State Farm Mut. Ins. Co. v. Blevins

• Decision Date: 07 March 1990
• Docket Number: No. 88-1664,88-1664
• Parties: STATE FARM MUTUAL INSURANCE COMPANY, Appellee, v. BLEVINS et al., Appellants.
• Court: Ohio Supreme Court

Page 165

49 Ohio St.3d 165

551 N.E.2d 955

STATE FARM MUTUAL INSURANCE COMPANY, Appellee, v. BLEVINS et al., Appellants.

No. 88-1664.

Supreme Court of Ohio.

Submitted November 7, 1989.

Decided March 7, 1990.

Syllabus by the Court

1. An arbitrator's powers are set by the agreement from which he draws his authority. The arbitrator has no authority to decide issues which, under the agreement, the parties did not submit to review.

2. In the absence of specific contractual language, coverage for punitive or exemplary damages will not be presumed under a provision for uninsured motorist coverage. (Hutchinson v. J.C. Penney Cas. Ins. Co. [1985], 17 Ohio St.3d 195, 17 OBR 432, 478 N.E.2d 1000, paragraph two of the syllabus, overruled.)

Appellee, State Farm Mutual Insurance Company, issued an automobile liability insurance policy to appellants, Mary and Thomas Blevins. The policy included uninsured motorist coverage as required by R.C. 3937.18. The policy stated:

"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 accident arising out of the operation, maintenance or use of an uninsured motor vehicle." (Emphasis deleted.)

The uninsured motorist provision also contained an arbitration clause which stated:

"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, what amount?

"If there is no agreement, these questions shall be decided by arbitration * * *." (Emphasis deleted.)

It is undisputed that on August 28, 1982, appellants were injured in an accident caused by an uninsured motorist. Appellants and appellee were unable to reach a negotiated settlement. Appellants demanded arbitration. On May 28, 1987, a three-member arbitration panel rendered its award:

"Our decision on the issues is as follows:

"(1) Is the insured legally entitled to collect damages from the owner or driver of the uninsured motor vehicle? Yes[.]

"(2) If so, in what amount? We find that Mary Blevins is entitled to $35,000 compensatory damages and $50,000 punitive damages. We find that Thomas Blevins is entitled to recover $5,000 compensatory damages and $25,000 punitive damages.

"Under the terms of the policy, the arbitrators have the jurisdiction to decide whether or not the insured may collect punitive damages from the insurer. The policy provides coverage for punitive damages." ¹

Appellee applied for an order vacating the award in the Court of Common Pleas of Warren County, pursuant to R.C. 2711.10, on the ground that the arbitrators exceeded their powers in awarding punitive damages. The trial court held that the arbitrators were without power to award punitive damages due to the retroactive effect of amendments to R.C. 3937.18, which prohibited the payment of punitive damages by insurers for the acts of uninsured motorists. Appellants appealed, claiming that retroactive application of the amended statute was unconstitutional.

The court of appeals affirmed, in a split decision, on different grounds. It held that the right to collect punitive damages did not accrue until the arbitrators rendered their award. Because the award was rendered after the effective date of the amendments to R.C. 3937.18, the amended statute could be applied prospectively. ²

This cause is before the court pursuant to the allowance of a motion to certify the record.

Meyers, Hentemann, Schneider & Rea Co., L.P.A., Henry A. Hentemann, Joseph H. Wantz, Cleveland, Cash, Cash, Eagen & Kessel and Melvin J. Kessel, Cincinnati, for appellee.

Casper & Casper, S. Robert Casper and Bruce P. Gudenkauf, Middletown, for appellants.

HERBERT R. BROWN, Justice.

This case presents two issues. First, what is the scope of the arbitrators' power to award damages under the insurance contract? Second, did the arbitrators exceed their power by awarding punitive damages?

I

The power of Ohio courts to review an arbitration is defined by R.C. 2711.10, which states:

"In any of the following cases, the court of common pleas shall make an order vacating the award upon the application of any party to the arbitration if:

" * * *

"(D) The arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." (Emphasis added.)

We have held that "R.C. 2711.10 limits judicial review of arbitration to claims of fraud, corruption, misconduct, an imperfect award, or that the arbitrator exceeded his authority." Goodyear Tire & Rubber Co. v. Rubber Workers Local 200 (1975), 42 Ohio 71 O.O.2d 509, 330 N.E.2d 703, paragraph two of the syllabus.

In the case before us, appellee claims that the arbitrators exceeded their powers by awarding punitive damages. An arbitrator's powers are "limited by the bounds of the agreement from which he draws his authority." Internatl. Bhd. of Electrical Workers, Local 1400 v. Citizen's Gas & Coke Utility (Ind.App.1981), 428 N.E.2d 1320, 1326. The arbitrator has no authority to decide issues which, under their agreement, the parties did not submit to review. Our task is to determine whether the insurance policy, which is the contract between the parties, grants the power to award punitive damages.

II

The issue of whether uninsured motorist coverage (required by R.C. 3937.18) extends to punitive damages was considered in Hutchinson v. J.C. Penney Cas. Ins. Co. (1985), 17 Ohio St.3d 195, 17 OBR 432, 478 N.E.2d 1000. We begin our discussion with a review of that case.

In Hutchinson the insurance policy covered "damages which a covered person is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury * * *." (Emphasis added.) Id. at 197, 17 OBR at 434, 478 N.E.2d at 1002. An arbitration panel awarded the plaintiff compensatory and punitive damages for injuries caused by an uninsured motorist, and the defendant insurer applied for an order vacating the award on the ground that the arbitrators exceeded their powers. Id. at 196, 17 OBR at 433, 478 N.E.2d at 1001-1002.

This court found that the uninsured motorist provision at issue was ambiguous, and should be construed liberally in favor of the plaintiff. Id. at 198, 17 OBR at 434, 478 N.E.2d at 1003. Applying principles of liberal construction, we found "that punitive damages are the type of damages which a party would be legally entitled to recover from an uninsured motorist where the facts and circumstances of the particular case warrant such an award. By structuring the language of the uninsured motorist provision as it did, the defendant insurance company has agreed * * * to stand in the shoes of the tortfeasor and pay those damages which the insured would have been able to recover * * * if she had sued the uninsured motorist herself." Id. at 198, 17 OBR at 435, 478 N.E.2d at 1003. Accordingly, we held that "[a]s a matter of public policy, and in the absence of specific contractual language to the contrary, punitive or exemplary damages may be awarded to an insured under an uninsured motorist provision, where the issuer of the policy agrees to pay damages * * * which a covered person is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by a covered person and caused by an accident." Id. at paragraph two of the syllabus.

The policy interpretation made in Hutchinson was controversial. ³ The dissent argued that our holding "ignored the well-founded rationale underlying punitive damages and instead * * * provided an enhanced reward to an adequately compensated party solely for reward's sake." Id. at 201, 17 OBR at 437, 478 N.E.2d at 1005.

The purpose of punitive damages is to punish the offending party and make the offender an example to others so that they might be deterred from similar conduct. Detling v. Chockley (1982), 70 Ohio St.2d 134, 24 O.O.3d 239, 436 N.E.2d 208. In accord with this purpose, Ohio law has long disfavored insurance against punitive damages resulting from the insured's own torts. Casey v. Casey (1987), 40 Ohio App.3d 83, 531 N.E.2d 1348; Willowick Towers Investment Co. v. General Ins. Co. of America (Sept. 22, 1980), Lake App. No. 7-239, unreported; Troyer v. Horvath (1983), 13 Ohio App.3d 155, 13 OBR 189, 468 N.E.2d 351; see, also, Prosser & Keeton, Law of Torts (5 Ed.1984) 13, Section 2 (purpose of punitive damages would be frustrated by permitting insurance to indemnify the wrongdoer).

However, uninsured motorist coverage insures against the tortious acts and financial irresponsibility of persons other than the insured. See, generally, Woodroof, Fonseca & Squillante, Automobile Insurance and No-Fault Law (1974) 186-187, Section 7.1-7.3. Thus, the policy against insulating the tortfeasor from the consequences of his wrongful acts is not violated by our holding in Hutchinson.

The Hutchinson court reasoned that the deterrent effect of punitive damages was preserved because "the defendant insurance company may subrogate and bring an action against the tortfeasor for the full measure of damages that it agreed to indemnify plaintiff, its insured." Hutchinson, supra, at 198, 17 OBR at 435, 478 N.E.2d at 1003. While this is true in theory, the economic reality is that many uninsured motorists are judgment-proof. Thus the insurer will often not recover punitive damages from the tortfeasor. More likely, the insurer will raise premiums and pass the loss on to financially responsible consumers. Comment, Ohio's Uninsured Motorist Coverage--Should the Legislature Re-examine the Statute? (1986), 15 Cap.U.L.Rev. 325, 340-341; Note, Uninsured Motorist Insurance Now Covers Punitive Award--Hutchinson v. J.C. Penney Casualty Insurance Company (1985), 19 Akron U.L.Rev. 325, 332. The practical...