Arbitration - Sure, but Only on Our Terms: Escape Clauses in Uninsured Motorist Policies - Schaefer V

Journal of Dispute Resolution Volume 1993 Issue 1 Article 9 1993 Arbitration - Sure, but Only on Our Terms: Escape Clauses in Uninsured Motorist Policies - Schaefer v. Allstate Ins. Co. Steven R. Leppard Follow this and additional works at: https://scholarship.law.missouri.edu/jdr Part of the Dispute Resolution and Arbitration Commons Recommended Citation Steven R. Leppard, Arbitration - Sure, but Only on Our Terms: Escape Clauses in Uninsured Motorist Policies - Schaefer v. Allstate Ins. Co., 1993 J. Disp. Resol. (1993) Available at: https://scholarship.law.missouri.edu/jdr/vol1993/iss1/9 This Note is brought to you for free and open access by the Law Journals at University of Missouri School of Law Scholarship Repository. It has been accepted for inclusion in Journal of Dispute Resolution by an authorized editor of University of Missouri School of Law Scholarship Repository. For more information, please contact [email protected]. Leppard: Leppard: Arbitration - Sure, but Only on Our Terms: NOTES ARBITRATION? SURE, BUT ONLY ON OUR TERMS: ESCAPE CLAUSES IN UNINSURED MOTORIST POLICIES Schaefer v. Allstate Ins. Co.' I. INTRODUCTION Historically, the insurance industry has widely used arbitration to resolve disputes.2 Insurance companies have increasingly included "escape clauses" in their policies.' These clauses allow an insurance company to ignore an arbitrator's award and have a claim directly heard in a trial court if the award exceeds a pre-determined amount.' The Ohio Supreme Court in Schaefer v. Allstate Insurance Co. addressed this issue and decided that the escape clause was unenforceable due to public policy.' II. FACTS AND HOLDING On November 8, 1985, an automobile occupied by David and Jeanette Schaefer was involved in an accident with a car negligently driven by an uninsured motorist.' At the time of the accident, the Schaefers had an insurance policy with appellant Allstate Insurance Company that provided uninsured motorist coverage with limits at $100,000 per person and $300,000 per 7 occurrence. 1. 590 N.E.2d 1242 (Ohio 1992). 2. Stephen Lamson, The Impact of the Federal ArbitrationAct and the McCarran-FergusonAct on Uninsured Motorist Arbitration, 19 CONN. L. REv. 241, 242-46 (1987). 3. Schaefer, 590 N.E.2d at 1248. 4. Id. at 1243-44. 5. Id. at 1249. 6. Id. at 1243. 7. Id. Published by University of Missouri School of Law Scholarship Repository, 1993 1 Journal of Dispute Resolution, Vol. 1993, Iss. 1 [1993], Art. 9 JOURNAL OF DISPUTE RESOLUTION [Vol. 1993, No. 1 After the accident, a dispute arose between the Schaefers and Allstate over the amount of uninsured motorist benefits, if any, due to the Schaefers.8 Pursuant to an arbitration clause in the Allstate policy,9 the parties brought the dispute over benefits before a panel of three arbitrators for determination.' At this hearing, there was no dispute that the uninsured motorist coverage provision applied to this accident or that Jeanette Schaefer suffered from a serious and perhaps permanent disability resulting from a head injury sustained in the accident." Rather, the dispute concerned the cause of Jeanette Schaefer's head injury: the car accident or a 1984 fall down a flight of stairs. 2 After a full hearing, the panel decided that the Schaefers had not met their burden of proof that the 1985 car accident was the proximate cause of the injury or that the accident aggravated the 1984 injury.'3 The panel did, however, decide that the thereby Schaefers had suffered some physical injury 4from the accident and awarded $500 to David and $1500 to Jeanette.' After the parties entered into the insurance contract, but prior to the accident, Allstate had issued an amendment to the contract designed to replace the original clause requiring arbitration."' The amendment was the applicable clause in the event that a dispute arose between Allstate and the insured parties.' 6 The amendment clause stated that any arbitration award not exceeding the limits imposed by the Ohio Financial Responsibility Law' 7 would bind both parties and could be entered as a judgment in a proper court, but any award exceeding such 8. Id. 9. The original Allstate insurance policy issued to the Schaefers contained the following arbitration clause: If any person making claim hereunder and Allstate do not agree that such person is legally entitled to recover damages from the owner or operator of an uninsured automobile because of bodily injury to the insured, or do not agree as to the amount of payment which may be owing under this coverage, then, upon written demand of either, the matter or matters upon which such person and Allstate do not agree shall be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Such person and Allstate agree to consider itself bound and to be bound by any award made by the arbitrators pursuant to this coverage. Id. at 1247. 10. Id. at 1243. 11. Id. 12. Id. 13. Id. 14. Id. 15. Id. at 1247-48. Such amendments are known as "endorsements." See id. at 1247. 16. Id. at 1248. 17. OHIo REV. CODE ANN. §§ 4509.01-.99 (Anderson 1988 & Supp. 1991). The Ohio Financial Responsibility Law requires that every person be insured to a minimum of $12,500 per person or $25,000 per occurrence. Id. §§ 4509.01(K), .20(A). https://scholarship.law.missouri.edu/jdr/vol1993/iss1/9 2 Leppard: Leppard: Arbitration - Sure, but Only on Our Terms: 1993] INSURANCE POLICY ARBITRATION limits could be taken by either party to a trial court of competent jurisdiction regarding any issue. 8 On August 11, 1989, the Schaefers filed a motion to vacate the panel's award in the Court of Common Pleas of Franklin County, claiming that the terms of the amendment were unconscionable and against public policy.' 9 They advanced an alternative request that they be allowed to have their claims heard before an appropriate trial court.2' The court denied the motion and confirmed the panel's award. 2' On appeal, the Ohio Court of Appeals for the Tenth District concluded that the provision allowing a party a trial de novo if the amount exceeded the financial responsibility law was "so fundamentally unfair as to be unconscionable. 2 2 The court, in an attempt to remedy the unfairness, refused to recognize that portion of the provision making an award binding so that all awards were appealable de novo.2 3 In so doing, the appeals court reversed the trial court and remanded the case for further proceedings.24 Finding that its decision conflicted with other Ohio courts of appeals, the appellate court certified the case to the Supreme Court of Ohio for review and final determination.' The Ohio Supreme Court affirmed the appellate court, holding that when an insurance contract contains a provision for arbitration to be binding only if it is within certain limits and otherwise to be reviewable de novo, whether or not knowingly bargained for, the policy interest of the state favoring arbitration (1) requires that such a clause be unenforceable and (2) allows that either party may seek de novo review from a proper trial court.26 18. Schaefer, 590 N.E.2d at 1243-44. While Allstate and the Schaefers interpreted the amendment differently, both parties agreed that the relevant provision was as follows: Regardless of the method of arbitration, any award not exceeding the limit of the Financial Responsibility law of Ohio will be binding and may be entered as a judgment in a proper court. Regardless of the method of arbitration when any arbitration award exceeds the Financial Responsibility limits of the State of Ohio either party has a right to a trial on all issues in a court of competent jurisdiction. This right must be exercised within 60 days of the award. Id. at 1247. 19. Id.at 1244. 20. Id. 21. Id. 22. Id. 23. Id. 24. Id. 25. Id. 26. Id. at 1248-50. The Schaefer case was in fact consolidated with another case, Nationwide Mutual Insurance Co. v. Fallon-Murphy, Case Nos. 91-2105 & 91-2333. The facts of Fallon-Murphy were very similar to the facts of Schaefer, and the insurance clause at issue was identical. See Schaefer, 590 N.E.2d at 1249. In Fallon-Murphy, however, the panel of arbitrators awarded the plaintiffs $1 million, which the insurance company immediately appealed. Id. Justice Douglas, in his plurality opinion in Schaefer, recognized that the sword cut both ways in holding that the escape clause was unenforceable. See id. Since both sides could immediately litigate the issue, the award of the arbitrators would not be binding, and when the trial jury brought in a lower figure for plaintiffs, Published by University of Missouri School of Law Scholarship Repository, 1993 3 Journal of Dispute Resolution, Vol. 1993, Iss. 1 [1993], Art. 9 JOURNAL OF DISPUTE RESOLUTION [Vol. 1993, No. I III. LEGAL BACKGROUND The origins of arbitration are ancient. Arbitration has been said to pre-date the legal systems of both the Greeks and the Romans.' While many realized the benefits of an arbitration system,' English courts and, later, American courts were generally hostile to enforcing agreements to arbitrate.29 This hostility took the form of the doctrine of revocability, which provided that either party to a disagreement could revoke an agreement to arbitrate future disputes for any reason20 Judicial hostility to enforcing such agreements has been linked to jealousy over jurisdiction, 3' to a fear of loss of income,32 and to concerns that parties involved would not receive fair and adequate treatment due to an arbitrator's lesser authority compared to that of a judge.

Load more