Graham v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 27 June 1989
• Citation: 565 A.2d 908
• Parties: George GRAHAM and Mary Jane Graham, Plaintiffs Below, Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a foreign corporation, Defendant Below, Appellee. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 908

565 A.2d 908

George GRAHAM and Mary Jane Graham, Plaintiffs Below, Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a foreign

corporation, Defendant Below, Appellee.

Supreme Court of Delaware.

Submitted: June 27, 1989.

Decided: Oct. 16, 1989.

Harold Schmittinger and William D. Fletcher, Jr. (argued) of Schmittinger and Rodriguez, P.A., Dover, for appellants.

Robert B. Young (argued) and Norman H. Brooks, of Young & Sherlock, Dover, for appellee.

Before CHRISTIE, C.J., and WALSH and HOLLAND, JJ.

WALSH, Justice:

In this appeal, we are called upon to decide whether a mandatory binding arbitration clause in an automobile insurance policy is enforceable over the objection of the insured. The plaintiffs, George and Mary Jane Graham (the "Grahams"), appeal from a decision of the Superior Court granting the defendant-insurer's motion for summary judgment. The Grahams object to the enforcement of the arbitration clause on both statutory and constitutional grounds. Specifically, they contend that because 18 Del.C. § 3902 does not explicitly endorse the resolution of uninsured motorist claim disputes through the arbitral mechanism, an insured may not be compelled by contractual language to submit to arbitration. The Grahams further argue that enforcement of the arbitration clause would deprive them of the right to trial by jury preserved in Article I, § 4 of the Delaware Constitution. We find no merit in either contention. Accordingly, we hold that the arbitration clause is enforceable and affirm the judgment of the Superior Court.

I

The factual circumstances giving rise to this appeal are quite straightforward. On or about August 4, 1985, the Grahams were travelling in a motor vehicle insured by State Farm Mutual Automobile Insurance Company ("State Farm"). The vehicle was forced off the roadway by a negligent motorist whose identity has never been ascertained. The Grahams' vehicle struck a telephone pole and the couple sustained physical injuries.

A dispute arose between the parties concerning the amount that State Farm was obligated to pay under the uninsured motorist provisions of its policy with the Grahams. The Grahams filed suit in the Superior Court, seeking a determination of State Farm's responsibility for coverage. State Farm filed a motion for summary judgment, asserting that the Grahams' suit was barred by language in the policy that purported to mandate that claims such as the Grahams' be resolved through binding arbitration. ¹ The parties have agreed that the Grahams were not explicitly advised of the inclusion of this language in the policy and were never given the option of selecting a different dispute resolution mechanism. Moreover, the Grahams did not receive a copy of the policy until after they had paid their first premium. However, the Superior Court found that the Grahams ratified the policy by failing to object to any of its provisions after receiving it. Even if the Grahams could have avoided the arbitration provisions of the policy shortly after its execution, the court found that they lost that right by their silent acceptance of the policy's coverage during the two years prior to their accident. Accordingly, the court granted State Farm's motion for summary judgment and held that the parties' dispute should be resolved in an arbitration proceeding.

II

In arguing against enforcement of the arbitration clause, the Grahams attempt to appeal to "the old judicial hostility to arbitration." Kulukundis Shipping Co. v. Amtorg Trading Corp., 2d Cir., 126 F.2d 978, 985 (1942). At common law, courts readily declared agreements to arbitrate contrary to public policy, since such agreements were viewed as an attempt to deprive the court of its jurisdiction. See, e.g., Home Ins. Co. of N.Y. v. Morse, 87 U.S. (20 Wall.) 445, 451, 22 L.Ed. 365 (1874); Randel v. Chesapeake & Del. Canal Co., Del.Super., 1 Del. (1 Harr.) 233 (1833). Over time, however, the judicial view of arbitration has evolved from hostility to eager acceptance. In part, this change has been fostered by a recognition of the efficiency and specialized expertise available in an arbitral forum. In addition, many jurisdictions have enacted legislation mandating the enforcement of agreements to submit to arbitration. In 1947, Congress led the way with the United States Arbitration Act, 9 U.S.C. §§ 1-15. ² Subsequently, many states (including Delaware) enacted a Uniform Arbitration Act (the "Act") similar to the federal legislation. 10 Del.C. §§ 5701-5725.

The Delaware version of the Act provides that "[a] written agreement to submit to arbitration any controversy existing at or arising after the effective date of the agreement is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract...." 10 Del.C. § 5701. In short, the public policy of this state favors the resolution of disputes through arbitration. Pettinaro Constr. Co. v. Harry C. Partridge, Jr., & Sons, Inc., Del.Ch., 408 A.2d 957, 961 (1979). On its face, section 5701 applies to an agreement to arbitrate contained in an insurance policy. Therefore, to avoid enforcement of the arbitration clause, the Grahams must show either that the clear language of section 5701 has been superceded by some other provision of law or that the clause may be revoked under traditional principles of contract law.

First, the Grahams argue that because the statute governing uninsured motorist coverage, 18 Del.C. § 3902, does not explicitly endorse the inclusion of arbitration clauses in policies issued under the statute, any attempt to compel arbitration is contrary to the public policy embodied in section 3902. The Grahams seek to rely upon our recent decision in Frank v. Horizon Assurance Co., Del.Supr., 553 A.2d 1199 (1989). In Frank, we held that an insurer may not limit uninsured motorist coverage by restricting its scope to certain vehicles owned by the insured. Rather, section 3902 mandates that coverage be deemed personal to the insured, regardless of the vehicle he occupies. Thus, Frank stands for the proposition that an insurer may not contract the scope of coverage below the level established by statute. In this case, however, the insurer has not attempted to limit coverage in any way. State Farm has simply specified the means by which policy disputes are to be resolved. ³ The Grahams suggest that an arbitration of their dispute with State Farm would produce a biased result and thus limit their rights under the policy. They assert that arbitration would be "extremely harsh" because State Farm may select one of the arbitrators and because two out of the three arbitrators may impose a binding decision. Far from being unfair, the arbitral mechanism contained in the policy is quite common in the commercial arena and shows no favoritism to either party. Moreover, 10 Del.C. § 5714 provides a judicial remedy when an arbitration has been tainted by "corruption, fraud or other undue means," by "evident partiality," or by other specified forms of misconduct. We believe that this statutory safeguard is sufficient to insure that an arbitration under the policy will be fair to both parties.

The Grahams also argue that enforcement of the arbitration clause would deprive them of their constitutional right to a jury trial. Del.Const., art. I, § 4. The Delaware Constitution preserves the right to trial by jury as it existed at common law. Fountain v. State, Del.Supr., 275 A.2d 251 (1971); In re Markel, Del.Supr., 254 A.2d 236 (1969). Moreover, we have held in Allstate Ins. Co. v. Spinelli, Del.Supr., 443 A.2d 1286, 1290 (1982) that an action arising under an uninsured motorist policy is an action ex contractu, an action known to the common law. If the parties' dispute were to be tried in the courts of this State, the parties would be entitled to request a jury trial. The availability of a jury trial for dispute resolution is not determinative, however. That right is not absolute but subject to waiver if the parties so intend. Accordingly, we must decide whether the arbitration clause constitutes a valid waiver of the right to a jury trial. We believe that it does.

The Grahams argue that they should not be bound by contract terms to which they did not explicitly assent. They contend that because an insurance policy is a contract of adhesion, it cannot serve as the vehicle for a fully informed waiver. State Farm concedes that the Grahams were never informed of the arbitration clause and received a copy of the policy only after premiums had been paid and coverage had begun. Therefore, it is argued that the arbitration clause may not be enforced against the wishes of the insured.

The problem with the Grahams' argument is that it proves too much. It is true that an insurance policy is a contract of adhesion. State Farm Mut. Auto. Ins. Co. v. Arms, Del.Supr., 477 A.2d 1060, 1065 (1984). However, the adhesive nature of a contract does not allow the non-drafting party to reject contract terms that he later finds unappealing. If the Grahams' argument were followed to its logical extreme, an insured could radically redefine his policy simply by proving that he had not been informed of its stated terms in advance of purchase. ⁴

The fact that a contract is adhesive does not give rise to a presumption of unenforceability. The adhesion factor is an aid in contract interpretation. If there is an ambiguity in the terms of the contract, that ambiguity will be resolved against the party who drafted the contract. See E.I. du Pont de Nemours & Co. v. Shell Oil Co., Del.Supr., 498 A.2d 1108, 1114 (1985). The Grahams have not argued that the arbitration clause is ambiguous, however, and thus we have no occasion to apply this rule of construction.

A contract of adhesion may be declared unenforceable, in whole or in part, if its terms are unconscionable within the meaning of 6 Del.C. § 2-302....