Arbitrators Must Follow Contract Requirements

Posted on July 30, 2021 by Barry Zalma

Arbitrators Must Follow Contract Requirements

The primary issue in the consolidated appeals is the scope of an automobile insurance policy’s arbitration provision. Two insureds with identical Allstate Insurance Company medical payments and uninsured/underinsured motorist (UIM) insurance coverage settled with their respective at-fault drivers for applicable liability insurance policy limits and then made medical payments and UIM benefits claims to Allstate. Allstate and the insureds were unable to resolve the UIM claims and went to arbitration as the policy required. The arbitration panels initially answered specific questions submitted about the insureds’ accident-related damages. At the insureds’ requests but over Allstate’s objections, the panels later calculated what the panels believed Allstate ultimately owed the insureds under their medical payments and UIM coverages and issued final awards.

In Allstate Insurance Company v. Nathan Harbour, Allstate Insurance Company v. Kenneth N. Mattison, Supreme Court No. S-17307, Supreme Court No. S-17610 (Consolidated), No. 7545, Supreme Court Of The State Of Alaska (July 23, 2021) the Supreme Court was asked to reverse the award of the arbitrators that exceeded their authority

INTRODUCTION

Allstate filed superior court suits to confirm the initial damages calculations, reject the final awards as outside the arbitration panels’ authority, and have the court determine the total amounts payable to the insureds under their policies. The judge assigned to both suits affirmed the final arbitration awards; Allstate appealed both decisions.

BASIC UIM CONCEPTS

Automobile liability insurers issuing bodily injury and death policies in Alaska must offer optional UIM coverage. An underinsured motor vehicle is statutorily defined as having insurance policy liability limits that are less than the damages for bodily injury or death that an accident victim is legally entitled to recover from the vehicle’s owner or operator. In other words, UIM coverage insures against the risk that a liable motorist with no or insufficient liability insurance coverage may be unable to pay the insured’s accident-related damages. An insurer’s maximum UIM liability is “the lesser of” (1) the difference between the insured’s damages caused by an underinsured motorist and the amounts paid to the insured “by or for a person who is or may be held legally liable for the damages” or (2) the UIM coverage limits.

FACTS AND PROCEEDINGS

The Insureds’ Allstate Coverage

Allstate issued separate automobile insurance policies to Nathan Harbour and Kenneth Mattison. The policies have identical provisions for medical payments and UIM coverages. The medical payments coverage limit for each insured is $100,000 per person. The coverage contains a subrogation provision that if Allstate makes medical payments for an insured, the insured’s “rights of recovery from anyone else become [Allstate’s] up to the amount [Allstate has] paid.”

The UIM “Insuring Agreement” states that, excluding punitive damages, Allstate “will pay all damages” for bodily injury and property damage “that an insured person is legally entitled to recover from the owner or operator of an . . . underinsured auto.” It then states that the “right to benefits and the amount payable will be decided by agreement between the insured person and Allstate” (bold text in original).

The Insureds’ Accidents And Settlements With At-Fault Drivers

The insureds were injured in unrelated car accidents; the other drivers undisputedly were at fault. Allstate paid medical expenses of $21,784 for Harbour and $5,982.52 for Mattison under their medical payments coverages. Allstate sent each insured notice that it intended to negotiate its right of recovery with the responsible driver. Allstate later instructed the insureds that they were not authorized to pursue its subrogated claims.

The insureds settled with the at-fault motorists for their respective liability insurance policy limits. Harbour received policy limits of $100,000 plus additional available amounts for prejudgment interest, attorney’s fees, and costs, for a total of $121,407.96. Mattison received policy limits of $100,000, but prejudgment interest was unavailable under the at-fault driver’s liability insurance policy; Mattison did not seek attorney’s fees and costs available under the liability policy.

Arbitrations

The insureds’ claims could not be resolved and were submitted to arbitrations pursuant to Allstate’s UIM arbitration provision. The arbitration panels, with two members in common, issued similar prehearing orders expressly limiting the arbitration’s scope to: (1) whether the insured had a right to receive damages from the at-fault driver; (2) the amount of such damages; and (3) the allocation of arbitration fees and expenses.

Superior Court Proceedings

Allstate filed complaints asking the superior court to confirm the initial damages determinations and then decide Allstate’s ultimate contractual obligation to the insureds. After the panels issued their final decisions, Allstate amended its complaints to seek relief vacating those decisions. The court ultimately confirmed both final awards on summary judgment.

DISCUSSION

The Panels Exceeded Their Arbitration Authority By Deciding Issues That Allstate Did Not Agree To Arbitrate.

Arbitration clauses are creatures of contract, and “a party cannot be required to submit to arbitration any dispute which [the party] had not agreed” to submit. Courts “decide whether . . . a controversy is subject to an agreement to arbitrate.” But if interpretation of other contract provisions is necessary to determine whether a claim fits within the contract’s arbitration clause, the arbitrator’s contract interpretation is given due weight if the parties did not seek a pre-arbitration ruling on arbitrability.

Harbour’s and Mattison’s arbitration panels concluded that they had authority to determine the total amounts payable under the insureds’ coverages despite their pre-arbitration orders expressly limiting the arbitrations’ scope to: (1) whether the insured had a right to recover damages from the at-fault driver; (2) the amount of such damages; and (3) the allocation of arbitrable fees and expenses. But Allstate did not consent to expanding arbitration authority; to the contrary, it repeatedly and affirmatively withheld consent. The panels therefore had no authority to determine the total benefit amounts payable under the policies.

The arbitration panels, therefore, exceeded their authority by purporting to determine the total benefit amounts Allstate owed the insureds under their coverages; the panels had authority to determine only each insured’s damages arising from the at-fault driver’s conduct. Only a court, not an arbitration panel, may determine whether the insureds are entitled to: prejudgment interest on Allstate’s liability to the insureds. It was legal error to affirm the panels’ determinations of their arbitration authority.

UIM insurers are not required to reimburse insureds for attorney’s fees and costs incurred in exhausting at-fault drivers’ liability insurance coverage underlying UIM excess insurance coverage.

The Supreme Court concluded that it was error to independently adopt the arbitration panels’ mistaken legal conclusions that the insureds’ settlements with the at-fault parties’ insurers provided common fund benefits requiring Allstate to pay a pro rata share of the insureds’ attorney’s fees and costs incurred in obtaining the settlements

The insureds mistakenly argue that they secured a direct benefit for Allstate by settling with the at-fault parties because “Allstate seeks to net 100% of that liability recovery against its UIM obligation to [the insureds].” Securing the settlements thus did not create a common fund or otherwise provide Allstate any direct benefit beyond the subrogated medical payment claims.

As part of the insured’s settlement with the at-fault driver’s insurance company, the insurance company agreed to satisfy Allstate’s subrogated claim.

CONCLUSION

Because the arbitration panels had no authority to determine anything beyond the insureds’ damages arising from their accidents and because Allstate withheld its consent for the panels to determine anything else, we reverse the superior court’s decisions and judgments. We also reverse some aspects of the court’s separate analysis and rulings on legal issues that the panels improperly decided. Given (1) the arbitration panels’ damages calculations and (2) our clarification of legal issues presented, we remand for the superior court to determine the amount, if any, Allstate must pay each insured under their medical payments and UIM coverages.

The superior court’s judgments are reversed and remanded for the superior court to determine what amounts, if any, Allstate owes the insureds under their policies in light of the arbitration determinations of the insureds’ damages caused by the at-fault drivers.

ZALMA OPINION

Arbitration usually saves time and money to the parties whose disputes are resolved by arbitration. It works most of the time because the arbitrators asked to resolve insurance issues limit their findings to what the arbitration provision of the policy allows. In this case the Alaska Supreme Court found that the arbitrators exceeded their authority and rendered an award that included findings that only a court could provide.

? 2021 – Barry Zalma Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at https://www.zalma.com and [email protected]. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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