O'Hanesian v. State Farm Mutual Automobile Insurance Company
(Cal. Court of Appeal, Fourth District; December 19, 2006 06 C.D.O.S. 11628)

California Supreme Court Grants Review and Depublishes Decision Holding Insured Must Submit Underinsured Motorist Claim To Arbitration

On March 14, 2007, the California Supreme Court granted review and depublished O'Hanesian v. State Farm Mutual Automobile Insurance Company (2006) 145 Cal.App.4th 1305. In the appellate court case, the Fourth District affirmed the trial court's order of dismissal following a ruling sustaining the defendant insurers' demurrers, without leave to amend. The trial court held plaintiff was required to submit his underinsured motorist ("UIM") claim to arbitration despite having previously obtained judgment against the other driver in an underlying action. The Court of Appeal found no error in this ruling and agreed arbitration is the proper forum to determine the plaintiff's right to UIM benefits under the terms of his policy.

The California Supreme Court granted review on the following issue: does the arbitrator or the trial court decide whether a prior default judgment against the driver of an underinsured vehicle resolves the two questions - (1) whether the insured under an underinsured motorist insurance policy is entitled to collect damages from the driver and (2) if so, the amount - that the policy and Insurance Code section 11580.2(f), otherwise leave to the arbitrator?

Plaintiff Charles O'Hanesian was injured in a rear-end collision with a vehicle operated by Curtis Thurlow. O'Hanesian sued Thurlow and, after Thurlow failed to appear, the trial court awarded O'Hanesian a $3,751,000 judgment following a prove-up hearing.

Thurlow's insurer paid O'Hanesian its policy limits of $100,000. O'Hanesian then demanded his insurers, State Farm Mutual Automobile Insurance Company and State Farm General Insurance (collectively, "State Farm"), pay him the maximum benefits available under his UIM coverage. State Farm refused to pay these benefits and informed O'Hanesian it wished to evaluate the nature and the extent of his injuries. O'Hanesian contended his judgment against Thurlow conclusively established the nature, extent and amount of his injuries. When State Farm again refused to pay the UIM coverage limits, O'Hanesian sued, alleging causes of action against State Farm for declaratory relief, breach of contract, and bad faith.

State Farm demurred, contending it was not bound by the judgment entered against Thurlow in the underlying action. State Farm also argued O'Hanesian's action is premature because O'Hanesian was required under Insurance Code section 11580.2(f), ("Section 11580.2(f)") to pursue his claim for benefits through arbitration before he could sue State Farm for breach of contract or bad faith. State Farm also moved to strike the claims for emotional distress and punitive damages.

State Farm's policy defined an uninsured motor vehicle to include an underinsured motor vehicle. The policy also provided:

Two questions must be decided by agreement between the insured and us:

1. Is 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 is no agreement, upon written request of the insured or us, these questions shall be decided by arbitration as provided by section 11580.2....

Section 11580.2(f) addresses resolution of claims by arbitration as follows:

The policy or an endorsement added thereto shall provide that the determination as to whether the insured shall be legally entitled to recover damages, and if so entitled, the amount thereof, shall be made by agreement between the insured and the insurer or, in the event of disagreement, by arbitration…

The trial court sustained State Farm's demurrer without leave to amend. It held that, despite the judgment in the underlying action, State Farm was entitled to arbitration to determine the amount of O'Hanesian's damages. The trial court also granted State Farm's motion to strike.

O'Hanesian appealed. He contended State Farm was bound by the underlying judgment and that neither Section 11580.2(f) nor State Farm's policy provisions required arbitration. He contended Section 11580.2(f) did not apply because UIM claims are specifically governed by Insurance Code section 11580.2(p). This subsection by its terms expressly prevails over any other inconsistent provisions of the statute.

The Court of Appeal rejected this contention. It noted California's strong public policy favoring arbitration and that any reasonable doubt as to whether a claim falls within an arbitration clause is to be resolved in favor of arbitration. Villacreses v. Molinari (2005) 132 Cal.App.4th 1223, 1229. Moreover, California courts have previously held Section 11580.2(f)'s arbitration provisions apply to UIM claims. Since this arbitration procedure does not conflict with anything expressed in Section 11580.2(p), O'Hanesian was required to arbitrate his claims.

The Court of Appeal also rejected O'Hanesian's contention that his policy was ambiguous and thus should not be read to require him to arbitrate. State Farm's policy language conforms to the statutory language of Section 11580.2. Therefore, the broad principle that ambiguities in insurance policies must be construed against the insurer does not apply. Instead, the policy provision should be given a reasonable construction. Since California courts had already interpreted Section 11580.2(f) as applying both to uninsured and UIM claims, State Farm's similar policy language should be similarly construed.

The Appellate Court, however, cautioned its decision only addresses enforcement of the parties' agreement to arbitrate. O'Hanesian is free to submit to the arbitrator that the underlying judgment is dispositive of liability and damage issues. Because the Fourth District's decision was depublished by the California Supreme Court and review was granted, the Fourth District's decision is unavailable for use as legal authority. The California Supreme Court's decision should be issued in the next twelve months.

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