Ohio Casualty Insurance v. Benson

The opinion of the Court was delivered by

POLLOCK, J.

The sole issue is whether, under the arbitration clause of an uninsured motorist endorsement, the question of the existence of a “phantom” hit and run driver should be decided by a court, as a preliminary matter, or by an arbitrator.

We hold that, under the policy in this case, the issue is not a question for the court, but one, together with issues of negligence and damages, for the arbitrator.

I

On December 7, 1977, a car driven by defendant, Cornell Benson, went off the road and crashed into a tree. Benson filed a claim for benefits under the uninsured motorist endorsement of an automobile insurance policy issued to him by plaintiff Ohio Casualty Insurance Company (Ohio Casualty). Benson claims his damages were caused by a “phantom” hit and run driver who had forced him off the road without hitting his vehicle. Ohio Casualty and Benson could not agree on the damages payable under the uninsured motorist endorsement, so Benson sought arbitration under the policy.

The arbitration clause of the policy provided:

If any person making claim hereunder and the company do not agree that such person is legally entitled to recover damages from the owner or operator of an uninsured highway vehicle ... or do not agree as to the amount of payment which may be owing under this insurance, then ... the matter or matters upon which such person and the company do not agree shall be settled by arbitration

In addition, the coverage clause of the endorsement states that “[t]he company will pay all sums which the insured .. . shall be legally entitled to recover as damages from the owner or operator of an uninsured highway vehicle ..., provided . .. determination as to whether the insured ... is legally entitled to recover such damages, and if so the amount thereof, shall be made by agreement between the insured . . . and the company or, if they fail to agree, by arbitration.” With respect to compensation for bodily injury, the policy includes hit and run drivers within its definition of “uninsured highway vehicle.”

After Benson requested arbitration, Ohio Casualty instituted a civil action seeking a declaratory judgment that the endorsement did not cover the accident. Ohio Casualty also sought an injunction against arbitration. Benson moved to dismiss the complaint, but the trial court denied the motion. The Appellate Division denied, but we granted leave to appeal. 85 N.J. 491 (1980). We now reverse the trial court and grant the motion to dismiss the complaint.

II

This Court has never expressly considered whether the liability of a hit and run driver to the insured subsumes the issue of the existence of a hit and run driver. Cf. Perez v. American Bankers Ins. Co., 81 N.J. 415, 417 (1979) (parties agreed to submit coverage issue to arbitration); In re Grover, 80 N.J. 221, 228-229 (1979) (parties did not object to arbitration of coverage issue although Court suggests that coverage normally would not be arbitrable). The Appellate Division, however, has concluded “that questions of coverage, even when depending for their resolution upon pure questions of fact, equally related to the concededly arbitrable questions of the insured’s liability and fault, must be determined in a court of law, before the arbitration (if there is to be any) is commenced.” Government Employees Ins. Co. v. Bovit, 142 N.J.Super. 268, 273 (1976), certif. den. 71 N.J. 502 (1976). See New Jersey Mfrs. Ins. Co. v. Franklin, 160 N.J.Super. 292, 297 (App.Div.1978) (question whether other driver is uninsured is question of coverage to be determined by court); Satzinger v. Satzinger, 156 N.J.Super. 215, 220 (App.Div.1978) (only issues of uninsured’s negligence and amount of damages are to be determined by arbitration); Keystone Ins. Co. v. Bowman, 138 N.J.Super. 544, 548 (App.Div.1976) (question whether driver is uninsured where injured insured is co-employee passenger arbitrable under Pennsylvania law but not arbitrable in New Jersey). Cf. Korshalla v. Liberty Mut. Ins. Co., 154 N.J.Super. 235, 239 (Law Div.1977) (issue whether passenger met no-fault dollar threshold arbitrable). In Bovit, supra, the Appellate Division held that the existence of a “phantom” hit and run driver was an issue of coverage and thus “must ... be resolved by a court of law before any arbitration proceedings can commence.” 142 N.J.Super. at 274.

Many courts in other states have construed the arbitration clause as reposing in the arbitrator primary jurisdiction over some or all issues of coverage. See Van Tassel v. Superior Court of Fresno Cty., 12 Cal.3d 624, 526 P.2d 969, 116 Cal.Rptr. 505 (1974) (arbitrator decides all jurisdictional facts); Orpustan v. State Farm Mut. Auto. Ins. Co., 7 Cal.3d 988, 500 P.2d 1119, 103 Cal.Rptr. 919 (1972) (arbitrator decides if there was physical contact when contact is a statutory prerequisite to uninsured motorist coverage); McGovern v. Middlesex Mut. Ins. Co., 359 Mass. 443, 269 N.E.2d 445 (1971) (arbitrator decides all coverage issues); Employers’ Fire Ins. Co. v. Garney, 348 Mass. 627, 205 N.E.2d 8 (1965) (arbitrator decides whether “a particular situation of fact comes within the policy provisions” so as to avoid piecemeal litigation and court congestion); Detroit Auto. Inter-Ins. Exch. v. Spafford, 62 Mich.App. 365, 233 N.W.2d 283 (1975) (arbitrator decides coverage issues when coverage issues are not expressly exempted from arbitration by the policy); Maryland Cas. Co. v. McGee, 32 Mich.App. 539, 189 N.W.2d 44 (1971) (arbitrator decides all issues of disagreement between insured and insurance company); Dunshee v. State Farm Mut. Auto. Ins. Co., 303 Minn. 473, 228 N.W.2d 567 (1975) (“legally entitled” ambiguous, arbitrator decides scope of arbitration clause); Northwestern Security Ins. Co. v. Clark, 84 Nev. 716, 448 P.2d 39 (1968) (arbitrator can decide issue of law as to coverage and bind insurers when insurers submit issue to arbitration); Firemen’s Ins. v. Petrie, 10 Ohio Misc. 188, 39 Ohio Op.2d 286, 226 N.E.2d 808 (1966) (arbitrator decides whether injury was caused by hit-skip accident involving physical contact); Fawyer v. Allstate Ins. Co., 267 Or. 292, 516 P.2d 743 (1973) (arbitrator decides whether other vehicle was “phantom vehicle” within contract’s definition of uninsured vehicle); Allstate Ins. Co. v. McMonagle, 449 Pa. 362, 296 A.2d 738 (1972) (arbitrator decides whether policy was in force on day of accident); National Grange Mut. Ins. Co. v. Kuhn, 428 Pa. 179, 236 A.2d 758 (1968) (all matters of dispute are to be decided by arbitration). The rationale of these cases follows from the impracticality of bifurcating the decision making process in uninsured motorist claims. In justifying expanded construction of the arbitration clause, these courts have sometimes found that the clause is ambiguous and thus should be construed as allowing arbitration. An expansive approach is supported by the public policy favoring arbitration ¹ and by the construction of ambiguous insurance contracts most favorable to the insured.² In addition, these courts have asserted that a limited arbitrability approach conflicts with the strong public policy against clogging the courts with piecemeal litigation.

A leading commentator has criticized the limited arbitrability construction of the arbitration clause presented in this case:

Allowing the insurance company to stay the arbitration pending the determination of whether coverage exists means that a claimant may be forced through a multiple adjudicative process often including three stages: first, a judicial hearing to determine whether the arbitration should be stayed, then a judicial resolution of whether coverage exists, and finally an arbitration to ascertain the liability of the uninsured motorist for purposes of the uninsured motorist coverage .... [A]n adjudicative process which subjects claimants to a series of two or three separate hearings is certainly suspect, and probably undesirable.

The system also negates what is generally urged as one of the principal advantages of arbitration: the avoidance of delay inherent in the use of the court system. [A. Widiss, A Guide to Uninsured Motorist Coverage § 6.23 at 208-209 (1969)].

In addition, Professor Widiss states that the limited arbitrability approach “conflicts with the generally accepted proposition that once a controversy is brought before a tribunal, it is desirable to litigate and dispose of all the related issues between the parties . . . . ” Id. § 6.18 at 203.

Many other courts, however, have concluded that resolution of coverage questions under an uninsured motorist endorsement is for the courts and that only the issues of the uninsured’s liability and damages should be submitted to an arbitrator. See State Farm Fire & Cas. Co. v. Rossini, 14 Ariz.App. 235, 241, 482 P.2d 484, 490 (1971) (coverage issues are not within the scope of uninsured motorist endorsement arbitration provision), rev’d and remanded on other grounds, 107 Ariz. 561, 490 P.2d 567 (1971); International Serv. Ins. Co. v. Ross, 169 Colo. 451, 464, 457 P.2d 917, 924 (1969) (arbitration clause limited to liability and damages, does not require arbitration of alleged failure to comply with policy provisions pertaining to exclusions, proof of claim and medical reports, and so-called other insurance); Frager v. Pennsylvania Gen. Ins. Co., 155 Conn. 270, 273-277, 231 A.2d 531, 533-534 (1967) (whether there was contact so that phantom vehicle is within policy’s definition of “uninsured automobile” nonarbitrable question of coverage); Midwest Mut. Ins. Co. v. Santiesteban, 287 So.2d 665, 667 (Fla.Sup.Ct.1973) (“A challenge of coverage is exclusively a judicial question and may not be decided by arbitration”); Flood v. Country Mut. Ins. Co., 41 Ill. 2d 91, 93, 242 N.E.2d 149, 151 (1968) (question whether deceased covered by policy is for court not for arbitration); Liddy v. Companion Ins. Co., Ind.App., 390 N.E.2d 1022, 1028 (Ct.App.1979) (question of amount of payment from insurance company not arbitrable); In re Rosenbaum, 11 N.Y.2d 310, 312-316, 183 N.E.2d 667, 668-669, 229 N.Y.S.2d 375, 377-379 (Ct.App.1962) (issue whether motorist insured not arbitrable); Hartford Accident & Indem. Co. v. Novak, 83 Wash.2d 576, 585, 520 P.2d 1368, 1374 (1974) (question of coverage not for arbitration); Annot., “What issues are arbitrable under arbitration provision of uninsured motorist insurance,” 29 A.L.R.3d 328 (1970). See also Grover, supra, 80 N.J. at 228-229 (dicta suggests arbitration is limited to issues of uninsured's liability and damages). Underlying these cases are the principles that the parties have a right to rely on the terms of their agreement and that, absent an express agreement to the contrary, interpretation of the scope of a contractual provision is for the courts. See M. Domke, The Law & Practice of Commercial Arbitration § 12 at 99 (1968); 5 Am.Jur.2d, Arbitration and Award, § 15 at 531.

The present case, however, does not present the broad issue of whether arbitrators can decide questions of coverage. Furthermore, we accept the proposition that “the arbitrator’s authority is circumscribed by whatever provisions and conditions have been mutually agreed upon.” Grover, supra, 80 N.J. at 229. Like our dissenting colleagues, we also conclude that the issue of the uninsured’s liability to the insured is arbitrable. Our difference with the dissent is that it would not permit arbitration of the issue of the existence of a hit and run driver. In a similar case, this Court found that the issue of the existence of a hit and run driver could be arbitrated when the parties had agreed to arbitrate whether there had been a contact or noncontact accident. Perez, supra, 81 N.J. at 420. As Justice Sullivan noted: “It is difficult to see how the arbitrator could decide whether the accident was a contact or noncontact accident without deciding whether or not a hit-and-run vehicle was involved in the first place.” Id. As in Perez, we believe that the arbitrable issue subsumes the subordinate issue, whether a hit and run driver existed. Common sense and practicality militate against a technical construction that would cause unnecessary delay in the resolution of the insured’s claim. The logic of fairness and economy suggests a one-stop proceeding. To the extent that Bovit conflicts with our holding, we overrule Bovit.

A modern system of judicial administration should provide not only for the efficient disposition of cases within the judicial system, but also should contemplate alternative methods of dispute resolution outside the system. One such alternative method is arbitration. Just as we view piecemeal litigation as anathema, we also look with disfavor upon the unnecessary bifurcation of disputes between judicial resolution and arbitration. See generally Ford Foundation, New Approaches to Conflict Resolution 44 — 45 (May, 1978). Thus, our construction of the scope of arbitration clauses is consistent with the policy of favoring commercial arbitration as a speedy and inexpensive method for settling disputes. See Carpenter v. Bloomer, 54 N.J.Super. 157, 162 (App.Div.1959); 196 n. 1 supra.

We reverse the judgment of the Chancery Division and grant the motion to dismiss the complaint.

1 For New Jersey authority relating to the policy favoring arbitration, see N.J.S.A. 2A:24-1 et seq. (“a written agreement to submit . .. any existing controversy to arbitration .. . shall be valid, enforceable and irrevocable”); Barcon Associates, Inc. v. Tri-County Asphalt Corp., 86 N.J. 179 (1981); Brick Tp. Municipal Utilities Auth. v. Diversified R. B. & T. Constr. Co., 171 N.J.Super. 397, 402 (App.Div.1979) (“public policy favors the arbitration process, and contracts should be read liberally to find arbitrability if reasonably possible”); Hudik-Ross, Inc. v. 1530 Palisade Ave. Corp., 131 N.J.Super. 159, 166 (App.Div.1974) (N.J.S.A. 2A:24-1 et seq. reflects strong public policy in favor of arbitration); Keppler v. Terhune, 88 N.J.Super. 455, 461 (App.Div.1965) (“Arbitration is favored by our courts”); Carpenter v. Bloomer, 54 N.J.Super. 157, 162 (App.Div.1959) (arbitration is favored because it is a speedy, inexpensive, expert and amicable method of settling disputes); James Stewart Polshek & Assocs. v. Bergen Cty. Iron Works, 142 N.J.Super. 516, 521-522 (Ch.Div.1976) (settlement by arbitration is favored by our courts).

2 For a discussion of this policy consideration, see Bryan Constr. Co. v. Employers’ Surplus Lines Ins. Co., 60 N.J. 375, 377 (1972) (ambiguous policy to be resolved against insurer); Butler v. Bonner & Barnewall, Inc., 56 N.J. 567, 576 (1970) (if policy will support two meanings, interpretation favoring coverage should be applied); Bowler v. Fidelity & Cas. Co., 53 N.J. 313, 326 (1969) (courts give insured benefit “of any construction .. . which can be said fairly to represent the protection extended to him”); Allen v. Metropolitan Life Ins. Co., 44 N.J. 294, 305 (1965) (insurance contract is contract of adhesion and its terms are to be construed strictly against insurer; when ambiguous, interpretation most favorable to insured should be used); Travelers Indem. Co. v. Mongiovi, 135 N.J.Super. 452, 457 (App.Div.1975) (ambiguity should be interpreted in favor of insured); 13 J. Appleman, Insurance Law and Practice § 7481 at 542-543 (1976) (“That interpretation of a casualty insurance policy which is most favorable to the insured will be adopted, especially where some ambiguity exists therein”).