Given the judicial system’s persistent concerns regarding overburdened dockets, it came as a surprise to many practitioners when the Supreme Court of Pennsylvania decided in a 7-2 opinion that the Pennsylvania Insurance Commissioner can not require private passenger motor vehicle insurers to include binding arbitration provisions for resolving uninsured and underinsured motorists claims.  Specifically, in Insurance Federation of Pennsylvania, Inc. v. Insurance Commissioner, Diane Koken, 889 A.2d 550 (Pa. 2005), the court held that the “Insurance Department overstepped its legislative mandate in requiring mandatory binding arbitration in UM and UIM disputes.”  Id. at 555.

Ironically, the Insurance Federation argued for the preservation of the right to access to the courts.  In doing so, the Insurance Federation has now cleared the way for its members to remove binding arbitration provisions from their private passenger motor vehicle policies.  Consequently, many questions arise as to what an UM/UIM claim will look like if it is brought in a trial court.  Indeed, both sides are poised for a standoff.

Originally, there was speculation as to what, if anything, the insurance companies would do.  Would the carriers actually remove the binding arbitration provision?  Would the carriers attempt to change the arbitration provision to the more liberal provisions of Act of 1927 permitting greater appeal rights?  Would the carriers try to create a hybrid situation requiring some sort of consent before a claim would be submitted to arbitration?  Did the carriers actually want to submit these claims to trials?

Since the publication of the IFP decision in December 2005, a few carriers have created new policy forms that are silent with respect to arbitration of UM/UIM claims or attempt to create hybrid situations.  It will take some time for these new policies to work their way through approval and into the marketplace.  Once they do and the claims arise, practitioners and insurance carriers will need to consider a number of tactical and practical issues.

From the insured’s vantage point, there may be a number of benefits to proceeding to trial rather than binding arbitration.  A complaint surrounding an UM/UIM claim may potentially involve multiple counts including, but not limited to, breach of contract, breach of the duty of good faith and fair dealing, bad faith (42 Pa. Cons. Stat. Ann. § 8371), and violations of the Unfair Trade Practices Act, 73 Pa.C.S.A. § 201-1, et seq. There may be circumstances where the consumer might be able to allege these claims in the same complaint as the third-party claim.

Pennsylvania law provides a number of statutory and common law tools for the consumer to utilize when their claims are not paid.  One of the most powerful weapons is Pennsylvania’s statute regarding Actions on Insurance Policies, 42 Pa. Cons. Stat. Ann. § 8371 (so-called “bad faith”).  The statute provides that “in an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

(1) Award interest in the amount of the claim on the date the claim was made by the insured in the amount equal to the prime rate of interest plus 3%.

(2) Award punitive damages against the insurer.

(3) Assess court costs and attorneys’ fees against the insurer.”

Id. Importantly, claims in state court under the bad faith statute are determined by a judge, not a jury.  Mishoe v. Erie Ins. Co., 573 Pa. 267,  824 A.2d 1153 (2003).

Another claim which is currently not available to consumers in an UM/UIM arbitration proceeding but potentially viable in court is a claim under The Birth Center v. The St. Paul Companies, 567 Pa. 386, 787 A.2d 376 (2001).  A Birth Center claim is based upon the insurance carrier’s breach of its duty of good faith and fair dealing.  In The Birth Center, the Pennsylvania Supreme Court recognized that a consumer may seek damages beyond those amounts afforded under the insurance policy.  A Birth Center claim permits recovery of those consequential damages flowing from the insurance company’s breach of its first party duties to its insured.  Although the Superior Court recently confirmed in Condio v. Erie Insurance Exchange, 2006 Pa. Super. 92, 899 A.2d 1136 (2006), that UM/UIM claims are adversarial in terms of posture and process, “where an insurer acts in bad faith, the insured is entitled to recover such damages sufficient to return it to the position it would have been in but for the breach.”  Id. at 400, 787 A.2d at 385.

Likewise, Pennsylvania courts recognize independent actions for bad faith based upon the insurance carrier’s misconduct during the litigation of the underlying claim which serves to delay or improperly impede the payment of benefits. O’Donnell v. Allstate Insurance Company, 1999 Pa. Super. 901, 734 A.2d 901 (1999).  While typical discovery abuses and misconduct are not enough, if the misconduct or delays during the litigation of a claim which remains unpaid serve to delay the payment or constitute outrageous conduct, this too becomes an additional claim that may be determined concurrently with the underlying UM/UIM claim.

While many trial lawyers have seen the impact of the tort reform campaign on jurors’ opinions, insurance companies are not viewed as victims like physicians and individual defendants.  As premiums in many areas including health insurance, disability insurance, property insurance and private passenger motor vehicle insurance continue to escalate, more members of the public continue to ask: “Where is all this money going?”  By submitting these disputes to juries, the gamesmanship employed by many carriers in responding to UM/UIM claims may serve to enhance the values of claims rather than depress them.

Many leaders of the defense bad faith bar acknowledge that one of the most fertile areas in today’s bad faith law is UM/UIM actions.  In light of the IFP decision, there is uncertainty with respect to the scope of potential risks faced by carriers that choose to remove binding arbitration provisions.  Carriers are now faced with a “Hobson’s Choice” of whether to retain their binding clauses or to subject these claims to the trial system.

“Be careful what you wish for."