Parker v. American Family Insurance

April 23, 1998

NO. 3--97--0534


IN THE

APPELLATE COURT OF ILLINOIS

THIRD DISTRICT

A.D., 1998

DENNIS PARKER ) Appeal from the Circuit Court
) of the 18th Judicial Circuit,
Plaintiff-Appellee, ) DuPage County, Illinois
)
v. ) No. 97--L--574
)
AMERICAN FAMILY INSURANCE CO. ) Honorable
) Hollis Webster
Defendant-Appellant. ) Judge, Presiding


Justice BRESLIN delivered the opinion of the court:


The issue before the court is whether an insurance policy's
underinsured motorist arbitration provision is contrary to public
policy if it permits a trial de novo for awards in excess of the
minimum liability set forth in the Illinois Safety Responsibility
Law (625 ILCS 5/7--100 et seq. (West 1996)). The trial court
concluded that such a structure is contrary to public policy and
entered a judgment confirming an arbitration panel's award in favor
of the insured, Dennis Parker. Defendant American Family Insurance
Company (American Family) appeals. We affirm.
FACTS
Parker was injured in a motor vehicle accident while he was a
passenger in a car. The vehicle that struck the one in which he
was riding had liability insurance limits in the amount of $20,000.
Parker filed suit against the driver of that vehicle and settled
the case for the $20,000 policy limit. Parker then filed for
arbitration with his own insurance company, American Family, as
permitted by the arbitration provisions for underinsured motorist
coverage in his American Family policy. The pertinent provisions
of the policy provided:
"Arbitration
We or an insured person may demand arbitration if
we do not agree:
1. That the person is legally entitled to recover
damages from the owner or operator of an
underinsured motor vehicle.
2. On the amount of payment under this part.
* * *
Any arbitration award not exceeding the minimum
limit of the Illinois Safety Responsibility Law:
1. Will be binding; and
2. May be entered as a judgment in any court
having jurisdiction.
* * *
If any arbitration award exceeds the minimum limits
of the Illinois Safety Responsibility Law, either
party has a right to trial on all issues in any
court having jurisdiction."
An arbitration panel awarded Parker $75,000 less the $20,000
received in the settlement. Parker filed a petition for judgment
on the award in the circuit court. American Family moved to
dismiss the petition and filed a counterclaim for a trial on all
issues. Relying on Fireman's Fund Ins. Co. v. Bugailiskis, 278
Ill. App. 3d 19, 662 N.E.2d 555 (1996), the trial court found that
the arbitration clause was one of adhesion and violated public
policy. The court subsequently denied American Family's petition
and entered a judgment on Parker's petition. This appeal followed.
ANALYSIS
The arbitration clause in dispute is common to insurance
policies. Numerous courts have addressed the issue of whether such
clauses are valid. A majority of courts have determined that these
"escape hatch" clauses are contrary to public policy. See O'Neill
v. Berkshire Mutual Insurance Co., 786 F. Supp. 397 (D. Vt. 1992);
Field v. Liberty Mutual Insurance Co., 769 F. Supp. 1135 (D. Haw.
1991); Mendes v. Automobile Insurance Co., 212 Conn. 652, 563 A.2d 695 (1989); Worldwide Insurance Group v. Klopp, 603 A.2d 788 (Del.
1992); Schmidt v. Midwest Family Mutual Insurance Co., 426 N.W.2d 870 (Minn. 1980); Hanover Insurance Co. v. Losquadro, 157 Misc.2d
1014, 600 N.Y.S.2d 419 (1993); Nationwide Mutual Insurance Co. v.
Marsh, 15 Ohio St. 3d 107, 472 N.E.2d 1061 (1984) (Sweeney, J.,
concurring); Pepin v. American Universal Insurance Co., 540 A.2d 21
(R.I. 1988).
In finding that the escape hatch clauses are contrary to
public policy the courts generally follow two lines of reasoning.
In the first line, the courts invalidate the clauses because they
conflict with state policies regarding arbitration. Several courts
have determined that the clauses frustrate the state's requirement
of binding arbitration. E.g., Pepin, 540 A.2d at 22-23. In the
second line, courts void the clauses on the basis that they
unfairly favor the insurer. E.g., Bugailiskis, 278 Ill. App. 3d at
24, 662 N.E.2d at 558. Since our state encourages arbitration,
whether it be binding or non-binding, (see Mayflower Insurance Co.
v. Mahan, 180 Ill. App. 3d 213, 535 N.E.2d 924 (1988)), the policy
considerations in the first line of reasoning are not relevant. We
need address solely whether the clause is void because it is
unconscionable. American Family asserts that the clause is proper
and not against public policy because it promotes arbitration and
does not unreasonably favor itself over the insured.
Comments from courts in our sister states have described the
clause as creating a "manifest inequit[y]." Mendes, 212 Conn. at
660, 563 A.2d at 698. Although facially equal, they are not truly
equal. Marsh, 15 Ohio St. 3d at 110, 472 N.E.2d at 1063 (Sweeney,
J., concurring). Policies with such clauses have been found to
possess "earmarks of an adhesive contract." Schmidt, 426 N.W.2d at
874. They are said to lack mutuality of remedy and are the result
of unequal bargaining positions in which the purchaser has little
opportunity for arms length negotiation. Schmidt, 426 N.W.2d at
874; see also Losquadro, 157 Misc.2d at 1019, 600 N.Y.S.2d at 423
("[T]he appearance of mutuality is an illusion."). The fact that
both parties are bound by a low award, when an insurance company is
unlikely to appeal, and not bound when there is a high award, when
an insurance company is more likely to appeal, demonstrates that
the benefits of the clause truly only favor the insurer. Klopp, 603 A.2d at 791; Schmidt, 426 N.W.2d at 873-75. In essence, the
clauses are escape devices which may be used to escape the unwary
claimant. Mendes, 212 Conn. at 659-60, 563 A.2d at 698.
Courts in Florida and New Jersey reject these descriptions.
They note that the insurer also has a right to reject an award over
the statutorily prescribed level and demand a jury trial. Roe v.
Amica Mutual Insurance Co., 533 So. 2d 279 (Fla. 1988); Cohen v.
Allstate Insurance Co., 231 N.J. Super. 97, 555 A.2d 21 (1989)).
Thus, there is no unconscionable result.
Recently, the second district of our appellate court in
Bugailiskis, a case involving underinsured motorist coverage,
interpreted a clause similar to the one at issue here. After an
analysis of the cases from various jurisdictions, the court
concluded that the clause was simply an "escape hatch" for the
insurance company and because of its unequal application, cost,
delay and the fact that the contract possessed many "earmarks of a
contract of adhesion," it violated public policy and was
unenforceable. Accordingly, because of the oppressive nature of
the agreement, the insurer had no right to a trial and the court
held that the arbitration provision was enforceable except to the
extent that it provided for a trial de novo. Bugailiskis, 278 Ill.
App. 3d at 24, 662 N.E.2d at 558.
More recently, this court addressed a similar clause
concerning uninsured motorist coverage in Reed v. Farmers Insurance
Group, 291 Ill. App. 3d 1068, 685 N.E.2d 385, appeal allowed, 175 Ill. 2d 553, 689 N.E.2d 1146 (1997). In Reed, this court held that
"the clause's structural inequality coupled with its mandatory
presence in the policy render it particularly oppressive and
unconscionable," and thus unenforceable. Unlike Bugailiskis, the
entire arbitration clause was held to be unenforceable.
Furthermore, the court held that Section 143(a) of the Illinois
Insurance Code (Code), (215 ILCS 5/1 et seq. (West 1996)), which
requires that policies include arbitration clauses for claims
relating to uninsured motorist coverage, was unconstitutional
because it interfered with an insured's right to contract. Reed,
291 Ill. App. 3d at 1076, 685 N.E.2d at 390-91.
Although we agree with American Family that the policy
promotes arbitration and that Illinois law encourages arbitration
as an alternate method of dispute resolution, (Johnson v.
Baumgardt, 216 Ill. App. 3d 550, 576 N.E.2d 515 (1991); Kostakos v.
KSN Joint Venture No. 1, 142 Ill. App. 3d 533, 491 N.E.2d 1322
(1986)), we believe the escape clause favors the insurance company
in such a way as to render the agreement oppressive. Such
agreements are entered with little opportunity for any meaningful
negotiation. The result is to allow a safety net to protect the
insurer from larger awards, while at the same time insulating the
insurer from additional litigation when a small award is granted.
Under this system, the insured would truly benefit only if an award
were over $20,000, but yet less than the amount desired. However,
as a matter of common sense, the party who is likely to be
dissatisfied with an amount over $20,000 is the insurer, not the
insured. The right granted to the insured is merely theoretical.
The true benefits of the agreement inure solely to the insurer.
This is an unacceptable structure which unequivocally favors
American Family. Thus, we agree with Bugailiskis and hold that the
trial de novo clause is unconscionable and contrary to public
policy.
What remains to be determined is whether the entire
arbitration scheme of the policy should be voided, or whether only
the escape hatch provision should be stricken.
Relying on Reed, American Family contends that the proper
remedy is to strike the entire arbitration section from the
contract and remand the case to the circuit court for trial.
Although this court took that approach in Reed, we do not believe
a remand is mandated in the instant case. Reed involved uninsured
motorist coverage and thus mandatory arbitration under 215 ILCS
5/143a(1)(West 1996). The concerns in Reed stemmed from the
statute's requirement that all uninsured motorist claims be
arbitrated and that all such clauses contain the type of escape
hatch which is in dispute in this case -- a directive which we held
to be inconsistent with our Constitution. Reed, 291 Ill. App. 3d at
1076, 685 N.E.2d at 390-91. Accordingly, it was appropriate to
strike the entire arbitration scheme of the policy.
In this case, the parties were not statutorily required to
enter into an arbitration agreement. Unlike section 143a, section
143a-2 of the Code, (215 ILCS 5/143a-2 (West 1996)), which applies
to underinsured motorist provisions, does not require arbitration.
Mayflower Insurance Co. v. Mahan, 180 Ill. App. 3d 213, 535 N.E.2d 924 (1988). As noted above, however, arbitration is an encouraged
form of dispute resolution and in order to preserve the parties'
agreement to the greatest extent possible, we hold that only the
trial de novo clause is unenforceable and that the trial court
properly entered a judgment confirming the arbitration panel's
decision. See Bugailiskis, 278 Ill. App. 3d at 24, 662 N.E.2d at
558; Klopp, 603 A.2d at 791-92; Schmidt, 426 N.W.2d at 875.
For the foregoing reasons, the judgment of the circuit court
of DuPage County is affirmed.
Affirmed.
SLATER, J., concur.
JUSTICE HOLDRIDGE, dissenting:
I respectfully dissent. In order for the majority to find
that the trial de novo provision is unconscionable, and thus
unenforceable, it has engaged in the unsupported assumption that
only the insurance company would seek to avoid an arbitration award
of more than $20,000. Such an assumption is nothing more than pure
speculation. I see no empirical evidence to support the majority's
bald assertion that "as a matter of common sense, the party who is
likely to be dissatisfied with an amount over $20,000 is the
insurer, not the insured."
Unlike appeals based upon the law, appeals to common sense
often depend upon who is the appellant. Indeed, as long as we are
engaging in pure speculation and appeals to common sense to support
our holdings, I could speculate that a plaintiff expecting a
$100,000 award from an arbitrator would invoke the de novo
provision to avoid an arbitration award of $21,000, much to the
chagrin of the insurance company that would have been happy to pay
the arbitrator's award.
I admit that from among our sister states that have ruled on
this identical issue, only the Florida Supreme Court (Roe v. Amica
Mutual Insurance Co, 533 So. 2d 279 (Fla. 1988)),the New Jersey
Appellate Court (Cohen v. Allstate Insurance Co., 231 N.J. Super.
97, 555 A.2d 21 (1989)), and the Arizona Appellate Court (Liberty
Mutual Insurance Co. v. Mandile, 259 Ariz. Adv. Rep. 71 (December
30, 1997)) have rejected the temptation to speculate that an
insured would never reject an arbitral award above the statutory
financial responsibility limit. However, I find their analysis
more persuasive.
I agree with the reasoning of the Arizona court in Mandile
that:
"When a plaintiff who thinks his case is worth
$300,000 gets only $50,000 from the arbitrators,
that plaintiff will want the option of appeal (and
may use that option as a leverage point in
settlement discussions). Conversely, an insurance
company that thinks a case is defensible, and is
ordered to pay $14,999, may wish it could appeal
but will lack the right to do so. The de novo
appeal right, overall, is probably as important to
plaintiffs as to defendants." Mandile, 259 Ariz.
Adv. Rep., slip op. at 6.
Similarly, in rejecting the same unsupported speculation
adopted by the majority in this matter, the Cohen court noted that:
"A variety of situations can be hypothesized
in which an insured would welcome the opportunity
to reject an arbitration award and demand a trial.
* * * In short, while we might speculate that the
policy provision is unfairly tilted in favor of
Allstate, that would be nothing more than
guesswork. We cannot properly base a determination
of unconscionability on unsubstantiated impressions
and personal intuition. Evaluation and adjustment
of the competing public and private interests are
best left to the legislative and administrative
process." Cohen, 231 N.J. Super. at 102, 555 A.2d
at 24.
For the reasons articulated above, I would reverse the trial
court judgment for Parker and grant American Family's counterclaim
for a trial on all issues. I dissent on that basis.