The Office of General Counsel issued the following informal opinion on December 3, 2001, representing the position of the New York State Insurance Department.
RE: Insurance Department Regulation 35-D Supplementary Uninsured/Underinsured Motorists Coverage/ Arbitration
1. In a minimum coverage situation, the insured commences litigation against the insurance company with regard to SUM coverage. Upon receipt of the court papers, the carrier decides to opt for arbitration by serving a written demand as required under the policy provisions. Can the carrier opt for arbitration once the insured has commenced litigation?
2. Does the carrier have the right to seek to enforce its rights under the policy to demand a physical examination and/or an oral examination once the insured has filed a demand for arbitration?
3. Does the carrier have the right to seek to enforce its rights under the policy to demand a physical examination and/or an oral examination once the insured has filed a lawsuit?
4. With regard to SUM coverage, can the insured submit the determination of damages as the sole issue to be decided in arbitration or would submitting the matter to arbitration entitle the arbitrator(s) to consider and decide liability issues as well?
1. Yes. The carrier may request that the court stay the judicial action and enforce the insurer's contractual right to submit the controversy to arbitration and the court may so order.
2. The result would be dependent on the specific facts. If the insurer had sufficient time to enforce its rights under the policy to demand a physical examination and/or an oral examination and failed to exercise that right, it should not be entitled to a stay of arbitration. If the insurer presents a justifiable excuse for its failure to enforce its rights, a temporary stay of arbitration may be granted to allow the insurer to obtain discovery. Either determination would have to be made by a court of competent jurisdiction.
3. The court decisions on this issue only address the question with regard to the situation where the insured has made a demand for arbitration, a right derived from the required policy provisions pursuant to Insurance Department Regulation No. 35-D (N.Y. Comp. Codes R. & Regs. Tit. XI, § 60-2.0 (1999)). The reasoning discussed in response to question 2 above would be equally applicable. The determination would have to be made by a court of competent jurisdiction.
4. With regard to SUM coverage, Insurance Department Regulation No. 35-D (N.Y. Comp. Codes R. & Regs. Tit. XI, § 60-2.3 (1999)) specifically provides that the insured may arbitrate the issue of whether it is "legally entitled to recover damages from the owner or operator of an uninsured motor vehicle" or "the amount of payment that may be owing under this SUM coverage". While the language of the regulation would seem to indicate that the demand for arbitration may limit the issue(s) to be decided by the arbitrator, in practice the two issues are almost always indivisible.
No specific factual situation was presented.
Insurance Department Regulation No. 35-D (N.Y. Comp. Codes R. & Regs. Tit. XI, § 60-2.3(f) (1999)) sets out the required provisions to be included in the "Prescribed SUM endorsement". Provision 12 of the Conditions section of the endorsement reads as follows:
Arbitration: If any insured making claim under this SUM coverage and we do not agree that such insured is legally entitled to recover damages from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by the insured, or do not agree as to the amount of payment that may be owing under this SUM coverage, then, at the option and upon written demand of such insured, the matter or matters upon which such insured and we do not agree shall be settled by arbitration, administered by the American Arbitration Association, pursuant to procedures prescribed or approved by the Superintendent of Insurance for this purpose.
If, however, the maximum amount of SUM coverage provided by this endorsement equals the amount of coverage required to be provided by section 3420(f)(1) of the New York Insurance Law and Article 6 or 8 of the New York Vehicle and Traffic Law, then such disagreement shall be settled by such arbitration procedures upon written demand of either the insured or us.
N.Y. Ins. Law § 3420(f)(1) (McKinney 2000) establishes the "minimum coverage" limits that must be provided for bodily injury liability insurance coverage in motor vehicle liability insurance policies issued or delivered in New York. Paragraph (2) of the same subsection provides that, at the option of the insured, the policy will provide SUM coverage "in an amount up to the bodily injury liability insurance limits provided under such policy."
The query posed refers to a minimum coverage situation. In that situation the regulation requires that the policy endorsement provide that "... such disagreement shall be settled by such arbitration procedures upon written demand of either the insured or us." In a non-minimum coverage situation, on the other hand, the required language specifies that arbitration is to be available "at the option and upon written demand of such insured...."
N.Y. Civil Practice Law and Rules § 7501 (McKinney 1998), entitled "Effect of arbitration agreement", reads as follows:
A written agreement to submit any controversy thereafter arising or any existing controversy to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award. In determining any matter arising under this article, the court shall not consider whether the claim with respect to which arbitration is sought is tenable, or otherwise pass upon the merits of the dispute.
In the circumstance presented, the parties had a written contractual agreement that in the event of a dispute regarding certain defined issues between the parties, either party could demand that the matter be submitted to arbitration for resolution. The insured can not defeat the insurer's right by commencing a lawsuit.
Although there is no reported New York decision on point there are decisions in other jurisdictions holding that contractual arbitration provisions should be enforced by a court, and that a parties contractual right to arbitrate a dispute may not be overridden by the initiation of a lawsuit by one of the parties to the contract, See 73 A.L.R. 3d 1325, Insured's Right to Bring Direct Action Against Insurer for Uninsured Motorist Benefits § 10 (2001).
Questions (2) and (3)
The second and third questions concern the right of the insurer to demand that the insured submit to a physical and/or oral examination after filing a notice and proof of claim. Specifically, the inquirer asks whether the insurer may enforce such rights after the insured has filed a demand for arbitration or a lawsuit against the insurer.
Provisions 2 and 3 of the Conditions section of the required provisions to be included in the SUM endorsement, Insurance Department Regulation No. 35-D (N.Y. Comp. Codes R. & Regs. Tit. XI, § 60-2.3(f) (1999)), read as follows:
2. Notice and Proof of Claim: As soon as practicable, the insured or other person making claim shall give us written notice of claim under this SUM coverage.
As soon as practicable after our written request, the insured or other person making claim shall give us written proof of claim, under oath if required, including full particulars of the nature and extent of the injuries, treatment, and other details we need to determine the SUM amount payable.
The insured and every other person making claim hereunder shall, as may reasonably be required, submit to examinations under oath by any person we name and subscribe the same. Proof of claim shall be made upon forms we furnish unless we fail to furnish such forms within 15 days after receiving notice of claim.
3. Medical Reports: The insured shall submit to physical examinations by physicians we select when and as often as we may reasonably require. The insured, or in the event of the insured's incapacity, such insured's legal representative (or in the event of such insured's death, the insured's legal representative or the person or persons entitled to sue therefor), shall upon each request from us authorize us to obtain relevant medical reports and copies of relevant records.
In Liberty Mutual v. Almeida, 266 A.D.2d 547, 699 N.Y.S.2d 287 (2nd Dept. 1999) an insurer was seeking to stay a SUM arbitration in order to exercise its contractual right to discovery. The court established a standard for review of the question as follows:
Where an insurer has ample time to seek discovery of its insured as provided for in the insurance policy, but unjustifiably fails to do so, it is not entitled to a stay of arbitration (see, Matter of Allstate Ins. Co. v Faulk, 250 AD2d 674; Matter of Liberty Mut. Ins. Co. v DeCaro, 244 AD2d 487; Matter of Allstate Ins. Co. v Urena, 208 AD2d 623; Matter of Allstate Ins. Co. v Nebedum, 208 AD2d 624). In contrast, where an insurer presents a justifiable excuse for its failure to seek such discovery, a temporary stay of arbitration will be granted to allow the insurer to obtain discovery (see, Matter of Metropolitan Prop. & Cas. Ins. Co. v Keeney, 241 AD2d 455; Matter of MVAIC [Lucash], 16 AD2d 975).
Liberty Mutual v. Almeida, 266 A.D.2d at 547.
There is also judicial authority that discovery is not an issue for determination by the arbitrator but, rather, a threshold issue to be determined by the court prior to arbitration. State Farm Insurance Co. v. Hiney, 262 A.D.2d 1076; 691 N.Y.S.2d 804 (4th Dept. 1999).
Thus, with respect to either query posed, the question of the insurer's right to discovery (whether an oral examination or a physical exam) should be decided by a court prior to arbitration. The issue for determination in either instance would be whether the insurer unreasonably failed to exercise its right to discovery. If the insurer's actions were found to be unreasonable then the court could find that the insurer had effectively waived its contractual rights. State Farm v. Urdahl, 170 Misc.2d 841, 652 N.Y.S.2d197 (Nassau 1996). If the insurer's action is seen as reasonable under the surrounding circumstances the court may grant the stay to allow for discovery. Matter of Metropolitan Prop. & Cas. Ins. Co. v Keeney, 241 A.D.2d 455, 660 N.Y.S.2d 54 (2nd Dept. 1997); Matter of MVAIC [Lucash], 16 A.D.2d 975, 230 N.Y.S.2d 262 (App. Div. 1962).
The above cited cases all involved situations where the insured had made a demand for arbitration. Had the insured instead initiated a court action, the same contractual issue would be presented for the court's determination, the reasonableness of the insurer's actions in failing to seek discovery previously.
The final question is whether the insured can limit the issue to be decided by the arbitrator to the amount of damages that may be owing under the SUM endorsement. The arbitration provision of Provision 12 of the Conditions or the prescribed SUM endorsement section found in Insurance Department Regulation No. 35-D (N.Y. Comp. Codes R. & Regs. Tit. XI, § 60-2.3(f) (1999)) states, in relevant part, as follows:
If any insured making claim under this SUM coverage and we do not agree that such insured is legally entitled to recover damages from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by the insured, or do not agree as to the amount of payment that may be owing under this SUM coverage, then, at the option and upon written demand of such insured, the matter or matters upon which such insured and we do not agree shall be settled by arbitration,...
A leading treatise, analyzing New York Law on this question, states as follows:
...although there are conflicting decisions on this point, the controlling view in New York is apparently that a provision for arbitration where the parties do not agree that the insured is legally entitled to recover damages from the owner or operator of an uninsured vehicle, or do not agree as to the amount of payment owing under this endorsement (or similar wording) provides only for arbitration of the issues of negligence and damages.
29 A.L.R. 3d 328, What Issues are Arbitrable Under Arbitration Provision of Uninsured Motorist Insurance § 6 (2001).
The provision would seem to indicate that in circumstances where arbitration is at the option of the insured (non-minimum coverage situations) the demand for arbitration could, by its terms, limit the authority of the arbitrator to deciding one of the two issues. In practice, however, the questions of liability and damages are intertwined. The New York Court of Appeals, speaking to the question of when SUM coverage is triggered, stated as follows:
A claim for underinsurance benefits, however, has a number of conditions along the way. The accident is obviously the first event, considering that if there is no accident, there can be no underinsurance claim. Nevertheless, an accident and a tortfeasor, without more, does not give rise to an underinsurance claim. There may be no such claim unless and until other conditions exist, including not only the injuries but also the insufficiency of the relevant tortfeasor coverage to compensate for them. In Matter of Prudential Prop. & Cas. Co. v Szeli (83 NY2d 681, 684, supra), this Court held that underinsured motorist coverage is triggered when the limit of the insured's bodily injury liability coverage is greater than the same coverage in the tortfeasor's policy." Even then, however, a claim for underinsurance need not be paid unless and until another "condition precedent" is met, notably that " 'the limits of liability of all bodily injury liability bonds or insurance policies applicable at the time of the accident shall be exhausted by payment of judgments or settlements' " ( S'Dao v National Grange Mut. Ins. Co., 87 NY2d 853, 854 [quoting Insurance Law § 3420 (f) (2)]).
Although in theory most automobile accidents carry a potential claim for underinsurance benefits, it takes time, investigation and analysis to determine whether one will actually result. In the assessment a number of factors come into play, including the seriousness and nature of the insured's injuries (e.g., Matan v Nationwide Mut. Ins. Co., 243 AD2d 978), the potential liability of multiple parties (e.g., Matter of Allstate Ins. Co. v Sala, 226 AD2d 172) and of course the extent of a tortfeasor's coverage (e.g., S'Dao v National Grange Mut. Ins. Co., 87 NY2d 853, supra). Because these factors will vary from case to case, so too will the time at which an underinsurance claim becomes reasonably ascertainable. Thus, although coverage is "triggered" when the limit of the insured's bodily injury coverage is greater than the same coverage in the tortfeasor's policy, the acquisition of this information, the existence of other conditions and the occurrence of other developments do not always take place at a fixed time.
Metropolitan Property and Casualty Insurance Company v. Mancuso, 93 N.Y.2d 487, 693 N.Y.S.2d 81 (1999).
As the above discussion evidences, the issues of liability and damages are often inextricably intertwined. In practice, the only exception would be a case where the parties agree that the insurer is liable under the SUM endorsement but disagree on the proper measure of damages. In that instance, the demand for arbitration could be limited to the measure of damages issue. This would be true in a non-minimum coverage situation or conceivably could occur in a minimum coverage situation if both the insured and the insurer agreed to limit the issue put before the arbitrator.
For further information you may contact Associate Attorney Sam Wachtel at the New York City Office.