Liability, Damages Arbitrable under California UM/UIM Law

Bouton v. USAA Cas. Ins. Co., 2008 WL 2332004 ( Cal. ), involved two consolidated cases, Bouton v. USAA Casualty Insurance Company and O'Hanesian v. State Farm Mutual Automobile Insurance Company.

The first action involved a driver who was injured in an automobile accident and settled his claim against the driver of the other vehicle for the policy limit of $15,000. The insured formally demanded arbitration with his sister's insurer, seeking damages exceeding the policy limit payment he received from the other driver's insurer. The insurer denied coverage, claiming that the plaintiff was not a resident of his sister's household, and was therefore not covered under her insurance policy.

The sister's policy's UM/UIM provision defined a “covered person” as the named insured “or any family member.” The policy defined a “family member” as “a person related to the named insured by blood, marriage, or adoption who is a resident of the named insured's household.” The plaintiff contended that he constituted a family member of the named insured, his sister, because they were blood relatives permanently residing in the same household. The UM/UIM provision of the policy provided that the insurer would pay compensatory damages that a covered person is legally entitled to recover from the owner or operator of an underinsured motor vehicle because of injury sustained by a covered person and caused by an auto accident. The policy provided that no payment would be made until the limits of liability under any applicable motor vehicle bodily injury liability bonds or policies have been exhausted by payment of judgments or settlements, and proof of such was submitted to the insurer.

The underinsured motorist provision of the policy also contained an arbitration agreement which stated that if the insurer and a covered person disagreed as to whether a covered person was legally entitled to recover damages from the owner or operator of an underinsured motor vehicle, or the amount of damages that the covered person was legally entitled to collect from that owner, that disagreement should be arbitrated.

The Supreme Court of California determined that the only issues arbitrable under California's statutory arbitration requirement for uninsured and underinsured motorist insurance coverage were whether the insured was entitled to recover against the underinsured motorist and, if so, the amount of the damages. This determination overruled Van Tassel v. Superior Court, 526 P.2d 969 (1974), in which the court had held that “jurisdictional facts,” such as whether a claimant was insured under an uninsured motorist provision, were subject to arbitration.

The court found that the determination of whether the claimant was insured under the underinsured motorist provision of his sister's automobile policy was not subject to the statutory arbitration requirement, and thus was not arbitrable absent an agreement to arbitrate more than the statute required, since it was not a question of the underinsured motorist's liability or damages owed to the insured.
The court also explained that the determination of whether the default judgment obtained by the insured against the underinsured motorist was binding on the insurer, with respect to the insured's general liability policy, and was subject to the statutory arbitration requirement for underinsured motorist coverage issues (even though the insured and the insurer both argued that the issue should be resolved by a court). According to the court, this was because an arbitrator would necessarily address the effect of the default judgment in determining whether the insured was entitled to collect damages from the owner or the driver of the underinsured motor vehicle, and, if so, in what amount.

In the second action, the plaintiff was injured when his car was rear-ended. The plaintiff filed an action against the driver of the other car, who failed to appear. The plaintiff submitted evidence regarding the extent of his injuries at a bench trial, and the court awarded him $2,751,000 in compensatory damages and $1 million in punitive damages. The plaintiff made a demand on the other driver's insurer, and received the policy limit of $100,000.

The plaintiff was insured by the defendant under a general policy with a $100,000 limit for bodily injury, and under an umbrella policy with a $1 million limit for bodily injury. The underinsured motorist provision of the policies covered “damages for bodily injury an insured is legally entitled to collect from the owner or driver of an uninsured motor vehicle.” The policies required that the insured provide “all the details about the death, injury, treatment and other information” necessary to “determine the amount payable,” and “be examined by physicians chosen and paid by” the insurer.

The policies also contained an arbitration provision stating that two questions must be decided by agreement between the insured and the insurer: 1.Was the insured legally entitled to collect damages from the owner or driver of the uninsured motor vehicle; and 2. If so, in what amount? If there was no agreement, upon written request of the insured or the insurer, the two questions were to be decided by arbitration as provided by §11580.2 of the California Insurance Code.

The policies also provided that if the damages were caused by an underinsured motor vehicle, there was no coverage until the limits of liability of all bodily injury liability bonds and policies that applied were used up by payment of judgments or settlements to other persons or such limits of liability or remaining part of them had been offered to the insured in writing.

The plaintiff demanded payment of $900,000 from his insurer, the maximum available under his underinsured motorist coverage, asserting that the default judgment entered against the other driver conclusively established damages. The insurer refused to pay, seeking instead to informally evaluate the damages before tendering any money.

The plaintiff sued the insurer for declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing, arguing that the default judgment obtained against the other driver established his damages and that he was not required to submit to the insurer's evaluation. The insurer demurred to the plaintiff complaint, arguing that it was not bound by the declaratory judgment, and that the plaintiff's action was premature because no arbitration had occurred as required by the policies and by §11580.2. The trial court granted the insurer's demurrer without leave to amend and dismissed the action. Plaintiff appealed.

The court held that the insured and the insurer were required to arbitrate the issue of whether the default judgment obtained by the insured against the underinsured motorist was binding on the insurer with respect to the insured's umbrella policy, where the umbrella policy provided that it would apply in accordance with the terms and conditions of the underlying underinsured motorist coverage, which was subject to the statutory arbitration requirement.