Chapter 2 - § 2.8 • RESOLUTION OF UM|UIM CLAIMS — ISSUES INVOLVING ARBITRATION AND LITIGATION

• Jurisdiction: Colorado

§ 2.8 • RESOLUTION OF UM/UIM CLAIMS — ISSUES INVOLVING ARBITRATION AND LITIGATION

Many automobile insurance policies provide that if a dispute arises between the insurer and the insured over the liability of an uninsured or underinsured motorist, or over the amount of damages the insured is entitled to collect from an uninsured or underinsured motorist, any such dispute shall be resolved by mandatory, binding arbitration. Some insurance policies no longer require mandatory, binding arbitration, but permit arbitration as long as both parties agree. If the parties do not agree to arbitration, then the dispute may be resolved through a lawsuit. If the policy does contain an arbitration clause, it may provide that specific rules apply to the arbitration, such as the rules of the American Arbitration Association (AAA). If the policy does not specify what rules apply, then the arbitration process will be governed by the Uniform Arbitration Act, C.R.S. §§ 13-22-201, et seq. The following subsections address issues that have arisen in connection with both means of resolving disputes over UM/UIM benefits.

§ 2.8.1—Arbitration Clause in UM/UIM Coverage Is Not Invalid as Contrary to Public Policy

Where insurance policy contained clause requiring arbitration of dispute over insurer's obligation to pay UM benefits, and policy stated that arbitration was a condition precedent to maintaining a cause of action against the company, arbitration clause was valid and enforceable and was not contrary to public policy of uninsured motorist statute. Moreover, requirement to arbitrate divested trial court of jurisdiction to enter judgment against uninsured motorist, and judgment against uninsured motorist was a nullity. Wales v. State Farm Mutual Automobile Insurance Co., 559 P.2d 255 (Colo. App. 1976).

In Wales v. State Farm Mutual Automobile Insurance Co., 559 P.2d 255 (Colo. App. 1976), the plaintiff, Mary Lou Wales, was injured in June 1969, when the vehicle in which she was a passenger was involved in a three-car collision. Wales brought suit against two of the drivers, McTaggart and Suazo, and settled her claim against McTaggart. However, she soon discovered that Suazo was uninsured. Wales notified her own insurance carrier, State Farm, of that fact, and the parties attempted to initiate arbitration, but no arbitration took place. In the meantime, Wales obtained a judgment against Suazo in the amount of $22,350, and brought a separate action to enforce that judgment against State Farm. State Farm denied liability, asserting that Wales's claim for UM benefits was subject to mandatory arbitration under the insurance policy and that arbitration was a condition precedent to maintenance of any suit against State Farm. The trial court ruled in favor of Wales, holding that the arbitration clause was invalid as contrary to public policy and that the judgment that Wales had obtained against Suazo was conclusive as to State Farm's obligation to pay UM benefits. The court of appeals reversed, concluding that the arbitration clause was valid and enforceable and that in the absence of arbitration the trial court had no jurisdiction to enter a judgment against State Farm.

The court of appeals rejected Wales's argument that the arbitration clause was contrary to the public policy of Colorado as embodied in the uninsured motorist statute, which at that time was codified as C.R.S. §§ 10-4-319 and -320 (1973). Wales argued that the arbitration clause was invalid because its enforcement would restrict her access to judicial determination of the amount of damages that she was legally entitled to collect from the uninsured motorist, thus defeating the purpose of the UM statute, which is to protect innocent victims from financially irresponsible motorists. The court of appeals noted that protecting innocent victims from such irresponsible motorists is an important legislative goal, but that it was not conclusive.

The court of appeals noted that under Article XVIII, § 3 of the Colorado Constitution, the General Assembly is authorized to enact laws permitting the resolution of disputes by arbitrators. Further, the court noted that the supreme court had upheld common law arbitration in Ezell v. Rocky Mountain Bean & Elevator Co., 76 Colo. 409, 232 P. 680 (1925). In addition, in enacting the Uniform Arbitration Act of 1975, C.R.S. §§ 13-22-201, et seq., the General Assembly adopted a policy of encouraging the resolution of disputes through arbitration. Thus, the court of appeals held that the arbitration clause in State Farm's UM coverage was not contrary to public policy and was enforceable. 559 P.2d at 257.

The court of appeals also rejected Wales's argument that the arbitration clause in the contract was unenforceable because it did not comply with C.R.C.P. 109, which requires a written agreement to arbitrate a dispute. The court found that the policy itself was such an agreement to arbitrate. The court noted that the policy stated that any dispute over the legal liability of an uninsured motorist for payment of damages would be submitted to arbitration, in which each party would select an arbitrator and the two arbitrators so chosen would select a third. Further, the policy provided that arbitration was a condition precedent to maintaining a cause of action. The court of appeals declined Wales's invitation to invalidate this arbitration provision as an involuntary contract of adhesion. 559 P.2d at 258.

Finally, the court of appeals held that the judgment that Wales had obtained against Suazo could not be enforced because the arbitration clause divested the trial court of jurisdiction to enter a judgment against State Farm. "Arbitration having been a prerequisite to jurisdiction, the proceedings below in the absence of arbitration were a nullity . . . ." Id. Thus, the court of appeals did not need to address the question of the validity of a "consent to sue" clause in State Farm's policy.

§ 2.8.2—Costs of Arbitration to Be Borne by Insurer

Provision in UM policy that required insured to arbitrate dispute over UM benefits and to pay his own costs and half the costs of the neutral arbitrator was void as against public policy expressed in C.R.S. § 10-4-609, because requiring insured to pay his own costs and half of third arbitrator's fee would reduce insured's recovery well below his actual damages. Requiring insured to pay such costs would penalize him for utilizing mechanism that should provide low-cost, speedy means of resolving dispute. Garceau v. Iowa Kemper Insurance Co., 859 P.2d 243, 245 (Colo. App. 1993).

In Garceau v. Iowa Kemper Insurance Co., 859 P.2d 243 (Colo. App. 1993), George Garceau was injured while riding as a passenger in an uninsured motor vehicle. Garceau made a claim for uninsured motorist benefits under a policy issued to his father by Economy Fire and Casualty Co. That policy provided that if the parties could not agree on the amount of benefits to which an insured was entitled, either party could request arbitration. Arbitration was to occur before a panel of three arbitrators, one selected by each party, and a third selected by the other two. In addition, the policy contained the following provision: "'Each party will: 1. Pay the expenses it incurs; and 2. Bear the expenses of the third arbitrator equally.'" Id. at 244. Garceau's claim went to arbitration, and the arbitrators awarded him damages of $42,000. However, Garceau also incurred arbitrators' fees of $7,888.63 and costs of $9,398.55. When Garceau requested payment of these expenses, the insurer, relying upon the quoted policy language, declined. Garceau then brought a declaratory judgment action, seeking a determination that the provision requiring him to pay fees and costs was void as contrary to public policy. The trial court entered summary judgment against Garceau, reasoning that because arbitration was only optional under the policy, Garceau would be required to bear his own fees and expenses. However, the Colorado Court of Appeals agreed with Garceau that the policy provision requiring Garceau to pay arbitrators' fees and expenses was void as contrary to the purpose of the uninsured motorist statute.

Citing Kral v. American Hardware Mutual Insurance Co., 784 P.2d 759 (Colo. 1989), the court pointed out that the "purpose of the uninsured motorist statute is to enable the insured to gain compensation for loss resulting from the negligent conduct of a non-insured motorist in the same manner as the insured would be compensated for loss resulting from the negligent conduct of an insured motorist." 859 P.2d at 245. The court noted that this principle "has been followed consistently by the courts of this state." Id.

The court recognized that the policy language contested by Garceau substantially penalized him by requiring him to pay $17,287.18 for fees and costs. This policy provision undermined the purpose of the uninsured motorist statute, C.R.S. § 10-4-609. Therefore, the court held that "the fee and expense provision is void as against the public policy expressed in § 10-4-609 and, thus, is unenforceable." 859 P.2d at 245. The court found that courts in other jurisdictions had reached the same result.

The court rejected the insurer's argument that the policy language at issue was consistent with the purpose of the uninsured motorist statute because C.R.S. § 10-4-706 requires only mandatory liability coverage of $25,000, exclusive of interest and costs. Relying upon Allstate Insurance Co. v. Allen, 797 P.2d 46 (Colo. 1990), the court recognized that "the 'exclusive of interest and costs' language establishes a minimum applicable to an initial amount of damages suffered and not an exclusion from liability as defendant asserts." 859 P.2d at 246.

Therefore, the court of appeals held that Garceau should be awarded $42,000 exclusive of arbitrators' fees and costs. The amount of costs should be determined under C.R.S. § 13-16-122 and should reflect the amount of costs...