Lovey v. Régence BlueShield of Idaho

• Decision Date: 18 June 2003
• Docket Number: No. 28949.,28949.
• Citation: 139 Idaho 37,72 P.3d 877
• Parties: Peggy LOVEY, Plaintiff-Respondent, v. REGENCE BLUESHIELD OF IDAHO, an Idaho corporation, Defendant-Appellant.
• Court: Idaho Supreme Court

72 P.3d 877

139 Idaho 37

Peggy LOVEY, Plaintiff-Respondent, v. REGENCE BLUESHIELD OF IDAHO, an Idaho corporation, Defendant-Appellant.

No. 28949.

Supreme Court of Idaho, Boise, April 2003 Term.

June 18, 2003.

Hall, Farley, Oberrecht & Blanton, Boise, for appellant. Richard E. Hall argued.

Gjording & Fouser, PLLC, Boise, for respondent. Bobbi K. Dominick argued.

EISMANN, Justice.

This is an interlocutory appeal from an order holding that the arbitration clause in an insurance policy is unenforceable. We reverse.

I. FACTS AND PROCEDURAL HISTORY

The plaintiff-respondent Peggy Lovey purchased a short-term, non-renewable health insurance policy from defendant-appellant Regence BlueShield of Idaho (BlueShield) providing coverage from August 4, 2000, until December 4, 2000. In November 2000, Ms. Lovey underwent testing to determine whether pain she was experiencing in her legs was due to a vascular condition. BlueShield paid benefits related to those tests.

On December 11, 2000, after her first BlueShield policy had expired, Ms. Lovey contacted BlueShield agent Jack Dies of Sun Valley Insurance to obtain health coverage. With his assistance, she applied for another short-term health insurance policy from BlueShield and paid the six-month premium. BlueShield accepted Ms. Lovey's application and sent her a copy of the policy. Ms. Lovey contends that Mr. Dies informed her that her coverage would commence on December 12, 2000. BlueShield contends that her coverage commenced on December 14, 2000.

On December 13, 2000, Ms. Lovey returned to her physician for additional testing. On the basis of those test results, her physician determined that Ms. Lovey needed bypass surgery on her abdominal aorta, which she later underwent. BlueShield refused to pay benefits for the testing and surgery on the ground that coverage under Ms. Lovey's policy did not begin until December 14, 2000.

On March 25, 2002, Ms. Lovey filed this action seeking damages for breach of contract and bad faith. BlueShield responded by filing a motion to dismiss this action, or in the alternative to stay the proceedings, on the ground that the insurance policy required arbitration of the dispute between Ms. Lovey and BlueShield. Ms. Lovey countered by contending that the arbitration clause in the insurance policy was unconscionable.

After oral arguments on BlueShield's motion, the district court issued a memorandum decision on August 20, 2002, denying the motion on the ground that the arbitration clause was unconscionable. This Court then granted an interlocutory appeal.

II. ISSUES

A. Is the arbitration clause in the insurance contract enforceable?

B. Does the arbitration clause include within its scope the tort of bad faith?

C. Is either party entitled to an award of attorney's fees on appeal?

III. ANALYSIS

A. Is the Arbitration Clause in the Insurance Contract Enforceable?

In 1975 the Idaho legislature enacted the Uniform Arbitration Act, IDAHO CODE § 7-901 et seq. (1998). "Under the act arbitration and agreements to arbitrate are encouraged and given explicit recognition as effective means to resolve disputed issues. Arbitration generally offers an inexpensive and rapid alternative to prolonged litigation. It also serves to alleviate crowded court dockets." Loomis, Inc. v. Cudahy, 104 Idaho 106, 108, 656 P.2d 1359, 1361 (1982) (footnotes omitted). Idaho Code § 7-901 provides: "A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist in law or in equity for the revocation of any contract." In Loomis we stated that grounds for revocation are mutual agreement or a condition that vitiates the agreement ab initio, such as fraud, mistake, or duress. Because unconscionability is also a ground for voiding a contract, Smith v. Idaho State Univ. Fed. Credit Union, 114 Idaho 680, 760 P.2d 19 (1988), it can also be a basis for revoking an agreement to arbitrate.

Pursuant to the Uniform Arbitration Act, a court can, on appropriate grounds, invalidate either a written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit a controversy to arbitration. In this case, there was no written agreement between Ms. Lovey and BlueShield to submit their controversy to arbitration. Rather, there was an arbitration clause in their written insurance contract. Thus, she seeks to invalidate that arbitration clause, not the insurance contract as a whole.

States may not invalidate arbitration agreements under state law, whether of legislative or judicial origin, that is applicable only to arbitration provisions. Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).¹ Rather, the validity of either a contract to arbitrate or an arbitration provision in a contract must be determined under contract defenses that are generally applicable to all contracts. Id. When reviewing an unconscionability determination made by the trial court, we must accept the factual findings made by the trial court, as long as they are supported by substantial, competent evidence. Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997). Whether, under those facts, a contractual provision is unconscionable is a question of law over which this Court exercises free review. Id.; Opportunity, L.L.C. v. Ossewarde, 136 Idaho 602, 38 P.3d 1258 (2002).

Courts do not possess the roving power to rewrite contracts in order to make them more equitable. Smith v. Idaho State Univ. Federal Credit Union, 114 Idaho 680, 760 P.2d 19 (1988). Equity may intervene to change the terms of a contract if the unconscionable conduct is serious enough to justify the court's interference. Id. "While a court of equity will not relieve a party from a bargain merely because of hardship, yet he [or she] may claim the interposition of the court if an unconscionable advantage has been taken of his [or her] necessity or weakness." 114 Idaho at 684,760 P.2d at 23 (quoting 28 AM.JUR.2d Equity § 24 (1966)). It is not sufficient, however, that the contractual provisions appear unwise or their enforcement may seem harsh. Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997).

For a contract or contractual provision to be voided as unconscionable, it must be both procedurally and substantively unconscionable. Id. Procedural unconscionability relates to the bargaining process leading to the agreement while substantive unconscionability focuses upon the terms of the agreement itself. Id.

Procedural unconscionability may arise when the contract "was not the result of free bargaining between the parties." Northwest Pipeline Corp. v. Forrest Weaver Farm, Inc., 103 Idaho 180, 183, 646 P.2d 422, 425 (1982). Indicators of procedural unconscionability generally fall into two areas: lack of voluntariness and lack of knowledge. Lack of voluntariness can be shown by factors such as the use of high-pressure tactics, coercion, oppression or threats short of duress, Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997), or by great imbalance on the parties' bargaining power with the stronger party's terms being nonnegotiable and the weaker party being prevented by market factors, timing, or other pressures from being able to contract with another party on more favorable terms or to refrain from contracting at all, East Ford, Inc. v. Taylor, 826 So.2d 709 (Miss.2002). Lack of knowledge can be shown by lack of understanding regarding the contract terms arising from the use of inconspicuous print, ambiguous wording, or complex legalistic language, Id.; the lack of opportunity to study the contract and inquire about its terms, Id.; or disparity in the sophistication, knowledge, or experience of the parties, Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997).

Substantive unconscionability focuses solely upon the terms of the contract or provision at issue. Hershey v. Simpson, 111 Idaho 491, 725 P.2d 196 (Ct.App.1986). The contract or provision is substantively unconscionable if it is a bargain that no person in his or her senses and not under delusion would make on the one hand and that no honest and fair person would accept on the other. Id. Factors to consider include whether the contract or provision is one-sided or oppressive. Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997).² When determining whether a contractual provision is unconscionable, the court must consider the purpose and effect of the terms at issue, the needs of both parties and the commercial setting in which the agreement was executed, and the reasonableness of the terms at the time of contracting. Id.; Hershey v. Simpson, 111 Idaho 491, 725 P.2d 196 (Ct.App.1986).

The district court found that the arbitration clause in BlueShield policy in this case was procedurally unconscionable for several reasons. The district court noted that this was an adhesion contract—an agreement between two parties of unequal bargaining strength, expressed in the language of a standardized contract, written by the more powerful bargainer to meet its own needs, and offered to the weaker party on a "take-it-or-leave-it basis." As the district court correctly stated, however, an adhesion contract cannot be held procedurally unconscionable solely because there was no bargaining over the terms.³ Adhesion contracts are a fact of modern life. They are not against public policy. As this Court stated in Hansen v. State Farm Mutual Automobile Insurance Company, 112 Idaho 663, 669-70, 735 P.2d 974, 980-81 (1987) (citations and footnotes omitted):

Hansens also argue that the arbitration provision should be found unenforceable because the contract in question is an adhesion contract and therefore there is no bargaining with insurance companies over

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