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David Barber v. Lm Property and Casualty Insurance

March 22, 2011


The opinion of the court was delivered by: Honorable Joan B. Gottschall


David Barber ("Barber") sued Defendant LM Property and Casualty Insurance Company ("LMPC") to enforce an arbitration award. LMPC has moved to dismiss Barber's complaint under Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, LMPC's motion is granted.


Barber was involved in a motor vehicle accident and settled with the other driver for $58,000. Barber then brought a claim for underinsured motorist benefits under his policy with LMPC. The parties submitted Barber's underinsured motorist claim to arbitration. Arbitrators heard the case and awarded Barber $275,000 on August 30, 2009. LMPC rejected the award about four days later. Barber eventually responded with this action, in which he asks the court to declare that the arbitration award is binding (Count I), seeks enforcement of the award (Count II), and requests statutory damages on grounds that LMPC acted unreasonably and vexatiously when it rejected the award (Count III).


When deciding a motion to dismiss under Rule 12(b)(6), the court must take "all well-pleaded allegations of the complaint as true and view[] them in the light most favorable to the plaintiff." Santiago v. Walls, 599 F.3d 749, 756 (7th Cir. 2010) (citation omitted). To survive a motion to dismiss, a plaintiff's claim needs to be "plausible on its face," Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), which occurs when there are enough facts that the court can "draw the reasonable inference that the defendant is liable for the misconduct alleged," Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). The court, however, is not obligated to accept the truth of legal conclusions or unsupported conclusions of fact. Hickey v. O'Bannon, 287 F.3d 656, 658 (7th Cir. 2002).

Although this case is in federal court, it turns on Illinois law. "[T]he duty of the federal court, sitting in diversity, is to determine the content of state law as the highest court of the state would interpret it." Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630, 636 (7th Cir. 2002) (citing Erie R.R. v. Tompkins, 304 U.S. 64, 78, 80 (1938)). When the highest state court has not decided an issue, federal courts should give "great weight" to the state appellate court decisions and should deviate from appellate court holdings only when there are "persuasive indications that the highest court of the state would decide the case differently." Id. at 637 (citing West v. Am. Tel. & Tel. Co., 311 U.S. 223, 237 (1940); State Farm Mut. Auto. Ins. Co. v. Pate, 275 F.3d 666, 669 (7th Cir. 2001); Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087, 1090 (7th Cir. 1999); Allen v. Transamerica Ins. Co., 128 F.3d 462, 466 (7th Cir. 1997)).


A. Although Barber's Policy Does Not Contain a Trial De Novo Clause, LMPC has an Implied Right to Trial to the Extent the Award Exceeds $20,000 LMPC argues that, consistent with Zappia v. St. Paul Fire and Marine Insurance Company., 364 Ill. App. 3d 883 (1st Dist. 2006), the following language from Barber's Policy allows it to reject the arbitral award and proceed to trial (a trial de novo): "Any decision made by arbitrators shall be binding for the amount of damages not exceeding the Financial Responsibility limits for bodily injury or death set forth in the Illinois Vehicle Code." (Mot. to Dismiss at 3.) Zappia held that a policy with similar language enabled the parties to reject the arbitral award and proceed to trial. 364 Ill. App. 3d at 887-88. Nevertheless, LMPC's reliance on Zappia is misplaced. While the policy at issue in Zappia contained similar language,*fn1 it apparently also contained language that "expressly allowed [the insured] to demand trial" in the event that the arbitral award was more than the $20,000 Illinois Vehicle Code Financial Responsibility limit. Zappia, 364 Ill. App. 3d at 887; see also 625 Ill. Comp. Stat. 5/7-203 (West 2011) (setting forth the Illinois Vehicle Code's Financial Responsibility limits). Barber's policy lacks any such language. Thus, LMPC's arguments that Barber's Policy contains an express trial de novo clause or a so-called right-to-reject clause are incorrect. Compare Am. Family Mut. Ins. Co. v. Stagg, 393 Ill. App. 3d 619, 620 (5th Dist. 2009) (recognizing the presence of a trial de novo provision where the policy expressly provided a right to trial if the arbitral award exceeded a certain amount); Costello v. Liberty Mut. Fire Ins. Co., 376 Ill. App. 3d 235, 237 (5th Dist. 2007) (same); Shultz v. Atlantic Mut. Ins. Co., 367 Ill. App. 3d 1, 2 (1st Dist. 2006) (same); Samek v. Liberty Mut. Fire. Ins. Co., 341 Ill. App. 3d 1045, 1047 (1st Dist. 2003) (same); Kost v. Farmers Auto. Ins. Ass'n, 328 Ill. App. 3d 649, 651 (5th Dist. 2002) (same); Parker v. Am. Family Ins. Co., 315 Ill. App. 3d 431, 432 (3d Dist. 2000) (same).

The Policy is clear, however, that arbitration awards in the underinsured motorist context are binding only to the extent of $20,000 ("Any decision made by the arbitrators shall be binding for the amount of damages not exceeding the Financial Responsibility limits for bodily injury or death set forth in the Illinois Vehicle Code." (Compl., Ex. A, Part 4, ¶ 4.)). Barber thus has an arbitral award for $275,000 that is binding only to the extent of $20,000, less than he already recovered from the other driver.

As LMPC argues, under Illinois law there is no waiver of the right to a trial absent clear language in the policy stating so. See Stratford West Homeowners Ass'n v. Country Mut. Ins. Co., 338 Ill. App. 3d 288, 290-91 (3d. Dist. 2003); De Groot v. Farmers Mut. Hail Ins. Co., 267 Ill. App. 3d 723, 725 (3d. Dist. 1994). Since the policy makes clear that the arbitral award is binding only to the extent of $20,000 and is otherwise silent about whether the right to trial is waived, this law supports LMPC's argument that it cannot be compelled to pay the full arbitral award and is entitled to bring an action de novo on the issue of the damages it owes Barber.*fn2

LMPC's argument is complicated by a line of Illinois cases holding that insurance policies which make arbitral awards binding to a limited extent (usually $20,000) but non-binding above that limit, and allow either party to opt for a trial de novo to the extent that they are not satisfied with a higher arbitral award are void as against public policy. The first Illinois case to so hold was Fireman's Fund Insurance Companies v. Bugailiskis, 278 Ill. App. 3d 19 (2d Dist. 1996). Bugailiskis, relying in part on cases from other states, reasoned that the policy's trial de novo clause possessed "some of the earmarks of an adhesive contract" in that it lacked mutuality of remedy and was entered into between parties with unequal bargaining power. Specifically as to the lack of mutuality issue, the court reasoned "that the language allows the insurer to avoid a high award while binding the insured to a low award." Id. at 22. Besides the lack of mutuality issue, the policy's trial de novo provision, which made the arbitration non-binding even in the absence of any claimed impropriety in the arbitration process, contravened the public policy favoring arbitration: the efficient, cost-effective resolution of disputes. A provision allowing non-binding arbitration, followed by the option of a trial de novo if the arbitral award exceeded $20,000, operated to defeat those goals.

Two Illinois cases followed Bugailiskis. In Parker v. American Family Insurance Company, 315 Ill. App. 3d 431 (3d Dist. 2000), Parker, the insured, received $75,000 in an arbitration. In response to his petition for judgment on the award, the insurance company moved to dismiss and counterclaimed for trial de novo. The court agreed with Bugailiskis that the trial de novo provision had the earmarks of an adhesion contract because it benefitted only the insurer and thus lacked mutuality. Although invalidating the clause as contrary to public policy on the basis of the mutuality argument, the Parker court rejected Bugailiskis' second ground: that such a policy provision conflicted with state policies favoring arbitration. Illinois, the Parker court held, encourages arbitration, whether it is binding or non-binding, so the argument that such a provision contravenes the public policy favoring arbitration is not persuasive.

Finally, in Samek v. Liberty Mutual Fire Insurance Company, 341 Ill. App. 3d 1045 (1st Dist. 2003), the court held, in agreement with Bugailiskis and Parker, that the policy's clause allowing for a trial de novoif the arbitration award was in excess of $20,000 was void as against public policy as lacking mutuality. Such clauses, the court held: are inherently unfair because they afford a remedy to insurers, while denying the same to the insured, which means that while both parties are bound by a low award, the insurance company is unlikely to appeal it, ...

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