Scott A. Blumenshine, Law Offices of Meyer and Blumenshine, December 2006

A binding arbitration agreement between an injured uninsured motorist claimant and her insurer did not bar her subsequent lawsuit alleging the insurer's unreasonable and vexatious delay in handling her claim. Smith v. State Farm, No 1-06-0519, Illinois Appellate Court, 1st Dist. 12/06.

In Smith v State Farm, the court reviewed the trial court's order of summary judgment in favor of State Farm and against the insured plaintiff Mary Smith. The circuit court granted summary judgment on the basis that the binding arbitration agreement barred the insured's bad faith action and that no evidence of bad faith by State Farm existed.

The plaintiff in Smith v State Farm was injured in a collision with a hit and run driver. She was insured by State Farm for uninsured motorist coverage in the amount of $100,000.00. State Farm initially offered to settle her claim for $13,000.00. Ms. Smith rejected State Farm's offer and retained an attorney who demanded arbitration. State Farm then offered to settle Ms. Smith's claim for $25,000.00 and tendered her that amount as an interim payment. Subsequent settlement efforts failed.

The parties agreed to arbitration through A.D.R. Systems of America. The agreement contained high-low provisions. The agreement provided that the arbitration award would be "final and binding and not subject to appeal or motion for reconsideration by either party." The agreement further provided that "when the decision is rendered, the matter is resolved, any award arising from this agreement shall operate as a bar and complete defense to any action or proceeding in any court or tribunal that may arise from the same incident upon which the arbitration agreement is based."

The matter proceeded to an arbitration hearing. State Farm did not appear. The arbitrator awarded plaintiff $124,823.99. State Farm paid her the award amount less the set-off for the interim payment.

The plaintiff then filed a complaint against State Farm claiming damages under section 155 of the Illinois Insurance Code. The complaint alleged State Farm's willful and vexatious refusal to properly evaluate and settle her uninsured motorist claim. The complaint alleged that State Farm had years to evaluate and settle her claim and that no bona fide dispute regarding coverage existed. The complaint sought a finding that State Farm's actions constituted a vexatious and unreasonable refusal to settle and requested damages pursuant to statute including fees, costs and penalties.

State Farm filed a motion to dismiss with prejudice asserting that the arbitration agreement operated as a complete bar to her lawsuit. Mary Smith countered that the arbitration agreement related only to the car crash and compensation for her injuries. She contended that the arbitration agreement did not bar a separate case relating to State Farm's handling of her claim. She further argued that State Farm should be collaterally stopped as a matter of public policy from alleging that the arbitration agreement acted as a bar to her case. The basis of her argument was that State Farm had argued in another case that the plaintiff had prematurely filed a section 155 action, asserting that an aggrieved policyholder could only file a Section 155 action after arbitration was completed.

The trial court granted defendant's motion to dismiss which it treated as a motion for summary judgment. The trial court's order stated that "As there is no proof of a vexatious or unreasonable delay in settling (as both parties agreed to be bound to the finding of the arbitration agreement), plaintiff's claim cannot continue." The court cited the arbitration agreement.

On review, the appellate court stated that its goal was to construe the arbitration agreement and give effect to the parties' intent at the time they entered into the contract. The court cited the rule that the intent of the parties is to be determined from the language used and the circumstances of the transaction.

The court quoted the arbitration agreement which provided that the arbitrator shall decide the issues of "liability, personal injury damages and causation only." The court stated: "We read that language to mean that the arbitration hearing was confined solely to those issues." The "matter" referred to in the agreement referred to the collision and plaintiff's damages. The court determined that the "matter" cannot be construed to refer to a section 155 claim.

The opinion noted that separate Insurance Code provisions address arbitration (section 143a1) and bad faith (section 155). The court cited supreme court precedent (State Farm v. Yapejian) for the rule that arbitration is limited to issues of liability and damages only and that coverage issues are for the court. The opinion further noted the purpose of section 155 in redressing policyholder grievances for insurer delay, and it cited numerous cases allowing insureds to recover under section 155 for losses due to insurer misconduct in claims handling. "This type of claim is only proper in court and not arbitration proceedings" as section 155 vest the court with discretion to determine the award.

The court summarized by stating that the plaintiff's action is authorized by section 155 and is not covered by arbitration for two reasons: 1) arbitrations are governed by section 143 (arbitration) which defines the scope of arbitration, and 2) unreasonable and vexatious delay is governed by section 155 which vests sole authority in the court to determine the award. In closing, the court reversed the circuit court judgment and remanded the matter for further proceedings consistent with its opinion.