February 16, 2006

UM/UIM
Arbitration

A long-held and policy-driven precept requiring mandatory arbitration of uninsured (UM) and underinsured (UIM) claims between policyholders and insurance carriers has now been abrogated under the Pennsylvania Supreme Court’s December 30, 2005 Opinion, holding that the Pennsylvania Insurance Department lacked the requisite statutory authority to require mandatory arbitrations of all UM and UIM claims.

The explicit authority to compel mandatory arbitrations had arisen under the Insurance Commissioner’s Declaratory Opinion and Order of July 16, 2001, under which the Insurance Department lmandated that it would disapprove insurance policies that did not require binding arbitration of UM and UIM disputes.

IIn Insurance Federation of Pennsylvania v. Department of Insurance, the Supreme Court overturned and reversed the Commonwealth Court’s earlier en banc decision validating the Insurance Department’s authority to require that automobile insurance policies contain provisions for mandatory arbitration of all UM/UIM claims.

IIn Insurance Federation, two prongs of attack were raised on appeal; the first being the Department’s authority to mandate the arbitration of all UM/UIM claims, with the second being whether the mandatory arbitration of UM/UIM claims necessarily deprived policyholders of the constitutional right to a jury trial.

Many insurance contracts incorporated mandatory binding arbitration provisions for all UM/UIM disputes.

Reviewing legislative history, the Supreme Court noted that the UM Act had originally been enacted in 1963. Under that Act, insurance carriers were required to offer uninsured motorist coverage, unless expressly waived by the policyholder. The same requirement applied to underinsured motorist protection. Consequently, many insurance contracts, approved by the Insurance Department, incorporated mandatory binding arbitration provisions for all UM/UIM disputes.

Subsequent legislation in 1984 under the Pennsylvania Motor Vehicle Financial Responsibility Law, which law was amended under Act 6 of 1990, never specifically mandated that the UM/UIM disputes/claims be settled through mandatory or binding arbitration.

Against this backdrop, Liberty Mutual sought approval from the Insurance Department in 1996 to revise its policies to remove mandatory and binding arbitration of UM/UIM disputes. The policy revision that Liberty Mutual sought would have resulted in all UM/UIM disputes being resolved in State or Federal Courtrooms, obviously dependent upon diversity jurisdiction principles.

The Insurance Department denied the proposed revisions, issuing an opinion letter indicating that the failure to provide for arbitration in the context of uninsured or underinsured motorist claims violated the statutory requirement to provide UM/UIM coverage unless specifically waived in writing by policyholders.

The Insurance Federation of Pennsylvania sought declaratory judgment before the Insurance Department on its mandatory arbitration opinion.

The Insurance Department’s denial was never appealed by Liberty Mutual. However, the Insurance Federation of Pennsylvania sought declaratory judgment before the Insurance Department on its mandatory arbitration opinion. The Insurance Federation contended that the Insurance Department had neither statutory nor regulatory authority to require mandatory arbitration of UM/UIM coverage disputes.

The Commonwealth Court ruled that the issue was controlled by its ruling in Prudential v. Muir, 513 A.2d 1129 (Pa. Cmwlth. 1986), in which the Commonwealth Court had held that the Insurance Department did have the authority to regulate insurance policies for purposes of enforcing the public policy in favor of providing proper protection to the victims of uninsured motorists.

The Commonwealth Court denied the Insurance Federation’s Petition for Declaratory Judgment, affirming the opinion and regulatory action of the Insurance Department. It found that, under principles of stare decisis, the Muir decision required the Commonwealth Court to hold that the Insurance Department did have regulatory authority to deny the Insurance Federation’s declaratory judgment petition seeking to strike the Insurance Department’s opinion that all UM/UIM disputes should be determined through binding arbitration.

Two prongs of attack were then raised by the Insurance Federation on appeal to the Supreme Court. The first prong was that the Insurance Department had never been directly given that authority by the General Assembly. The second prong of appellate attack was that policyholders were deprived of their constitutional right to a jury trial because policy provisions required binding arbitration of all UM/UIM claims.

The Supreme Court agreed with insurers and opened the door to UM/UIM claims being filed, tried, and resolved in State and Federal Courts.

Finding for the Insurance Federation and against the Insurance Department, the Supreme Court agreed with insurers that the Insurance Department had no regulatory power to require mandatory arbitration of all UM/UIM claims. In so doing, the Supreme Court has opened the door to UM/UIM claims being filed, tried, and resolved in State and Federal Courts.

This is not to suggest that policyholders cannot still agree to binding arbitration of UM/UIM disputes, but it will mean that policyholders will not be bound by the inclusion of a binding Arbitration provision in the controlling insurance policy.

The actions in State or Federal Court would then be subject to civil procedural rules in terms of pleadings, discovery, expert reports, as well as actual jury trials.

Under Insurance Federation, UM/UIM disputes can be tried like any other civil dispute. It will mean that policyholders seeking UM/UIM protection benefits will be allowed to file suit, either in State or Federal Court, against insurance carriers. The actions in State or Federal Court would then be subject to civil procedural rules in terms of pleadings, discovery, expert reports, as well as actual jury trials. Diversity actions can be filed in Federal Court subject to the insurance carrier being incorporated in another state and the amount in controversy exceeding the Federal diversity jurisdictional limits of $75,000.00.

With UM/UIM claims being disputed through the State and Federal Civil Court’s systems, the pros and cons of such a process might well depend on the vagaries of individual claims.

In general, the UM/UIM practice before Insurance Federation was one that generally left the perception that the policyholders were, sometimes in no small measure, merely being rebated premium dollars paid by policyholders to fund the available coverage. The perception, whether true or not, was that the policyholder had purchased coverage for UM/UIM for the personal protection necessitated by the all-too-high probability of uninsured motorists never being subjected to civil liability.

More often than not, the focus of UM/UIM arbitration disputes centered on coverage being available, liability being certain against the uninsured/underinsured driver, a de minimis burden of proof being imposed on the policyholder to prove injury and damages, coupled with the willingness of arbitration panels to reward policyholders for securing this protection through purchasing available coverage.

Each claim is potentially freed of the conclusory perception that the policyholder must recover.

IIn a practical realm, the Pennsylvania Supreme Court’s ruling in Insurance Federation untethers the perceptions which have been nurtured by deferential indifference. In place of those perceptions, a practical void unfolds. As it unfolds, each claim is potentially freed of the conclusory perception that the policyholder must recover. Instead, the policyholder and the insurance carrier will now be locked in a real dispute, and theories of liability, damages, and defenses will take on new meaning and import.

Some measure of control over the “cost” of the dispute will be sacrificed in exchange for awards having greater credibility.

Procedurally, the disputes will still be about entitlement and money, but some measure of control over the “cost” of the dispute will be sacrificed in exchange for awards having greater credibility by virtue of being decided by nascent triers of fact rather than passé Arbitration panels.

The most obvious advantage to both parties will be the expansion of discovery, an advantage that is seemingly more pro-defense than pro-policyholder. An obvious disadvantage to both parties, without binding arbitration, will be that UM/UIM disputes will be more expensive to litigate. It will likewise result in longer delays to resolve disputes as UM/UIM disputes are integrated into the civil court systems.

A negative corollary is that already crowded court dockets will now have to absorb the UM/UIM practice. As the disputes are absorbed into the civil court system, there will still be a growing need, as is already apparent with other types of disputes, for alternative dispute resolution, or for binding arbitration, either before single arbitrators or arbitrator panels; that becomes a matter of choice for the disputing parties.

Unresolved, at least at this juncture, is the extent to which UM/UIM litigation will invest policyholders to posture or pursue “bad faith” litigation against insurance carriers that elect to try disputes that result in a jury verdict in excess of the applicable policy limits, suggesting, obviously dependent upon circumstances, that the carrier be protected with side stipulations or agreements molding awards within policy limits. Experience will soon dictate the necessity of this course of action.

UM/UIM disputes will become more formalized through civil procedure in civil arbitrations and trials.

Practically speaking, the Supreme Court’s ruling in Insurance Federation will have an immediate impact on UM/UIM practice. It will abrogate mandatory policy-driven arbitration of UM/UIM disputes. It will result in UM/UIM disputes becoming more formalized through civil procedure in civil arbitrations and trials. It will open discovery practice in UM/UIM disputes, and will, no doubt, fuel appeals of arbitration awards and jury verdicts.

It need not completely eliminate the practice of arbitrating UM/UIM disputes before agreed-upon arbitration panels, as the parties will still be able to agree to arbitrate claims, either in a non-binding or binding format.

Insurance Federation will result in UM/UIM disputes tracking more traditional civil litigation.

Whether intended or not, the ruling in Insurance Federation will result in UM/UIM disputes tracking more traditional civil litigation, creating greater time and expense than less costly arbitration procedures.

Questions concerning this decision or its impact should be directed to our casualty litigation attorneys.

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