Shand v. Aetna Ins. Co.

• Decision Date: 19 May 1980
• Parties: In the Matter of Sidney SHAND, Appellant, v. AETNA INSURANCE COMPANY, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 462

428 N.Y.S.2d 462

74 A.D.2d 442

In the Matter of Sidney SHAND, Appellant, v. AETNA INSURANCE COMPANY, Respondent.

Supreme Court, Appellate Division, Second Department.

May 19, 1980.

Murray O. Ellenberg, Baldwin, for appellant.

Gottlieb & Hahn, Melville (David Farber, New York City, of counsel), for respondent.

Before LAZER, J. P., and GULOTTA, COHALAN and MARTUSCELLO, JJ.

LAZER, Justice Presiding.

This appeal confronts us with an opportunity to attempt definition of the standard to be applied when reviewing a compulsory arbitration award which has been infected by error of law. ¹ Three recent Court of Appeals determinations have set awry the conventional method of dealing with such questions (see Matter of Garcia v. Federal Ins. Co., 46 N.Y.2d 1040, 416 N.Y.S.2d 544, 389 N.E.2d 1066; Matter of Furstenberg (Aetna Cas. & Sur. Co.), 49 N.Y.2d 757, 426 N.Y.S.2d 465, 403 N.E.2d 170; cf. Matter of Levine v. Zurich Amer. Ins. Co., 49 N.Y.2d ---, --- N.Y.S.2d ----, --- N.E.2d ---- (April 3, 1980)) while failing to clearly articulate guidelines for the future. Until definitive precepts do arrive, we conclude that the test traditionally utilized for judicial review of quasi-legislative acts of administrative agencies whether any rational basis whatsoever exists for the determination is appropriate when error of law is the focus of challenge in a compulsory arbitration award.

At issue is a judgment of Special Term confirming an arbitrator's denial of first-party no-fault benefits in which the facts are relatively undisputed. While driving his own car, petitioner was involved in an accident and applied to his insurance carrier, respondent Aetna Insurance Company, for no-fault benefits. The application was rejected with the statement that "(t)his accident arises out of and in the course of applicant's employment. The matter should be referred to applicant's Workers Compensation carrier." The petitioner was also informed that if he wished to contest Aetna's determination he could file a written complaint with the State Insurance Department, "submit this dispute to binding arbitration," or bring a court action. He chose arbitration.

At the conclusion of the arbitration proceeding the claims for medical expenses and lost earnings were denied. The arbitrator found that petitioner's virtual one-man gardening-landscaping business had been incorporated under the name Shand Landscaping Corporation some time prior to the accident, that the workers' compensation policy the corporation obtained from Aetna had been canceled upon its expiration on June 17, 1976, and that at the time of the accident, nine months later, the policy still had not been replaced. After deciding that the accident arose in the course of petitioner's employment while driving with an employee-passenger to solicit a customer, the arbitrator ruled:

"The fact that (petitioner) violated the workmens compensation law by failing to have his corporation continue obtaining a policy of insurance, should not work to his benefit, since it must be noted that although no evidence of injuries to his passenger was brought out, if his passenger who he testified was going to help him on this job, had been injured, that passenger would have been left without a workmens compensation remedy.

"Of one further note, while it is true that if a policy of workmens compensation had been maintained in this case, he would have been entitled to the difference that the workmens compensation carrier would have paid him for loss of wages and eighty percent of his loss of earnings. However, other than his bare testimony with regard to his wages, no evidence was presented to me by way of any books, records, income tax statements or anything else with regard to lost earnings.

"I therefore find that the claimant has failed to sustain his burden of proof and am constrained to deny him benefits."

The arbitrator's conclusion that the petitioner's failure to carry worker's compensation insurance defeated his claim clearly was predicated upon the language of subdivision 2 (par. (b)) of section 671 of the Insurance Law, which relevantly provides:

"2. 'First party benefits' means payments to reimburse a person for basic economic loss on account of personal injury arising out of the use or operation of a motor vehicle, less;

"(b) amounts recovered or recoverable on account of such injury under state or federal laws providing * * * workmen's compensation benefits".

In any event, the petitioner instituted the current proceeding to vacate the award pursuant to CPLR 7511 on the grounds that (1) he "was operating a private passenger vehicle * * * on the date of the accident, and did not feel that he was in the course of his employment" and (2) "(a)s no Workmen's Compensation policy existed, and no Workmen's Compensation claim had been made or pending, the 'No-Fault' benefit claims should have been honored."

Special Term found that whether the injuries arose during the course of petitioner's employment was "a factual issue which cannot be reviewed by this Court"; that petitioner could file for workers' compensation under section 26-a of the Workers' Compensation Law (Uninsured Employers' Fund); and that these "recoverable" benefits precluded payment of any further benefits by the no-fault carrier. Having concluded that the award was rationally based under the standard for mandatory arbitration established in Mount St. Mary's Hosp. v. Catherwood, 26 N.Y.2d 493, 311 N.Y.S.2d 863, 260 N.E.2d 508, Special Term confirmed the award and dismissed the petition.

On appeal, petitioner argues that Special Term erred because (1) the injuries did not arise "out of and in the course of employment" (Workers' Compensation Law, § 2, subd. 7); and (2) petitioner had no workers' compensation remedy since his corporation had provided no security to compensate injured employees as required by statute (Workers' Compensation Law, §§ 10, 50 and 52). The latter contention implicates interpretation of the no-fault law, but whether we can decide the correctness of his construction of that law depends upon the standard of review to be utilized when the challenge to a no-fault arbitration award is based on a claim of error of law.

I

The applicable statute, of course, is article 75 of the CPLR, of which section 7511 (subd. (b), par. 1, cl. (iii)) provides:

"The award shall be vacated on the application of a party * * * if the court finds the rights of that party were prejudiced by:

"(iii) an arbitrator, or agency, or person making the award exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made" (emphasis added).

The classic interpretation of this provision is that the arbitrator will be deemed to have exceeded his power if he gives a completely irrational construction to the parties' governing agreement (see Lentine v. Fundaro, 29 N.Y.2d 382, 385, 328 N.Y.S.2d 418, 278 N.E.2d 633). That test ignores an arbitrator's mistake of law (or fact) and focuses instead on whether he has made a new contract for the parties (Matter of National Cash Register Co. (Wilson), 8 N.Y.2d 377, 383, 208 N.Y.S.2d 951, 171 N.E.2d 302; Matter of Raisler Corp. (NYC Housing Auth.), 32 N.Y.2d 274, 282, 344 N.Y.S.2d 917, 298 N.E.2d 91), employed a "perverse" rather than merely an "egregious" misconstruction of the governing terms (Matter of Wilkins, 169 N.Y. 494, 496, 62 N.E. 575, Matter of S. & W. Fine Foods (Office Employees Int. Union), 8 A.D.2d 130, 132, 185 N.Y.S.2d 1021, affd. 7 N.Y.2d 1018, 200 N.Y.S.2d 59, 166 N.E.2d 853) or rendered an award violative of public policy if enforced (see Matter of Sprinzen (Nomberg), 46 N.Y.2d 623, 631, 415 N.Y.S.2d 974, 389 N.E.2d 456). In Rochester City School Dist. v. Rochester Teachers Assn., 41 N.Y.2d 578, 582, 394 N.Y.S.2d 179, 182, 362 N.E.2d 977, 981, the Court of Appeals explained this highly restrictive view of the juridical review power as follows:

"In the final analysis 'Arbitrators may do justice' and the award may well reflect the spirit rather than the letter of the agreement (Lentine v. Fundaro, supra, 29 N.Y.2d at p. 386, 328 N.Y.S.2d 418, 278 N.E.2d 633). Thus courts may not set aside an award because they feel that the arbitrator's interpretation disregards the apparent, or even the plain, meaning of the words or resulted from a misapplication of settled legal principles."

But the cited tests and reasoning have been applied principally to consensual arbitrations those deriving from the voluntary submission to the arbitral forum by the disputing parties. The dispute here, however, arises under subdivision 2 of section 675 of the Insurance Law which requires insurers to submit to binding arbitration of no-fault claims at the option of the insured. Such compelled submissions are classified as compulsory arbitrations (see Matter of Furstenberg (Aetna Cas. & Sur. Co.), 49 N.Y.2d 757, 426 N.Y.S.2d 465, 403 N.E.2d 170, supra ) even if (as here), it is the assured who complains after exercising the option to pursue arbitration instead of legal action (see Matter of Conroy v. Country-Wide Ins. Co., App.Div., 427 N.Y.S.2d 646 (2d Dept. dec. May 12, 1980); Matter of Hicks (Royal Globe Ins. Co.), 96 Misc.2d 477, 409 N.Y.S.2d 196) and despite the fact that statutory schemes for compulsory arbitration usually impose a mutual duty to arbitrate (see, e. g., Labor Law, § 716; Civil Service Law, § 209).

When a party to a controversy is compelled by statute to submit to arbitration and thereby loses the right of initial resort to a judicial forum the right to review the resulting arbitration award cannot in turn be overly limited in scope without involving a due process issue. Thus, the Court of Appeals has interpreted CPLR article 75 as requiring broader review when compulsory arbitration is in issue than when the matter has a consensual origin (see Matter of Furstenberg (Aetna Cas. & Sur. Co.), supra (Insurance Law, § 675,...