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Reed v. Farmers Insurance Group

October 21, 1999

JULIE REED, APPELLEE, V. FARMERS INSURANCE GROUP, APPELLANT.


The opinion of the court was delivered by: Justice Miller

-Agenda 21-September 1998.

The defendant, Farmers Insurance Group, brings this appeal from a decision by the appellate court (291 Ill. App. 3d 1068) that found part of section 143a of the Illinois Insurance Code (215 ILCS 5/143a (West 1996)) to be unconstitutional. Jurisdiction lies in this court pursuant to Supreme Court Rule 317. 134 Ill. 2d R. 317. We now reverse the judgment of the appellate court.

The plaintiff, Julie Reed, initiated the present action in the circuit court of Tazewell County, seeking a declaration that the arbitration requirement in the uninsured-motorist portion of the automobile insurance policy issued to her by the defendant was unenforceable. According to the allegations in the amended complaint, the plaintiff was injured on April 1, 1995, as she was driving in East Peoria. It appears that one vehicle collided with another at an intersection, and the second car then hit the plaintiff's vehicle. The complaint alleges that the first driver was uninsured and that he fled the scene after the accident and could not later be located. As required by section 143a of the Insurance Code, the plaintiff's automobile insurance policy contained a clause calling for arbitration if the plaintiff and her insurer were unable to agree on the amount of compensation she was entitled to receive under the policy's uninsured- motorist coverage. The policy further provided, again as required by statute, that the arbitrators' award would be binding on the parties if it fell below a specified amount: the minimum required limits for bodily injury as set forth in the Illinois Financial Responsibility Law, currently $20,000 per person. 625 ILCS 5/7-100 et seq. (West 1996). If the arbitrators awarded more than that amount, however, then either party could reject the award and the case would proceed to trial instead.

Before the matter could be submitted to arbitration, the plaintiff filed the present action, seeking a declaratory judgment that the policy's arbitration provision was unconstitutional. The plaintiff's amended complaint challenged both the clause permitting either party to reject awards greater than $20,000 and the requirement that matters be submitted to arbitration. She argued that the $20,000 threshold between binding and non-binding awards was unconscionable because it favored insurers. The plaintiff also contended that the arbitration requirement violated separation of powers principles, the right of access to the courts, equal protection, and due process, and, further, that it represented special legislation and resulted in an unconstitutional impairment of contracts. The plaintiff sought a declaration that the arbitration provision in her policy was void, and she requested a jury trial to recover for the damages she allegedly sustained as a result of her accident.

The defendant moved to dismiss the amended complaint. Following a hearing, the circuit court granted the defendant's motion, holding that the policy's arbitration provision and the statute were constitutional. The appellate court reversed. 291 Ill. App. 3d 1068. The appellate court agreed with the plaintiff that the provision allowing either party to reject an award exceeding a certain amount was oppressive because it favored insurers. The court noted that insureds are likely to wish to appeal low arbitral awards, while insurers are more likely to seek to appeal higher ones. The court therefore believed that the proviso operated to the advantage of insurers, by permitting them to appeal awards that exceeded the $20,000 threshold, and to the detriment of insureds, by denying them a corresponding opportunity to appeal awards below that limit. The appellate court also held that section 143a is unconstitutional because it impairs an insured's right to contract. Given these holdings, the appellate court found it unnecessary to address the plaintiff's remaining constitutional challenges to the statute. We allowed the defendant's petition for leave to appeal as a matter of right. 134 Ill. 2d R. 317.

Section 143a of the Insurance Code requires that disputes with respect to uninsured motorist coverage be submitted to arbitration. The statute provides, in pertinent part:

"No policy shall be renewed, delivered, or issued for delivery in this State unless it is provided therein that any dispute with respect to the coverage shall be submitted for arbitration to the American Arbitration Association or for determination in the following manner: Upon the insured requesting arbitration, each party to the dispute shall select an arbitrator and the 2 arbitrators so named shall select a third arbitrator." 215 ILCS

5/143a (West 1996).

The arbitrators' determination is binding only with respect to awards below $20,000, however, for the statute permits either party to reject an award that exceeds that amount and to resolve the claim instead through the judicial process. Section 143a states:

"Any decision made by the arbitrators shall be binding for the amount of damages not exceeding the limits for bodily injury or death set forth in Section 7-203 of the Illinois Vehicle Code." 215 ILCS 5/143a (West 1996).

The financial responsibility limits set forth in section 7-203 are $20,000 per person. 625 ILCS 5/7-203 (West 1996). Thus, under section 143a, arbitration awards for less than $20,000 are binding on the parties, but awards of $20,000 or more are not. A binding award would be subject only to limited judicial review under the Uniform Arbitration Act (710 ILCS 5/1 et seq. (West 1996)).

We note that the uninsured-motorist statute has been amended since the plaintiff commenced her action. See 215 ILCS 5/143a (West 1998). The statute now provides more formal evidentiary procedures for the arbitration of claims. The amended version leaves intact, however, the provisions at issue here: that disputes regarding uninsured-motorist coverage must first go to arbitration, and that arbitral awards are binding if they do not exceed the statutorily prescribed financial responsibility limits. As noted later in this opinion, the variety of disputes that must be submitted to arbitration under this provision is limited. Neither party suggests that the amended statute applies to the present case.

The plaintiff's principal argument in this appeal is that the special provision in her uninsured-motorist coverage that allows parties to seek a trial de novo if the arbitrators' award exceeds a certain amount violates public policy and therefore is unenforceable. The plaintiff cites a number of decisions that have found similar provisions in uninsured-motorist policies to be violative of public policy. See Mendes v. Automobile Insurance Co., 212 Conn. 652, 563 A.2d 695 (1989); Worldwide Insurance Group v. Klopp, 603 A.2d 788 (Del. 1992); Schmidt v. Midwest Family Mutual Insurance Co., 426 N.W.2d 870 (Minn. 1988); Schaefer v. Allstate Insurance Co., 63 Ohio St. 3d 708, 590 N.E.2d 1242 (1992); Pepin v. American Universal Insurance Co., 540 A.2d 21 (R.I. 1988). To be sure, courts in other states have approved similar clauses appearing in automobile insurance policies. Roe v. Amica Mutual Insurance Co., 533 So. 2d 279 (Fla. 1988); Cohen v. Allstate Insurance Co., 231 N.J. Super. 97, 555 A.2d 21 (1989). In two decisions prior to this one, our appellate court also concluded that provisions in automobile insurance policies allowing parties to reject arbitral awards above a certain threshold violate public policy. Fireman's Fund Insurance Cos. v. Bugailiskis, 278 Ill. App. 3d 19 (1996) (underinsured- motorist coverage); American Family Mutual Insurance Co. v. Baaske, 213 Ill. App. 3d 683 (1991) (uninsured-motorist coverage).

Some courts that have invalidated provisions similar to the one at issue here have observed that the non-binding character of the award conflicts with the goals of arbitration, which is designed to promote finality and judicial economy. See, e.g., Schmidt v. Midwest Family Mutual Insurance Co., 426 N.W.2d 870, 874-75 (Minn. 1988); Schaefer v. Allstate Insurance Co., 63 Ohio St. 3d 708, 716, 590 N.E.2d 1242, 1248 (1992). Other cases that have invalidated these provisions believe that they are unfairly structured in favor of the insurer, because the insurer is free to reject large awards, but the insured does not enjoy a corresponding right to reject small awards. Mendes v. Automobile Insurance Co., 212 Conn. 652, 660, 563 A.2d 695, 698-99 (1989); Worldwide Insurance Group v. Klopp, 603 A.2d 788, 791 (Del. 1992).

The plaintiff's appeal to public policy as grounds for invalidating the arbitration provision is unavailing here, for the arbitration provision that appears in the plaintiff's insurance contract is already an expression of public policy and represents the legislature's consideration of the question. In each of the foreign decisions cited above invalidating similar measures, the special provision allowing the rejection of awards over a specified threshold was inserted by the insurer without legislative authorization; the relevant statutes in those cases did not require the presence of the provision in the insurance contract. In the present case, in contrast, the legislature has determined that uninsured-motorist coverage must contain this provision, and section 143a of the Insurance Code accordingly requires its presence in automobile policies. The two prior decisions by our appellate court are also distinguishable on this ground. Notably, the statute concerning underinsured-motorist coverage, at issue in Bugailiskis, does not require a similar arbitration provision. The version of the uninsured-motorist statute applicable in Baaske also did not require the use of this provision. Thus, in the cases cited by the plaintiff, the courts were not called upon to consider statutes requiring arbitration clauses in insurance policies.

We believe that this distinction is dispositive of this issue. The public policy of the state is found in its constitution, its statutes, and its judicial decisions. O'Hara v. Ahlgren, Blumenfeld & Kempster, 127 Ill. 2d 333, 341 (1989); Roanoke Agency, Inc. v. Edgar, 101 Ill. 2d 315, 327 (1984). In relation to the judicial branch, the General Assembly, which speaks through the passage of legislation, occupies a superior position in determining public policy. Committee for Educational Rights v. Edgar, 174 Ill. 2d 1, 29-32 (1996). As this court once explained:

"When the legislature has declared, by law, the public policy of the State, the judicial department must remain silent, and if a modification or change in such policy is desired the law-making department must be applied to, and not the judiciary, whose function is to declare the law but not to ...


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