Clausen Miller Victory Makes New Law: Time Limits For Challenging Arbitration Award Do Not Bar Insurer From Asserting Policy Limits Defense That Was Not Arbitrated
October, 2006
Introduction
The Illinois Appellate Court recently forged new law in holding that the time limits for moving to vacate, modify, or correct an arbitration award do not apply to an insurer’s policy limits defense that has been reserved from arbitration. Shultz v. Atlantic Mut. Ins. Co., No. 1-05-0749, 853 N.E.2d 94 (Ill. App. 2006).
Facts
Defendant Atlantic Mutual issued plaintiff an automobile policy with $500,000 in uninsured/underinsured motorist (“UM/UIM”) coverage and $2 million in personal umbrella liability coverage. The UM/UIM portion of the policy contained an arbitration clause, stating that the insured could demand arbitration if a dispute arose concerning whether and how much Atlantic Mutual was obligated to pay. The arbitration section contained a trial de novo clause, which provided that an award in excess of the minimum statutory limit for bodily injury liability was binding if neither side demanded a trial within 60 days.
During the policy period, plaintiff pedestrian was hit by an underinsured motorist. The driver was insured by American Family Insurance, which paid plaintiff $100,000, the limit of the driver’s policy. Plaintiff then submitted a claim to Atlantic Mutual seeking payment for the remainder of his damages under the UM/UIM coverage section. Plaintiff demanded arbitration after Atlantic Mutual paid him $10,000 for medical expenses, less than his claimed damages.
Before the arbitration, Atlantic Mutual’s counsel faxed plaintiff’s counsel a letter stating that by going forward with arbitration, Atlantic Mutual was not waiving its coverage defenses. Specifically, Atlantic Mutual maintained its position that the policy provided a maximum of $500,000 in coverage for plaintiff’s claim. Plaintiff’s counsel acknowledged his agreement with the letter and further stated, “We will not disclose insurance limits or coverage dispute.”
A few months later, the matter was arbitrated. The award stated, “We find for [plaintiff], and against Atlantic Mutual, in the amount of $925,000 and with a set off of $110,000, leaving a net award in the amount of $815,000.” Atlantic Mutual paid plaintiff $390,000, representing the $500,000 policy limit less the $10,000 medical expenses payment and the $100,000 American Family Insurance payment.
Plaintiff then sought to confirm the entire arbitration award, less Atlantic Mutual’s $390,000 payment. Plaintiff argued that Atlantic Mutual had waived its policy limits defense by failing to challenge the award within 90 days, as required by the Illinois Arbitration Act, and failing to demand a trial de novo within 60 days, as required by the policy. The trial court granted summary judgment for Atlantic Mutual, finding that it could raise its policy limits defense for the first time in the confirmation proceeding. The Illinois Appellate Court affirmed.
Analysis
As a matter of first impression, the appellate court held that the Arbitration Act’s 90-day time limit for moving to vacate, modify, or correct an award does not apply to an insurer’s policy limits defense where the defense has been reserved from arbitration. The court reasoned that coverage disputes are not included in arbitration provisions of uninsured motorist coverage. Rather, arbitration in such instances is limited to a determination of the uninsured motorist’s liability and the extent of the insured’s damages.
Further, the parties had specifically agreed that only the issue of damages would be submitted to arbitration, and the arbitrator had not actually decided the coverage limits defense or considered any evidence in that regard. Thus, the Arbitration Act’s time limit for challenging an award did not apply: issues not submitted to arbitration are not subject to the Act’s requirements.
For the same reasons, the court rejected plaintiff’s argument that the policy’s trial de novo provision independently barred the coverage defense. What was rendered final and binding by confirmation of the award was the arbitrator’s determination of damages, not a determination of Atlantic Mutual’s liability beyond the policy limits.
Learning Point:
Shultz is a new illustration of the principle that issues not arbitrated are not governed by either statutory or policy arbitration provisions. Where there is a clear reservation of a coverage defense from arbitration, and the insurer does not challenge the amount of damages as determined by the arbitrator, the insurer can raise the defense for the first time in a confirmation proceeding.
The Shultz plaintiff’s maneuvering, had it been successful, would have allowed him to recover nearly twice the policy limits — in plain contravention of the parties’ contractual agreement. Plaintiff seized on the somewhat vague wording of the arbitration award, which stated merely that the arbitrator found “against Atlantic Mutual…in the amount of $815,000.” Absent extrinsic evidence that the coverage defense had been reserved from arbitration, the award could have been read as a determination of liability. Thus, in an abundance of caution, defense counsel should move to clarify such awards to specify that the arbitrator determined damages only.
Editors Note:
This significant insurance victory was obtained by CM partner Michelle Valencic in the trial court and successfully defended by CM Partner Melinda Kollross and senior associate Agelo Reppas of CM's Appellate Practice Group before the Illinois Appellate Court, First. District
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