ILLINOIS FARMERS INS. v. GLASS SERVICE, No. A03-109.

• Decision Date: 22 July 2004
• Docket Number: No. A03-109.
• Citation: 683 N.W.2d 792
• Parties: ILLINOIS FARMERS INSURANCE COMPANY, et al., Respondents, v. GLASS SERVICE COMPANY, Inc., et al., Appellants.
• Court: Minnesota Supreme Court

683 N.W.2d 792

ILLINOIS FARMERS INSURANCE COMPANY, et al., Respondents, v. GLASS SERVICE COMPANY, Inc., et al., Appellants.

No. A03-109.

Supreme Court of Minnesota.

July 22, 2004.

Charles J. Lloyd, Matthew P. Lewis, Livgard & Rabuse, P.L.L.P., Minneapolis, MN, for Appellants.

Eric J. Magnuson, John M. Bjorkman, Paula Duggan Vraa, Rider Bennett, LLP, Minneapolis, MN, for Respondents. William M. Hart, Thomas H. Propson, Livia E. Babcock, Meagher & Geer, P.L.L.P., Minneapolis, MN, for Amicus Curiae Ins. Federation of MN.

Thomas H. Goodman, Mark Thieroff, Siegel, Brill, Greupner, Duffy & Foster, P.A., Minneapolis, MN, for Amicus Curiae MN Ind. Auto Glass Ass'n.

Heard, considered, and decided by the court en banc.

OPINION

ANDERSON, PAUL H., Justice.

Glass Service Company and its wholly-owned subsidiary, Auto Glass Service Center (collectively Glass Service), appeal from a Minnesota Court of Appeals decision requiring them to separately arbitrate over 5,700 individual claims of alleged underpayment by Illinois Farmers Insurance Company and Mid-Century Insurance Company (collectively Farmers). Glass Service asserts that Farmers underpaid it for glass work that it performed for Farmers' insureds. The alleged underpayments collectively total more than $1,000,000. The district court concluded that a mandatory arbitration clause in Farmers' insurance policy and Minnesota's No-Fault Automobile Insurance Act (No-Fault Act), Minn.Stat. §§ 65B.41-65B.71 (2002), require Glass Service to separately arbitrate each claim of alleged underpayment. The court also ordered the parties to arbitrate each underpayment claim before the same arbitration panel. The court of appeals agreed in part, but held that the parties were required to arbitrate each of the more than 5,700 alleged underpayments before separate arbitration panels. Ill. Farmers Ins. Co. v. Glass Service Co., Inc., 669 N.W.2d 420, 428 (Minn.App.2003). We affirm in part, holding that arbitration is required, but we remand to the district court to determine whether some or all of these claims may be consolidated.

Minnesota's auto glass industry is highly regulated and the case before us appears to be another chapter in the evolving relationship between independent auto glass companies and automobile insurers. For example, legislation now bars insurers from requiring customers to use particular insurer-favored auto glass companies. Minn.Stat. § 72A.201, subd. 6(14)-(16) (2002). Likewise, the glass companies are prohibited from soliciting insureds as customers by offering gifts to those customers who choose to use their services. Minn.Stat. § 325F.783 (2002). Once a customer selects an auto glass company, the insurers are required to pay "a competitive price that is fair and reasonable within the local industry at large." Minn.Stat. § 72A.201, subd. 6(14) (2002). The Commissioner of Commerce is empowered to promulgate rules to enforce this legislation. Minn.Stat. § 72A.201, subd. 1 (2002).

Minnesota Statutes § 65B.134 (2002) requires that "[a]ny policy of automobile insurance * * * providing comprehensive coverage * * * must provide at the option of the insured complete coverage for repair or replacement of all damaged safety glass without regard to any deductible or minimum amount." By forbidding deductibles, Minnesota's statutory scheme for automobile insurance essentially removes the auto glass customer from the payment process. As a result, auto glass companies routinely bill their customers' insurance companies directly. Glass Service follows this practice and includes on its invoices language that its customer "assign[s] any and all claims in connection with this installation against my insurance company to Glass Service Company, Inc."

Glass Service asserts that Farmers underpaid it for glass work by systematically paying Glass Service less than the amounts stated on its invoices. According to Glass Service, this practice is contrary to the requirements of Farmers' insurance policy, which requires payment in the "amount which it would cost to repair or replace damaged * * * property with other of like kind and quality." Glass Service alleges over 5,700 instances of underpayment, for which it demands compensation in the amount of $1,138,229.52, plus interest.

The amount of the alleged underpayments varies among the several claims. Some include discrepancies as large as 72.5 percent between the amount billed and the amount paid, while other discrepancies are as small as 5.5 percent. The underpayments result from work Glass Service performed across the state and span a five-year time period from August 1997 to April 2002.

During this time period, the regulatory structure of the auto glass industry changed significantly. An earlier statute regulating claims practices required insurers to "assume all reasonable costs sufficient to pay the insured's chosen [glass] vendor." Minn.Stat. § 72A.201, subd. 6(14) (1996). In 2000, the legislature amended this statute to require payment "based on a competitive price," and directed the Commissioner of Commerce to conduct a market survey to determine "a fair and reasonable market price for similar services." Minn.Stat. § 72A.201, subd. 6(14) (2000). Under this legislation, the market survey was to be used to establish prices for glass work when an insurer disputed an amount charged by a glass company. Id. The legislature again amended the statute in 2002 to require payment "based on a competitive price that is fair and reasonable within the local industry at large."¹ Minn.Stat. § 72A.201, subd. 6(14) (2002).

The parties agree that pricing in the auto glass industry is based primarily on three components: glass, adhesives, and labor. Both Glass Service and Farmers base their prices upon the National Auto Glass Specifications (NAGS), a national price-list publication. Glass Service charges prices for glass, adhesive, and labor that are percentages of the list prices. While Farmers pays Glass Service based upon identical NAGS figures, it employs different percentages of the NAGS list prices to calculate the amount it pays Glass Service. The NAGS list prices change quarterly and the parties adjust their prices accordingly. Therefore, the component prices that Glass Service charges and the amount that Farmers pays change on a regular basis.

Using its percentage of the NAGS list prices, Farmers regularly paid Glass Service less than the amount billed. Glass Service characterizes the pricing and payment method in the auto glass industry as "formulaic." It contends that the issues in its dispute with Farmers do not vary among the 5,700 claims. Rather, it contends that these claims against Farmers amount to one dispute over the percentage of the NAGS list prices to be used in calculating payments for auto glass work. While Farmers admits that its payments are based on formulas, Farmers contends that Glass Service oversimplifies the uniformity of the individual disputed claims. The record demonstrates that Glass Service utilized different percentages of the NAGS list prices throughout the five-year time period at issue. During this time period, Glass Service also adjusted the prices it charged for labor and adhesive. Because the discrepancies between the amounts billed and the amounts reimbursed were relatively small, usually under $500, Glass Service rarely disputed individual claims. If Glass Service had disputed any of those claims individually, it would have been bound by a mandatory arbitration clause in Farmers' policy. The clause requires arbitration of "all cases where a claim made by an insured person is $5000 or less." The No-Fault Act also provides for the "mandatory submission to binding arbitration of all cases at issue where the claim at the commencement of arbitration is in an amount of $10,000 or less * * * for no-fault benefits or comprehensive or collision damage coverage." Minn.Stat. § 65B.525, subd. 1. The Act includes auto glass coverage under the umbrella of "comprehensive coverage." Minn.Stat. § 65B.134. None of the alleged underpayments in this case exceeds $5,000, so the parties agree that each customer's claim, standing alone, is subject to arbitration. But they disagree whether those claims must be arbitrated separately and, most critically, whether the 5,700 plus claims can be combined so that Glass Service's "claim" exceeds the jurisdictional amount for mandatory arbitration.

In 2002, Glass Service served a demand for arbitration of its claims against Farmers. Farmers in turn brought a declaratory judgment action in Ramsey County District Court, arguing that any assignment of claims from its policyholders to Glass Service did not include the right to arbitrate. Alternatively, Farmers sought a declaration that any right to arbitration did not include the right to arbitrate claims collectively. But then the parties' positions on arbitration changed. In its answer, Glass Service brought a counterclaim for breach of contract resulting from the alleged underpayments. In response, Farmers moved for summary judgment on the breach of contract counterclaim and sought a declaration that Glass Service was required to arbitrate each claim individually. The court ordered the parties to arbitrate the claims separately, but required that each of the claims be arbitrated before the same arbitration panel. The court of appeals affirmed the district court's summary judgment ruling, but held that the district court erred when it required that all the claims be arbitrated before the same panel. Ill. Farmers, 669 N.W.2d at 428. Rather, the court of appeals held that the claims could not be consolidated to be heard by the same arbitration panel. Id. Glass Service petitioned for further review, which we granted.

I.

Before addressing whether any or all of the disputed claims must be arbitrated, we first address Glass Service's argument that Farmers waived its contractual right to mandatory arbitration under its...