Lerma v. Allstate Insurance Company

Decision Date22 April 1968
Docket NumberCiv. No. 4758.
Citation301 F. Supp. 361
PartiesBen LERMA and Robert Lerma v. ALLSTATE INSURANCE COMPANY, an Illinois corporation.
CourtU.S. District Court — Northern District of Indiana

Edward J. Raskosky, Hammond, Ind., for plaintiffs.

Patrick J. Dougherty, Gary, Ind., for defendant.

MEMORANDUM

BEAMER, District Judge.

Plaintiffs bring this action to recover on the "uninsured motorist coverage" of defendant's policy of automobile insurance No. 12-041-779. Plaintiff Ben Lerma was the named insured in the policy and he alleges that he was injured in an automobile collision with an uninsured motorist while driving an automobile covered by the policy. Plaintiff Robert Lerma alleges that he is the son of Ben Lerma and that he was injured in the same collision with his father, and is also entitled to recover under the "uninsured motorist coverage" clause.

The defendant insurer has filed a motion to dismiss the complaint for failure to state a claim upon which relief may be granted. It is defendant's contention that the pleadings and exhibits demonstrate that the plaintiffs have failed to fulfill a condition precedent — arbitration. The Contract between the parties provides:

In the event of disagreement and upon written demand of the insured, the matter or matters upon which the insured and Allstate do not agree shall be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrator(s) may be entered in any Court having jurisdiction thereof. The insured and Allstate each agrees to consider itself bound and to be bound by any award made by the Arbitrator(s) pursuant to this Section II.

The plaintiffs contend that this provision is void as against public policy in the State of Indiana.

The issue thus presented is whether a contract provision purporting to require the parties to submit future disputes to binding arbitration is void under Indiana law and whether under such a provision, arbitration is a condition precedent to bringing suit on the contract. Both parties have approached this question as one of Indiana law, and the Court, as it is bound to do, decides it on that basis. See Bernhardt v. Polygraphic Co., 350 U.S. 198, 76 S. Ct. 273, 100 L.Ed. 199, 202 (1956); Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).

An examination of the Indiana cases reveals one overriding fact — confusion. There are three distinct principles enunciated in the various cases. First, the Indiana Supreme Court has held that an agreement purporting to oust the Courts of jurisdiction over a future dispute is void as against public policy. Second, an agreement making arbitration a condition precedent to a suit on the contract is valid under some circumstances. Third, once a dispute has been submitted to arbitration and an award has been made, the award is binding on the parties. It would appear that the strict prohibition enunciated by the Supreme Court would be circumvented by making arbitration a condition precedent to an action on the contract, and making that arbitration binding once it was undertaken. Because the Indiana law may be uncertain or confused is no reason for this Court to ignore it or remake it. Instead, the Court must look to that law to determine what the Indiana courts would do when presented the same questions raised here.

As early as 1882 the Indiana Supreme Court held, in Kistler v. Indianapolis and St. Louis Railroad Co., 88 Ind. 460, 464 (1882) that:

It is said, however, that, by the contract, the parties made the engineer the sole umpire of all differences that might arise between them, and thus precluded themselves from the right to resort to the courts for the settlement of such differences. If the eleventh clause of the contract means this, we think it against public policy, and void.

This case still states the law of Indiana. Later cases, which indicate that submission of the dispute to some third party might be a condition precedent, also hold that the decisions of an arbitrator or third party cannot be made binding. In Supreme Council of the Order of Chosen Friends v. Forsinger, 125 Ind. 52, 25 N.E. 129, 130, 9 L.R.A. 501 (1890) the Court stated: "Our decisions declare that it is not competent for parties, in advance of any dispute, to oust the jurisdiction of the courts by providing that the decision of persons named in the contract shall be final and conclusive." (emphasis added) See Maitland v. Reed, 37 Ind.App. 469, 77 N.E. 290 (1906).

The defendant claims that even if the arbitration provided in the contract cannot be binding, it is still a condition precedent to a suit on the contract. There are two classes of cases in which arbitration or analogous proceedings have been considered conditions precedent to a suit on the contract. There are cases which hold that submission of a dispute over a building contract to the architect is a legitimate prerequisite to suit on the contract. Lake Michigan Water Co. v. United States Fidelity and Guaranty Co., 70 Ind.App. 537, 123 N.E. 703 (1919); Maitland v. Reed, 37 Ind.App. 469, 77 N.E. 290 (1906).

In Maitland v. Reed, 37 Ind.App. 469, 77 N.E. 290, 291 (1906), involving a money demand upon a construction contract, the Court said:

The parties might properly agree that any controversy or dispute arising under the contract should be submitted for determination to the architect, and it must be shown that such a condition precedent was performed before bringing suit, or a valid reason shown for its non-performance. But that provision of the contract which assumes to make the decision of the architect, or of an arbitrator, final, is void. It is not competent for parties to a contract, in advance of any dispute, to oust the jurisdiction of the courts by providing that the decision of a party therein named upon a dispute which might thereafter arise shall be final and conclusive.

The exact provision in question called for submission of all disputes to the architect, and if either party was not satisfied with his decision, he could appeal to binding arbitration. The Court held that the provision for submission to the architect was a condition precedent to suit on the contract, but there was no need to further arbitrate the dispute before resorting to the courts, because the provision for further arbitration was against public policy. The Court distinguished cases involving voluntary associations where internal appeal was required before filing suit, on the ground that those cases involved entirely different considerations of public policy.

In Lake Michigan Water Co. v. United States Fidelity and Guaranty Co., 70 Ind.App. 537, 123...

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4 cases
  • Indiana Ins. Co. v. Noble, 569A84
    • United States
    • Indiana Appellate Court
    • 30 Diciembre 1970
    ...motorist's coverage as above set forth. The appellee cites and relies heavily upon the decision of Judge Beamer v. Lerma v. Allstate Ins. Co., 301 F.Supp. 361 (N.D.Ind.1968), which stated in 'The final principle enunciated by the courts of this state which bears upon this question is that a......
  • Pathman Const. Co. v. Knox County Hospital Ass'n
    • United States
    • Indiana Appellate Court
    • 5 Mayo 1975
    ...88 Ind. 460; The Supreme Council of the Order of Chosen Friends v. Forsinger (1890), 125 Ind. 52, 25 N.E. 129; Lerma v. Allstate Insurance Co., 301 F.Supp. 361 (N.D.Ind.1968); Indiana Insurance Co. v. Noble (1970); 148 Ind.App. 297, 265 N.E.2d 419.5 We note that this conclusion is in accord......
  • Utopia Coach Corp. v. Weatherwax
    • United States
    • Indiana Appellate Court
    • 21 Agosto 1978
    ...held that, under Indiana law, a contract provision requiring arbitration of future disputes was of no effect. Lerma v. Allstate Insurance Company, 301 F.Supp. 361 (N.D.Ind.1968); Vernon Fire and Casualty Insurance Company v. Matney (1976), Ind.App., 351 N.E.2d 60; Indiana Insurance Company ......
  • Vernon Fire & Cas. Ins. Co. v. Matney, 1--1075A186
    • United States
    • Indiana Appellate Court
    • 15 Julio 1976
    ...law applicable in Indiana at that time invalidated arbitration agreements. Indiana Insurance Co. v. Noble, supra; Lerma v. Allstate Ins. Co. (1968), 301 F.Supp. 361 (N.D.Ind.). That fact would preclude the use of the arbitration clause in the policy.' 'Consent to sue' provisions have also b......

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