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

• Decision Date: 08 May 1997
• Docket Number: No. 96CA0600,96CA0600
• Citation: 948 P.2d 63
• Parties: 21 Colorado Journal 655 Doris E. PETERMAN, John H. Peterman, Sally Joseph, and Penny Hardrick, Plaintiffs-Appellees and Cross-Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois corporation, Defendant-Appellant and Cross-Appellee. . A
• Court: Colorado Court of Appeals

Page 63

948 P.2d 63

21 Colorado Journal 655

Doris E. PETERMAN, John H. Peterman, Sally Joseph, and Penny Hardrick, Plaintiffs-Appellees and Cross-Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois corporation, Defendant-Appellant and Cross-Appellee.

No. 96CA0600.

Colorado Court of Appeals Div. A.

May 8, 1997.

Rehearing Denied June 26, 1997.

Certiorari Granted Dec. 2, 1997.

Law Offices of Steven Taffet, Steven Taffet, Boulder; Harshman & McBee, Donald L. McBee, Grand Junction, for Plaintiffs-Appellees and Cross-Appellants.

James R. Alvillar, Grand Junction, for Defendant-Appellant and Cross-Appellee.

Opinion by Judge BRIGGS.

Defendant, State Farm Mutual Automobile Insurance Company (insurer), appeals the summary judgment in favor of plaintiffs, Doris E. Peterman, John H. Peterman, Sally Joseph, and Penny Hardrick (insureds), on their claim for breach of contract. The insureds cross-appeal the summary judgment in favor of the insurer on the insureds' claims for bad faith breach of insurance contract and exemplary damages. We reverse the summary judgment in favor of the insureds on the claim for breach of contract and remand the cause to the trial court to enter summary judgment on the claim in favor of the insurer and to grant the insurer's motion to compel arbitration. We affirm the summary judgment in favor of the insurer on the insureds' claims for bad faith breach of insurance contract and exemplary damages.

The insurer provided motor vehicle insurance to the insureds, who were injured in a traffic accident. They brought suit against the driver of the other vehicle and his employer, the company that owned the vehicle.

The insureds gave notice of the lawsuit by letter to the insurer. They informed the insurer that the other vehicle may have been uninsured and that, if it were, they intended to make a claim for uninsured motorist (UM) benefits.

After the insureds obtained a default judgment against the company and its driver for $924,000, they requested payment from the insurer of $300,000, the limits of their UM coverage. The insurer refused to tender any payment until the claim had been arbitrated, as required by the policy.

The insureds initiated this action against the insurer, asserting claims for breach of contract, bad faith breach of insurance contract, and exemplary damages. The insurer sought to compel arbitration. Both parties filed motions for summary judgment.

Relying on the reasoning in Briggs v. American Family Mutual Insurance Co., 833 P.2d 859 (Colo.App.1992), the trial court concluded that compelling arbitration would require the insureds to relitigate issues, including liability and damages, already determined in the prior litigation and that this would inappropriately impact their right under § 10-4-609, C.R.S. (1994 Repl.Vol. 4A) to UM protection. It held that, because the insurer had been given notice and an opportunity to intervene in the insureds' suit against the driver and the owner of the uninsured vehicle, it was bound by that judgment and, as a result, was liable for the full amount of the uninsured motor vehicle benefits. The court therefore granted summary judgment in favor of the insureds on the claim for breach of contract. However, because the insurer's obligation to intervene had not been well-settled under Colorado law, the court granted summary judgment in favor of the insurer on the claims for bad faith breach of insurance contract and exemplary damages.

I.

The insurer contends the trial court erred in entering summary judgment in favor of the insureds and against it for the limits of the UM benefits and in refusing instead to compel the insureds to arbitrate their claim. In the circumstances presented here, we agree.

The insurance policy provided for uninsured motor vehicle coverage as follows:

We will pay damages for bodily injury an insured is legally entitled to collect from the owner or driver of an uninsured motor vehicle. The bodily injury must be caused by an accident arising out of the operation, maintenance or use of an uninsured motor vehicle.

....

Deciding Fault and Amount

Two questions must be decided by agreement between the insured and us:

1. Is the insured legally entitled to collect damages from the owner or driver of the uninsured motor vehicle; and

2. If so, in what amount?

If there is no agreement, these questions shall be decided by arbitration upon written request of the insured or us.

....

We are not bound by any judgment against any person or organization obtained without our written consent.

The purpose of the "consent to be bound" clause is to supplement the clause requiring that the insurer's liability for UM benefits be determined in a separate arbitration proceeding. Therefore, in the circumstances presented here, the two clauses can be analyzed together. See Nationwide Mutual Insurance Co. v. Webb, 291 Md. 721, 436 A.2d 465 (1981).

A.

To support the insurer's position that it was not bound by the insureds' judgment against the uninsured motorist and that it had the right to compel arbitration, the insurer relies on Wales v. State Farm Mutual Automobile Insurance Co., 38 Colo.App. 360, 559 P.2d 255 (1976). There, as in this case, the plaintiff's insurance policy included a provision requiring arbitration of any disagreement concerning UM coverage and the amount of benefits to which the plaintiff was entitled. It further provided the insurer would not be bound by any judgment against an uninsured motorist unless it had given consent to sue.

The plaintiff in Wales informed her insurer she had been involved in an accident with an uninsured motorist, requested arbitration and, at the same time, requested consent to proceed with a lawsuit against the uninsured driver. Although the insurer consented, for reasons not revealed in the record the plaintiff did not proceed with arbitration. She instead proceeded with a lawsuit against the uninsured motorist.

After obtaining a judgment in that action, the plaintiff demanded that the insurer pay UM benefits without arbitration. When the insurer refused the demand, the plaintiff brought an action against it for breach of contract, contending that any provision in the policy which restricted her access to a judicial determination of the damages to which she was "legally entitled" under the UM coverage was invalid.

A division of this court disagreed. It reasoned that, while the General Assembly was concerned with protecting innocent victims of uninsured drivers, this concern was not wholly conclusive of the issue presented. The General Assembly had also been emphatic in fostering arbitration. Taking both public policies into account, the court in Wales held the arbitration clause was enforceable and thus the insurer had not breached its agreement with the plaintiff.

The same conclusion has been reached by courts in other jurisdictions. For example, in Victor v. State Farm Fire & Casualty Co., 795 F.Supp. 300 (D.Alaska 1992), the insured obtained a default judgment against an uninsured motorist and demanded payment of uninsured motorist benefits. The insurer refused to pay because the insured had not complied with the arbitration provision in the insurance policy.

The court in Victor recognized the many cases from other jurisdictions refusing to require relitigation of issues determined in a prior suit against an uninsured motorist, but distinguished them because they required further judicial proceedings to resolve the claim. In contrast, the policy before the court required arbitration. Because of the state's "strong public policy" in favor of arbitration, the court refused to invalidate the arbitration provision. See also Riley v. State Farm Mutual Automobile Insurance Co., 420 F.2d 1372 (6th Cir.1970)(insurer entitled to determine by arbitration UM liability as provided in policy, even though insured had previously obtained default judgment against the uninsured motorist); Sands v. Andino, 404 Pa.Super. 238, 590 A.2d 761 (1991)(insurer entitled to summary judgment upholding right to arbitrate UM benefits, even though insured had obtained default judgment against the uninsured motorist).

B.

In response, the insureds contend Wales stands only for the limited proposition that an insurer can in some circumstances require arbitration rather than having a claim for UM benefits decided in court. They argue the court in Wales did not expressly address the issue presented here: whether, despite notice and an opportunity to intervene in an insured's suit against an uninsured motorist, the insurer can instead wait and demand arbitration after a court has determined the uninsured motorist's liability. The insureds assert that the reasoning in the more recent case of Briggs v. American Family Mutual Insurance Co., supra, supports their position that the insurer is bound by their default judgment against the owner and the driver of the uninsured vehicle and that the arbitration clause is unenforceable.

The insurance policy in Briggs did not contain an arbitration clause. It instead provided that, if the insurance company and its insured were unable to agree on UM liability or the amount of UM benefits, the insured had two options: she could bring suit directly against the insurance company, as long as the uninsured motorist was made a defendant; or she could bring suit against the uninsured motorist, with notice to the insurance company. However, as in this case, the policy provided that the insurance company could not be bound by any judgment against the uninsured motorist absent its written consent.

When the parties in Briggs were unable to agree to the damages the insured had incurred, the insured brought suit against the insurance company but did not join the uninsured motorist. Instead, on the same day, the insured filed a separate tort action against the uninsured motorist. The insured gave notice of that suit to her insurance company, which informed her it...