Binding Arbitration Provision In Insurance Code Ruled Unconstitutional

The 1st District Appellate Court recently found unconstitutional a section of the Illinois Insurance Code requiring the mandatory binding arbitration of physical damage subrogation claims between insurers, where the amount in controversy is less than $2,500, as violating the constitutional right to a jury trial. Interstate Bankers Casualty Co. v. Hernandez, 2013 IL App (1st) 123035, 2013 WL 6699473 (Dec. 18, 2013).

The subrogee, Interstate, and its insured, Jose Gonzalez, were represented by Beermann, Pritikin, Mirabelli, Swerdlove LLP. The Law Offices of Laura A. Holwell of Chicago represented the defendant, Alberto Hernandez.

Gonzalez and Hernandez were involved in a car accident in 2012, as a result of which Interstate made payments to its insured, Gonzalez, for property damage to his vehicle. Interstate as subrogee and Gonzalez subsequently brought a negligence complaint against Hernandez with a jury demand, seeking, in one count, the recovery of $1,154.47, and in a second count an additional $500, both for property damage.

Hernandez moved to dismiss, claiming that the action was barred by Section 143.24d of the Illinois Insurance Code, 215 ILCS 5/143.24d. That section requires the arbitration of physical damage subrogation claims between insurers pursuant to the Nationwide Inter-Company Arbitration Agreement (NICAA) for amounts less than $2,500. The statute applies to all insurers, regardless of whether the insurer signed the NICAA. The statute does not contain a provision for rejection of the arbitration award.

The plaintiffs opposed the motion to dismiss on the ground that Section 143.24d is unconstitutional because it deprives them of the right to a jury trial. The trial court, nevertheless, granted the motion and the plaintiffs took this appeal.

Common Law Rights In 1970

In an opinion by Justice Aurelia Pucinski, the 1st District reversed. She began her analysis by noting that the constitutionality of Section 143.24d was one of first impression.

Pucinski then discussed Reed v. Farmers Insurance Group, 188 Ill. 2d 168 (1999), in which the Illinois Supreme Court upheld the validity of a mandatory binding arbitration requirement for claims for uninsured motorist coverage. It did so on the ground that an action for uninsured motorist coverage was created by statute and did not exist at common law.

The Reed court distinguished Grace v. Howlett, 51 Ill. 2d 478 (1972), in which the court struck down a statute requiring arbitration of certain automobile injury cases, as violative of the right to a jury trial. The Reed court also relied on Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33 (1994), in which the court found that no right to a jury trial existed under the Consumer Fraud Act, inasmuch as that act created a statutory right not existing at common law.

Based on these cases, Pucinski said that two issues presented themselves here. One was the effective date of the common law actions for which the right to a jury trial was preserved. The other was how the action here should be characterized, i.e., whether one for subrogation, negligence or both.

As to the first issue, Pucinski noted various interpretations of the relevant date, such as the time of the adoption of Illinois’ 1870 Constitution or the adoption of the U.S. Constitution. She rejected both of these and referenced language in the 1970 Illinois Constitution, which provides that “[t]he right of trial by jury as heretofore enjoyed shall remain inviolate.” (Emphasis added.) She took this language to mean that the jury trial right preserved in Illinois is the right as it existed at common law in 1970.

Nature Of Action

She then turned to the nature of a subrogation action and observed that it originally arose in equity and was still considered a creature of equity in the late 1800s. As such, the action did not involve a right to a jury trial.

By 1970, however, subrogation actions evolved into common law actions at law with an attendant right to jury trial. This was so even after the distinction developed between “conventional subrogation,” which is based on contract, and “legal subrogation,” which is based merely on the relationship between the parties. She noted that the subrogation in this case was “conventional” in nature.

Pucinski alternatively analyzed subrogation as merely a theory of recovery in the present case, with the “underlying” cause of action being one based on negligence. She observed that a negligence claim for damages is one at law and has always carried the right to a jury trial.

Thus, either way—whether the case was characterized as an action for negligence or a subrogation action—both types of actions were recognized as common law actions entailing the right to a trial by jury at the time of the adoption of the 1970 Illinois Constitution.

The court therefore reversed the decision of the trial court and held that Section 243.24d is unconstitutional as it violated the right to trial by jury.

Key Point

Statutory provisions imposing mandatory binding arbitration of common law actions to which the right to jury trial existed as of 1970 are unconstitutional.