Bonds v. Farmers Insurance

240 P.3d 1086, 349 Or. 152, 2010 Ore. LEXIS 787

• Court: Oregon Supreme Court
• Decided: October 14, 2010
• Docket: CC 051213375; CA A134011; SC S057422
• Status: Published

Opinions

WALTERS, J.

In this case, we decide that, to “formally institute arbitration,” and thereby satisfy the timelines set forth in ORS 742.504(12)(a)(B) and maintain a claim for under-insured motorist (UIM) benefits, an insured or an insurer must expressly communicate to the other party that the initiating party is beginning the process of arbitrating a dispute. We further decide that two letters written by defendant to plaintiff in this case did not meet that standard and that plaintiffs claim for UIM benefits is therefore time-barred.

On July 2, 2003, plaintiff was injured in an automobile collision caused by the negligence of another driver. Plaintiff was insured under an automobile policy with Farmers Insurance Company (defendant) and was entitled to UIM coverage. In March 2005, plaintiffs lawyer told defendant that he had reached a settlement agreement with the other driver, that the settlement did not adequately cover plaintiffs damages, and that plaintiff therefore intended to seek UIM coverage from defendant for the remainder. Subsequently, a claims representative for defendant sent plaintiffs lawyer two letters. The first letter acknowledged plaintiffs UIM claim and stated, “Should we disagree on the liability/damages owed by the underinsured motorist, [defendant] consents to submit this matter to binding arbitration.” The second letter stated that defendant disagreed about the extent of the damages owed — in particular, the representative stated that plaintiff already had been compensated for his injuries through the other driver’s insurance coverage— and that plaintiff was not entitled to UIM benefits. The representative offered, however, to consider additional information about plaintiffs alleged injuries. Both letters likely arrived on the same day.¹

On July 6, 2005 — two years and four days after the accident — defendant’s claims representative called plaintiffs lawyer to ask whether he had filed an action against defendant regarding the UIM claim. When plaintiffs lawyer said that he had not, the representative and the lawyer disagreed about whether the time for filing such an action had expired. The next day, plaintiffs lawyer called the representative and, referring to the representative’s March 2005 letters, stated that plaintiff would accept defendant’s offer to arbitrate. When defendant asserted that plaintiffs UIM claim was time-barred, plaintiff sought a judicial declaration to the contrary. Following a bench trial, the trial court concluded that defendant had formally instituted arbitration proceedings within two years of the date of the accident and ordered defendant to arbitrate.

Defendant appealed. The issue before the Court of Appeals focused on the action required by ORS 742.504(12)(a)(B), which governs how parties to an insurance contract can initiate arbitration respecting the contract:

“The parties to this coverage agree that no cause of action shall accrue to the insured under this coverage unless within two years from the date of the accident:

“(B) The insured or the insurer has formally instituted arbitration proceedings[.]”

(Emphasis added.) Defendant argued that, to formally institute arbitration proceedings under ORS 742.504(12)(a)(B), the parties must follow a sequential two-step process: first, the parties must reach a mutual agreement to arbitrate; and second, one of the parties must give notice to arbitrate in compliance with the “arbitration laws of the State of Oregon,” specifically Oregon’s Uniform Arbitration Act. In a written opinion, the Court of Appeals decided that mutual agreement to arbitrate is not a prerequisite to a party’s formal institution of arbitration proceedings. Bonds v. Farmers Ins. Co., 227 Or App 185, 205 P3d 45 (2009). However, the court also decided that the party instituting arbitration proceedings must send notice of arbitration in accordance with Oregon’s Uniform Arbitration Act and that defendant’s letters were insufficient to meet the requirements of that act. Id. at 191. We allowed plaintiffs petition for review, and, for the reasons we explain, we affirm the decision of the Court of Appeals, but on different grounds.

We begin our analysis with the text of ORS 742.504.² ORS 742.504 sets out a comprehensive model UIM policy. Subsection (12) of that statute provides that the accrual of a claim for uninsured and underinsured motorist benefits is conditioned on the occurrence of one of several events within two years of the date of a motor vehicle accident. One of those events is that “[t]he insured or the insurer has formally instituted arbitration proceedings^]”³

Defendant argues that we can determine the meaning of ORS 742.504(12)(a)(B) by considering its context and that neither party may formally institute arbitration proceedings under ORS 742.504(12)(a)(B) until both parties have agreed to arbitrate under ORS 742.504(10). That subsection provides, in part:

“If any person making claim hereunder and the insurer do not agree that the person is legally entitled to recover damages from the owner or operator of an uninsured vehicle because of bodily injury to the insured, or do not agree as to the amount of payment that may be owing under this coverage, then, in the event the insured and the insurer elect by mutual agreement at the time of the dispute to settle the matter by arbitration, the arbitration shall take place as described in section 2, chapter 328, Oregon Laws 2007.”

(Emphases added.) Plaintiff agrees that, under subsection (10), arbitration cannot “take place” absent mutual agreement to arbitrate, but contends that, under subsection (12), one party acting alone may initiate the arbitration process and thereby preserve a claim for benefits. Both parties point us to the enactment history of subsections (10) and (12) to support their positions.

In 1967, when the legislature originally enacted the forerunner to those subsections, either the insured or the insurer could elect to arbitrate their dispute, and election by one bound the other. The predecessor to ORS 742.504(10) provided, in part:

“\I\n the event the insured or the insurer elects to settle the matter by arbitration, * * * [s]uchperson and the insurer each agree to consider themselves bound and to be bound by any award made by the arbitrators pursuant to this coverage in the event of such election.”

Former ORS 743.792(10) (1967), renumbered as ORS 742.504(10) (1989) (emphasis added). The predecessor to subsection (12) provided:

“The parties to this coverage agree that no cause of action shall accrue to the insured under this coverage unless within two years from the date of the accident:

“(a) Suit for bodily injury has been filed against the uninsured motorist, in a court of competent jurisdiction;

“(b) Agreement as to the amount due under the policy has been concluded; or

“(c) The insured or the insurer has formally instituted arbitration proceedings.”

Former ORS 743.792(12) (1967), renumbered as ORS 742.504(12) (1989) (emphases added).

In 1987, this court determined that a statute that compelled the parties to a fire insurance policy to “accept” the result of a damages appraisal procedure that only one party had invoked deprived the nonconsenting party of the right to a jury trial under Article I, section 17, of the Oregon Constitution. Molodyh v. Truck Insurance Exchange, 304 Or 290, 295, 744 P2d 992 (1987); see also Carrier v. Hicks, 316 Or 341, 352, 851 P2d 581 (1993) (construing ORS 742.504(10) not to compel arbitration by unwilling party and not to violate right to jury trial). After Molodyh, an “arbitration trap” existed. That is, one party could demand arbitration, the parties could arbitrate their dispute, and then the nonelecting party, if dissatisfied with the results in arbitration, could demand that party’s constitutional right to a jury trial.

In 1997, in part to “[e]liminate[ ] the trap for the unwary party,” the legislature amended subsection (10). Senate Committee on Business, Law and Government, SB 645, May 8, 1997, Ex K, p 1 (“Summary of SB 645-2”). The legislature revised subsection (10) to make an arbitration award binding only upon mutual agreement of the parties:

“[I]n the event that the insured and the insurer elect by mutual agreement at the time of the dispute to settle the matter by arbitration, the arbitration shall take place under the arbitration laws of the State of Oregon or, if the parties agree, according to any other procedure.”

Or Laws 1997, ch 808, § 2. That amendment of subsection (10), defendant contends, demonstrates that the legislature intended that the mutual agreement of the parties be a prerequisite to the institution of arbitration proceedings under subsection (12). Plaintiffs retort is that the legislature did not similarly amend subsection (12) to add a requirement of mutuality, an omission that indicates its intent that a party’s unilateral action will be sufficient to meet the timelines imposed by that subsection.

There is merit to the arguments of both parties. Defendant is correct that subsection (12) originally was adopted years before this court announced its decision in Molodyh. After Molodyh, even if one party elected to arbitrate under subsection (12), the other could avoid binding arbitration by refusing to consent. It is reasonable to conclude that, when the legislature amended subsection (10) in 1997 to explicitly recognize, as required by Molodyh, that mutual agreement to arbitrate was necessary to bind the parties to the resulting arbitration award, the legislature also intended that that mutual agreement would occur before institution of arbitration proceedings under subsection (12).

On the other hand, it also is reasonable to conclude that, when the legislature retained without amendment the text, that is now subsection (12)(a)(B), it did so intending to continue to permit either party to take the action necessary to meet the time limits that it imposed without also requiring that that party obtain the agreement of the opposing party. The legislature could have been concerned that, if the accrual of an insured’s claim depended on the insured obtaining the insurer’s agreement to arbitrate, the insurer could, by refusing to consent to arbitration, negate, or at least interfere with, the insured’s ability to meet statutory timelines. That argument is supported by the fact that, although the legislature did not amend subsection (12) to require mutual action to institute arbitration proceedings, it did amend subsection (12) to provide that an insured’s claim accrues if, within two years from the date of the accident, “[t]he insured has filed an action against the insurer in a court of competent jurisdiction.” Or Laws 1997, ch 808, § 2, codified as ORS 742.504(12)(a)(C). That the legislature chose to amend subsection (12) in one way but not another is an indication that the legislature consciously chose to continue to permit action by one party alone to “formally institute” arbitration proceedings and satisfy the statutory limitations period.

The legislative history of ORS 742.504 does not provide further guidance as to the legislature’s intent, and we therefore rest our decision on the text of subsections (10) and (12) and the purposes that they serve. State v. Gaines, 346 Or 160, 171, 206 P3d 1042 (2009). We read subsection (10) as identifying rules for conducting arbitration once an agreement to arbitrate has been reached, not as addressing the action necessary to meet the timeliness requirements of subsection (12). Subsection (10) requires arbitration when the parties agree to arbitrate “at the time of the dispute.” In the event that the parties reach mutual agreement to arbitrate, subsection (10) provides that the arbitration shall “take place” under the state arbitration laws. “Take place” means “[to] occur” or “[to] happen.” Webster’s Third New Int’l Dictionary 2331 (unabridged ed 2002). In contrast, subsection (12) sets out the circumstances that must exist for a claim for benefits to accrue and explicitly permits either party, acting alone, to “formally institute” arbitration proceedings.

We do not think that, by modifying ORS 742.504(10), the legislature also changed subsection (12) in the same way sub silentio. See ORS 174.010 (in interpreting statutes, duty of court is not to insert what has been omitted). We therefore hold, as did the Court of Appeals, that, to meet the requirements of ORS 742.504(12)(a)(B), a party need not have obtained the other party’s agreement to arbitrate.

The question that remains, and to which we now turn, is the particular action that a party must take to “formally institute” arbitration proceedings. Defendant argues, and the Court of Appeals concluded, that the answer is found in the requirement of subsection (10) that arbitration shall “take place under the arbitration laws of the state of Oregon.”⁴ Defendant argues, and the Court of Appeals also concluded, that that was a statutory reference to the Uniform Arbitration Act, particularly ORS 36.635(1). However, the Oregon Uniform Arbitration Act applies only to a binding “agreement to arbitrate.” See Or Laws 2003, ch 598, § 3 (so stating). Under the Uniform Arbitration Act, an agreement to arbitrate is an enforceable and irrevocable agreement that requires the court, upon petition by one party, to order the other party to arbitrate. See ORS 36.620 (an agreement to arbitrate generally is enforceable and irrevocable); ORS 36.625(1) (court shall order parties to arbitrate upon showing of an agreement to arbitrate). A contract of insurance that contains the model provisions authorized by ORS 742.504 is not itself a binding agreement to arbitrate. As noted, ORS 742.504(10) requires arbitration only when the parties agree to arbitrate “at the time of the dispute.” Because we hold that an agreement to arbitrate is not a prerequisite to formal institution of arbitration proceedings, the Uniform Arbitration Act, which does not apply unless such an agreement has been reached, does not establish the manner in which a party “formally institutes” arbitration proceedings. It follows that we disagree with the contrary conclusion of the Court of Appeals.

Alternatively, defendant argues that “arbitration proceedings are ‘formally instituted’ when the process of arbitration has begun in accordance with established rules.” Defendant relies, for that position, on a Court of Appeals case that analyzed ORS 742.504(12) and purported to define those terms:

“ ‘Formal’ means ‘following or according with established form, custom or rule * * * based on forms and rules, esp. such as are accepted by convention: of or following a prescribed form.’ Webster’s Third New Int’l Dictionary, 893 (unabridged ed 1993). ‘Formal’ has the opposite meaning of ‘informal,’ which means ‘conducted or carried out without formal * * * or ceremonious procedure: unofficial.’ Id. at 1160. ‘Institute’ means ‘to originate and get established: set up: cause to come into existence.’ Id. at 1171. Thus, to ‘formally institute’ arbitration means to commence and establish arbitration according to prescribed or official terms and rules.”

Sanderson v. Allstate Ins. Co., 164 Or App 58, 63, 989 P2d 486 (1999). Consequently, defendant contends, until the parties have agreed to arbitrate, no single party can “commence and establish arbitration according to prescribed or official terms and rules” under Sanderson and thereby “formally institute it.” Plaintiff responds that the words “formally institute” do not impose a requirement of mutual agreement and that initiating arbitration should be pragmatic and uncomplicated, just like arbitration itself.

We consult, as did the Court of Appeals in Sanderson, the dictionary. Although it is true that “formally” can mean according to rule or custom, it also has a simpler, more straightforward meaning, namely, “expressly’ or “explicitly.” Webster’s at 893. Although “according to custom or rule” is a possible meaning of the word “formally,” that is an unlikely meaning in this context, because the legislature did not specify the custom or rule to which the parties should adhere.⁵ We conclude that it is more likely that the legislature simply sought to emphasize that the nature of a communication regarding arbitration should be “express” or “explicit.”

Likewise, the word “institute” has a more straightforward meaning than the one that the Court of Appeals suggested in Sanderson. “Institute” can indicate bringing something into existence, establishing something, or creating a set of procedures. However, it also may indicate simply a beginning: “to set on foot: INAUGURATE, INITIATE.” Webster’s at 1171.

Putting the synonyms for “formally” and “institute” together, we conclude that the legislature used the words “formally institute” arbitration proceedings to require that a party “expressly begin” those proceedings. To take the action necessary to satisfy ORS 742.504(12)(a)(B), an insured or insurer expressly must communicate to the other party that the initiating party is beginning the process of arbitrating the dispute. The first step in that process is the party’s offer to utilize the arbitration process. Thus, to “formally institute” arbitration proceedings, an insured or an insurer must expressly communicate to the other party that the initiating party offers to arbitrate or otherwise commits to the arbitration process.

That said, however, we must address whether defendant’s two letters satisfied the requirements of ORS 742.504(12)(a)(B) as we have described them. One letter from defendant said that, “[s]hould [defendant] disagree on the liability/damages owed by the underinsured motorist, [defendant] consents to submit this matter to binding arbitration.” The subsequent letter from defendant stated defendant’s view that plaintiff already had been compensated for his injuries through other insurance, but specifically noted that defendant was willing to consider additional information.

Although we cannot say that “formal institution” of arbitration proceedings must always occur in a single communication, we think that the word “formal” evidences an expectation that, when a party begins arbitration, the party will do so in an obvious and express way, such as occurs when a party sets forth, either in one document or in multiple documents that are part of a single message, a notice, offer, or demand for arbitration. Here, plaintiff relies for its argument that defendant formally instituted arbitration proceedings not only on two documents, but also on an inference that, plaintiff asserts, can be drawn from those two documents. Plaintiff contends that, taking the two documents in combination, the trial court correctly concluded that defendant had agreed to arbitrate the dispute if necessary and that defendant’s rejection of plaintiffs claim for damages was an indication that arbitration was necessary.

The problem with plaintiffs position, in our view, is that even viewing defendant’s letters, as we must, in the light most favorable to plaintiff, see Liles v. Damon Corp., 345 Or 420, 423, 198 P3d 926 (2008) (stating standard of review), defendant did not obviously and expressly state that it was offering to arbitrate. The first letter indicated a willingness to arbitrate, depending on whether a future event -disagreement-occurred.⁶ The second letter did not definitively state that a disagreement existed, nor did it mention arbitration.

We do not mean to suggest that the parties must have reached an impasse in negotiations before either party may “institute” arbitration proceedings. A party that files a complaint with a court of competent jurisdiction within two years of the date of a motor vehicle accident satisfies the time limits of ORS 742.504(12)(a)(C) and does so even if the parties are engaged in negotiations. The filing of a complaint, however, serves to begin the litigation process. Similarly, a party that wishes to satisfy the time limits of ORS 742.504(12)(a)(B) by formally instituting arbitration proceedings must explicitly offer to arbitrate or demand arbitration to expressly begin that process. Where, as here, a party’s consent to arbitrate is contingent on some future event and that party does not expressly advise or acknowledge to the other party that that event has occurred, no “formal institution” of arbitration proceedings has occurred. We conclude that, on this record, defendant did not “formally institute” arbitration proceedings within two years from the date of the accident as required by ORS 742.504(12)(a)(B) and that plaintiffs claim for UIM benefits was therefore time-barred.

The decision of the Court of Appeals is affirmed. The judgment of the circuit court is reversed, and the case is remanded to the circuit court for further proceedings.

1 The second letter is not in the record. The representative testified to the contents of the letter at trial.

2 Former ORS 742.504 (2003) was in effect at the time of the accident. We refer to the current version of the statute because the operative language has not changed materially. We note amendments to the statute where relevant to the analysis.

3 In this case, defendant incorporated the provisions of ORS 742.504(12)(a)(B) in its insurance contract with plaintiff. Insurers must include, in their UM/UIM policies, coverage no less favorable to the insured than that set forth in the provisions of the statutory comprehensive model policy. ORS 742.504; Vega v. Farmers Ins. Co., 323 Or 291, 301-02, 918 P2d 95 (1996). Insurers may include terms that vary from the model policy only by excluding or softening terms that disfavor insureds or by adding extraneous terms that are neutral or that favor insureds. Vega, 323 Or at 301-02. In this case, defendant issued a UM/UIM policy to plaintiff that incorporated the time limitations of the statutory model policy. Therefore, it is the terms of the model policy that are operative here. See id. at 296 (terms of model policy not applicable unless included in contract with insured); North River Insur. v. Kowaleski, 275 Or 531, 534-35, 551 P2d 1286 (1976) (terms of statutory model policy inoperative unless included in contract with insured). Of course, when we interpret such statutorily imposed terms, we are seeking to identify the legislative policy choice that is represented in the statute.

4 In 2007, the legislature removed the reference to the “arbitration laws of the State of Oregon” and substituted reference to “local court rules in the county where arbitration is held.” Or Laws 2007, ch 328, §§ 2(2), 5.

5 We also have some indication that, in 1997, when the legislature amended ORS 742.504(12), practitioners used a letter that included a “demand for arbitration” to institute arbitration proceedings. See Lind v. Allstate Ins. Co., 134 Or App 395, 397, 895 P2d 327, modified on recons, 136 Or App 532, 534-35, 902 P2d 603, rev den, 322 Or 362 (1995) (demand for arbitration contained in letters from plaintiff).

6 Defendant characterized its letter as intended to avoid payment of attorney fees under OES 742.061(1). ORS 742.061(1) provides, in part, that, subject to certain exceptions,

“if settlement is not made within six months from the date proof of loss is filed with an insurer and an action is brought in any court of this state upon any policy of insurance of any kind or nature, and the plaintiffs recovery exceeds the amount of any tender made by the defendant in such action, a reasonable amount to be fixed by the court as attorney fees shall be taxed as part of the costs of the action and any appeal thereon.”

ORS 742.061(3) provides one of those exceptions:

“Subsection (1) * * * does not apply to actions to recover uninsured or underinsured motorist benefits if, in writing, not later than six months from the date proof of loss is filed with the insurer:

“(a) The insurer has accepted coverage and the only issues are the liability of the uninsured or underinsured motorist and the damages due the insured; and

“(b) The insurer has consented to submit the case to binding arbitration.”

(Emphasis added.) Defendant’s representative testified, “If we don’t consent to binding arbitration and they file suit, then they’re entitled to attorney’s fees no matter what the award is. So that’s why we send that.”