Hanover Ins. Co. v. Losquadro

Citation157 Misc.2d 1014,600 N.Y.S.2d 419
PartiesHANOVER INSURANCE COMPANY, Plaintiff, v. Joseph LOSQUADRO and Bessie Losquadro, Defendants.
Decision Date08 June 1993
CourtNew York Supreme Court

Vincent P. Crisci, New York, for plaintiff.

John J. Guadagno, Mineola, for defendants.

EDWARD H. LEHNER, Justice:

The issue presented on this motion by defendants to dismiss the complaint and confirm an arbitration award is whether the automobile insurance policy provision permitting a trial de novo when an arbitration panel awards a claim for underinsurance in excess of $10,000 is enforceable.

Facts

Defendants were injured in an automobile accident. In settlement of their claims the insurer of the offending vehicle paid $10,000 to each of them, which sums constituted the full limits of its policy. Since the defendants carried supplemental uninsured motorists coverage (commonly referred to as "underinsurance"), they sought recovery from their insurer, the plaintiff herein.

The subject policy contained the following provision with respect to this coverage:

"If we and a covered person do not agree:

1. Whether that person is legally entitled to recover damages under this endorsement; or

2. As to the amount of damages;

either party may make a written demand for arbitration. In this event, each party will select an arbitrator. The two arbitrators will select a third....

. . . . .

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

1. Whether the covered person is legally entitled to recover damages; and

2. The amount of damages. This applies only if the amount does not exceed the minimum limit for bodily injury liability specified by the financial responsibility law of the state in which your covered auto is principally garaged. 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 arbitrators' decision. If this demand is not made, the amount of damages agreed to by the arbitrators will be binding."

In accordance with these provisions an arbitration proceeding ensued which culminated in an unanimous award by the three person panel of $210,000 to defendant Joseph Losquadro and $25,000 to defendant Bessie Losquadro, from both of which sums $10,000 was deducted representing the amounts received from the insurer of the offending vehicle.

Thereafter, rather than pay the amounts awarded, plaintiff instituted this action, asserting that since the awards exceeded the "minimum limit for bodily injury liability" specified in this state ($10,000--Vehicle and Traffic Law § 311), it was entitled to a trial de novo "on all issues".

Defendants have now moved to dismiss the complaint pursuant to CPLR 3211(a), and to confirm the award pursuant to CPLR 7510 on the ground that the provision for a trial de novo is unenforceable as against public policy in that it unfairly favors insurers because the insured is bound by an award that does not exceed $10,000, whereas an award in excess of that amount is non-binding.

Discussion

Plaintiff asserts that the enforceability of the provision has already been upheld by our Court of Appeals in the case of Reichel v. Government Employees Insurance Company, 66 N.Y.2d 1000, 499 N.Y.S.2d 385, 489 N.E.2d 1287 (1985). There, although a trial de novo was directed based on provisions similar to that quoted above, the validity thereof had not been challenged and thus was not passed upon by the court, as is clearly indicated in the Appellate Division opinion (107 A.D.2d 463, 465, 487 N.Y.S.2d 99). Research has not located any New York decision on this specific issue, although the question was raised in Liberty Mutual Insurance Company v. Lodha, 131 Misc.2d 670, 500 N.Y.S.2d 989 (Sup.Ct., Queens Co., 1986), but not decided because the court found a waiver in light of the fact that the arbitration proceeded with one arbitrator under the rules of the American Arbitration Association, rather than in accordance with the policy provisions.

Although not in unanimity, courts in other states that have examined the trial de novo provision, which appears to be fairly standard throughout the country, have in recent years generally declined enforcement on public policy grounds [see, Schmidt v. Midwest Family Mutual Insurance Company, 426 N.W.2d 870 (Minn.1988); Mendes v. Automobile Insurance Company of Hartford, 212 Conn. 652, 563 A.2d 695 (1989); Pepin v. American Universal Insurance Co., 540 A.2d 21 (R.I.1988); Worldwide Insurance Group v. Klopp, 603 A.2d 788 (Del.1992); Schaefer v. Allstate Insurance Company, 63 Ohio St.3d 708, 590 N.E.2d 1242 (1992); O'Neill v. Berkshire Mutual Insurance Company, 786 F.Supp. 397 (D.Vt.1992); Field v. Liberty Mutual Insurance Company, 769 F.Supp. 1135 (D.Hawaii, 1991) (the latter two federal cases interpreted Vermont and Hawaii law, respectively, even though the highest courts of those states had yet to rule on the issue) ].

Holdings to the contrary may be found in Cohen v. Allstate Insurance Company, 231 N.J.Super. 97, 555 A.2d 21 (1989) and Roe v. Amica Mutual Insurance Co., 533 So.2d 279 (Fla.1988), where the provision was upheld, essentially on the principle that parties should be free to contract as they see fit, with the courts finding no public policy barring enforcement.

The reasoning supporting the majority rule was aptly set forth by the Supreme Court of Minnesota in Schmidt v. Midwest Family Mutual Insurance Company, supra, where it stated (pp. 874-875):

"The policy's arbitration provision, instead of providing a speedy, informal, and relatively inexpensive procedure for resolving controversies between the 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 in resolving the controversy it likewise operates to defeat goals designed to promote judicial economy and respect for the judicial system.

. . . . .

"To hold otherwise would be to relegate arbitration to little more than a precursor to litigation rather than as a means through which contracting parties may achieve final resolution of claims expeditiously and with relatively little expense. Those reasons seem to us to be particularly compelling when considering trial de novo provisions which have been inserted into insurance contracts."

Thus, the question before me hinges on a determination as to whether under compulsory arbitration the contractual right of either party to demand a trial de novo of an award in excess of $10,000, which on its face appears to provide mutuality, contravenes any public policy of this state.

Initially it should be observed that "[a]rbitration is a favored method of dispute resolution in New York" [166 Mamaroneck Avenue Corp. v. 151 East Post Road Corp., 78 N.Y.2d 88, 93, 571 N.Y.S.2d 686, 575 N.E.2d 104 (1991) ], and "that the State favors and encourages arbitration 'as a means of conserving the time and resources of the courts and contracting parties' " [Mobil Oil Indonesia, Inc. v. Asamera Oil (Indonesia) Ltd., 43 N.Y.2d 276, 281-282, 401 N.Y.S.2d 186, 372 N.E.2d 21 (1977) ] by providing litigants with "a relatively expeditious and inexpensive forum to resolve their disputes" [Sablosky v. Edward S. Gordon Company, Inc., 73 N.Y.2d 133, 138, 538 N.Y.S.2d 513, 535 N.E.2d 643 (1989) ]. In Weinrott v. Carp., 32 N.Y.2d 190, 344 N.Y.S.2d 848, 298 N.E.2d 42 (1973), the court, after noting the legislative intent of encouraging arbitration, observed that a "way to encourage the use of the arbitration forum would be to prevent parties to such agreements from using the courts as a vehicle to protract litigation"(p. 199, 344 N.Y.S.2d 848, 298 N.E.2d 42).

Here the arbitration provision only accomplishes the foregoing goals if the insurer is successful in winning on the issue of liability or if damages are found not to exceed $10,000. On the other hand, if a higher award is rendered and the insurer requests a trial de novo, the insured faces the expenses and uncertainty of formal litigation with the consequence that many costs associated therewith, including those incurred to obtain needed expert medical testimony, which in these times are quite significant, will have to be incurred twice.

To me it is evident that the trial de novo provision at issue cannot be said to be in harmony with the goal of providing arbitration as an "expeditious and inexpensive forum" for the resolution of disputes between insureds and insurers. The fact that Insurance Law § 5106 grants an insured the option to arbitrate a dispute with respect to the payment of no-fault first party benefits, with either party then having the right to demand a trial de novo if the award is $5,000 or greater, does not demonstrate a contrary legislative intent as under that section only the insured can require that ...

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