a
promise to defend and/or indemnify YOU for claims against YOU, any dispute
concerning whether THE COMPANY is obliged to defend or indemnify YOU for a
particular claim against YOU;
4. Any dispute concerning
whether THE COMPANY has breached its duty to act in good faith towards YOU in
handling and/or paying a claim YOU make for benefits under THE POLICY.
The
endorsement should also set forth the manner in which arbitration shall be had;
in particular, the manner in which arbitration may be requested and the manner
in which the arbitrator or arbitrators shall be chosen.
Finally, the
endorsement must include a separate and express acknowledgment by the insured
that the insured has read, and understands, that he or she is waiving the right
to bring suit over an insurance dispute in exchange for a lower premium:
I, _____________________, acknowledge that I understand I am
constitutionally entitled to bring claims regarding this policy in court, and
that, if I sign this agreement, I will not be able to bring a lawsuit
concerning any dispute that may arise which is covered by this arbitration
agreement, unless it involves a question of constitutional or civil
rights. Instead, I agree to submit any
such dispute to arbitration as provided above.[35] I also acknowledge that, in exchange for my
agreeing to submit any dispute to arbitration, THE COMPANY will apply, and I
will receive, a discount in the premium I pay for this POLICY.
The sample
endorsement addresses concerns of adhesion and unconscionability that might
otherwise persuade a court to decline to enforce an arbitration provision by:
1) giving the insured the option of submitting to arbitration
at the time of contracting; 2) giving the insured consideration for
exercising that option and waiving the right to submit a dispute to resolution
in court; and by 3) eliciting a written acknowledgment from the
insured that the insured understands that she is waiving substantive rights in
exchange for real consideration. The
following discussion addresses these features and the way in which they are
intended to operate in greater detail.
B. Operation of Particular Features of the
Endorsement
The first
and most obvious feature of the proposed arbitration endorsement is the fact
that it is optional: before an insured may become bound to submit future
disputes with the insurer to arbitration, the insured must take an affirmative
step manifesting his or her intent to be so bound. Making the endorsement optional mitigates the
“adhesive” character of the insurance contract to which so many courts voice
objection. A contract of adhesion is one
“formed as a product of a gross inequality of bargaining power between
parties.”[36] “‘The essence of an adhesion contract is that
it is offered on a take it or leave it basis to a consumer who has no
realistic bargaining strength and who cannot obtain the desired services or
goods without consenting to the contract terms.’”[37]
In Obstetrics & Gynecologists v. Pepper,[38]
the Nevada Supreme Court declined to reverse a trial court refusal to compel
arbitration pursuant to a clause contained in a medical clinic’s admission
form. In that action, the plaintiff sued the clinic when she suffered a stroke
after obtaining oral contraceptives.[39] The court focused on the fact that the
patient had been required to sign the agreement to submit to arbitration as a
prerequisite to receiving medical treatment.
It noted that the arbitration agreement clearly fell into the category
of a contract where “the weaker party has no choice as to its terms” which is
the “distinctive feature of an adhesion contract.”[40] Since the evidence supported a conclusion
that the arbitration agreement did not elicit an informed consent to
arbitration, the court affirmed the trial court’s declination to compel
arbitration.[41]
The optional
character of the proposed arbitration endorsement might have fared better in
the Nevada Supreme Court because offering arbitration as an option rather than
a mandatory part of contracts vitiates one of the major objections to such
provisions. In Pepper the patient could not receive the service - medical
treatment - without consenting to arbitration of disputes.[42] Under our proposed arbitration endorsement,
however, the insured can obtain the same insurance from the same company
without the endorsement. There is no
fair construction of an optional
endorsement for arbitration of future disputes over insurance coverage by which
it can be characterized as “take it or leave it.”
Another way
of looking at the effect of offering the optional arbitration endorsement is
that such an offer cannot, as a matter of law, be unconscionable. The fact that a particular contract provision
appears in a contract of adhesion does not, in and of itself, render the
provision unenforceable;[43]
otherwise, no consumer contracts would be enforceable in any detail. Accordingly, even when an arbitration
agreement appears in an adhesion contract, the provision only fails if it is
unconscionable - that is, inherently unreasonable or the result of coercion,
duress or fraud.[44] An arbitration endorsement such as the one
proposed should be extremely hard to avoid on the ground that it resulted from
coercion or duress in light of the fact that the insured does not have to
include it in the policy in the first place.[45]
The second
feature of the proposed arbitration endorsement that potentially enhances its
enforceability is the fact that the insured gets something in exchange for
submitting to arbitration. Purported
lack of mutuality in some arbitration agreements does not necessarily render
them void and unenforceable.[46] Recent court decisions concerning arbitration
agreements in the context of employment contracts find that mutual pledges to
be bound by arbitration itself provide adequate consideration to support the
arbitration provision concerned.[47]
Nevertheless,
providing consideration in the form of a premium discount in exchange for the
insured’s election to submit future disputes to arbitration can weigh in favor
of enforcement of the arbitration endorsement.
The United States Supreme Court itself has acknowledged that a clause in
an adhesion contract that was challenged as being unconscionable was
enforceable, in part, because the clause was specifically tied to lower expense
to the consumer.[48] In Carnival
Cruise Lines, Inc. v. Shute,[49]
an injured passenger sued the operators of a cruise ship in her home state of
Washington. The passenger’s ticket included a forum selection clause that
required suit to be brought in Florida, the state where many of the line’s
tours originated and where it had its principal place of business.[50] Even though the cruise ticket was
unquestionably an adhesion contract, and the Court acknowledged that it was
wildly unlikely that the passenger had even been in a position to negotiate
over the forum selection clause, the Court ruled that the clause was
enforceable because it was reasonable.[51]
The Court’s
finding of reasonability was based, in part, on a presumption that the
passenger would enjoy a lower fare as the result of the forum selection clause:
“[I]t stands to reason that passengers who purchase tickets containing a forum
clause like that at issue in this case benefit in the form of reduced fares
reflecting the savings that the cruise line enjoys by limiting the fora in
which it may be sued.”[52] Significantly, the Supreme Court considered
this factor probative even though there was no mention of any evidence in the
record establishing that the passengers did, in fact, enjoy lower fares!
The premium
discount proposed as consideration for an insured’s agreement to submit to
arbitration should offer a reviewing court an even more compelling indicator of
fairness than the lower fare in Shute. The disputed forum selection clause in Shute was mandatory, while the proposed
arbitration endorsement is optional. The
forum selection clause in Shute was
less than obvious to a ticket holder and there was no evidence that the
passengers were aware of the clause, while an insured electing the proposed
arbitration endorsement would necessarily
be aware of the endorsement. Finally,
there was no evidence in Shute that
the passengers actually received real consideration in exchange for the forum
selection clause, while the consideration received by an insured for electing
the proposed arbitration endorsement would be real and immediate. Providing consideration in the form of a
premium discount materially increases the likelihood that a court examining the
endorsement would find the transaction to have been reasonable.
The third
feature of the proposed arbitration endorsement aimed at eliciting enforcement
is the written acknowledgment by the insured.
The written acknowledgment accomplishes at least two goals: first, it
provides the basis for establishing that the insured’s election to arbitrate
was knowing, voluntary and intelligent; and second, it moots any argument that
the arbitration endorsement “ousts” the court of jurisdiction. The fundamental right of access to the courts
is founded both in the first amendment right to petition the government[53]
and in constitutional guarantees of due process,[54]
both assuring that no person will be denied the opportunity to present
allegations to the judiciary concerning violations of fundamental rights. In order to waive a fundamental
constitutional right effectively, the waiver must be knowing, voluntary and
intelligent.[55] In considering whether a waiver of
fundamental rights has occurred, a court must indulge every reasonable
presumption against the waiver of the right.[56]
In addition
to disclosure of the precise rights being waived, the endorsement must include
a detailed disclosure of the scope of the arbitration agreement. The law of different federal and state
jurisdictions varies concerning whether an arbitration clause is to be
interpreted broadly to bring issues within the purview of arbitration[57]
or strictly to limit arbitration only to those matters contemplated by the
express terms of the arbitration provision at issue.[58] This issue is further complicated by the
split in authority regarding whether an arbitration agreement encompasses the
issue of its own scope,[59]
as opposed to authority that the issue of arbitrability is one for the court to
determine before arbitration takes place.[60] Some jurisdictions have held that the issue
of whether an insurance policy
provides benefits claimed by an insured is properly the subject of arbitration
where a valid arbitration clause exists.
For instance, in Wisconsin, coverage issues can be arbitrated if the
contractual terms so provide.[61] In Minnesota, the issue of coverage will be
referred to arbitration if it is even “reasonably debatable” that the scope of
the arbitration clause applies to coverage issues.[62]
However the
relevant jurisdiction interprets the arbitration endorsement, inclusion of
express reference to the issues subject to arbitration - whether benefits are
due, the amount of those benefits, whether a duty to defend or indemnify exists
under a third-party liability provision, or whether any party has breached the
implied covenant of good faith and fair dealing -- materially enhances the
likelihood that the provision will be found to apply to the issues sought to be
arbitrated.
The express,
plain-language disclosure concerning arbitration also serves to moot any
remaining issue of whether the arbitration endorsement could be argued to
“oust” the court of jurisdiction over a dispute, rendering the arbitration
endorsement unenforceable. Prior to
enactment of the FAA and similar statutory schemes for arbitration,
impermissible ouster of jurisdiction was the most common rationale for finding that
agreements to arbitrate future disputes were not valid or enforceable.[63] Indeed, Congress enacted the FAA in principal
part to “to overrule the judiciary’s long-standing refusal to enforce
agreements to arbitrate on the ground of ouster of jurisdiction.”[64] The widespread acceptance of arbitration has
made this issue far less likely to bar enforcement of an arbitration agreement.[65] However, decisions issued as recently as last
year demonstrate that the issue of whether a court will find an arbitration
clause to be unenforceable on grounds of impermissible ouster of jurisdiction
persists.[66] It is therefore worthwhile to make it as
plain as possible that, before insureds waived the fundamental right to avail
themselves of that jurisdiction, they were informed both of the right they were
waiving and the fact they were waiving it.
In other words, the acknowledgment makes clear that the insured has
opted out of the court’s jurisdiction rather than the proposition that
jurisdiction has been ousted by operation of the arbitration endorsement.
There are
other potential problems with constructing an enforceable program for referring
issues such as breach of an insurance contract and of the covenant of good
faith and fair dealing that must be addressed in order to make enforcement more
likely. Chief among these is the manner
in which arbitration is requested and conducted.
Numerous
courts have found that an insurance arbitration provision that permits the
insurance company to control the composition of an arbitration panel renders
the arbitration provision unconscionable and unenforceable. For instance, the Fourth Circuit Court of
Appeals recently ruled that an employment arbitration clause was unenforceable,
in part because the manner in which arbitrators were chosen was so one-sided as
to insure that the panel was biased.[67] In that case, the arbitration provision
permitted each party to the employment contract to choose an arbitrator, and
the two arbitrators, in turn, to choose a third.[68] While that gave the provision the cosmetic
appearance of fairness, the provision also required that all of the arbitrators, including the employee’s, be chosen from a
list of arbitrators maintained by the employer.[69] Nothing in the arbitration rules prohibited
the employer from placing its own managers on the list or punishing arbitrators
who ruled against the employer.[70] The rules were so slanted, the court
concluded, that “the selection of an impartial decision-maker would be a
surprising result.”[71]
Thoughtful
crafting or selecting rules pursuant to which arbitration would be conducted
under the proposed arbitration endorsement would avoid such a result. The endorsement could either set forth a
detailed recitation of the rules or state that arbitration would be conducted
according to the rules of the American Arbitration Association or a similar
organization. The goal would be to make
sure that substantive fairness underlies the agreement.
Another
potential problem with the proposed endorsement is the distinction between
offering the arbitration option in connection with renewal of existing policies
as opposed to new business. If the
proposed arbitration agreement is offered in connection with a new policy, the
signed acknowledgment should prevent any issue from arising concerning whether
the insured knowingly waived the right to bring suit in exchange for a reduced
premium. However, because the
arbitration endorsement makes a significant change in the contract between the
insurer and its insured, the question of how it is offered in the context of
renewal of an insurance contract becomes significant. For instance, under Maryland law, renewal of
a policy is “not a new contract, but an extension of the policy’s life when
made pursuant to a policy provision concerning renewal.”[72] Thus, in Maryland any change in an insurance
policy upon renewal must be clear and obvious or it is not enforceable.[73] Other states have similar laws concerning
changes in coverage at the time an insurance policy is renewed.[74]
Addressing
this issue presents some practical problems.
A homeowner or a driver enrolling in coverage for the first time
typically does so in the presence of an insurance agent who can present the
arbitration endorsement, explain it, and elicit the knowing written waiver from
the insured. However, renewal of such
policies is typically done by mail, in response to notices from the insurer,
without the involvement of an insurance agent or broker.
Two
practical options regarding the arbitration endorsement in connection with an
existing policy may be considered. The
first is to offer the arbitration endorsement by mail, separately from any
renewal notice, with a plain-language letter explaining the rights that are
being waived and the discount in the premium that will be received in
return. Election by the insured to add
the arbitration endorsement to the policy could be conditioned upon a
face-to-face meeting with the insurance agent or broker. This would ensure both
that the insured’s election and waiver is knowing and voluntary, and that there
is a record of the election and waiver that will stand up to attempts to avoid
the arbitration clause if a dispute arises.[75]
The other
practical option regarding existing insurance
policies is to not offer arbitration at all.
With respect to those existing policies, this would save the insurer the
time, trouble and expense of marketing the arbitration endorsement separately
to insureds already enlisted with the company.
This would also provide a pool of policies not subject to arbitration whose litigation history and expense
could be compared to contemporary policies that contain the arbitration clause.
It must also
be noted that even a broadly worded optional insurance endorsement, voluntarily
and intelligently entered into by an insured in a jurisdiction inclined to
enforce it, will not free an insurance company from all litigation surrounding
the particular insurance policy. Depending
upon the jurisdiction within which an insurance dispute arises, allegations
that the arbitration clause was elicited through fraud might remain a subject
reserved for judicial determination.[76] Similarly, many jurisdictions have determined
that the courts are responsible for determining whether a valid arbitration
agreement exists in the first place,[77]
although this determination may be made by means of a relatively simple
petition to compel arbitration without the delay and expense of discovery. Furthermore, the question of whether an
arbitration award is subject to judicial review will have different answers
depending upon the different jurisdictions in which the dispute arises.
Finally, a
state may require approval of specific arbitration clauses by the state
insurance commissioner or other responsible regulatory body as a prerequisite
to enforcing the clause.[78] The statutory scheme of a particular state
may also include unique requirements for enforceability of agreements to
arbitrate future disputes. For instance,
in Oregon, such an agreement is valid and enforceable “provided the arbitration
is held within the State of Oregon.”[79] Vermont’s arbitration statute not only
requires that an arbitration clause has a separate, written acknowledgment of
submission to arbitration, but it also provides a model acknowledgment.[80] Any insurer serious about developing a
program of offering arbitration to insureds will have to address the different
requirements and issues presented in different states.
The most
controversial part of our proposal is the suggestion that the insurance
arbitration clause provide: “In any such arbitration dispute, the arbitrator is
authorized to award compensatory damages and, if appropriate, punitive or
exemplary damages, but in no event may the amount of the punitive or exemplary
damages exceed three times the amount of the compensatory award.”
One of the
worst injustices in American jurisprudence today is the lack of standards given
to juries in deciding punitive damage cases.
A host of cases has reached even the United States Supreme Court on this
subject, but we are still waiting on a definitive ruling on the grave
constitutional issues presented by punitive damages, their reasonableness, and
their excessiveness. Many juries run
amok, and their awards are often set aside by trial judges, or reversed or
modified by appellate courts. Putting a
cap on punitive damages injects some certainty into a very uncertain field, yet
provides some significant punishment for an insurer that has behaved
egregiously.[81]
A recent
decision from the California Supreme Court found two of its justices, citing
cases and statutes from throughout the country, endorsing the proposition that
punitive damages will always be excessive if they exceed three times the compensatory
award.[82] This is a well-reasoned approach and should
be tried and tested by the insurance industry in its policy contracts.
One of the
arguments that will be raised against such a clause is that a litigant is
unable to obtain the same amount of damages
in an arbitration that the litigant could receive in court. For example, a state may allow an unlimited punitive damage award to be
returned. In Armendariz v. Foundation Health Psychcare Services, Inc., [83]
the court gave sweeping approval to arbitration agreements, including
agreements to arbitrate civil rights and constitutional rights related to
employment. However, the court indicated
that the agreement cannot deprive the
litigant in arbitration from obtaining various categories of damages that could be awarded in court.[84]
Our proposal
is somewhat different: the claimant is fully entitled to recover all categories
of damages that a court could award, but the amount of punitive damages is restricted. Since punitive damages are not compensatory to the claimant, and
the claimant will receive full compensation for his or her injuries from the
arbitrator, this is another argument that the insurer can use to justify such a
limitation clause on punitive damages.
A recent
development will provide major impetus to the concept that we are
advocating. On March 21, 2001, in Circuit City Stores, Inc. v. Adams,[85] the United States Supreme Court, by a five-four decision, ruled
that the FAA applied to private arbitration agreements that employees are
required to sign as a condition of employment.
The case involved a homosexual who was terminated from work. Adams had signed a mandatory arbitration
agreement, but argued that he should be permitted to sue in court for civil
rights violations, discrimination, and wrongful termination. Although the district court ruled in favor of
the arbitration agreement, the Ninth Circuit Court of Appeals (contrary to ten
other federal appellate court decisions) held that Adams was engaged in
“interstate commerce” and was therefore exempt from the requirements of the
FAA. The Supreme Court reversed, giving
broad application to the FAA, in effect ruling that it pre-empts state court
decisions and state statutes that are hostile towards arbitration.
Conversations
with members of the Employees’ Bar reveal their concern that this decision
could wipe out class-action discrimination and other class-action employment
related cases, in addition to seriously undermining the right of employees to
sue in court for violation of their civil rights. The California Supreme Court, in the Armendariz case, has already ruled that
it is permissible to require arbitration of civil rights violations. Therefore, the Circuit City case must be viewed as a huge boost for mandatory
arbitration.
Note
carefully that the proposed endorsement, which is reproduced at the end of this
article in Appendix A, provides that the endorsement is entered into pursuant
to the FAA, is to be governed by the FAA, and is to be interpreted in
accordance with the FAA. This should
provide considerable protection from attack.
There is an
additional note on alternatives for the insurer. The entire approach of this
article has been to give the insured a choice by providing a discounted policy
in return for an agreement to mandatory arbitration. As a business matter, there may be insurers
who are reluctant to offer a discounted premium. Those insurers could do other things such as
waive the deductible, offer a lower deductible, or waive other insurer
defenses.
Also notable
in the proposed endorsement is the fact that we have provided a very generous
“attorney fees” provision, allowing the insured (but not the insurer) to
recover attorney fees up to one-third of the total recovery, if the insured
prevails in whole or in part in the arbitration. For example, the insured might win the
coverage case but lose the bad faith case.
The provision would still authorize attorney fees in that event. Such a provision should go a long way
towards convincing a court that the arbitration agreement is fair.
We have
thrown down the gauntlet: now, can we find an insurer brave enough to take up
the sword! We suggest that with the
increasing acceptance of arbitration agreements and with the national climate
becoming disenchanted with litigation abuses, now is a perfect time for
insurers to try this innovative approach.
Lest we forget, swiftness and finality of the arbitration approach can
be most beneficial to the insured as well.
Appendix A
ARBITRATION ENDORSEMENT
YOU [i.e., the insured] and THE COMPANY hereby covenant and agree
that, at the election of either YOU or THE COMPANY, any disputes arising from
THE POLICY shall be submitted to binding arbitration. YOU and THE COMPANY acknowledge that, in
exchange for YOU choosing to enter into this arbitration endorsement, THE
COMPANY will apply and YOU will receive a discount in your premium [as set
forth in the declarations page].
For purposes of this arbitration endorsement, “any disputes arising
from THE POLICY” includes, but is not limited to:
1.
Any dispute concerning whether
this policy covers a claim YOU make for benefits under THE POLICY;
2.
Any dispute concerning the
amount of benefits due on a claim YOU make for benefits under THE POLICY;
3.
Any dispute concerning whether
THE COMPANY is obliged to defend or indemnify YOU for a particular claim
against YOU, if THE POLICY includes a promise to defend and/or indemnify YOU
for claims against YOU;
4.
Any dispute concerning whether
THE COMPANY has breached its duty to act in good faith towards YOU in handling
and/or paying a claim YOU make for benefits under THE POLICY.
Either YOU or THE COMPANY may elect arbitration of a dispute
arising from THE POLICY. Arbitration
under this endorsement shall be conducted according to the rules of the
American Arbitration Association.
Arbitration will be conducted by [a single arbitrator chosen by
agreement between YOU and THE COMPANY] [a panel of three arbitrators, one
chosen by YOU, one by the COMPANY, and one chosen by agreement of the parties]. Before arbitration takes place, YOU and THE
COMPANY agree that reasonable discovery will be permitted.
The cost of paying the [arbitrator] [arbitrators] will be borne by
THE COMPANY. However, YOU and THE
COMPANY agree that each of you will bear your own costs and attorney fees.
YOU and THE COMPANY agree that in the event the insured prevails,
in whole or in part, in the arbitration proceeding, the arbitrator is
authorized to award attorney fees to the insured in an amount not to exceed
one-third of the amount of the total recovery.
This provision is to provide no benefit to the insurer.
YOU and THE COMPANY agree that the arbitrator will have
jurisdiction to issue any and all relief that would have been available if the
dispute had been litigated in court except that an award of punitive damages,
if any, will be limited to an amount not to exceed three times the compensatory
damages awarded by the arbitrator.
It is further agreed by insured and insurer that this endorsement
is entered into pursuant to the Federal Arbitration Act (FAA), is to be
governed by the Act, and is to be interpreted in accordance with the Act.
The [arbitrator’s] [arbitrators’] decision will be in writing and
subject to review by the court having jurisdiction over the dispute as provided
in the laws of that jurisdiction.
Acknowledgment
of Intent To Submit Disputes To Arbitration
I, [the insured], acknowledge that I understand that I am
constitutionally entitled to bring claims regarding this policy in court, and
that, if I sign this agreement, I will not be able to bring a lawsuit
concerning any dispute that may arise which is covered by this arbitration
agreement, unless it involves a question of constitutional or civil
rights. Instead, I agree to submit any
such dispute to arbitration as provided above.
I also acknowledge that, in exchange for my agreeing to submit any
dispute to arbitration, THE COMPANY will apply, and I will receive, a discount
in the premium I pay for this POLICY.
_____________________________
[insured’s signature]
ENDNOTES
[1] Lane v. Hughes
Aircraft Co., 993 P.2d 388, 399 (Cal. 2000) (Brown and Chin, J.J., concurring).
[2] On this subject, we
have always believed that if the claims department, by changing the policy, can
save the company $50 million, whereas the change causes a $10 million loss in
sales, the company is ahead of the game!
How often we succeed with this common sense argument is another story.
[3] 9 U.S.C. §§ 1 - 16
(2001).
[4] States whose
statutory schemes make agreements to arbitrate future disputes valid and
enforceable include the following: Alaska [Alaska
Stat. § 09.43.010 (2000)];
Arizona [Ariz. Rev. Stat.
§ 12-1501 (2000)]; Arkansas [Ark. Code Ann. § 16-108-201
(2001)]; California [Cal. Civ. Proc. Code § 1281
(2001)]; Colorado [Colo. Rev. Stat. § 13-22-203
(2000)]; Connecticut [Conn. Gen. Stat. § 52-408 (2001)]; Delaware [Del.
Code Ann. tit. 10 § 5701 (2000)];
District of Columbia [D.C. Code
Ann. § 16-4301 (2000)]; Florida [Fla. Stat. Ch. 682.02 (2000)]; Georgia [Ga.
Code Ann. § 9-9-3 (2000)]; Hawaii
[Haw. Rev. Stat. § 658-1
(2000)]; Idaho [Idaho Code § 7-901 (2000)];
Illinois [710 Ill. Comp. Stat.
5/1 (2001)]; Indiana [Ind. Code Ann. § 34-57-2-1 (Michie
2000)]; Iowa [Iowa Code § 679A.1 (2000)];
Kansas [Kan. Stat. Ann. §
5-401 (2000)]; Kentucky [Ky. Rev. Stat. Ann. § 417.050
(2001)]; Louisiana [La. Rev. Stat. Ann. § 9:4201 (West
2000)]; Maine [Me. Rev. Stat. Ann. tit. 14 § 5927 (West 2000)]; Maryland [Md.
Code Ann. Cts. & Jud. Proc. § 3-206 (2001)]; Massachusetts [Mass. Gen. Laws Ann. ch. 251 § 1
(2001)]; Michigan [Mich. Comp. Laws.
§ 600.5001 (2000)]; Missouri [Mo. Rev.
Stat. § 435.350 (2001)]; Minnesota [Minn.
Stat. § 572.08 (2000)]; Montana [Mont.
Code Ann. § 27-5-114 (2000)]; Nebraska [Neb. Rev. Stat. § 25-2602.01 (2001)]; Nevada [Nev. Rev. Stat.
Ann. § 38.035 (Michie 2001)]; New Hampshire [N.H.
Rev. Stat. Ann. § 542:1 (2000)]; New Jersey [N.J. Stat. Ann. § 2A:24-1 (West 2001)]; New Mexico [N.M.
Stat. Ann. §44-7-1 (2000)]; New York [N.Y. C.P.L.R. § 7501 (2001)]; North Carolina [N.C. Gen. Stat. § 1-567.2 (2000)]; North Dakota [N.D. Cent. Code § 32-29.2-01 (2000)];
Ohio [Ohio Rev. Code Ann. §
2711.01 (Anderson 2001)]; Oklahoma [Okla.
Stat. tit 15 § 802 (2000)]; Oregon [Or.
Rev. Stat. §36.305 (1999)];
Pennsylvania [42 Pa. Cons. Stat.
§ 7303 (2000)]; Rhode Island [R.I. Gen. Laws § 10-3-2 (2001)]; South Carolina [S.C. Code Ann. § 15-48-10 (Law. Co-op. 2000)]; South Dakota [S.D. Codified Laws § 21-25A-1 (Michie
2001)]; Tennessee [Tenn. Code Ann. § 29-5-302 (2001)];
Texas [Tex. Civ. Prac. & Rem. Code
Ann. § 172.031 (Vernon 2000)];
Utah [Utah Code Ann. §
78-31a-3 (2000)]; Vermont [Vt. Stat.
Ann. tit. 12 § 5652 (2000)]
Virginia [Va. Code Ann. §
8.01-581.01 (2000)]; Washington [Wash.
Rev. Code Ann. § 7.04.010 (2001)]; Wisconsin [Wis. Stat. § 788.01 (2000)]; Wyoming [Wyo Stat. Ann. § 1-36-103 (Michie 2001)].
[5] District of
Columbia v. Bailey, 171 U.S. 161, 177 (1898); Lucas v. Brotherhood of Am.
Yeomen, 185 P. 901, 902 (Kan. 1919). While it was justified on the grounds of
protecting the right to access to the courts, application of the outdated rule
against agreements to arbitrate future disputes may have had an additional,
less altruistic basis as well. In 1965,
the Supreme Court of Utah plainly stated that one of the factors that had
previously made courts hostile to arbitration was that informal arbitration
denied courts the pay they received for adjudicating disputes:
One of the criticisms of the rule [against
enforcement of compulsory arbitration agreements] is that compulsory
arbitration should not be considered against public policy as its opponents
claim, but rather in accord therewith, because it encourages the amicable
settlement of disputes. It is sometimes
asserted that the underlying motivation for this doctrine when it originated
was that the income of the judges depended upon the cases handled, so they
desired to hold on to litigation for pecuniary reasons; and that inasmuch as
this condition no longer exists, the doctrine should be abolished. We agree that no such consideration exists
today, and that neither the possible erstwhile pecuniary interest of the
courts, nor any present jealousy over the prerogative of handling the nowadays
all too numerous disputes, has any legitimate bearing on the issue of
compulsory arbitration. The real issue
is whether it fits properly into the pattern of our system of law and justice.
Barnhart v. Civil Serv. Employees Ins. Co., 398 P.2d
873, 875 (Utah 1965).
[6] N.Y. C.P.L.R. §
7501 (McKinney 2001).
[7] 9 U.S.C. §1- 16
(2001).
[8] To Validate Certain
Agreements for Arbitration, H.R. Rep. No. 96, 68th Cong., 1st Sess. 1-2 (1924);
see Philip E. Karmel, Comment, Injunctions Pending Arbitration and the
Federal Arbitration Act: A Perspective from Contract Law, 54 U. Chi. L. Rev. 1373, 1391-92 (1987).
[9] 9 U.S.C. §2 (2001).
[10] Hooters of Am., Inc.
v. Phillips, 173 F.3d 933, 938 (4th Cir. 1999)(citing Prima Paint Corp. v.
Flood & Conklin Mfg. Co., 388 U.S. 395, 402-04 (1967)).
[11] 9 U.S.C. §4 (2001)
(emphasis added).
[12] Chiron Corp. v.
Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000); Dean Witter
Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985).
[13] Alabama continues to
bar enforcement of agreements to arbitrate: Ҥ8-1-41. Obligations not specifically enforceable. The
following obligations cannot be specifically enforced: . . . (3)
An agreement to submit a controversy to arbitration.” Ala. Code § 8-1-41 (2001); see Southern United Fire Ins. Co. v.
Knight, 736 So. 2d 582, 586-87 (Ala. 1999).
[14] See supra note 2.
[15] Compare 9 U.S.C. § 2
(2001) to Alaska Stat. §
09.43.010 (2000)]; Ariz. Rev. Stat.
§ 12-1501 (2000); Ark. Code Ann.
§ 16-108-201 (2001); Cal. Civ.Proc. Code
§ 1281 (2001); Colo. Rev. Stat. §
13-22-203 (2000); Del. Code Ann.
tit. 10 § 5701 (2000); D.C. Code Ann.
§ 16-4301 (2000); Haw. Rev. Stat.
§ 658-1 (2000); Idaho Code § 901
(2000); 710 Ill. Comp. Stat. 5/1
(2001); Ind. Code Ann. §
34-57-2-1 (Michie 2000); Iowa Code
§ 679A.1 (2001); Kan. Stat. Ann.
§ 5-401 (2000); Ky. Rev. Stat. Ann.
§ 417.050 (2001); La. Rev. Stat. Ann.
§ 9:4201 (West 2000); Me. Rev. Stat.
Ann. tit. 14 § 5927 (West 2000); Md.
Code Ann. Cts. & Jud. Proc. § 3-206 (2001); Mass. Gen. Laws Ann. ch. 251 § 1 (2001); Mich. Comp. Laws. § 600.5001 (2000); Minn. Stat. § 572.08 (2000); Mont. Code Ann. § 27-5-114 (2000); Neb. Rev. Stat. § 25-2602.01 (2001);
Nev. Rev. Stat. Ann. § 38.035 (Michie 2001); N.J.
Stat. Ann. § 2A:24-1 (West 2001); N.M.
Stat. Ann. §44-7-1 (2000); N.C.
Gen. Stat. § 1-567.2 (2000); N.D.
Cent. Code § 32-29.2-01 (2000); Ohio
Rev. Code Ann. § 2711.01 (Anderson 2001); Okla. Stat. tit 15 § 802 (2000); R.I. Gen. Laws § 10-3-2 (2001); S.C. Code Ann. § 15-48-10 (Law. Co-op. 2000); S.D. Codified Laws § 21-25A-1 (Michie
2000); Tenn. Code Ann. § 29-5-302
(2001); Utah Code Ann. § 78-31a-3
(2000); Va. Code Ann. §
8.01-581.01 (2000); Wyo Stat. Ann.
§ 1-36-103 (Michie 2001).
[16] See, e.g., Conn. Gen. Stat.
§ 52-408 (2001); Fla. Stat. ch.
682.02 (2000); Ga. Code Ann.
§9-9-3 (2000); Okla. Stat. tit.
15 § 802 (2000); Or. Rev. Stat. §
36.305 (1999); 42 Pa. Cons. Stat.
§ 7303 (2000); Tex. Civ. Prac. &
Rem. Code § 172.031 (Vernon 2000); Vt.
Stat. Ann. tit. 12 § 5652 (2001).
[17] See, e.g., Ark. Code Ann.
§ 16-108-201(b) (2001) (“[T]his subsection shall have no application to . . .[
any insured or beneficiary under any insurance policy . . . .”]; Kan. Stat. Ann. § 5-401(c) (2000) (“The provisions [that agreements to
arbitrate future disputes are enforceable] . . . shall not apply to . . .
Contracts of insurance . . . .”); Ky. Rev. Stat. Ann. § 417.50
(2001)(“This chapter does not apply to . . . Insurance contracts.”); Mont. Code Ann. § 27-5-114 (2000); Neb.
Rev. Stat. § 25-2602.01 (2001); S.C. Code Ann. § 15-48-10 (Law. Coop. 2000). See, also, R.I. Gen. Laws § 10-3-2 (2001)(arbitration clause not enforceable in
insurance policy unless clause appears immediately before coverage promise or
insured’s signature).
[18] See Iowa Code, §
679A.1 (2001). Missouri’s arbitration
statute declines to enforce arbitration agreements in either insurance policies or adhesion contracts. (Mo. Rev. Stat. §
435.350 (2001) (arbitration provision in contract “except contracts for
insurance and contracts of adhesion” are enforceable).
[19] See, e.g., Broemmer v.
Abortion Servs. of Phoenix, Ltd., 840 P.2d 1013, 1018 (Ariz. 1992) (arbitration
clause in adhesion contract not enforceable if unconscionable); Taylor v. State
Farm Mut. Auto. Ins. Co., 913 P.2d 1092, 1094 (Ariz. 1996) (insurance policy
“characterized” by adhesion); First Financial Ins. Co. v. American Sandblasting
Co., 477 S.E.2d 390, 392 (Ga. Ct. App. 1996) (insurance policies are adhesion
contracts); Cincinnati Ins. Co. v. Hopkins Sporting Goods, Inc., 522 N.W.2d
837, 839 (Iowa 1994) (insurance policies are adhesion contracts); see also Kosierowski v. Madison Life
Ins. Co., 298 N.Y.S.2d 810, 813 (App. Div. 1969) (insurance policy is “the
prime example of a contract of adhesion . . .”).
[20] Molodyh v. Truck
Ins. Exch., 714 P.2d 257, 260-61 (Ore. Ct. App. 1986).
[21] Id. at 261 (emphasis added).
[22] Id. at 260-61 (emphasis added)
[23] Id. at 261.
[24] 9 U.S.C. § 2 (2001).
[25] 9 U.S.C. § 1 (2001).
[26] See, e.g., Dowd v. First Omaha Sec. Corp., 495 N.W.2d 36, 41 (Neb.
1993).
[27] See United States v. South-Eastern Underwriters Ass'n, 322 U.S.
533, 546-53 (1944). The McCarran-Ferguson Act was enacted to supersede the
Supreme Court’s holding in this decision.
Dep't of Treasury v. Fabe, 508 U.S. 491, 499 (1993).
[28] 15 U.S.C. § 1012(a)
(2001).
[29] 15 U.S.C. § 1012(b)
(2001).
[30] Doctor’s Assoc.,
Inc. v. Casarotto, 517 U.S. 681, 685-86 (1996).
[31] Group Life &
Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 215-16 (1979).
[32] See, e.g., Hamilton Life Ins. Co. of N.Y. v. Republic National Life
Ins. Co., 408 F.2d 606, 611 (2d Cir. 1969); Federated Rural Electric Ins. Co.
v. International Ins. Co., 874 F. Supp. 1204, 1206-07 (D. Kan. 1995).
[33] In American Bankers
Ins. Co. v. Crawford, 757 So. 2d 1125, 1132 (Ala. 1999), the Alabama Supreme
Court ruled that the McCarran-Ferguson Act does not apply to its statutory
proscription on enforcement of agreements to arbitrate future disputes because
it does not mention insurance. The court
distinguished the Kansas Supreme Court decision in Friday v. Trinity Universal
of Kansas, 939 P.2d 869 (Kan. 1997) which held that the McCarran-Ferguson Act
protected Kansas’ arbitration statute because the Kansas statute proscribes
enforcement of arbitration provisions in insurance
[34] A more complete
proposed endorsement appears in the appendix to this article.
[35] This language is
drawn from Vermont’s arbitration provision:
§5652. Validity
of arbitration agreements
. . .
(b) Required provision. – No agreement
to arbitrate is enforceable unless accompanied by or containing a written
acknowledgment of arbitration signed by each of the parties . . . . The
acknowledgment shall provide substantially as follows:
ACKNOWLEDGMENT OF ARBITRATION
I
understand that (this agreement/my agreement with ____ of _____) contains an
agreement to arbitrate. After signing
(this/that) document, I understand that I will not be able to bring a lawsuit
concerning any dispute that may arise which is covered by the arbitration
agreement, unless it involves a question of constitutional or civil
rights. Instead, I agree to submit any
such dispute to an impartial arbitrator.
Vt. Stat. Ann. tit. 12, § 5652 (2001).
[36] Klos v. Polskie
Linie Lotnicze, 133 F.3d 164, 168 (2d Cir. 1997) (internal quotation omitted); see also Nelson v. Becton, 929 F.2d
1287, 1293 (8th Cir. 1991) (insurance policies are “classic examples” of
adhesion contracts leaving a consumer with “minimal bargaining power”).
[37] USAA Group v.
Universal Alarms, Inc., 405 N.W.2d 146, 147 (Mich. Ct. App. 1987) (emphasis
added) (quoting Wheeler v. St. Joseph Hosp., 133 Cal. Rptr. 775 (Ct. App. 1976);
see also Witmer v. Exxon Corp., 434
A.2d 1222, 1228 (Pa. 1981) (finding that contract term is unconscionable
requires that the aggrieved party have had no meaningful choice in accepting
the challenged provision).
[38] 693 P.2d 1259, 1261
(Nev. 1985).
[39] Id. at 1260.
[40] Id. at 1260-61.
[41] Id. at 1261-62.
[42] Id. at 1260.
[43] Koveleskie v. SBC
Capital Mkts., Inc., 167 F.3d 361, 367 (7th Cir. 1999); Seus v. John Nuveen
& Co., 146 F.3d 175, 184 (3d Cir. 1998); Witmer v. Exxon Corp., 434 A.2d
1222, 1228 (Pa. 1981).
[44] Adams v. Merrill
Lynch Pierce Fenner & Smith, 888 F.2d 696, 700 (10th Cir. 1989); Surman v.
Merrill Lynch Pierce Fenner & Smith, 733 F.2d 59, 61 n.2 (8th Cir. 1984). See Obstetrics & Gynecologists v.
Pepper, 693 P.2d 1259, 1261 (Nev 1985) (arbitration clause in adhesion contract
would be enforceable if it included “plain and clear notification of the terms
and an understanding consent”). NOTE that this is only true where the
statutory scheme pursuant to which an arbitration agreement is enforced does
not exempt adhesion contracts from their effect. See Ark. Code Ann. §
16-108-201(b) (2001); Kan. Stat. Ann.
§ 5-401 (2000); Ky. Rev. Stat. Ann.
§ 417.50 (2001).
[45] Allegations of fraud
in the inducement remain as potential means of voiding the arbitration endorsement. As discussed below, the language of the
endorsement and the manner in which it is offered to an insured are the only
proactive means of addressing such potential allegations. See infra note 76 and accompanying text.
[46] Harris v. Green Tree
Fin. Corp., 183 F.3d 173, 180 (3d Cir. 1998);
Armendariz v. Foundation Health Psychcare Servs., 6 P.3d 669, 692 (Cal.
2000). An exception to this is found in
cases where an arbitration provision permits trial de novo of a dispute only
when an arbitrator’s award exceeds a set amount. Mendes v. Automobile Ins. Co.
of Hartford, 563 A.2d 695, 697 (Conn. 1989); Schmidt v. Midwest Family Mut.
Ins. Co., 413 N.W.2d 178 (Minn. Ct. App. 1987); Nationwide Mut. Ins. Co. v.
Marsh, 572 N.E.2d 1061 (Ohio 1984). The rationale for these holdings is that
only an insurance company has motivation to challenge an arbitrator’s award above a certain amount, and the de novo
clause renders the arbitration agreement inequitable because it makes the
mutuality of the arbitration agreement illusory. But cf. Hayden v. Allsate Ins. Co., 5 F. Supp. 649, 653 (trial de
novo clause enforceable because only the insured could request arbitration in
the first place).
This
view is not unanimous among the states. See
Allstate Ins. Co. v. Purdy, 606 N.Y.S.2d 535 (Sup. Ct. 1993) (policy term
permitting trial de novo of uninsured motorist claim only on award in excess of
statutory financial responsibility limits was neither unreasonable nor
unconscionable).
[47] Wright v. Circuit
City Stores, Inc., 82 F. Supp.2d 1279, 1280 (N.D. Ala. 2000); see also Michaelski v. Circuit City
Stores, Inc., 177 F.3d 634, 636-37 (7th Cir. 1999).
[48] Carnival Cruise
Lines, Inc. v. Shute, 499 U.S. 585, 594 (1991).
[49] Id. at 588.
[50] Id. at 588, 595.
[51] Id. at 595.
[52] Id. at 594.
[53] California Motor
Transp. Co. v. Trucking Unlimited, 404 U.S. 508, 513 (1972).
[54] Wolff v. McDonnell,
418 U.S. 539, 556 (1974).
[55] Johnson v. Zerbst,
304 U.S. 458, 465 (1938); Jenkins v.
Percival, 962 P.2d 796, 799 (Utah 1998);
Petersen v. United Servs. Auto. Ass’n, 955 P.2d 852, 855 n.2 (Wash. Ct.
App. 1998).
[56] Johnson, 304 U.S. at 464; see
also DeGroot v. Farmers Mut. Hail
Ins. Co., 643 N.E.2d 875, 876 (Ill. App. Ct. 1994).
[57] Under the FAA, a
broadly worded arbitration clause creates a presumption that the clause covers
disputes offered for arbitration. Collins & Aikman Prods. Co. v. Building
Sys., 58 F.3d 16, 20-21 (2d Cir. 1995). Some states are in accord. See, e.g., Phillips v. Parker, 794 P.2d
716 (Nev. 1990); Clark County Pub. Employees Ass'n v. Pearson, 798 P.2d 136
(Nev. 1990); Nationwide Gen. Ins. Co. v. Investors Ins. Co. of Am., 332 N.E.2d
333, 335 (N.Y. 1975); K.L. House Const. Co. v. City of Albuquerque, 576 P.2d
752 (N.M. 1978).
[58] See, e.g., State Farm Mut. Auto. Ins. Co. v. Coviello, 233 F.3d 710,
717-19 (3d Cir. 2000) (applying Pennsylvania law).
[59] For instance, in
Minnesota, the issue of arbitrability is submitted to an arbitrator if the
dispute concerns the scope of the arbitration agreement. Duluth Police Local v.
City of Duluth, 466 N.W.2d 36, 39 (Minn. Ct. App. 1991).
[60] Under the FAA,
arbitrability is an issue for the Court’s determination. AT&T Tech., Inc.
v. Communications Workers of Am., 475 U.S. 643, 649 (1986).
[61] Maryland Casualty
Co. v. Seidenspinner, 512 N.W.2d 186, 188 (Wis. Ct. App. 1994).
[62] Woog v. Home Mut.
Indemn. Co., 340 N.W.2d 863, 865 (Minn 1983); compare Myers v. State Farm Mut. Auto. Ins. Co., 336 N.W.2d 288
(Minn. 1983) with Austin Mut. Ins.
Co. v. Templin, 428 N.W.2d 387 (Minn. 1988).
[63] See supra note 5.
[64] Mediterranean Shipping
Co. S.A. Geneva v. POL-Atlantic, 229 F.3d 397, 405 n.14 (2d Cir. 2000).
[65] See, e.g., Pettinaro Constr. v. Partridge, 408 A.2d 957, 961 (Del.
Ch. 1979); Wales v. State Farm Mutual Auto. Ins. Co., 559 P.2d 255, 257 (Colo.
Ct. App. 1976) (fact that the legislature itself
has provided a method of arbitration renders any objection to arbitration on
the grounds that it ousts the court of jurisdiction “without merit”).
[66] See, e.g., Hughley v. Rocky Mt. HMO, 927 P.2d 1325, 1331 (Colo.
1996); Friday v. Trinity Universal, 939 P.2d 869, 872 (Kan. 1997); see also litany of decisions in Tarlow
v. Gateway Country Store, No. CV 990175198S, 2000 Conn. Super. Ct. LEXIS 1098
(May 2, 2000).
[67] Hooters of Am., Inc.
v. Phillips, 173 F.3d 933, 938-39 (4th Cir. 1999).
[68] Id. at 938.
[69] Id. at 938-39.
[70] Id. at 939.
[71] Id.
[72] Benner v. Nationwide
Mut. Ins. Co., 93 F.3d 1228, 1238 (4th Cir. 1996); see World Ins. Co. v. Perry, 124 A.2d 259, 262 (Md. 1956). Compare Missourri law, which holds that a
renewed policy “constitutes a separate and distinct contract for the period of
time covered by the renewal.” Resolution Trust Corp. v. American Casualty Co.,
874 F. Supp. 961, 967 (E.D. Mo. 1995).
[73] Nationwide Mut. Fire
Ins. Co. v. Mekiliesky, 876 F. Supp. 351, 353 (D. Md. 1997); J.A.M. Assocs. v. Western World Ins. Co., 622
A.2d 818, 822 (Md. Ct. Spec. App. 1993) (what is required is a "short,
separately attached, and boldly worded modification”).
[74] See, e.g., Stowe Township v. Standard Life Ins. Co. of Indiana, 507
F.2d 1332, 1337 (3d Cir. 1975) (under Pennsylvania law, when insurer curtails
coverage upon renewal without notice to the insured, the insurer is held to the
terms of the original policy); Perry v. Economy Fire & Cas. Co., 724 N.E.2d
151, 153-54 (Ill. App. Ct. 1999) (statute required notice of change in coverage
on renewal to be provided sixty days before renewal).
[75] It must be
recognized that an offer by mail may be of dubious effect in any event. Direct-mail solicitations of any kind elicit
notoriously low response rates. There is
no reason to believe that an insurer’s customers will respond in large numbers
to an offer by mail regarding arbitration, regardless of how the offer is
posed.
[76] Doctor’s Assoc.,
Inc. v. Stuart, 85 F.3d 975, 979-80 (2d Cir. 1996). But see
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967)
(a broadly-worded arbitration agreement may include jurisdiction to determine
whether the arbitration agreement was the result of fraud).
[77] Smith v. Cumberland
Group, Ltd., 687 A.2d 1167, 1171 (Pa. Super. Ct. 1996); Battaglia v. McKendry, 233 F.3d 720, 724 (3d
Cir. 2000). See also Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626-27 (1985).
[78] Wis. Stat. Ann. § 631.85 (West 2000). See also Appleton Papers, Inc. v. Home
Indem. Co., 612 N.W.2d 760, 770 (Wis. Ct. App. 2000).
[79] Or. Rev. Stat. § 36.305 (1999).
[80] Vt. Stat. Ann. tit.
12, § 5652(b) (2001); see discussion of
clause’s utility supra, pp. 23-27.
[81] For example, if the
compensatory award is large, multiplying it by three times and adding that to
the compensatory award can result in a sizable recovery for the claimant.
[82] Lane v. Hughes
Aircraft Co., 993 P.2d 388, 393 (Cal 2000)(Brown, J., concurring).
[83] 6 P.3d 669, 680-83
(Cal. 2000).
[84] Id. at 682-83.
[85] 121 S. Ct. 1302,
1313 (2001).
(Authors' bios)
Michael
J. Brady (use same photo and bio as Vol 51, No. 2 , p. 147.
Terry P. Anastassiou is a partner in Ropers, Majeski, Kohn & Bentley and works in the areas of insurance defense, appeals, law and motion, and alternative dispute resolution. He was born in New York, New York, and received his undergraduate degree from George Washington University and his law degree from Santa Clara University School of Law. Prior to joining Ropers, Mr. Anastassiou worked as a legal research attorney for the San Mateo County Superior Court. He has published articles on contractual arbitration and on the use of special masters in complex litigation.