Mendes v. Automobile Ins. Co. of Hartford, s. 13636

Citation212 Conn. 652,563 A.2d 695
Decision Date22 August 1989
Docket Number13637,Nos. 13636,s. 13636
CourtSupreme Court of Connecticut
PartiesLuis MENDES v. AUTOMOBILE INSURANCE COMPANY OF HARTFORD. AUTOMOBILE INSURANCE COMPANY OF HARTFORD v. Luis MENDES.

Philip F. von Kuhn, with whom, on the brief, was Arnold J. Bai, for appellant in both cases (Automobile Ins. Co. of Hartford).

Robert R. Sheldon, for appellee in both cases (Luis Mendes).

Before PETERS, C.J., and SHEA, GLASS, COVELLO and HULL, JJ.

HULL, Associate Justice.

The primary issue on these appeals is whether an automobile insurance policy provision that permits either party to the contract to demand a trial de novo when an uninsured or underinsured motorist arbitration award exceeds $20,000 is void as against public policy. We agree with the trial court's ruling that such a provision contravenes the public policy of this state and is therefore unenforceable. Accordingly, we find no error.

The procedural and factual history of these appeals is not in dispute. On July 24, 1986, the defendant, Automobile Insurance Company of Hartford, 1 issued to Manuel Mendes an automobile insurance policy covering two vehicles owned by him. The plaintiff, Luis Mendes, was an insured under this policy. The policy provides that uninsured and underinsured motorist claims shall be resolved by arbitration. Specifically, where the amount in demand is $40,000 or less, the arbitration proceeding is to be conducted by a single arbitrator agreed upon by the insured and the defendant. Where the amount in demand is more than $40,000, the insured and the defendant are each to select an arbitrator, who are then to agree upon a third arbitrator. The policy then provides: "The decision made by the arbitrator(s) will be binding. However, either party may make a written demand for a trial if the amount of damages awarded is greater than 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 this demand is not made within 60 days of the decision of the arbitrator(s), the amount of damages awarded by the arbitrator(s) will be binding." The minimum coverage limit for bodily injury liability in Connecticut is $20,000. See General Statutes §§ 38-175c, 14-112. Thus, the quoted policy provision (escape clause) purports to grant either party the right to demand a trial de novo where an uninsured or underinsured arbitration award exceeds $20,000.

On or about November 17, 1986, the plaintiff sustained personal injuries when, as a pedestrian, he was struck by an automobile driven by Margaret Monterosso. At the time of this accident there was $20,000 in bodily injury liability coverage on the Monterosso vehicle, which was collected from Monterosso's insurance carrier. Thereafter, pursuant to the arbitration provision contained in the defendant's insurance policy, the plaintiff submitted a demand for arbitration to the defendant seeking recovery of underinsured motorist benefits for injuries received in the accident. 2 Subsequently, the plaintiff's claim was arbitrated before a three person arbitration panel. On September 21, 1988, the arbitration panel unanimously awarded the plaintiff $50,000 in underinsured motorist benefits. Relying upon the escape clause, the defendant notified the plaintiff by letter dated October 19, 1988, that it had "chosen not to be bound" by the arbitrators' decision and that it was demanding a trial de novo.

On October 21, 1988, the defendant filed in the Superior Court an application to vacate the arbitration award pursuant to General Statutes § 52-418(a)(4). 3 The defendant argued that because the arbitration award exceeded $20,000, it was entitled to a trial de novo under the express language of the escape clause. Pursuant to General Statutes § 52-417, 4 the plaintiff on October 26, 1988, filed with the Superior Court an application seeking to confirm the arbitration award and requesting that an order be issued directing the defendant to pay the full amount of the award, plus interest from the date of the award. By way of a single memorandum of decision dated December 23, 1988, the trial court ruled upon both applications. Relying upon cases in other jurisdictions that have addressed the validity of similar escape clauses, the trial court concluded that the provision at issue unfairly favored the defendant insurer and therefore was unenforceable as against public policy. Accordingly, the trial court granted the plaintiff's application to confirm the arbitration award and denied the defendant's application to vacate the arbitration award. From these judgments the defendant appeals.

In reaching its conclusion that the escape clause at issue is unenforceable, the trial court relied heavily on General Statutes § 38-175c, which requires every uninsured motorist insurance policy that contains a provision for binding arbitration to include "a provision for final determination of insurance coverage in such arbitration proceeding." The insurance policy in this case provides that the decision of the arbitrator or arbitrators "will be binding." The statute is nonetheless not precisely on point, because it applies only to determinations of "insurance coverage," while the underlying issue in these appeals apparently concerns the amount of damages. Undeniably, however, § 38-175c manifests a strong public policy in favor of final arbitral resolution of disputes concerning uninsured motorist insurance policies. That policy is undermined by an escape clause allowing the defendant at will to set aside arbitral awards in excess of $20,000.

The trial court found further support for its conclusion in three out-of-state cases that have held similar escape clauses invalid. See Schmidt v. Midwest Family Mutual Ins. Co., 413 N.W.2d 178 (Minn.App.1987), aff'd en banc, 426 N.W.2d 870 (Minn.1988); Nationwide Mutual Ins. Co. v. Marsh, 15 Ohio St.3d 107, 472 N.E.2d 1061 (1984); Pepin v. American Universal Ins. Co., 540 A.2d 21 (R.I.1988). There appears to be little difference between the escape clauses held invalid in these cases and the escape clause at issue on this appeal. All of them purport to grant a trial de novo by request of either the insured or insurer if an uninsured or underinsured motorist arbitration award exceeds the state statutory minimum bodily injury insurance requirement, but make binding any award less than that amount.

The court in Schmidt v. Midwest Family Mutual Ins. Co., supra, 180, held such a provision invalid for the following reasons: "[The] provision ... skews the trial de novo remedy in favor of the insurer, which is more likely to be dissatisfied with an award above $25,000 [the statutory minimum bodily injury requirement]. Conversely, the insured is more likely to be dissatisfied with an award below $25,000, which could not be tried de novo." The Schmidt court went on to state that "[t]he trial de novo provision not only favors the insurer, in a contractual relationship which in most situations is one of unequal bargaining power and little opportunity for negotiation, but also contravenes public policies favoring arbitration and judicial economy." Id., at 181.

In Nationwide Mutual Ins. Co. v. Marsh, supra, 15 Ohio St.3d at 110, 472 N.E.2d 1061, Justice Sweeney, in a concurring opinion, had the following to say with regard to the validity of a similar escape clause: "The effect of Endorsement 1604 is to create binding arbitration for awards below the $12,500/$25,000 statutory coverage minimums and to create non-binding arbitration for awards in excess of those minimums. Nationwide asserts that the foregoing arbitration agreement is entirely fair because both the insured and Nationwide have the right to avoid an arbitration award in excess of $12,500/$25,000. This 'facial equality' is not a true equality, however, because both parties are bound only by low awards, which are likely to be in Nationwide's favor. High awards can be avoided by either the insured or Nationwide, but it is unlikely that an insured would ever seek to avoid a high award, even if he was unsatisfied with it, because by avoiding the award and seeking a trial the insured would incur additional legal expense while also placing at risk the entire award that he already has received. Thus, the real impact and effect of Endorsement 1604 is to give Nationwide the power to avoid high arbitration awards, regardless of whether those awards are fair and just." Id., at 111, 472 N.E.2d 1061. In addition to the provision's inherent unfairness, Justice Sweeney noted that the escape clause contravened Ohio's strong public policy in favor of final and binding arbitration. Id. In striking down a similar escape clause as against public policy, the court in Pepin v. American Universal Ins. Co., supra, at 22, stressed that such a provision circumvented "[t]he whole purpose of arbitration, namely, providing an expedient and inexpensive mechanism for finally resolving...

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