Fireman's Fund Ins. Companies v. Bugailiskis

• Decision Date: 28 February 1996
• Docket Number: No. 2-95-1115,2-95-1115
• Citation: 214 Ill.Dec. 989,278 Ill.App.3d 19,662 N.E.2d 555
• Parties: , 214 Ill.Dec. 989 FIREMAN'S FUND INSURANCE COMPANIES, Plaintiff-Appellee, v. Deborah BUGAILISKIS, Defendant-Appellant (Ronald Bugailiskis, Defendant).
• Court: United States Appellate Court of Illinois

Page 555

662 N.E.2d 555

278 Ill.App.3d 19, 214 Ill.Dec. 989

FIREMAN'S FUND INSURANCE COMPANIES, Plaintiff-Appellee, v. Deborah BUGAILISKIS, Defendant-Appellant (Ronald Bugailiskis, Defendant).

No. 2-95-1115.

Appellate Court of Illinois Second District.

Feb. 28, 1996.

Appeal from the Circuit Court of Lake County. No. 93-L-1649; Honorable Patrick N. Lawler, Judge Presiding.

James J. Hermann Jr., James J. Hermann, Jr. & Associates P.C., Waukegan, for Deborah Bugailiskis and Ronald Bugailiskis.

Aronson, Smith & Cross, Robert M. Smith, Kurt E. Olsen, Chicago, for Fireman's Fund Insurance Companies.

Justice THOMAS delivered the opinion of the court:

Pursuant to Supreme Court Rule 308 (155 Ill.2d R. 308), defendant, Deborah Bugailiskis, appeals the denial of her motion to dismiss plaintiff's complaint demanding a jury trial of defendant's underinsured motorist claim. The issues on appeal are: (1) whether an underinsured motorist coverage arbitration clause which allows arbitration awards to be appealed only when they exceed the minimum liability amount set forth in the Illinois Safety Responsibility Law (625 ILCS 5/7-100 et seq. (West 1994)) is void as against public policy; and (2) if the clause is valid, whether it allows a jury trial as to liability and damages or only as to damages. We reverse and remand.

On March 26, 1989, defendant was injured when a vehicle operated by Rob Delaney ran over her legs. Defendant filed a complaint in the circuit court of Lake County, and Rob Delaney's insurer paid its policy limit of $25,000. At the time of the occurrence, Ronald Bugailiskis, defendant's father, had an automobile insurance policy with plaintiff, Fireman's Fund Insurance Company, providing underinsured motorist coverage in the amount of $300,000. Ronald Bugailiskis was a party to the lawsuit but is not a party to this appeal. Defendant asserted a claim under that policy for the amount of the damages which exceeded the $25,000 paid by Delaney's carrier.

The claim was submitted to arbitration. On October 8, 1993, the arbitration panel found plaintiff liable and found that defendant's damages were $192,414.99. The panel also found that defendant's comparative negligence was 27 1/2%, which resulted in a net award of $139,500.85.

The arbitration provision in the policy provided in relevant part:

"A decision agreed to by two of the arbitrators will be binding as to:

a. Whether the insured is legally entitled to recover damages; and

b. The amount of damages. This applies only if the amount does not exceed the minimum limit for bodily injury liability specified by the Illinois Safety Responsibility Law. If the amount exceeds that limit, either party may demand the right to a trial. This demand must be made within 60 days of the arbitrator's decision. If this demand is not made, the amount of damages agreed to by the arbitrators will be binding."

Pursuant to the arbitration provision, plaintiff rejected the award. On December 2, 1993, plaintiff filed a complaint demanding a jury trial.

On August 8, 1995, the trial court denied defendant's motion to dismiss but found that plaintiff was entitled to a trial only as to the damages issue. On August 17, 1995, the trial court entered an order pursuant to Supreme Court Rule 308, finding that the issues created by defendant's motion to dismiss involve questions of law as to which there is a substantial ground for difference of opinion and that an immediate appeal of the August 8, 1995, order may materially advance the ultimate termination of the litigation. On August 31, 1995, defendant filed an application for leave to appeal pursuant to Supreme Court Rule 308. On September 27, 1995, we allowed defendant's application for leave to appeal.

The trial court's August 17, 1995, order certified the following questions for our review:

"1. Whether language in Plaintiff's policy providing for a new trial only if an arbitration award exceeds the financial responsibility limit of $20,000.00 per person is invalid, as it discriminates against the insured who cannot appeal a low award or no award, but gives the insurer trial de novo of a high award and is therefore violative of public policy, as a majority of states considering the question have held?

2. Whether by virtue of the policy language, trial is limited to the issue of damages only?"

Illinois law encourages arbitration as a means of reducing litigation in the court system. Charles O. Finley & Co. v. Kuhn, 569 F.2d 527 (7th Cir.1978); Mayflower Insurance Co. v. Mahan, 180 Ill.App.3d 213, 217, 129 Ill.Dec. 159, 535 N.E.2d 924 (1988). However, an arbitration clause is not against public policy merely because it permits nonbinding arbitration. American Family Mutual Insurance Co. v. Baaske, 213 Ill.App.3d 683, 688, 157 Ill.Dec. 239, 572 N.E.2d 308 (1991); Mayflower, 180 Ill.App.3d at 217, 129 Ill.Dec. 159, 535 N.E.2d 924.

Our supreme court has not yet determined the validity of this type of arbitration clause. However, the language allowing the parties to demand a trial if the arbitration award is above the minimum liability amount is common in insurance policies, not just in Illinois but in several other states. Several courts have addressed the validity of this type of arbitration clause language, and a majority of those courts have held that the clause itself is void as against public policy. See Mendes v. Automobile Insurance Co., 212 Conn. 652, 563 A.2d 695 (1989); Worldwide Insurance Group v. Klopp, 603 A.2d 788 (Del.1992); Schmidt v. Midwest Family Mutual Insurance Co., 426 N.W.2d 870 (Minn.1988); Hanover Insurance Co. v. Losquadro, 157 Misc.2d 1014, 600 N.Y.S.2d 419 (1993); O'Neill v. Berkshire Mutual Insurance Co., 786 F.Supp. 397 (D.Vt.1992).

In Connecticut, Delaware, Minnesota, New York, and Vermont, the courts have held void as against public policy the type of arbitration clause contained in the policy in the present case. The courts have held that, although the clause is ostensibly neutral because it allows either party to demand a trial if the award exceeds the minimum liability amount, application of the "escape hatch" language of the clause unfairly and unequivocally favors the insurer over the insured. O'Neill, 786 F.Supp. at 398. The courts have held that the language allows the insurer to avoid a high award while binding the insured to a low award. O'Neill, 786 F.Supp. at 398-99.

In Klopp, the court stated:

"Under the present policy language both parties are bound by a low award which an insurance company is unlikely to appeal. While high awards may be appealed by either party, common experience suggests that it is unlikely that an insured would appeal such an award." Klopp, 603 A.2d at 791.

Moreover, courts have held that, although the insurance policy may not technically qualify as a contract of adhesion, it possesses some of the earmarks of an adhesive contract. Schmidt, 426 N.W.2d at 874. The provision lacks mutuality of remedy and was entered into between parties possessing unequal bargaining power with little or no opportunity for arm's length negotiation. Schmidt, 426 N.W.2d at 874.

Courts have also concluded that the clause contravenes the public policy behind arbitration--the efficient, cost-effective resolution of disputes. In Schmidt, the court explained "The policy's arbitration provision, instead of providing a speedy, informal, and relatively inexpensive procedure for resolving controversies between parties--the raison d'etre of arbitration--instead substantially thwarts those policy goals. By permitting resort to the court system for a trial de novo notwithstanding the absence of any claimed impropriety in the arbitration process itself, by fostering multiple hearings in multiple forums, by increasing the costs to the contracting parties, and, by unnecessarily, and without real cause, extending the time consumed...