Padilla v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 16 November 2001
• Docket Number: No. 21,222.,21,222.
• Citation: 38 P.3d 187,131 N.M. 419,2002 NMCA 1
• Parties: Frieda PADILLA, Plaintiff-Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellee.
• Court: Court of Appeals of New Mexico

38 P.3d 187

131 N.M. 419

2002 NMCA 1

Frieda PADILLA, Plaintiff-Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellee.

No. 21,222.

Court of Appeals of New Mexico.

November 16, 2001.

Certiorari Granted January 7, 2002.

Dennis P. Murphy, Montoya, Murphy & Garcia, LLP, Santa Fe, NM, for Appellant.

Katherine W. Hall, Miller, Stratvert & Torgerson, P.A., Santa Fe, NM, for Appellee.

Certiorari Granted, No. 27,258, January 7, 2002.

OPINION

ALARID, Judge.

{1} This case presents the issue of whether the public policy of New Mexico precludes the enforcement of an "escape hatch" arbitration provision found in an uninsured motorist endorsement. The district court viewed the Supreme Court's decision in Bruch v. CNA Ins. Co., 117 N.M. 211, 213, 870 P.2d 749, 751 (1994), as controlling; and, applying Bruch, upheld the provision. We find Bruch to be distinguishable. We conclude that on the facts of this case the public policies underlying the uninsured motorist statute and the Uniform Arbitration Act collectively outweigh the public policy favoring freedom of contract; accordingly, we hold that the escape hatch arbitration provision at issue is unenforceable.

BACKGROUND

{2} Plaintiff Frieda Padilla, (Padilla) is insured under four automobile insurance policies issued by Defendant, State Farm Mutual Automobile Insurance Company (State Farm). Padilla was injured in an automobile accident on April 26, 1996. Padilla sued the tortfeasor. With State Farm's consent, Padilla settled the suit against the tortfeasor for $25,000, the limits of the tortfeasor's liability policy. Padilla then filed a claim under her under-insured motorist policies.

{3} Padilla's policies with State Farm covered four vehicles and provided uninsured/under-insured motorist coverage of $25,000 per person, $50,000 per collision. Padilla paid separate premiums for each vehicle for uninsured/under-insured motorist coverage. Padilla sought $70,000 in under-insured motorist benefits from State Farm. Padilla calculated the $70,000 figure by stacking the four $25,000 coverages and then setting off the $25,000 recovered from the tortfeasor and the $5,000 in medical benefits paid by State Farm.

{4} The uninsured motorist endorsement to State Farm's policy contains the following arbitration clause:

If there is no agreement [as to the insured's entitlement to damages and the amount of damages], these questions shall be decided by arbitration upon written request of the insured or us. Each party shall select a competent and impartial arbitrator. These two shall select a third one.... The written decision of any two arbitrators shall be binding on each party when the amount of an award for damages does not exceed the limits of the Financial Responsibility law of New Mexico. When any award for damages exceeds these limits, either party has a right to trial on all issues in the proper court.

(Emphasis in original omitted; emphasis added).

{5} Padilla filed a complaint in the Santa Fe County District Court seeking a declaration that the arbitration clause in State Farm's policy is unenforceable to the extent it provides for non-binding arbitration of awards in excess of the minimum statutory limits of uninsured/under-insured coverage. Padilla asserted that State Farm's arbitration clause conflicted with the following arbitration clause promulgated by the superintendent of insurance.

Arbitration. If any person making a claim [under this endorsement] and the company do not agree that [the] person is legally entitled to recover damages from the owner or operator of an uninsured motor vehicle ... or do not agree as to the amount payable [under the endorsement], then each party shall, upon written demand of either, select a competent and disinterested arbitrator. The two arbitrators so named shall select a third arbitrator.... The arbitrators shall then hear and determine the question or questions so in dispute, and the decision in writing of any two arbitrators shall be binding upon the insured and the company.

13 NMAC 12.3.17.8.1 (1997) (emphasis added). In addition to declaratory relief, Padilla requested that her policies be reformed to provide for binding arbitration.

{6} Padilla and State Farm filed cross-motions for summary judgment. State Farm argued that, in Bruch, the Supreme Court had validated the type of arbitration clause contained in State Farm's policy. Padilla distinguished Bruch on the grounds that the effect of the superintendent's mandatory binding arbitration clause had not been briefed in Bruch. Padilla also argued that State Farm's arbitration clause conflicted with a provision of the Unfair Claims Practices Act, NMSA 1978, § 59A-16-20(K) (1997). Padilla argued that this issue also had not been briefed in Bruch.

{7} The district court denied Padilla's motion and granted summary judgment in favor of State Farm. The district court explained that it felt itself bound by Bruch:

Our Supreme Court has already had occasion to pass upon the validity of an identical provision in the matter of Bruch v. CNA, 117 N.M. 211, 870 P.2d 749 (1994). There, the court held that the clause allowing for a trial de novo did not violate public policy.

Plaintiff argues that the Supreme Court, in deciding Bruch, did not take into account regulations issued by the Superintendent of Insurance. But such regulations are accorded the force of law. Romero v. Dairyland Ins. Co., 111 N.M. 154, 803 P.2d 243 (1990). It is not at all likely that the Supreme Court somehow forgot that legislatively authorized rules and regulations have the force of law when it stated, in Bruch, that the provision at issue was not repugnant to public policy "as manifest in positive law." The only reasonable reading of Bruch is to assume that the Supreme Court knew what it was talking about. Any other view would be heresy, at least for a district court.

DISCUSSION

{8} Although this case came before the district court on cross-motions for summary judgment, we do not view this as a "genuine issues" case. Rather, this is a case in which the operative facts are not in dispute. In this type of case, "the district court determines as a matter of law which movant is entitled to summary judgment." (internal citation and quotation marks omitted). Gunaji v. Macias, 2001-NMSC-028, ¶ 8, 130 N.M. 734, 31 P.3d 1008. We therefore review the district court's ruling under a de novo standard. Id.

{9} Padilla argues that, contrary to the district court's reasoning, Bruch is not authority for propositions that were not considered by the Supreme Court. We agree. Bruch, held that the public policies manifested in the Uniform Arbitration Act are not offended by an arbitration provision providing for a trial de novo in a court of law if an arbitration award exceeds a certain amount. Bruch recognized that, because arbitration is a matter of contract, the parties to a contract providing for arbitration ordinarily may define for themselves the circumstances under which arbitration will be binding. The Supreme Court made absolutely no mention of the arguments, now asserted by Padilla, that an arbitration provision providing for non-binding arbitration where the insured recovers more than the minimum limit of uninsured motorist coverage violates the superintendent's regulations or the Unfair Claims Practices Act, or is otherwise contrary to the public policy manifested in the uninsured motorist statute. The Supreme Court did not discuss any of the cases to which Padilla refers us, such as Mendes v. Auto. Ins. Co. of Hartford, 212 Conn. 652, 563 A.2d 695, 699 (1989), which have held escape hatch arbitration provisions to be unenforceable.

{10} State Farm argues that we should presume that, in Bruch, the Supreme Court canvassed every conceivable source of public policy bearing upon the arbitration provision at issue in that case, regardless of whether the source of public policy was called to the Supreme Court's attention. We find no indication that the Supreme Court considered the arguments now presented by Padilla. We therefore apply the established rule that "cases are not authority for propositions not considered," and hold that Bruch does not necessarily control the outcome of the present case. Fernandez v. Farmers Ins. Co., 115 N.M. 622, 627, 857 P.2d 22, 27 (1993); Ramirez v. Dawson Prod. Partners, Inc., 2000-NMCA-011, ¶ 10, 128 N.M. 601, 995 P.2d 1043.

{11} Arbitration was adopted as a means of dispute resolution early on in the development of uninsured motorist coverage in large part as a response to the inherent conflict of interest created by the coupling of liability coverage with uninsured motorist coverage:

Uninsured motorist insurance is sold as a package with liability insurance. Although arbitration has not been universally accepted for disputes between insurer and insured in the liability insurance area, the unique nature of uninsured motorist coverage may best explain why arbitration is used in uninsured motorist cases and not elsewhere.

The basic reason why arbitration is appropriate in uninsured motorist disputes involves the inherent conflicts between insurer and insured. Contrary to the liability insurance situation, in which the insurer defends its own insured against allegations of negligence in order to avoid making payment to a third party, the insurer in this situation is trying to avoid liability to its own insured. This can be accomplished by showing ... that ... the uninsured motorist was not negligent or that the insured was negligent. In other words, in an uninsured motorist situation, the insurance company is placed in the position of defending the uninsured motorist against its own insured.

3 Eileen Swarbrick, No-Fault and Uninsured Motorist Automobile Insurance, § 28.00 at 28-3 to -5 (1997). The solution chosen by the insurance industry was to separate the forums in which the respective disputes between insured and insurer and insured and third-party are...