Developments in the arbitration of no-fault claims have prompted significant discussion among insurers writing automobile insurance in Minnesota. Several are discussing the need for reform in light of developing case law. This paper discusses several leading Minnesota cases and the resulting issues that have arisen.
Minnesota's no-fault arbitration system has as its purpose "to promote the orderly and efficient administration of justice in this State."1 Under the statute, no-fault claims in an amount of $10,000 or less are subject to mandatory binding arbitration.2 The mandate to arbitrate claims, and the resulting denial of the right to a jury trial, has been based both on the relatively small amounts in controversy in many cases, and the fact that the insurance industry is highly regulated, justifying administrative rather than judicial resolution of certain disputes.
Over the past decade, a line of Minnesota Supreme Court decisions permitting assignment and consolidation of windshield repair claims has resulted in an interpretation of the statute that the $10,000 jurisdictional limit relates only to each individual claim and not the aggregate of claims assigned to a no-fault assignee. Accordingly, a single no-fault arbitration in Minnesota between an insurer and one assignee may include thousands of individual claims and result in an award in the hundreds of thousands of dollars or even in excess of $1,000,000. These developments present significant issues for Minnesota insurers. And the resolution of those issues does not seem likely to come from future judicial decisions.
In Illinois Farmers Ins. Co. v. Glass Service Co.,3 the court considered whether over 5,700 individual short pay4 windshield claims, totaling over $1,000,000 and assigned over a 5 year period to Glass Service Co. could be combined into one proceeding. While the parties agreed that each individual claim was subject to mandatory arbitration under the no-fault statute, Glass Service advanced two distinct arguments: (1) that it (Glass Services) was a single claimant with a single claim in excess of $1,000,0005 not subject to mandatory arbitration and alternately, (2) that if its claim(s) were all subject to mandatory arbitration then they should all be combined into a single arbitration proceeding. As to the first argument, the court agreed with Farmers that, "Glass Service may not defeat the No-Fault Act's jurisdictional mandate for arbitration by consolidating the claims of Farmers' individual policyholders" and stated that "the No-Fault Act requires that each of these claims be arbitrated."6
The court then considered the issue of consolidation. The court relied upon Grover-Dimond Assocs. v. Am. Arbitration Ass'n.7 In Grover-Dimond (a construction contract case) the court noted, "Where consolidation is not prohibited by statute or by the agreement to arbitrate, consolidation of similar disputes prevents both redundancy and conflicting awards."8 Considering that one statutory purpose of the No-Fault Act is judicial efficiency,9 the Court found Grover-Diamond to be a "good law" to be followed in determining whether no-fault arbitrations should be consolidated. The court acknowledged (but did not follow) federal circuit court decisions which refused to permit consolidation under the Federal Arbitration Act (FAA).10 Accordingly, the case was remanded to district court to determine if consolidated arbitration would be efficient, avoid the risk of inconsistent results, and not result in prejudice to any party.
Upon remand, the district court did order consolidation of the 5,700 claims into three groups and, in 2007, the awards were upheld by the Minnesota Court of Appeals in an unpublished opinion.11
In response to the Farmers decision, automobile insurers either turned to existing anti-assignment clauses in their policies,12 or revised the policies to include them. In Tavertine Corp. v. Lexington-Silverwood,13 the supreme court had held that an "anti-assignment clause is a valid and enforceable term" that precluded the assignment of a right to payment under a contract.14 Obviously, if assignment was restricted, glass vendors could not be in a position to seek consolidation. In 2009, the court addressed the validity of such clauses. But that argument was not embraced by the supreme court.
In Star Windshield Repair Inc. v. Western Nat'l Ins. Co.,15 the court acknowledged that "an anti-assignment clause is a valid and enforceable term" under a contract16 but did not apply this precedent to the issue of whether anti-enforcement clauses in insurance policies were enforceable. Rather, the court focused on a much more specific issue of the enforcement of such clauses where auto glass vendors sought to arbitrate disputes with insurers over assigned short-pay claims.17 The Court looked to the No-Fault statute18 and the Minnesota Unfair Claims Settlement Practice Act19 to interpret the "statutory framework regarding auto glass insurance." The court interpreted these statutes as indicating a legislative intent that auto glass vendors should be able to arbitrate "their shortpay claims against insurers ... because the statutory scheme removes the policy holder from the payment process for auto glass claims and requires disputes to be arbitrated."20 The court held that anti-assignment clauses in the insurers contracts did not defeat the insured's assignment of post-loss proceeds to a glass vendor. In a brief concurring opinion, Justice Barry Anderson argued that the validity of anti-assignment clauses in insurance contracts should be limited to pre-loss assignments.
Taken together, the decisions in Farmers and Star Windshield (and subsequent cases) make clear that (1) insureds may assign their post-loss claims to auto glass vendors and (2) such assigned claims, no matter how numerous, may be aggregated into one arbitration in the discretion of a district court. The question becomes whether auto glass vendors are a uniquely privileged class under the statute or whether any no-fault vendor can consolidate assigned post -loss claims as well.
The answer to this question now appears to be emerging in the Minnesota courts. In a recent unpublished decision, the Minnesota Court of Appeal upheld a district court order to compel arbitration of 22 No-Fault medical expense claims assigned to a medical provider.21 The court of appeals rejected insurer arguments that (1) the assignments were invalid, (2) the No-Fault Act precludes the assignment of medical-expense claims to a medical provider and (3) the provider's arbitration of the assigned claims would constitute impermissible claim splitting. The court found that although there was no statutory framework similar to glass providers, the auto glass case law was analogous. Like the court in Farmers, it found that the medical provider had the same legal rights as the assignors had before the assignment. Significantly, in this case the insurance contract did not have an anti-assignment clause. Had a non-assignment clause been in place, the court may have enforced it.22 Because the majority opinion in Star Windshield relies on a statutory interpretation analysis of the auto glass laws rather than on a limiting the enforceability of anti-assignment clauses to pre-loss circumstances, contractual limitations or prohibitions against assignment to medical providers of post-loss claims appear to be enforceable. Considering the recent trend of cases, however, it is more likely that the Minnesota Supreme Court will expand its Star Windshield holding to limit the validity of anti-assignment clauses to pre-loss claims. In effect, Justice Anderson's concurrence will become the majority opinion.
Thus, it seems likely that Minnesota courts will consider post-loss assignment of no-fault claims to any vendor to be invalid and unenforceable. If this is a correct prediction, aggregation of multiple assigned claims into a single arbitration will be available to any assignee and limited only by the discretion of a district court.
Insurers have voiced significant concerns about this trend, a trend many view as judicial expansion of the no-fault statute. One overriding concern is the suitability of arbitration as a forum to resolve high value disputes. Arbitration is arguably unsuitable because under the Minnesota No-Fault Arbitration Rules:
- Conformity to legal rules of evidence is not necessary (Rule 24).
- A transcript, if one is made, is not considered to be an official record of the proceedings absent a determination by the arbitrator or agreement of the parties (Rule 17).
- The fact that an arbitrator, or the arbitrator's firm represents automobile accident claimants against insurers does not create a presumption of bias (Rule 10(b)).
- Discovery is limited (Rule 12).
In sum, no-fault arbitration is a relatively informal proceeding. Such informality is well suited to resolution of small claims which otherwise would entail significant costs to litigate. Much like conciliation court, arbitration offers access to justice at the expense of a several important rights that the parties would enjoy in a court proceeding. The issue is whether this trade off makes sense in the case of numerically complex, high value no-fault disputes.23
A second concern with consolidated arbitration of assigned claims is the potential for decision fatigue to influence the fact finder. In a consolidated arbitration of numerous claims, the claimant would be well advised to put his/her best foot forward from the outset by presenting the strongest claims first. As the proceeding wears on, the arbitrator may mistakenly assume that all subsequent claims are also meritorious. In a proceeding involving thousands of individual claims, they all tend to look alike after a period of time. Research indicates that judgment falters after extended periods of concentration. The New York Times has reported on a recent study of the "erratic judgment" of a panel of Israeli judges after a period of decisionmaking. The article reports, "The mental work of ruling on case after case, whatever the individual merits, wore them down."24
Ultimately, the issue of consolidated arbitration of assigned claims is one of public policy for the legislature. Arguing in its favor, assignment and consolidation certainly reduces the workload of Minnesota's underfunded court system. Also, there is a degree of consumer convenience in removing the insured from disputes regarding payment of claims. "Minnesota's statutory scheme for automobile insurance essentially removes the auto glass customer from the payment process."25 However, removing insureds from the payment process may tend to inflate the cost of the vendor's services. If the health insurance system is any indication, provider costs increase when the insured has no direct financial interest at stake. Insurers point out that windshield glass claims are more costly in Minnesota than in most other states. While windshield pricing may not matter to an individual insured, the systemic impact is higher insurance prices. Logically, higher costs will also result from consolidated arbitration of assigned medical provider and body shop repair claims if the consumer has "no skin in the game." If insurers pay out more to vendors than they should, the insureds will pay a higher premium than they should. Ultimately, the issue becomes one of affordability of insurance. Hopefully, the Minnesota legislature will soon address these issues. Otherwise, the insurance consumer will become a mere afterthought in the ongoing economic disputes between insurers and no-fault vendors.
1. Minnesota No-Fault, Comprehensive or Collision Damage Automobile Insurance Arbitration Rules.
2. Minn. Stat. § 65B.525 (2011).
3. 683 N.W. 2d, 792 (Minn. 2004),
4. Insurer payment in an amount less than billed by the vendor.
5. The district court does not have subject matter jurisdiction over no-fault comprehensive claims of $10,000 or less. See: Olson v. Am. Family Mut. Ins Co., 636 N.W. 2d 598, 604 (Minn. App. 2001). Conversely, if the "single claim" has a value of one million dollars, the district court would have subject matter jurisdiction.
6. Id. at 804.
7. 297 Minn. 324, 211 N.W. 2d 787 (1973).
8. Grover-Dimond 211 N.W. 2d at 790.
9. Minn. Stat § 65B.42(4) states as one of the purposes: "to speed the administration of justice, to ease the burden of litigation on the courts of this state and to create a system of small claims arbitration to decrease the expense of and to simplify litigation." The question is whether small claims arbitration simplifies million dollar litigation based on over 5700 individual claims and, if so, what and whose rights are sacrificed in this pursuit?
10. Baesler v. Continental Crain Co., 900 F2nd 1193 (8th cir. 1993).
11. Glass Services Inc. v. Illinois Farmers Ins. Co., A06-1074 (Minn. Ct. App., June 26, 2007).
12. In Farmers, the supreme court did not consider the impact of anti-assignment clauses in automobile insurance contracts.
13. 683 N.W.2d 267 (Minn. 2004).
14. Id. at 269, 274.
15. 768 N.W.2d 346 (Minn. 2009).
16. Star Windshield, citing Travertine Corp v. Lexington-Silverwood, 683 N.W.2d 267 (Minn.2004) at 349. The court distinguished Travertine on the basis that it dealt with a management contract rather than an automobile insurance contract. "While we have stated that insurance policies follow general principals of contract law unless there are statutory laws to the contrary ... we conclude our analysis in Travertine is not helpful in resolving the issues presented because the statutory framework regarding auto glass insurance, as laid out above, makes the insurance policies at issue sufficiently different from management contracts." 683 N.W.2d at 269.
17. A fundamental principal of the law of contract articulated in Travertine is that the plain language of the contract. determines the intent of the parties, at 271. The court in Star Windshield did not attempt to reconcile this fundamental principal with the No-Fault Act. Rather, the court seems to have assumed that, when applied to glass vendor claims, the anti-assignment provision was in conflict with the statute.
18. Minn. Stat. §§ 65B.41-71 (2008).
19. Minn. Stat. §§ 72A.17-.32 (2008).
20. Id. at 350.
21. Medical Scanning Consultants, PA d/b/a/Center for Diagnostic Imaging v. Metropolitan Property and Casualty Ins. Co. a/k/a MetLife Auto & Home. A10-2186 (Minn. Ct. App. July, 2011).
22. See: Physicians Neck & Back Clinics, P.A., v. Allied Ins. Co., A05-1788, (Minn. Ct. App., July 25, 2006).
23. It is conceded that many complex, high value disputes are resolved in arbitration outside of the no-fault context. However, in such instances,the parties contractually agree to arbitrate.
24. John Tierney, N.Y. Times, August 17, 2011.
25. Farmers, 683 N.W.2d at 796.