Amerisure Mutual Insurance v. Global Reinsurance Corporation of America ( 2010 )

FIRST DIVISION
March 15, 2010
No. 1-09-0820
AMERISURE MUTUAL INSURANCE COMPANY and ) Appeal from the
AMERISURE INSURANCE COMPANY, ) Circuit Court of
) Cook County.
Plaintiffs and Counterdefendants- )
Appellees, )
)
v. ) No. 08 CH 42242
)
GLOBAL REINSURANCE CORPORATION OF )
AMERICA, f/k/a Gerling Global )
Reinsurance Corporation of America, )
) The Honorable
Defendant and Counterplaintiff- ) Rita M. Novak,
Appellant. ) Judge Presiding.
JUSTICE LAMPKIN delivered the opinion of the court:
This case involves a dispute over attorney fees awarded by
an arbitration panel pursuant to section 155 of the Illinois
Insurance Code (Code) (215 ILCS 5/155 (West 2006)). Amerisure
Mutual Insurance Company and Amerisure Insurance Company
(Amerisure) were awarded $1,556,709.27 in damages plus interest
and attorney fees for the underlying reinsurance claim against
Global Reinsurance Corporation of America, f/k/a Gerling Global
Reinsurance Corporation of America (Global). Global challenged
the propriety of the section 155 attorney fee award in circuit
court. The circuit court affirmed. On appeal, Global contends
the attorney fee award should be vacated where the arbitration
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panel either exceeded its powers or committed a gross error of
law on the face of the award by awarding attorney fees pursuant
to section 155.
FACTS
Effective July 1, 2001, Amerisure and Global entered an
“Umbrella Quota Share Reinsurance Agreement,” a/k/a the treaty,
wherein Global agreed to reinsure a number of Amerisure’s
outstanding umbrella insurance policies. Pursuant to article 24
of the treaty, the parties agreed to arbitrate disputes.
According to Amerisure, in May 2006, it billed Global for a
reinsurance claim valued at approximately $1.5 million. In
response, Global made a number of requests to review documents
related to the claim. Amerisure complied with the requests;
however, Global never notified Amerisure of its intent with
regard to the claim. On December 27, 2006, Amerisure sent a
letter to Global demanding arbitration because Global refused to
pay the claim. Amerisure demanded “the amounts due under” the
treaty, in addition to “interest, costs and exemplary damages.”
Pursuant to their treaty, the parties appointed a three-person
panel to hear the dispute in Chicago, Illinois. According to the
choice-of-law provision in article 24 of their treaty, the
parties agreed Illinois law governed.
In October and November 2007, in prearbitration filings and
meetings, Amerisure expressly informed the panel it was seeking
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attorney fees.1 On November 20, 2007, Global submitted a letter
response to the panel. In relevant part, Global argued:
“[T]he Panel has no authority to award [attorney]
fees to either party because both parties have not
requested them ***, the arbitration agreement does not
authorize the Panel to award them, and there does not
appear to be any statute that would support such an
award.”
Global supported its argument by citing article 24 of the
parties’ treaty, Rule 43(d) of the American Arbitration
Association’s (AAA) Supplementary Procedures for the Resolution
of Intra-industry United States Reinsurance and Insurance
Disputes (Rule 43(d))2, and Illinois law.
Following discovery, Amerisure filed a prehearing brief on
September 22, 2008, arguing for the first time that its claim for
attorney fees was supported by section 155 of the Code, which
punishes an insurer for vexatious and unreasonable actions or
1
Amerisure maintains it requested attorney fees from “the
beginning,” noting it listed “costs” and “exemplary damages” in
its initial arbitration demand. Global does not take issue with
the timing of Amerisure’s request for attorney fees.
2
The parties agreed to waive all AAA rules except Rule
43(d).
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delays. Amerisure filed a memorandum in support of its argument.
Global responded by filing its own prehearing memorandum, arguing
that section 155 did not apply to reinsurance relationships and
therefore could not support Amerisure’s attorney fee claim.
On October 16, 2008, the parties’ attorneys and at least one
panel member participated in a teleconference. During the
teleconference, Amerisure said it was seeking attorney fees under
reinsurance law in general and Illinois law in particular.
The arbitration hearing was held from October 20, 2008, to
October 24, 2008. Amerisure referred to a list of examples of
Global’s bad faith conduct, as outlined in its prehearing brief.
Amerisure reiterated that it was seeking attorney fees based upon
section 155 of the Code. Then, when one of the panel members
asked what law controlled the dispute, Amerisure replied that
section 155 controlled, but that the panel should otherwise “fill
in the intersperses in the parties’ agreement with reinsurance
custom and practice.” Amerisure continued, “[t]hat’s my
understanding of the derivation of the utmost good faith rule, so
the parties do not have to put in their contracts all kinds of
provisions you see in a classic Wall Street M & A agreement.
That’s what custom and practice do.”
The record contains a document prepared by Amerisure
entitled “Proposed Findings and Conclusions.” The document is
not signed by the panel or either of the parties. However, in
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the document, Amerisure proposed that “[Global’s] refusal to pay
the [underlying] loss is unreasonable and vexatious within the
meaning of Section 155, because [Global] was uncooperative, acted
contrary to its duty of utmost good faith and forced Amerisure to
demand arbitration, depriving Amerisure of indemnification.”
On November 10, 2008, the panel awarded Amerisure the
principal disputed amount of $1,556,709 plus interest and
attorney fees. The panel said, “[Global] is hereby ordered to
pay by December 10, 2008, [Amerisure’s attorney] fees as billed
and paid in an amount not to exceed $1,500,000 based on the
finding by this panel of [Global’s] violation of its duty of
utmost good faith to [Amerisure].” (Emphasis added.) Global
timely paid the principal amount plus interest, but did not pay
the attorney fees.
On November 12, 2008, Amerisure moved to confirm the award
pursuant to the Uniform Arbitration Act (Act)(710 ILCS 5/1 et
seq. (West 2006)). On December 4, 2008, Global filed an answer
and a counterapplication to reject the award of attorney fees.
In its answer, Global admitted that Amerisure alleged Global
engaged in bad-faith conduct and that Amerisure sought fees
pursuant to section 155. In its counterapplication, Global
alleged the panel exceeded its authority by awarding fees: (1)
on a theory not submitted; (2) where not authorized by the
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parties’ arbitration agreement; (3) where the parties
“collectively did not vest the [p]anel with authority to decide
the issue”; (4) where section 155 does not authorize fees in a
reinsurance case; (5) where only a court and not an arbitration
panel may award section 155 attorney fees; (6) where Illinois
does not provide a legal basis for awarding fees based on a
violation of the duty of utmost good faith; and (7) where Rule
43(d) does not authorize the award.
On December 19, 2008, Global filed a motion for summary
judgment, alleging the panel exceeded its authority in awarding
the attorney fees because the award was not given based upon the
theory advanced by the parties, i.e., section 155 of the Code,
and it was not otherwise authorized by Illinois law. Moreover,
Global alleged the panel did not have the authority to award
attorney fees pursuant to section 155 because the statute only
authorizes courts to award fees. In the alternative, Global
claimed a gross error of law appeared on the face of the award.
On January 12, 2009, Amerisure filed a response to Global’s
motion for summary judgment. Amerisure alleged Global waived its
ability to challenge the arbitrability of attorney fees by
failing to file a petition before a court pursuant to section 2
of the Act (710 ILCS 5/2 (West 2006)) and by participating in
arguments before the panel regarding whether Amerisure was
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entitled to section 155 fees. Moreover, Amerisure alleged the
panel did not exceed its powers in awarding attorney fees,
maintaining “a vexatious and unreasonable delay of payment is
part and parcel of a violation of the duty of utmost good faith,
which the arbitration clause placed squarely before the [p]anel
for decision.” Amerisure additionally alleged there was no gross
error of law on the face of the panel’s award.
On March 16, 2009, Amerisure filed an answer to Global’s
counterapplication to reject a portion of the award, denying
Global’s allegations and asserting the affirmative defenses of
waiver and proper jurisdiction.
The circuit court denied Global’s motion for summary
judgment, finding the panel did not exceed its authority and no
gross error of law appeared on the face of the award.
Specifically, the court said:
“There [is], it seems to the Court, some overlap
with regard to the issue of whether or not the Panel
exceeded its authority and whether or not the Panel
made a gross error in law because it seems to the Court
that based on the entire record, I am really not able
to say that the Panel exceeded its authority in that it
was deciding an issue that was not permitted to decide
under Illinois law.
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I know [the Panel] didn’t use the words Section
155.
I know [the Panel] used a term that [the Panel]
was probably more familiar with as a result of its
expertise in reinsurance, but it seems to the Court
that given the entire record, which is that the primary
dispute and the briefs and the arguments were all about
whether Section 155 of the Illinois Insurance Code
applied.
I cannot find, frankly, in good faith, that the
Panel exceeded its authority.
It may, in fact, have [not] used precise and
specific terms that are embodied in Section 155, but
certainly the sentiment is expressed in that award.
And given the fact that that wasn’t heartfelt, the
parties’ arguments with regard to [attorney] fees, I
can’t find that the Panel exceeded its authority.
Secondly, I think that the question of the gross
error or the gross misapplication of the law, in fact,
is a harder hurdle to overcome for any person or entity
contesting an arbitration award.
It seems to the Court that the recent decisions of
our Appellate Court, including the First District
Appellate Court which are binding on this Court[,]
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really give the Panel broad berth in making judgment
calls about what the appropriate law is and really
admonished the Courts by their actions, if not by their
words, that it should not disturb an arbitration award
just because it may disagree with the application of
law.
So, while this might be an odd posture for a Court
which normally reviews questions of law de novo, it is,
it seems to the Court, clear from the Appellate Court’s
direction that this is territory that the Court is not
permitted to tread on except in those extreme
circumstances.
I don’t find that those extreme circumstances
exist in this case.
I know that there are two decisions cited, one
from the First District and one from the Fifth
District, involving questions of whether Section 155
applies to reinsurance agreements, but it seems to the
Court that ultimately the law in Illinois on that issue
is in flux, and that there is not a clear precedent
that clearly defines the scope of that provision, which
would presumably bind the Arbitration Panel applying
Illinois law.
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But I don’t think that the law is that clear, well
defined.
And I certainly can’t find, given that situation,
that the Panel committed a gross misapplication or
gross error of law.”
On March 25, 2009, the court granted Amerisure’s motion to
confirm the arbitration award, entering judgment against Global
for $861,176 in attorney fees and $27,217.04 in interest. Global
appeals.
DECISION
Global contends the circuit court erred in denying its
motion for summary judgment where the arbitrators exceeded their
contractual and statutory authority by awarding attorney fees to
Amerisure and committed a gross error of law in doing so.
We review a circuit court’s ruling on a motion for summary
judgment de novo. Neiman v. Economy Preferred Insurance Co., 357
Ill. App. 3d 786, 793, 829 N.E.2d 907 (2005). Summary judgment
is proper where the pleadings and documents on file, viewed in a
light most favorable to the nonmoving party, demonstrate there is
no genuine issue of material fact and the moving party is
entitled to judgment as a matter of law. Neiman, 357 Ill. App.
3d at 793.
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“Judicial review of an arbitration award is more
limited than the review of a trial court’s decision.
[Citation.] Because the parties have agreed to have
their dispute settled by an arbitrator, it is the
arbitrator’s view that the parties have agreed to
accept, and the court should not overrule an award
simply because its interpretation differs from that of
the arbitrator. [Citation.] There is a presumption
that the arbitrator did not exceed his authority
[citation], and a court must construe an award, if
possible, so as to uphold its validity [citation]. A
court has no power to determine the merits of the award
simply because it strongly disagrees with the
arbitrator’s contract interpretation. [Citation.]
Also, a court cannot overturn an award on the ground
that it is illogical or inconsistent. [Citation.] In
fact, an arbitrator’s award will not even be set aside
because of errors in judgment or a mistake of law or
fact. [Citation.]” Galasso v. KNS Cos., 364 Ill. App.
3d 124, 130, 845 N.E.2d 857 (2006).
The parties agree Illinois law applies in this case because
the situs of the arbitration was Chicago. Section 12(a) of the
Act provides that an award “shall” be vacated under very limited
circumstances. See 710 ILCS 5/12(a) (West 2006). In relevant
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part, an award “shall” be vacated where the “arbitrators exceeded
their powers.” 710 ILCS 5/12(a)(3) (West 2006). In addition,
our supreme court has determined that courts have the power to
vacate an arbitration award when a gross error of law appears on
its face. Lee B. Stern & Co. v. Zimmerman, 277 Ill. App. 3d 423,
425, 660 N.E.2d 170 (1995), citing Board of Education v. Chicago
Teachers Union, Local No. 1, 86 Ill. 2d 469, 477, 427 N.E.2d 1199
(1981).
I. Authority for the Award
Global contends the panel exceeded its authority in awarding
attorney fees to Amerisure.
Amerisure contends Global waived review of this contention
because it failed to challenge the arbitrability of attorney fees
in the circuit court during the pendency of the arbitration.
Amerisure relies on section 2 of the Act (710 ILCS 5/2 (West
2006)) and Galasso for support.
Global contends it did not commit waiver because it agreed
Rule 43(d) of the AAA authorized the panel to award attorney fees
if permitted by Illinois law; however, it timely argued before
the panel that Illinois law provided no authority to award the
attorney fees in this case. We agree.
The parties here have a contractual right to limit the
awarding of attorney fees in an arbitration proceeding. “A
contractual right with respect to arbitration can be waived as
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can any other contract right.” Ure v. Wangler Construction Co.,
232 Ill. App. 3d 492, 498, 597 N.E.2d 759 (1992); see also First
Health Group Corp. v. Ruddick, 393 Ill. App. 3d 40, 52, 911
N.E.2d 1201 (2009) (a party cannot “sit silent, wait until an
adverse award issued, and then first argue that the arbitrator
did not have the authority even to hear the claim”). “Waiver of
a contract term may occur when a party conducts itself in a
manner which is inconsistent with the subject clause, thereby
indicating an abandonment of its contractual right.” Ure, 232
Ill. App. 3d at 498-99 (the defendant waived his right to consent
to consolidation by waiting until the joint arbitration convened
and objecting for the first time during opening statements).
However, if a party makes a timely objection, i.e., at the
earliest possible time, “the issue will be preserved for judicial
review, even if the party then participates in the subsequent
arbitration proceeding.” First Health Group Corp., 393 Ill. App.
3d at 49; see Ure, 232 Ill. App. 3d at 499.
Here, Global preserved the attorney fee issue for judicial
review with its timely objections. Initially, in response to
Amerisure’s announcement that it intended to seek attorney fees
without specifying its basis for the fees, Global said:
“[T]he Panel has no authority to award [attorney]
fees to either party because both parties have not
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requested them ***, the arbitration agreement does not
authorize the Panel to award them, and there does not
appear to be any statute that would support such an
award.”
Then, once Amerisure expressly articulated that it was relying on
section 155 to support its attorney fee claim, Global argued in
its prehearing brief and at the hearing that section 155 does not
allow arbitration panels to award attorney fees in reinsurance
actions.
Despite Global’s consistent objections, Amerisure claims
Global waived review of this issue because Global did not bring a
section 2 petition to stay the arbitration and challenge the
arbitrability of the attorney fees before a court. We disagree.
Because Global does not dispute the arbitrability of attorney
fees but, rather, the applicability of section 155 to the instant
reinsurance action, Global was not required to bring an
arbitrability challenge.
Section 2 of the Act provides:
“On application, the court may stay an arbitration
proceeding commenced or threatened on a showing that
there is no agreement to arbitrate. That issue, when
in substantial and bona fide dispute, shall be
forthwith and summarily tried and the stay ordered if
found for the moving party. If found for the opposing
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party, the court shall order the parties to proceed to
arbitration.” 710 ILCS 5/2(b) (West 2006).
Section 2 is permissive. “On application” indicates the
challenging party has a choice whether to “apply” for review of
the arbitrability of an issue. 710 ILCS 5/2(b) (West 2006). If
the party so decides to challenge arbitrability, the circuit
court “may” stay an arbitration. 710 ILCS 5/2(b) (West 2006).
Amerisure’s reliance on Galasso to support its contention
that Global had to file a section 2 petition to avoid waiver is
misplaced. In Galasso, an arbitration panel awarded attorney
fees pursuant to the Attorneys Fees in Wage Actions Act
(Attorneys Fees Act) (705 ILCS 225/0.01 (West 2002)) based on a
finding that the appellees were employees under the Illinois Wage
Payment and Collection Act (820 ILCS 115/1 et seq. (West 2002)).
Galasso, 364 Ill. App. 3d at 132. On appeal, the appellant
contended the panel exceeded its authority because the fees were
not part of the parties’ employment agreements or permitted by
the Attorneys Fees Act, and therefore were not arbitrable.
Galasso, 364 Ill. App. 3d at 132. The appellant, however, did
not submit a section 2 petition to challenge the arbitration
agreement nor did the appellant object, at any point during the
arbitration, to the arbitrability of the fees sought. Galasso,
364 Ill. App. 3d at 133. Furthermore, in asking the circuit
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court to vacate the award, the appellant argued that, in addition
to the panel’s award not being authorized by contract or
permitted by the statute at issue, it improperly included fees
related to other claims. Galasso, 364 Ill. App. 3d at 133. This
court found the appellant conceded before the circuit court that
the arbitrator could resolve the issue of attorney fees.
Galasso, 364 Ill. App. 3d at 133. As a result, this court held
the appellant forfeited its argument. Galasso, 364 Ill. App. 3d
at 133.
Contrary to Amerisure’s argument on appeal, Galasso does not
stand for the proposition that a party must utilize section 2 in
all instances to preserve an issue for judicial review. Rather,
Galasso noted that matters relating to preliminary questions of
arbitrability, like the scope of arbitrable issues or the
validity of an employment agreement between the disputing
parties, should be decided by arbitrators rather than courts in
accordance with Illinois public policy favoring arbitration as a
means of dispute resolution. Galasso, 364 Ill. App. 3d at 128-
130. Nevertheless, Galasso acknowledged that section 2 provided
a procedure to a party to petition the circuit court to determine
arbitrability questions where a party challenges the existence of
an arbitration agreement. Galasso, 364 Ill. App. 3d at 129-130.
Relevant to this appeal, Galasso ruled the defendant forfeited
review of his argument that the arbitrator exceeded his authority
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by awarding attorney fees because the defendant neither submitted
a section 2 petition to the court nor raised an objection before
the arbitrator. Galasso, 364 Ill. App. 3d at 132-33. Thus, we
reject Amerisure’s contention that arbitration parties must
utilize section 2 to preserve issues for judicial review.
Furthermore, Galasso is distinguishable from the case at
bar. In the instant case, as we stated, Global was not required
to submit a section 2 petition where it was not challenging the
arbitrability of the panel’s authority to award attorney fees in
general. Global simply contested whether the panel had the power
to award attorney fees to Amerisure based on section 155.
Moreover, in contrast to the Galasso appellant, Global, as
discussed above in detail, clearly objected in a timely manner to
the panel’s authority to award attorney fees pursuant to section
155. First Health Group Corp., 393 Ill. App. 3d at 48-49; see
Ure, 232 Ill. App. 3d at 499. Accordingly, Global did not waive
its challenge to the panel’s authority to award the fees pursuant
to section 155.
Turning to the substance of this appeal, Global contends the
arbitrators exceeded their authority because (1) they awarded
attorney fees on a basis the parties did not submit for
resolution, and (2) Illinois law does not authorize arbitrators
to award section 155 attorney fees.
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Although an arbitration panel need not disclose its basis
for an award (Edward Electric Co. v. Automation Inc., 229 Ill.
App. 3d 89, 100, 593 N.E.2d 833 (1992)), the instant panel did.
The arbitrators awarded attorney fees “based on a finding of ***
[Global’s] violation of its duty of utmost good faith to
[Amerisure].”
Insurers have an implied duty to use good faith in
representing their insureds. Pekin Insurance Co. v. Home
Insurance Co., 134 Ill. App. 3d 31, 33, 479 N.E.2d 1078 (1985).
An insurer violates that duty when it acts in a vexatious,
unreasonable, or outrageous manner. Pekin Insurance Co., 134
Ill. App. 3d at 34. More specific to the instant appeal, the
reinsurance industry imposes the duty of utmost good faith. See
Northwestern Mutual Life Insurance Co. v. Amerman, 119 Ill. 329,
338, 10 N.E.2d 225 (1887).
“[R]einsurance relationships are governed by the
traditional principle of ‘utmost good faith’ (‘uberrima
fides’). [Citations.] ‘Utmost good faith ...
requires a reinsurer to indemnify its cedent for losses
that are even arguably within the scope of the coverage
of the reinsured, and not to refuse to pay merely
because there may be another reasonable interpretation
of the parties’ obligations under which the reinsurer
could avoid payment.’ ” Commercial Union Insurance Co.
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v. Seven Provinces Insurance Co., 217 F.3d 33, 43 (1st
Cir. 2000), quoting United Fire & Casualty Co. v.
Arkwright Mutual Insurance Co., 53 F. Supp. 2d 632, 642
(S.D.N.Y. 1999).
Global focuses much of its energy on arguing that the panel
exceeded its authority because it awarded the attorney fees based
on a violation of the duty of utmost good faith, which was not a
basis submitted by Amerisure or briefed by the parties. The
record, however, establishes that Amerisure requested attorney
fees based on both section 155 of the Code and the practices of
the reinsurance industry, which, as just described, include the
duty of utmost good faith.
A review of the portions of the pleadings and the
arbitration hearing transcript included in the record on appeal3
demonstrates the parties and the panel members repeatedly
referred to the reinsurance custom of utmost good faith. Global
admits such in its reply brief. In fact, during the hearing,
Amerisure urged the panel to rely on its reinsurance expertise,
specifically referencing the “utmost good faith rule,” in
3
The arbitration record was originally sealed by agreement
of the parties; however, the circuit court dissolved its order
during the proceedings and ordered the parties to file future
filings in the “usual fashion.”
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conjunction with section 155 in making its decision. Global did
not object then, or at any point when Amerisure referenced the
duty of utmost good faith. And, Amerisure consistently argued
before the panel that it was entitled to section 155 attorney
fees based on Global’s conduct in violation of the duty of utmost
good faith.
We recognize a violation of the duty of utmost good faith
does not, in itself, provide a basis for awarding attorney fees.
However, Illinois does recognize that allowing the recovery of
damages incurred as a result of unreasonable delays in the
settlement of insurance claims will encourage insurers to act
with the utmost good faith in resolving disputes. Calcagno v.
Personalcare Health Management, Inc., 207 Ill. App. 3d 493, 505,
565 N.E.2d 1330 (1991) (finding an insurer that paid the
underlying claim prior to being sued still may be held liable for
section 155 fees where the insurer unreasonably delayed settling
the claim). The instant record demonstrates that the terms
“violation of the duty of utmost good faith” and “vexatious and
unreasonable delay pursuant to section 155” were consistently
used, if not interchangeably, then as counterparts throughout the
arbitration. This was not, as Global contends, similar to Quick
& Reilly, Inc. v. Zielinksi, 306 Ill. App. 3d 93, 101, 713 N.E.2d
739 (1999), where the arbitrators in that case exceeded their
authority because they awarded attorney fees based on a statute
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not presented by the parties. Here, the panel did not exceed its
authority in considering the reinsurance industry duty of utmost
good faith in its ultimate award.
Nevertheless, we do find that the panel exceeded its
authority because it relied on Illinois law as the basis for
awarding attorney fees; however, Illinois law is clear that
section 155 of the Code does not authorize arbitrators to award
attorney fees.
Section 10 of the Act (710 ILCS 5/10 (West 2006)) provides:
“Unless otherwise provided in the agreement to
arbitrate, the arbitrators’ expenses and fees, together
with other expenses, not including attorney’s fees,
incurred in the conduct of the arbitration, shall be
paid as provided in the award.” (Emphasis added.)
This court has interpreted the statute to mean:
“[A]bsent a contrary provision in the arbitration
agreement, the Act authorizes arbitrators to assess all
fees and costs associated with an arbitration
proceeding, except for attorney fees. With respect to
attorney fees, the statute neither permits nor
prohibits the arbitrators’ assessment of attorney fees.
Rather, the Act delegates this decision to the parties.
As such, an arbitrator’s authority to assess attorney
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fees derives solely from the agreement to arbitrate.”
Lee B. Stern & Co., 277 Ill. App. 3d at 426.
Moreover, “ ‘[P]arties are only bound to arbitrate those issues
which by clear language they have agreed to arbitrate;
arbitration agreements will not be extended by construction or
implication.’ ” Lee B. Stern & Co., 277 Ill. App. 3d at 427-28,
quoting Flood v. Country Mutual Insurance Co., 41 Ill. 2d 91, 94,
242 N.E.2d 149 (1968).
Here, the parties’ arbitration agreement did not expressly
provide for attorney fees; however, in relation to the agreement
to arbitrate, the treaty said “except as provided ***,
arbitration shall be based upon the procedures of the American
Arbitration Association insofar as applicable.” In addition, the
treaty said “[t]he arbitrators shall not be obliged to follow
judicial formalities or rules of evidence except to the extent
required by governing law -– that is, the state law of the situs
of the arbitration ***; they shall make their decisions according
to the practice of the reinsurance business.”
Rule 43(d)(2) of the AAA provides three bases upon which an
arbitration panel may award attorney fees: (1) “if all parties
have requested such an award”; (2) if “it is authorized by law”;
or (3) if it is authorized by “their arbitration agreement.”
Both parties did not request attorney fees, only Amerisure did,
and, as stated, the arbitration agreement did not expressly
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provide for attorney fees. Therefore, the parties agreed to
arbitrate only those attorney fees authorized by Illinois law, as
the chosen forum.
Section 155 of the Code provides, in relevant part:
“(1) In any action by or against a company wherein
there is in issue the liability of a company on a
policy or policies of insurance or the amount of the
loss payable thereunder, or for an unreasonable delay
in settling a claim, and it appears to the court that
such action or delay is vexatious and unreasonable, the
court may allow as part of the taxable costs in the
action reasonable attorney fees.” 215 ILCS 5/155 (West
2006).
A court’s primary objective in interpreting a statute is to
give effect to the intent of the legislature. Harshman v.
DePhillips, 218 Ill. 2d 482, 493, 844 N.E.2d 941 (2006). The
best indicator of the legislators’ intent is the plain language
of the statute. Harshman, 218 Ill. 2d at 493. When a statute’s
language is clear and unambiguous, we will give it effect without
resorting to other aids of construction. Harshman, 218 Ill. 2d
at 493.
In interpreting section 155, this court has said:
“Section 155 is intended to penalize vexatious
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delay or rejection of legitimate claims by insurance
companies. If the insurance company vexatiously delays
or rejects legitimate claims, it is responsible for the
expense resulting from the insured’s efforts to
prosecute the claim. [Citation.] When an insured must
resort to bringing a declaratory action against the
insurer in order to enforce its right to coverage in an
underlying lawsuit, the insured may recover section 155
attorney fees incurred in both the underlying case and
the declaratory action. [Citation.]” (Emphasis
added.) Estate of Price v. Universal Casualty Co., 334
Ill. App. 3d 1010, 1012, 779 N.E.2d 384 (2002).
Since the statute was implemented in 1937, it has designated
the court as the authority to allow section 155 attorney fees.
Moreover, this court has held that a party may not “recover
attorneys fees under section 155 by way of an arbitration
proceeding.” American Service Insurance Co. v. Passarelli, 323
Ill. App. 3d 587, 591, 752 N.E.2d 635 (2001). Relying on the
plain language of the statute, this court found the insured
improperly attempted to recover attorney fees from an arbitration
panel when the fees may only be awarded by a circuit court.
Passarelli, 323 Ill. App. 3d at 591. Specifically, the
Passarelli court relied on the language of section 155: “ ‘the
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court may allow as part of the taxable costs in the action
reasonable attorney fees’ and that such an award is allowable if
‘it appears to the court that such action or delay is vexatious
and unreasonable.’ ” (Emphasis in original.) Passarelli, 323
Ill. App. 3d at 591, quoting 215 ILCS 5/155(1) (West 1998); see
McGee v. State Farm Fire & Casualty Co., 315 Ill. App. 3d 673,
681, 752 N.E.2d 635 (2000) (“[w]hether an insurer’s conduct is
vexatious and unreasonable is a matter committed to the circuit
court’s discretion”); see also Estate of Price v. Universal
Casualty Co., 322 Ill. App. 3d 514, 517-18 (2001) (when
determining whether an insurer is subject to section 155, a
circuit court must consider the totality of the circumstances).
More recently, in Smith v. State Farm Insurance Cos., 369
Ill. App. 3d 478, 485, 861 N.E.2d 183 (2006), this court said a
section 155 claim “is only proper in court and not in arbitration
proceedings, as the statute vests the court with the discretion
to determine the award.” (Emphasis added.) We found in Smith
that the plaintiff’s section 155 action was not authorized by
statute and was not “covered under the scope of an arbitration”
because “section 155 itself vests the court with discretion to
determine the award, if any, in a matter brought pursuant to it.”
(Emphasis added.) Smith, 369 Ill. App. 3d at 485 (holding a
release agreement following arbitration did not bar the plaintiff
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from filing a subsequent section 155 claim in a circuit court).
The arbitrators were required to recognize the parties’
contractual agreement that limited the arbitrators’ authority to
award attorney fees in conformance with Illinois law. When the
arbitrators awarded attorney fees based on section 155, they did
so in violation of Illinois law.
Amerisure relies on Beatty v. Doctor’s Co., 374 Ill. App. 3d
558, 871 N.E.2d 138 (2007), to support its contention that
Illinois courts have allowed arbitrators to award section 155
attorney fees. Amerisure’s reliance, however, is misplaced.
In Beatty, the plaintiff’s amended complaint in the circuit
court alleged the defendant failed to defend and indemnify the
plaintiff in a professional liability action, and sought, inter
alia, attorney fees pursuant to section 155. Beatty, 374 Ill.
App. 3d at 560. The parties eventually agreed to arbitrate, and
the circuit court issued a consent order in which the parties
agreed to binding arbitration for those matters raised in the
plaintiff’s amended complaint. Beatty, 374 Ill. App. 3d at 565.
The arbitrators then awarded attorney fees pursuant to section
155, and the award was confirmed. Beatty, 374 Ill. App. 3d at
561-62.
On appeal, the defendant primarily contended the arbitrators
grossly erred in finding it acted vexatiously and unreasonably
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pursuant to section 155. Beatty, 374 Ill. App. 3d at 564. The
Fifth District held it was outside the scope of the court’s
review to reanalyze the arbitrators’ determination because the
facts upon which the decision was based did not appear on the
face of the award. Beatty, 374 Ill. App. 3d at 564. In
addition, the Fifth District held Passarelli was distinguishable
because the parties mutually consented to arbitrate the issue of
section 155 attorney fees. Beatty, 374 Ill. App. 3d at 565.
We find Beatty inapplicable to the case at bar where it is
narrowly limited to its facts. Beatty never addressed the
arbitrator’s authority under Illinois law to award section 155
attorney fees because judicial review was essentially forfeited
where the parties agreed to arbitrate all matters alleged in the
amended complaint, including the claim for attorney fees under
section 155. Beatty, 374 Ill. App. 3d at 565. We find no
indication in Beatty that the appellant timely argued to the
arbitrators that Illinois law did not authorize them to award
section 155 attorney fees.
Here, in contrast, Global consistently argued in a timely
manner that section 155 fees could not be awarded. As discussed
in detail above, Amerisure and Global entered a standard
arbitration agreement when they first contracted, agreeing to
arbitrate only those attorney fees authorized by Illinois law.
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Section 155 does not provide arbitrators with the authority to
award attorney fees; the plain language of the statute reserves
that authority to circuit courts. 215 ILCS 5/155 (West 2006).
Therefore, the instant arbitrators were not authorized under
Illinois law to award attorney fees pursuant to section 155.
We are not persuaded by Amerisure’s argument that
Passarelli is distinguishable simply because the parties there
did not have an arbitration agreement and were forced to
arbitrate their uninsured motorist claim based on the Code. The
Passarelli holding that section 155 fees may only be awarded by a
court, not an arbitration panel, applies regardless of the method
by which the parties entered arbitration. And, we find
Amerisure’s reliance on Father & Sons, Inc. v. Taylor, 301 Ill.
App. 3d 448, 703 N.E.2d 532 (1998), to be misplaced. The statute
at issue there was the Consumer Fraud and Deceptive Business
Practices Act (815 ILCS 505/10a(e) (West 1996)). We need not
turn to other construction aids, such as the comparative language
of another statute, to interpret the clear and unambiguous
language of section 155. Harshman, 218 Ill. 2d at 493.
We do not come to our decision lightly, without
consideration of the deference given to arbitrators and the
public policy behind arbitration. However, the instant case is
an extraordinary one where the arbitrators awarded attorney fees
based on a statute which clearly reserves the authority to award
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such fees to the courts. This was a gross error of law, as we
discuss in the next section. A panel exceeds its authority when
“ ‘all fair and reasonable minds would agree that the
construction of the contract made by the arbitrator was not
possible under a fair interpretation of the contract.’ ” Garver
v. Ferguson, 76 Ill. 2d 1, 9-10, 389 N.E.2d 1181 (1979), quoting
M. Pirsig, Some Comments on Arbitration Legislation & the Uniform
Act, 10 Vand. L. Rev. 685, 706 (1957). We conclude that standard
has been met here.
We need not address whether section 155 applies to
reinsurance relationships because, even assuming, arguendo, it
does, the arbitrators did not have the authority to award
attorney fees pursuant to the statute.
II. Gross Error on the Face of the Award
Amerisure contends that any error by the arbitrators in
interpreting or applying section 155 was merely a mistake of law,
and, thus, not a sufficient ground to vacate the attorney fee
award. We disagree because this appeal does not involve a mere
dispute concerning the arbitrators’ statutory interpretation but,
rather, the awarding of attorney fees contrary to clear Illinois
law.
“Errors of judgment in law are not grounds for vacating an
arbitrator’s award when the interpretation of the law is
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entrusted to the arbitrator.” Board of Education v. Chicago
Teachers Union, Local No. 1, 86 Ill. 2d 469, 477, 427 N.E.2d 1199
(1981). “Only where it appears on the face of the award (and not
in the arbitrator’s opinion) that the arbitrator was so mistaken
as to the law that, if apprised of the mistake, the award would
be different may a court review the legal reasoning used to reach
the decision.” Board of Education, 86 Ill. 2d at 477.
Here, on its face, the arbitrators awarded attorney fees
based on Global’s violation of the duty of utmost good faith.
However, in Illinois, the “American” rule only allows a
successful litigant to recover attorney fees if authorized by the
parties’ agreement or statute. Krantz v. Chessick, 282 Ill. App.
3d 322, 329, 668 N.E.2d 77 (1996). The parties here did not
contract for the awarding of fees, by an arbitration panel or
otherwise, in the event of a violation of the duty of utmost good
faith. Amerisure does not cite, and our research has not
revealed, any statute providing fees in that event. Moreover,
Illinois does not recognize a bad-faith exception to the
“American” rule for attorney fees. Krantz, 282 Ill. App. 3d at
330. Since there is no methodology in the parties’ agreement or
under Illinois law for awarding attorney fees due to a violation
of the duty of utmost good faith, we find the panel was so
mistaken that if apprised of the law it would have made a
different decision.
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Accordingly, we may review the arbitration record, as we
previously did when analyzing whether the panel exceeded its
authority by considering a matter not raised by the parties.
Board of Education, 86 Ill. 2d at 477. As the record
demonstrated, the panel awarded the attorney fees based on
section 155 in conjunction with the reinsurance practice of the
duty of utmost good faith. Significantly, the parties admit that
Passarelli was never submitted or argued to the panel during the
arbitration proceedings. Moreover, neither party apprised the
panel of Smith. Passarelli and Smith clearly establish that
Illinois law has consistently held that arbitrators do not have
the authority to award section 155 attorney fees. And, as
discussed above, Beatty does not detract from that consistent
statement of Illinois law. The failure to provide the
arbitrators with an accurate argument concerning Illinois law on
this issue resulted in the panel being so mistaken as to the law
that, if apprised of the mistake, the award would have been
different.
CONCLUSION
We respectfully reverse the circuit court’s summary judgment
finding in favor of Amerisure and vacate that part of the
arbitrators’ order awarding attorney fees.
Judgment reversed; award vacated in part.
HALL, P.J., and PATTI, J., concur.
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REPORTER OF DECISIONS - ILLINOIS APPELLATE COURT
AMERISURE MUTUAL INSURANCE COMPANY and AMERISURE
INSURANCE COMPANY,
Plaintiffs and Counterdefendants-Appellees,
v.
GLOBAL REINSURANCE CORPORATION OF AMERICA, f/k/a Gerling
Global Reinsurance Corporation of America,
Defendant and Counterplaintiff-
Appellant.
No. 1-09-0820
Appellate Court of Illinois
First District, FIRST DIVISION
March 15, 2010
Justice Bertina E. Lampkin authored the opinion of the court:
Presiding Justice Hall and Justice Patti concur.
Appeal from the Circuit Court of Cook County.
The Hon. Rita M. Novak, Judge Presiding.
COUNSEL FOR APPELLANT
Hinshaw & Culbertson LLP, Chicago, IL 60601
OF COUNSEL: Edward K. Lenci, Fritz K. Huszagh and
Christine Olson McTigue
COUNSEL FOR APPELLEES
DLA Piper LLP, Chicago, IL 60601
OF COUNSEL: Stephen W. Schwab, Holly M. Spurlock
and Amanda L. Fox
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