Peterman v. State Farm Mut. Auto. Ins. Co., 97SC587

• Decision Date: 29 June 1998
• Docket Number: No. 97SC587,97SC587
• Citation: 961 P.2d 487
• Parties: 98 CJ C.A.R. 3507 Doris E. PETERMAN, John H. Peterman, Sally Joseph, and Penny Hardrick, Petitioners, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois corporation, Respondent.
• Court: Colorado Supreme Court

Page 487

961 P.2d 487

98 CJ C.A.R. 3507

Doris E. PETERMAN, John H. Peterman, Sally Joseph, and Penny Hardrick, Petitioners, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois corporation, Respondent.

No. 97SC587.

Supreme Court of Colorado En Banc.

June 29, 1998.

Law Offices of Steven Taffet, Steven Taffet, Boulder, Harshman & McBee, Donald McBee, Grand Junction, for Petitioners.

James R. Alvillar, Grand Junction, for Respondent.

Breit, Bosch, Levin and Coppola, P.C., Bradley A. Levin, Denver, for Amicus Curiae The Colorado Trial Lawyers Association.

Justice KOURLIS delivered the Opinion of the Court.

We granted certiorari to review the court of appeals' ruling in Peterman v. State Farm Mutual Automobile Insurance Co., 948 P.2d 63 (Colo.App.1997) concerning the operation of a consent to sue clause and an arbitration clause in the uninsured motorist provisions of an insurance contract. Specifically we address: (1) whether an insurer could enforce an arbitration clause relating to uninsured motorist coverage after the insured has already obtained a judgment against the uninsured motorist in an action of which the insurer had notice, but to which the insurer did not consent, and (2) whether certain conduct by an insurer can constitute a waiver of its right to arbitrate. ¹

We now hold that a consent to sue clause which allows an insurer to avoid being bound by a judgment in a suit by an insured against an uninsured motorist is void as against public policy. We further hold that an arbitration clause relating to uninsured motorist coverage in an insurance policy is valid and enforceable. However, when an insurer has notice of, and an opportunity to intervene in, an action brought by its insured against an uninsured motorist, the insurer may be deemed to have waived its right to arbitrate by failing to assert the right or by neglecting to seek intervention in the case. We therefore reverse the judgment of the court of appeals and remand this case to the court of appeals with directions that it return the case to the district court for entry of an order consistent with this opinion.

I.

In October of 1990, Doris Peterman, John Peterman and their two adult daughters, Sally Joseph and Penny Hardrick, (collectively the Petermans) were involved in an automobile accident with a tractor/trailer truck owned by DEKA Constructors, Inc. (DEKA). At the time of the accident, the Petermans carried an automobile insurance policy with State Farm that included uninsured motorist (UM) coverage.

The policy contains both an arbitration clause and a consent to sue clause. The UM coverage provides:

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 are to be decided by arbitration upon written request of the insured or us.

(Emphasis in original.)

The consent to sue clause provides:

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

At the scene of the accident, the driver of the DEKA vehicle assured the Petermans that the vehicle was insured by Ohio Casualty Insurance Company. Throughout 1991 and early 1992, the Petermans attempted to verify that DEKA had liability insurance, but they were unable to do so. On three separate occasions in 1992 and 1993, the Petermans' attorney advised State Farm that DEKA was uninsured at the time of the accident.

On February 25, 1993, the Petermans commenced an action in Mesa County District Court (the tort action) alleging that DEKA's driver had negligently caused them injury and damage in the 1990 accident. The Petermans notified State Farm of the tort action and provided State Farm with a copy of the complaint on March 25, 1993. In the cover letter forwarding the complaint, the Petermans' attorney informed State Farm that the Petermans would make a claim for uninsured motorist protection if DEKA were found to have no coverage. The letter also sought information from State Farm:

Please advise if there is anything we need to do on behalf of the claimants regarding making a claim for the uninsured motorist coverage. If their insurance policy contains any provisions pertaining to this claim please advise and provide us with a copy of the applicable policy language.

State Farm did not respond.

DEKA failed to answer or appear in the tort action. The Petermans notified State Farm of DEKA's failure to respond, but State Farm continued to decline to participate or to intervene. In May 1993, the Petermans moved for default and provided State Farm with a copy of the motion. The district court conducted an evidentiary hearing on damages on December 10, 1993, and entered a default judgment, awarding damages well in excess of policy limits. Neither State Farm nor the Petermans requested arbitration before judgment entered.

The Petermans then made a demand on State Farm for UM benefits at the policy limit of $300,000. State Farm refused to pay, claiming that the judgment did not bind it. State Farm asserted that regardless of the Petermans' judgment in the tort action, State Farm's liability to the Petermans for UM benefits was subject to arbitration. State Farm still did not, however, make a demand for arbitration at that time.

The Petermans instituted this action against State Farm in March, 1994, alleging breach of contract, bad faith breach of contract, and willful and wanton conduct, all arising out of State Farm's failure to pay UM benefits. State Farm moved to compel arbitration. From the record it appears that this was State Farm's first demand for arbitration. The parties filed cross motions for summary judgment regarding whether or not State Farm was bound by the judgment in the tort action.

The district court entered judgment for the Petermans in the amount of $300,000 on their claim that State Farm breached its contract. The district court acknowledged the benefits of arbitration and Colorado's policy favoring arbitration as a means of resolving disputes. However, the court also recognized that the benefits of arbitration are negated if an insurer can require its insureds to relitigate in an arbitration proceeding the same issues that have already been resolved in litigation. The court concluded that the arbitration clause was void as against public policy to the extent that it required an insured to relitigate the same issues that had already been decided by a court, so long as the insurer had notice of the proceedings and an opportunity to defend its interests. The district court specifically found that:

State Farm was provided with a copy of the complaint in March, 1993, and at that time was informed that the case may involve an uninsured vehicle and if the vehicle was uninsured, demand for uninsured benefits from State Farm would be made. State Farm was also notified that the defendants did not file an answer and default judgment was being sought. State Farm, therefore, was provided adequate notice of their potential liability and could have sought intervention. They failed to do so, however, despite the notice given them. ² State Farm appealed the entry of summary judgment on the Petermans' breach of contract claim. State Farm, relying on Wales v. State Farm Mutual Automobile Insurance Co., 38 Colo.App. 360, 559 P.2d 255 (1976), argued that the district court erred in refusing to compel arbitration pursuant to the policy language. In Wales, the court of appeals held that public policy favors arbitration, and that an insurer could demand arbitration of a UM claim pursuant to language in its policy even though the insured had already obtained a judgment against the uninsured motorist. See Wales, 38 Colo.App. at 363-64, 559 P.2d at 257-58. In Wales, however, "[n]either party ... allege[d] the occurrence of a waiver of arbitration." Id. at 362, 559 P.2d at 256.

The Petermans contended that Wales was inapposite because that insurer had not been provided notice of and an opportunity to intervene in its insured's suit against the uninsured motorist. The Petermans asserted that Briggs v. American Family Mutual Insurance Co., 833 P.2d 859 (Colo.App.1992), was controlling. In Briggs, the policy did not contain a mandatory arbitration clause. See Briggs, 833 P.2d at 860. Rather, the policy provided that if the insurer and the insured were unable to agree on UM liability or the amount of UM benefits, the insured could either: (1) bring suit directly against the insurance company, also naming the uninsured motorist as a defendant; or (2) bring suit against the uninsured motorist with notice to the insurance company. See id. As here, the policy in Briggs also provided that the insurance company would not be bound by any judgment against the uninsured motorist absent the insurer's written consent. See id. The court of appeals invalidated the consent to sue clause, holding that it diluted, conditioned, and limited the character of coverage mandated in the uninsured motorist statute. See id. at 862. Thus, where an insurer had notice of an action against an uninsured motorist and an opportunity to intervene, the insurer could not force the insured to relitigate the same issues in a second judicial proceeding. See id. at 862-65.

In the instant case, the court of appeals, while recognizing the "substantial merit" of the Petermans' position, nevertheless concluded that the arbitration clause was enforceable under the circumstances. The court of appeals reasoned that since the policy required arbitration, rather than a second judicial...