Binding arbitration of coverage and bad faith disputes: A way out of the thicket for the American insurance industry

Brady, Michael J

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This article sets forth a unique and intriguing idea: can an insurer insert a requirement in its policy that all disputes concerning coverage or bad faith be submitted to binding arbitration, and providing further that in the event the arbitrator awards punitive damages, they be capped at no more than three times the amount of the compensatory award?

In the past thirty years at least ten states have witnessed huge (and often unwarranted) jury verdicts against insurers for bad faith and punitive damages. Juries have frequently run amok, and many of these verdicts have been reduced or modified by the trial judge or by an appellate court. Nonetheless, such cases involve a huge expenditure of time, legal expense, and delay in achieving a final result. Many of these expenses, even if the insurer prevails, are nonreimbursable because of the American rule that parties bear their own legal fees.

Some of the same concerns apply to coverage litigation, particularly complex coverage cases such as environmental, products, advertising injury issues, and the like. These cases can drag out and take years to resolve, leaving the parties in a state of uncertainty and, frankly, potentially creating greater exposure for insurers by reason of the delay.

Arbitration has always had major advantages over litigation with respect to speed of result, simplicity of pleading and discovery. Moreover the finality of arbitration means virtual immunity from attack in further proceedings.

Litigants will always have to evaluate the central question of whether arbitration produces better results than litigation. But even if litigation is thought to produce lower indemnity awards or more defense verdicts, the cost of producing those results, when combined with the results themselves, may be greater than the total cost and result of the arbitration.

There is significant support for a movement away from litigation in the United States, because of the abuses of the system. Tort reform efforts will probably gather steam again with a new administration in Washington. Courts, possibly for selfish reasons (less work, overburdened dockets) have become increasingly sympathetic to arbitration agreements, even when they are somewhat stacked against the consumer and in favor of the party with the greater bargaining power. Therefore, the climate may well be ripe for a bold change in the way coverage and bad faith disputes are resolved - providing for binding arbitration of such disputes in the insurance contract.

This article goes beyond that: we also suggest that the insurance contract could provide that the arbitrator is authorized to award compensatory and, if appropriate, punitive damages. The latter would probably only be awarded in a bad faith case. However, our proposal would contractually cap awards of punitive damages at no more than three times the compensatory award. Such a provision would be very controversial, but it is a reasonable suggestion whose time has come. Some state supreme court justices have even suggested as much. I

A. What mechanism to utilize?

A preliminary question is how to implement this concept. We see this concept as working with respect to both personal lines and commercial policies, and with respect to first party claims and third-party liability claims against the insured. Frankly, we would like to see an insurer implement this concept in all new policies issued to new insureds. Inserting the binding arbitration provision in "renewal" policies raises complicated questions of notice to the insured of a change in the coverage. Nevertheless, that burdensome requirement could be met with careful draftsmanship.

A problem associated with implementing the concept in new policies issued to new insureds has nothing to do with the law. It has a great deal to do with the business operations of insurers themselves. The sales or marketing department of an insurance company may well object, contending that it will make the insurance product less competitive.'

The bulk of this article, however, deals with a more modified approach and one that may find wider acceptance in the insurance community. We are suggesting that insurers offer the policyholder a choice: take the standard policy which allows for litigation against the insurer and resolution of disputes in court; or, for a discounted price or premium, take the policy that contains the binding arbitration clause. Insurers might be surprised to see how many homeowners or businesses would opt for the cheaper policy, even though they are giving up their rights to jury trials and unlimited punitive damages. If that occurs, the insurer will be far ahead of the game financially for the reasons set forth above.

Finally, we suggest that every insurance contract that contains such a binding arbitration clause should also contain a provision that it is the intent of the insurer and the insured that the binding arbitration provision is crafted under, and pursuant to, the Federal Arbitration Act (FAA) and is to be interpreted according to that Act. This is important in light of the fact that there is a huge bias in the federal courts in favor of the FAA and in favor of enforcing arbitration agreements pursuant to that Act. This preference for arbitration is much stronger in the federal courts, under the Act, than comparable state statutes. This also means that if a policyholder attempts to avoid binding arbitration, the insurer might well have a basis to remove the action to federal court, cementing the insurer's right to compel arbitration and avoid litigation.

II. STATUTES AND PITFALLS RELATED TO ARBITRATION PROVISIONS IN INSURANCE CONTRACTS

Any agreement to arbitrate future claims for breach of an insurance contract or the covenant of good faith and fair dealing will be enforced (or not) according to the terms of the statutory arbitration schemes enacted by the federal and state governments.

A. Federal and State Arbitration Statutes

The legislative embrace of arbitration as a means of resolving disputes, now codified under the Federal Arbitration Act' and the civil codes of fortyeight states and the District of Columbia,4 is now so widespread that it is possible to forget how universally agreements by contracting parties to submit future disputes to arbitration were once disfavored. For the first century and a half of this country's history, agreements to arbitrate future disputes were generally held unenforceable because they were considered to "oust the court of jurisdiction," an unconstitutional deprivation of the right to access to the courts.5 New York State was the first to enact legislation permitting contracting

parties to agree in advance that future disputes would be resolved through arbitration.6 The United States Congress then laid the foundation for the nearuniversal acceptance of arbitration agreements in the 1920s when it enacted the United States Arbitration Act' (also referred to as the "Federal Arbitration Act" or "FAA").

The legislative history of the FAA manifests the recognition by Congress that parties choose arbitration in order to avoid the delay and expense of litigation.' To that end, the FAA states that agreements by contracting parties to submit future controversies arising from their contract to arbitration are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of the contract."9 Under the FAA, an arbitration clause will be found valid and enforceable unless grounds for revocation appear on the face of the arbitration clause itself. 10

Congress' desire that valid arbitration agreements be given effect also appears on the face of the FAA's enforcement provisions:

4 Failure to arbitrate under agreement...

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28 ... for an order directing that such arbitration proceed in the manner provided for in such agreement .... [U]pon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement."'

Federal courts have held that the public policy expressed in the statute is so important that this provision actually divests the district court of discretion to decline to compel arbitration under a valid arbitration agreement.2

Since enactment of the FAA, virtually every state" has enacted its own statutory scheme permitting parties to contract for arbitration of future disputes. II The majority of states have adopted versions of the Uniform Arbitration Act (UAA), the language of which concerning the validity and enforceability of agreements to arbitrate future disputes is substantially similar to section 2 of the FAA." Other states, without specifically mimicking the language appearing in the FAA or UAA, have enacted statutes manifesting their own legislature's intent that agreements to arbitrate future disputes be enforced. 16

B. Potential Statutory Pitfalls for Insurance Contract Arbitration Provisions The near-universal embrace of arbitration agreements as valid and enforceable has not universally impacted insurance contracts. The express terms of arbitration statutes of several states actually exclude contracts between insurers and their insureds from their application." Other states decline to apply their statutes approving arbitration agreements to adhesion contracts." The courts of some of these same states have issued strongly-worded decisions finding that insurance policies are presumed to be adhesion contracts 19 which, at a minimum, raises a presumption that arbitration agreements in insurance policies are unenforceable.

Even the mandatory nature of an arbitration clause can render it unenforceable. For instance, in one decision the Court of Appeal of Oregon declined to give effect to an arbitration provision in a fire insurance policy despite strong statements regarding the state's public policy favoring arbitration and enforcement of arbitration provisions.2' The court ruled that the arbitration provision in question, even though "statutorily mandated, 1121 should not be enforced because the insured "did not have an opportunity to enter into a valid fire insurance contract that did not include the statutorily mandated arbitration provision The court concluded that, because the insured never had the option to choose not to arbitrate, "he did not voluntarily waive his right to have the value of his fire loss determined by a jury" and was therefore entitled to maintain a lawsuit on the issue.

It must be emphasized that the fact that the statutory scheme of a particular state bars enforcement of arbitration agreements found in insurance policies or adhesion contracts does not necessarily mean that an insurance policy arbitration clause will not be enforced in that jurisdiction. No prohibition against arbitration of insurance disputes is found in the FAA. To the contrary, by its own terms the FAA is intended to apply to contracts including those "evidencing . commerce,"24 which the FAA defines in the arbitration context as "commerce among the several States."25 On its face, therefore, the FAA would seem to preempt state insurance law and therefore be the controlling statutory scheme concerning arbitration affecting interstate commerce.26

Numerous decisions have held that insurance policies can be found to affeet interstate commerce, even consumer policies issued in the same state as the property being insured." However, another Federal statute, the McCarranFerguson Act, reserves to the several states "the regulation or taxation" of "the business of insurance."28 The McCarran-Ferguson Act goes on to state: "No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance. . unless such Act specifically relates to the business of insurance . . ."19

If a state has an arbitration statute that is part of a statutory scheme regulating insurance, the FAA does not supersede the state statute even if the insurance policy at issue can be characterized as affecting interstate commerce.30 However, when Congress stated that the McCarran-Ferguson Act applies to regulation of "the business of insurance" it meant the Act would apply to underwriting and spreading of risk, that is, to "the relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement . . . ."" Numerous decisions have found that ordinary state arbitration schemes were not intended to regulate insurance, and therefore the McCarran-Ferguson Act would not bar enforcement of an arbitration clause in an insurance contract through application of the FAA.32 In a state whose arbitration enforcement statute purports to exclude insurance contracts from its scope, the question of whether the FAA would supersede the statute to make an insurance policy arbitration clause enforceable would depend upon whether the statute was found to concern regulation of the "business of insurance." That answer would vary from state to state.33

Regardless of whether a state's arbitration enforcement statute permits an insurance arbitration clause, any insurer's effort to so contract with an insured as to future disputes must address specific concerns before the arbitration clause can have a realistic hope of being enforced. Those concerns deal with inequality of bargaining positions and attendant findings of unconscionability. The proposal set forth below, that of offering an insured the opportunity to add an arbitration endorsement to a policy in exchange for specific consideration in the form of reduced premiums, may address the issue of unconscionability. Therefore, it may result in enforcement of arbitration clauses, at least in those states where insurance contracts are not automatically excluded from enforcement of such clauses.

III. PROPOSAL FOR ARBITRATION OPTION IN INSURANCE POLICIES

A. Sample Arbitration Endorsement"

It should be possible for an insurer to offer an insured, at the time an insurance policy is entered into or renewed, the option of electing to refer all future disputes arising from the insurance policy to arbitration in exchange for a specific reduction in premium. For example, in the context of homeowners insurance, that provides both first-party and third-party (liability) coverages, such an endorsement might provide as follows:

ARBITRATION ENDORSEMENT

YOU [i.e., the insured] and THE COMPANY hereby covenant and agree that, at the election of either YOU or THE COMPANY, any disputes arising from THE POLICY shall be submitted to binding arbitration. YOU acknowledge that, in exchange for choosing to enter into this arbitration endorsement, THE COMPANY will apply and you will receive a discount in your premium [as set forth in the declarations page].

For purposes of this arbitration endorsement, "any disputes arising from THE POLICY" includes, but is not limited to:

1. Any dispute concerning whether this policy covers a claim YOU make for benefits under THE POLICY;

2. Any dispute concerning the amount of benefits due on a claim YOU make for benefits under THE POLICY;

3. If THE POLICY includes a promise to defend and/or indemnify YOU for claims against YOU, any dispute concerning whether THE COMPANY is obliged to defend or indemnify YOU for a particular claim against YOU;

4. Any dispute concerning whether THE COMPANY has breached its duty to act in good faith towards YOU in handling and/or paying a claim YOU make for benefits under THE POLICY.

The endorsement should also set forth the manner in which arbitration shall be had; in particular, the manner in which arbitration may be requested and the manner in which the arbitrator or arbitrators shall be chosen.

Finally, the endorsement must include a separate and express acknowledgment by the insured that the insured has read, and understands, that he or she is waiving the right to bring suit over an insurance dispute in exchange for a lower premium:

I, , acknowledge that I understand I am constitutionally entitled to bring claims regarding this policy in court, and that, if I sign this agreement, I will not be able to bring a lawsuit concerning any dispute that may arise which is covered by this arbitration agreement, unless it involves a question of constitutional or civil rights. Instead, I agree to submit any such dispute to arbitration as provided above.35 I also acknowledge that, in exchange for my agreeing to submit any dispute to arbitration, THE COMPANY will apply, and I will receive, a discount in the premium I pay for this POLICY.

The sample endorsement addresses concerns of adhesion and unconscionability that might otherwise persuade a court to decline to enforce an arbitration provision by: 1) giving the insured the option of submitting to arbitration at the time of contracting; 2) giving the insured consideration for exercising that option and waiving the right to submit a dispute to resolution in court; and by 3) eliciting a written acknowledgment from the insured that the insured understands that she is waiving substantive rights in exchange for real consideration. The following discussion addresses these features and the way in which they are intended to operate in greater detail.

B. Operation of Particular Features of the Endorsement

1. OFFERING ARBITRATION ENDORSEMENT AS AN OPTION

The first and most obvious feature of the proposed arbitration endorsement is the fact that it is optional: before an insured may become bound to submit future disputes with the insurer to arbitration, the insured must take an affirmative step manifesting his or her intent to be so bound. Making the endorsement optional mitigates the "adhesive" character of the insurance contract to which so many courts voice objection. A contract of adhesion is one "formed as a product of a gross inequality of bargaining power between parties."36 "`The essence of an adhesion contract is that it is offered on a take it or leave it basis to a consumer who has no realistic bargaining strength and who cannot obtain the desired services or goods without consenting to the contract terms."'

In Obstetrics & Gynecologists v. Pepper,38 the Nevada Supreme Court declined to reverse a trial court refusal to compel arbitration pursuant to a clause contained in a medical clinic's admission form. In that action, the plaintiff sued the clinic when she suffered a stroke after obtaining oral contraceptives.39 The court focused on the fact that the patient had been required to sign the agreement to submit to arbitration as a prerequisite to receiving medical treatment. It noted that the arbitration agreement clearly fell into the category of a contract

2. GIVING CONSIDERATION IN EXCHANGE FOR SUBMISSION TO ARBITRATION

The second feature of the proposed arbitration endorsement that potentially enhances its enforceability is the fact that the insured gets something in exchange for submitting to arbitration. Purported lack of mutuality in some arbitration agreements does not necessarily render them void and unenforceable.46 Recent court decisions concerning arbitration agreements in the context of employment contracts find that mutual pledges to be bound by arbitration itself provide adequate consideration to support the arbitration provision concerned.47

Nevertheless, providing consideration in the form of a premium discount in exchange for the insured's election to submit future disputes to arbitration can weigh in favor of enforcement of the arbitration endorsement. The United States Supreme Court itself has acknowledged that a clause in an adhesion contract that was challenged as being unconscionable was enforceable, in part, because the clause was specifically tied to lower expense to the consumer.41 In Carnival Cruise Lines, Inc. v. Shute,49 an injured passenger sued the operators of a cruise ship in her home state of Washington. The passenger's ticket included a forum selection clause that required suit to be brought in Florida, the state where many of the line's tours originated and where it had its principal place of business." Even though the cruise ticket was unquestionably an adhesion contract, and the Court acknowledged that it was wildly unlikely that the passenger had even been in a position to negotiate over the forum selection clause, the Court ruled that the clause was enforceable because it was reasonable.5"

The Court's finding of reasonability was based, in part, on a presumption that the passenger would enjoy a lower fare as the result of the forum selection clause: "[Ilt stands to reason that passengers who purchase tickets containing a forum clause like that at issue in this case benefit in the form of reduced fares reflecting the savings that the cruise line enjoys by limiting the fora in which it may be sued."52 Significantly, the Supreme Court considered this factor probative even though there was no mention of any evidence in the record establishing that the passengers did, in fact, enjoy lower fares!

The premium discount proposed as consideration for an insured's agreement to submit to arbitration should offer a reviewing court an even more compelling indicator of fairness than the lower fare in Shute. The disputed forum selection clause in Shute was mandatory, while the proposed arbitration endorsement is optional. The forum selection clause in Shute was less than obvious to a ticket holder and there was no evidence that the passengers were aware of the clause, while an insured electing the proposed arbitration endorsement would necessarily be aware of the endorsement. Finally, there was no evidence in Shute that the passengers actually received real consideration in exchange for the forum selection clause, while the consideration received by an insured for electing the proposed arbitration endorsement would be real and immediate. Providing consideration in the form of a premium discount materially increases the likelihood that a court examining the endorsement would find the transaction to have been reasonable.

3. WRITTEN ACKNOWLEDGMENT WAIVER OF RIGHT To ACCESS COURTS

The third feature of the proposed arbitration endorsement aimed at eliciting enforcement is the written acknowledgment by the insured. The written acknowledgment accomplishes at least two goals: first, it provides the basis for establishing that the insured's election to arbitrate was knowing, voluntary and intelligent; and second, it moots any argument that the arbitration endorsement "ousts" the court of jurisdiction. The fundamental right of access to the courts is founded both in the first amendment right to petition the government" and in constitutional guarantees of due process,54 both assuring that no person will be denied the opportunity to present allegations to the judiciary concerning violations of fundamental rights. In order to waive a fundamental constitutional right effectively, the waiver must be knowing, voluntary and intelligent.51 In considering whether a waiver of fundamental rights has occurred, a court must indulge every reasonable presumption against the waiver of the right.56

In addition to disclosure of the precise rights being waived, the endorsement must include a detailed disclosure of the scope of the arbitration agreement. The law of different federal and state jurisdictions varies concerning whether an arbitration clause is to be interpreted broadly to bring issues within the purview of arbitration" or strictly to limit arbitration only to those matters contemplated by the express terms of the arbitration provision at issue.sg This issue is further complicated by the split in authority regarding whether an arbitration agreement encompasses the issue of its own scope,59 as opposed to authority that the issue of arbitrability is one for the court to determine before arbitration takes place.10 Some jurisdictions have held that the issue of whether an insurance policy provides benefits claimed by an insured is properly the subject of arbitration where a valid arbitration clause exists. For instance, in Wisconsin, coverage issues can be arbitrated if the contractual terms so provide.61 In Minnesota, the issue of coverage will be referred to arbitration if it is even "reasonably debatable" that the scope of the arbitration clause applies to coverage issues.62

However the relevant jurisdiction interprets the arbitration endorsement, inclusion of express reference to the issues subject to arbitration - whether benefits are due, the amount of those benefits, whether a duty to defend or indemnify exists under a third-party liability provision, or whether any party has breached the implied covenant of good faith and fair dealing - materially enhances the likelihood that the provision will be found to apply to the issues sought to be arbitrated.

The express, plain-language disclosure concerning arbitration also serves to moot any remaining issue of whether the arbitration endorsement could be argued to "oust" the court of jurisdiction over a dispute, rendering the arbitration endorsement unenforceable. Prior to enactment of the FAA and similar statutory schemes for arbitration, impermissible ouster of jurisdiction was the most common rationale for finding that agreements to arbitrate future disputes were not valid or enforceable.63 Indeed, Congress enacted the FAA in principal part to "to overrule the judiciary's long-standing refusal to enforce agreements to arbitrate on the ground of ouster of jurisdiction."' The widespread acceptance of arbitration has made this issue far less likely to bar enforcement of an arbitration agreement.65 However, decisions issued as recently as last year demonstrate that the issue of whether a court will find an arbitration clause to be unenforceable on grounds of impermissible ouster of jurisdiction persists.66 It is therefore worthwhile to make it as plain as possible that, before insureds waived the fundamental right to avail themselves of that jurisdiction, they were informed both of the right they were waiving and the fact they were waiving it. In other words, the acknowledgment makes clear that the insured has opted out of the court's jurisdiction rather than the proposition that jurisdiction has been ousted by operation of the arbitration endorsement.

B. Other Potential Pitfalls Which Careful Planning May Avoid

There are other potential problems with constructing an enforceable program for referring issues such as breach of an insurance contract and of the covenant of good faith and fair dealing that must be addressed in order to make enforcement more likely. Chief among these is the manner in which arbitration is requested and conducted.

Numerous courts have found that an insurance arbitration provision that permits the insurance company to control the composition of an arbitration panel renders the arbitration provision unconscionable and unenforceable. For instance, the Fourth Circuit Court of Appeals recently ruled that an employment arbitration clause was unenforceable, in part because the manner in which arbitrators were chosen was so one-sided as to insure that the panel was biased.67 In that case, the arbitration provision permitted each party to the employment contract to choose an arbitrator, and the two arbitrators, in turn, to choose a third.68 While that gave the provision the cosmetic appearance of fairness, the provision also required that all of the arbitrators, including the employee's, be chosen from a list of arbitrators maintained by the employer.69 Nothing in the arbitration rules prohibited the employer from placing its own managers on the list or punishing arbitrators who ruled against the employer." The rules were so slanted, the court concluded, that "the selection of an impartial decision-maker would be a surprising result."71

Thoughtful crafting or selecting rules pursuant to which arbitration would be conducted under the proposed arbitration endorsement would avoid such a result. The endorsement could either set forth a detailed recitation of the rules or state that arbitration would be conducted according to the rules of the American Arbitration Association or a similar organization. The goal would be to make sure that substantive fairness underlies the agreement.

Another potential problem with the proposed endorsement is the distinction between offering the arbitration option in connection with renewal of existing policies as opposed to new business. If the proposed arbitration agreement is offered in connection with a new policy, the signed acknowledgment should prevent any issue from arising concerning whether the insured knowingly waived the right to bring suit in exchange for a reduced premium. However, because the arbitration endorsement makes a significant change in the contract between the insurer and its insured, the question of how it is offered in the context of renewal of an insurance contract becomes significant. For instance, under Maryland law, renewal of a policy is "not a new contract, but an extension of the policy's life when made pursuant to a policy provision concerning renewal."72 Thus, in Maryland any change in an insurance policy upon renewal must be clear and obvious or it is not enforceable.71 Other states have similar laws concerning changes in coverage at the time an insurance policy is renewed.14

Addressing this issue presents some practical problems. A homeowner or a driver enrolling in coverage for the first time typically does so in the presence of an insurance agent who can present the arbitration endorsement, explain it, and elicit the knowing written waiver from the insured. However, renewal of such policies is typically done by mail, in response to notices from the insurer, without the involvement of an insurance agent or broker.

Two practical options regarding the arbitration endorsement in connection with an existing policy may be considered. The first is to offer the arbitration endorsement by mail, separately from any renewal notice, with a plain-language letter explaining the rights that are being waived and the discount in the premium that will be received in return. Election by the insured to add the arbitration endorsement to the policy could be conditioned upon a face-to-face meeting with the insurance agent or broker. This would ensure both that the insured's election and waiver is knowing and voluntary, and that there is a record of the election and waiver that will stand up to attempts to avoid the arbitration clause if a dispute arises."

The other practical option regarding existing insurance policies is to not offer arbitration at all. With respect to those existing policies, this would save the insurer the time, trouble and expense of marketing the arbitration endorsement separately to insureds already enlisted with the company. This would also provide a pool of policies not subject to arbitration whose litigation history and expense could be compared to contemporary policies that contain the arbitration clause.

It must also be noted that even a broadly worded optional insurance endorsement, voluntarily and intelligently entered into by an insured in a jurisdiction inclined to enforce it, will not free an insurance company from all litigation surrounding the particular insurance policy. Depending upon the jurisdiction within which an insurance dispute arises, allegations that the arbitration clause was elicited through fraud might remain a subject reserved for judicial determination." Similarly, many jurisdictions have determined that the courts are responsible for determining whether a valid arbitration agreement exists in the first place,77 although this determination may be made by means of a relatively simple petition to compel arbitration without the delay and expense of discovery. Furthermore, the question of whether an arbitration award is subject to judicial review will have different answers depending upon the different jurisdictions in which the dispute arises.

Finally, a state may require approval of specific arbitration clauses by the state insurance commissioner or other responsible regulatory body as a prerequisite to enforcing the clause." The statutory scheme of a particular state may also include unique requirements for enforceability of agreements to arbitrate future disputes. For instance, in Oregon, such an agreement is valid and enforceable "provided the arbitration is held within the State of Oregon."19 Vermont's arbitration statute not only requires that an arbitration clause has a separate, written acknowledgment of submission to arbitration, but it also provides a model acknowledgment.10 Any insurer serious about developing a program of offering arbitration to insureds will have to address the different requirements and issues presented in different states.

IV. CAPPING PUNITIVE DAMAGE AWARDS

The most controversial part of our proposal is the suggestion that the insurance arbitration clause provide: "In any such arbitration dispute, the arbitrator is authorized to award compensatory damages and, if appropriate, punitive or exemplary damages, but in no event may the amount of the punitive or exemplary damages exceed three times the amount of the compensatory award."

One of the worst injustices in American jurisprudence today is the lack of standards given to juries in deciding punitive damage cases. A host of cases has reached even the United States Supreme Court on this subject, but we are still waiting on a definitive ruling on the grave constitutional issues presented by punitive damages, their reasonableness, and their excessiveness. Many juries run amok, and their awards are often set aside by trial judges, or reversed or modified by appellate courts. Putting a cap on punitive damages injects some certainty into a very uncertain field, yet provides some significant punishment for an insurer that has behaved egregiously."

A recent decision from the California Supreme Court found two of its justices, citing cases and statutes from throughout the country, endorsing the proposition that punitive damages will always be excessive if they exceed three times the compensatory award.82 This is a well-reasoned approach and should be tried and tested by the insurance industry in its policy contracts.

One of the arguments that will be raised against such a clause is that a litigant is unable to obtain the same amount of damages in an arbitration that the litigant could receive in court. For example, a state may allow an unlimited punitive damage award to be returned. In Armendariz v. Foundation Health Psychcare Services, Inc., 83 the court gave sweeping approval to arbitration agreements, including agreements to arbitrate civil rights and constitutional rights related to employment. However, the court indicated that the agreement cannot deprive the litigant in arbitration from obtaining various categories of damages that could be awarded in court.84

Our proposal is somewhat different: the claimant is fully entitled to recover all categories of damages that a court could award, but the amount of punitive damages is restricted. Since punitive damages are not compensatory to the claimant, and the claimant will receive full compensation for his or her injuries from the arbitrator, this is another argument that the insurer can use to justify such a limitation clause on punitive damages.

A recent development will provide major impetus to the concept that we are advocating. On March 21, 2001, in Circuit City Stores, Inc. v. Adams,85 the United States Supreme Court, by a five-four decision, ruled that the FAA applied to private arbitration agreements that employees are required to sign as a condition of employment. The case involved a homosexual who was terminated from work. Adams had signed a mandatory arbitration agreement, but argued that he should be permitted to sue in court for civil rights violations, discrimination, and wrongful termination. Although the district court ruled in favor of the arbitration agreement, the Ninth Circuit Court of Appeals (contrary to ten other federal appellate court decisions) held that Adams was engaged in "interstate commerce" and was therefore exempt from the requirements of the FAA. The Supreme Court reversed, giving broad application to the FAA, in effect ruling that it pre-empts state court decisions and state statutes that are hostile towards arbitration.

Conversations with members of the Employees' Bar reveal their concern that this decision could wipe out class-action discrimination and other classaction employment related cases, in addition to seriously undermining the right of employees to sue in court for violation of their civil rights. The California Supreme Court, in the Armendariz case, has already ruled that it is permissible to require arbitration of civil rights violations. Therefore, the Circuit City case must be viewed as a huge boost for mandatory arbitration.

Note carefully that the proposed endorsement, which is reproduced at the end of this article in Appendix A, provides that the endorsement is entered into pursuant to the FAA, is to be governed by the FAA, and is to be interpreted in accordance with the FAA. This should provide considerable protection from attack.

There is an additional note on alternatives for the insurer. The entire approach of this article has been to give the insured a choice by providing a discounted policy in return for an agreement to mandatory arbitration. As a business matter, there may be insurers who are reluctant to offer a discounted premium. Those insurers could do other things such as waive the deductible, offer a lower deductible, or waive other insurer defenses.

Also notable in the proposed endorsement is the fact that we have provided a very generous "attorney fees" provision, allowing the insured (but not the insurer) to recover attorney fees up to one-third of the total recovery, if the insured prevails in whole or in part in the arbitration. For example, the insured might win the coverage case but lose the bad faith case. The provision would still authorize attorney fees in that event. Such a provision should go a long way towards convincing a court that the arbitration agreement is fair.

V.

CONCLUSION

We have thrown down the gauntlet: now, can we find an insurer brave enough to take up the sword! We suggest that with the increasing acceptance of arbitration agreements and with the national climate becoming disenchanted with litigation abuses, now is a perfect time for insurers to try this innovative approach. Lest we forget, swiftness and finality of the arbitration approach can be most beneficial to the insured as well.

1 Lane v. Hughes Aircraft Co., 993 P.2d 388, 399 (Cal. 2000) (Brown and Chin, J.J., concurring).

zOn this subject, we have always believed that if the claims department, by changing the policy, can save the company $50 million, whereas the change causes a $10 million loss in sales, the company is ahead of the game! How often we succeed with this common sense argument is another story.

19 U'S.C. R 1, -- 11.6,(!Mll).

4S tates whose statutory schemes make agreements to arbitrate future disputes valid and enforceable include the following: Alaska [ALASKA STAr. 09.43.010 (2000)]; Arizona [ARIZ. REV. STAT. 12-1501 (2000)]; Arkansas [ARK. CODE ANN. 16-108-201 (2001)1; California [CAL. CIV. PROC. CoDE 1281 (2001)]; Colorado [COLo. REV. STAT. 13-22-203 (2000)]; Connecticut [CONN. GEN. STAT. 52-408 (2001)]; Delaware [DEL. CODE ANN. tit. 10 5701 (2000)]; District of Columbia [D.C. CODE ANN. 16-4301 (2000)]; Florida [FLA. STAr. Ch. 682.02 (2000)]; Georgia [GA. CODE ANN. 9-9-3 (2000)]; Hawaii [HAw. REV. STAT. 658-1 (2000)]; Idaho [IDAHO CODE 7-901 (2000)]; Illinois [710 ILL. COMe. STAr. 511 (2001)]; Indiana [IND. CODE ANN. 34-57-2-1 (Michie 2000)]; Iowa [IOWA CODE 679A.1 (2000)]; Kansas [KAN. STAr. ANN. 5-401 (2000)]; Kentucky [Ky. REV. STAr. ANN. 417.050 (2001)]; Louisiana [LA. REV. STAT. ANN. 9:4201 (West 2000)]; Maine [ME. REV. STAr. ANN. tit. 14 5927 (West 2000)]; Maryland [MD. CODE ANN. CTS. & JUD. PROC. 3-206 (2001)]; Massachusetts [MASS. GEN. LAWS ANN. ch. 251 1 (2001)]; Michigan [MicH. Comp. LAws. 600.5001 (2000)]; Missouri [Mo. REV. STAT. 435.350 (2001)]; Minnesota [MINN. STAT. 572.08 (2000)]; Montana [MONT. CODE ANN. 27-5-114 (2000)]; Nebraska [NEB. REV. STAT. 25-2602.01 (2001)]; Nevada [Nev. Rev. Stat. Ann. 38.035 (Michie 2001)]; New Hampshire [N.H. REV. STAr. ANN. 542:1 (2000)]; New Jersey [N.J. STAr. ANN. 2A:24-1 (West 2001)]; New Mexico [N.M. STAT. ANN. 44-7-1 (2000)]; New York [N.Y. C.P.L.R. 7501 (2001)]; North Carolina [N.C. GEN. STAT. 1-567.2 (2000)]; North Dakota [N.D. CENT. CODE 32-29.2-01 (2000)]; Ohio [OHio REV. CODE ANN. 2711.01 (Anderson 2001)]; Oklahoma [OKLA. STAr. tit 15 802 (2000)]; Oregon [OR. REV. STAr. 36.305 (1999)]; Pennsylvania [42 PA. CONS. STAT. 7303 (2000)1; Rhode Island [R.I. GEN. LAWS 10-3-2 (2001)]; South Carolina [S.C. CODE ANN. 15-48-10 (Law. Co-op. 2000)]; South Dakota [S.D. CODIFIED LAWS 21-25A-1 (Michie 2001)]; Tennessee [TENN. CODE ANN. 29-5-302 (2001)]; Texas [TEX. CIV. PRAC. & REM. CODE ANN. 172.031 (Vernon 2000)]; Utah [UTAH CODE ANN. 78-31 a-3 (2000)]; Vermont [VT. STAr. ANN. tit. 12 5652 (2000)] Virginia [VA. CODE ANN. 8.01-581.01 (2000)1; Washington [WASH. REV. CODE ANN. 7.04.010 (2001)]; Wisconsin [Wis. STAT. 788.01(2000)]; Wyoming [WYO STAr. ANN. 1-36-103 (Michie 2001)].

'District of Columbia v. Bailey, 171 U.S. 161, 177 (1898); Lucas v. Brotherhood of Am. Yeomen, 185 P. 901, 902 (Kan. 1919). While it was justified on the grounds of protecting the right to access to the courts, application of the outdated rule against agreements to arbitrate future disputes may have had an additional, less altruistic basis as well. In 1965, the Supreme Court of Utah plainly stated that one of the factors that had previously made courts hostile to arbitration was that informal arbitration denied courts the pay they received for adjudicating disputes:

One of the criticisms of the rule [against enforcement of compulsory arbitration agreements] is that compulsory arbitration should not be considered against public policy as its opponents claim, but rather in accord therewith, because it encourages the amicable settlement of disputes. It is sometimes asserted that the underlying motivation for this doctrine when it originated was that the income of the judges depended upon the cases handled, so they desired to hold on to litigation for pecuniary reasons; and that inasmuch as this condition no longer exists, the doctrine should be abolished. We agree that no such consideration exists today, and that neither the possible erstwhile pecuniary interest of the courts, nor any present jealousy over the prerogative of handling the nowadays all too numerous disputes, has any legitimate bearing on the issue of compulsory arbitration. The real issue is whether it fits properly into the pattern of our system of law and justice.

Barnhart v. Civil Serv. Employees Ins. Co., 398 P.2d 873, 875 (Utah 1965).

6N.Y. C.P.L.R. 7501 (McKinney 2001). 79 U.S.C. 1- 16 (2001).

'To Validate Certain Agreements for Arbitration, H.R. Rep. No. 96, 68th Cong., 1st Sess. 1-2 (1924); see Philip E. Karmel, Comment, Injunctions Pending Arbitration and the Federal Arbitration Act: A Perspective from Contract Law, 54 U. CHI. L. Rev. 1373, 1391-92 (1987). 99 U.S.C. 22 (2001).

"Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 938 (4th Cir. 1999)(citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-04 (1967)).

119 U.S.C. 4 (2001) (emphasis added).

12Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000); Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985).

"Alabama continues to bar enforcement of agreements to arbitrate: "8-1-41. Obligations not specifically enforceable. The following obligations cannot be specifically enforced: ... (3) An agreement to submit a controversy to arbitration." ALA. CODE 8-1-41 (2001); see Southern United Fire Ins. Co. v. Knight, 736 So. 2d 582, 586-87 (Ala. 1999).

14See supra note 2.

"Compare 9 U.S.C. 2 (2001) to ALASKA STAT. 09.43.010 (2000)]; ARIZ. REV. STAT. 121501 (2000); ARK. CODE ANN. 16-108-201 (2001); CAL. CIV.PROC. CODE 1281 (2001); COLO. REV. STAT. 13-22-203 (2000); DEL. CODE ANN. tit. 10 5701 (2000); D.C. CODE ANN. 164301 (2000); HAW. REV. STAT. 658-1 (2000); IDAHO CODE 901 (2000); 710 ILL. COMP. STAT. 5/ 1 (2001); IND. CODE ANN. 34-57-2-1 (Michie 2000); IOWA CODE 679A. 1 (2001); KAN. STAT. ANN. 5-401 (2000); Ky. REV. STAT. ANN. 417.050 (2001); LA. REV. STAT. ANN. 9:4201 (West 2000); ME. REV. STAT. ANN. tit. 14 5927 (West 2000); MD. CODE ANN. CTS. & JUD. PROC,

3-206 (2001); MASS. GEN. LAWS ANN. ch. 251 1 (2001); MICH. ComP. LAWS. 600.5001 (2000); MINN. STAT. 572.08 (2000); MONT. CODE ANN. 27-5-114 (2000); NEB. REV. STAT. 25-2602.01 (2001); Nev. Rev. Stat. Ann. 38.035 (Michie 2001); N.J. STAT. ANN. 2A:24-1 (West 2001); N.M. STAT. ANN. 44-7-1 (2000); N.C. GEN. STAT. 1-567.2 (2000); N.D. CENT. CODE 32-29.2-01 (2000); OHIO REV. CODE ANN. 2711.01 (Anderson 2001); OKLA. STAT. tit 15

802 (2000); R.I. GEN. Laws AWS 10-3-2 (2001); S.C. CODE ANN. 15-48-10 (Law. Co-op. 2000); S.D. CODIFIED LAWS 21-25A-1 (Michie 2000); TENN. CODE ANN. 29-5-302 (2001); UTAH CODE ANN. 78-31a-3 (2000); VA. CODE ANN. 8.01-581.01 (2000); Wyo STAT. ANN. 1-36-103 (Michie 2001).

"See, e.g., CONN. GEN. STAT. 52-408 (2001); FLA. STAT. ch. 682.02 (2000); GA. CODE ANN. 9-9-3 (2000); OKLA. STAT. tit. 15 802 (2000); OKLA. STAT. tit. 15 802 (2000); OR. REV. STAT. 36.305 (1999); 42 PA. CONS. STAT. 7303 (2000); TEX. CIV. PRAC. & REM. CODE 172.031 (Vernon 2000); VT. STAT. ANN. tit. 12 5652 (2001).

17 See, e.g., ARK. CODE ANN. 16-108-201(b) (2001) ("IT]his subsection shall have no application to.. [any insured or beneficiary under any insurance policy . . . ."]; KAN. STAT. ANN. 5-401 (c) (2000) ("The provisions [that agreements to arbitrate future disputes are enforceable] . . . shall not apply to... Contracts of insurance .... ); Ky. REV. STAT. ANN. 417.50 (2001)("This chapter does not apply to ... Insurance contracts."); MONT. CODE ANN. 27-5-114 (2000); Neb. Rev. Stat. 25-2602.01 (2001); S.C. Code Ann. 15-48-10 (Law. Coop. 2000). See, also, R.I. Gen. Laws 10-3-2 (2001)(arbitration clause not enforceable in insurance policy unless clause appears immediately before coverage promise or insured's signature).

"See IOWA CODE, 679A. 1 (2001). Missouri's arbitration statute declines to enforce arbitration agreements in either insurance policies or adhesion contracts. (Mo. Rev. Stat. 435.350 (2001) (arbitration provision in contract "except contracts for insurance and contracts of adhesion" are enforceable).

"See, e.g., Broemmer v. Abortion Servs. of Phoenix, Ltd., 840 P.2d 1013, 1018 (Ariz. 1992) (arbitration clause in adhesion contract not enforceable if unconscionable); Taylor v. State Farm Mut. Auto. Ins. Co., 913 P.2d 1092, 1094 (Ariz. 1996) (insurance policy "characterized" by adhesion); First Financial Ins. Co. v. American Sandblasting Co., 477 S.E.2d 390, 392 (Ga. Ct. App. 1996) (insurance policies are adhesion contracts); Cincinnati Ins. Co. v. Hopkins Sporting Goods, Inc., 522 N.W.2d 837, 839 (Iowa 1994) (insurance policies are adhesion contracts); see also Kosierowski v. Madison Life Ins. Co., 298 N.Y.S.2d 810, 813 (App. Div. 1969) (insurance policy is "the prime example of a contract of adhesion . . .").

20 Molodyh v. Truck Ins. Exch., 714 P.2d 257, 260-61 (Ore Ct. App. 1986).

21Id at 261 (emphasis added)

22Id. at 260-61 (emphasis added)

23 Id at 261.

24 9 U.S.C. 2 (2001)

25 9 U.S.C. 1 (2001).

26 See e.g. Dowd v. First Omaha Sec. Corp., 495 N.W. .2d 36, 41 (Neb. 1993).

"See United States v. South-Eastern Underwriters Assn, 322 U.S. 533, 546-53 (1944). The McCarran-Ferguson Act was enacted to supersede the Supreme Court's holding in this decision. Dept of Treasury v. Fabe, 508 U.S. 491, 499 (1993).

28 15 U.S.C. 1012(a) (2001). 29 15 U.S.C. 1012(b) (2001).

'Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681, 685-86 (1996).

"Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 215-16 (1979).

"See, e.g., Hamilton Life Ins. Co. of N.Y. v. Republic National Life Ins. Co., 408 F.2d 606, 611 (2d Cir. 1969); Federated Rural Electric Ins. Co. v. International Ins. Co., 874 F. Supp, 1204, 1206-07 (D. Kan. 1995).

"In American Bankers Ins. Co. v. Crawford, 757 So. 2d 1125, 1132 (Ala. 1999), the Alabama Supreme Court ruled that the McCarran-Ferguson Act does not apply to its statutory proscription on enforcement of agreements to arbitrate future disputes because it does not mention insurance. The court distinguished the Kansas Supreme Court decision in Friday v. Trinity Universal of Kansas, 939 P.2d 869 (Kan. 1997) which held that the McCarran-Ferguson Act protected Kansas' arbitration statute because the Kansas statute proscribes enforcement of arbitration provisions in insurance

34 A more complete proposed endorsement appears in the appendix to this article.

"This language is drawn from Vermont's arbitration provision: 5652. Validity of arbitration agreements

(b) Required provision. - No agreement to arbitrate is enforceable unless accompanied by or containing a written acknowledgment of arbitration signed by each of the parties .... The acknowledgment shall provide substantially as follows: ACKNOWLEDGMENT OF ARBITRATION

I understand that (this agreement/my agreement with - of contains an agreement to arbitrate. After signing (this/that) document, I understand that I will not be able to bring a lawsuit concerning any dispute that may arise which is covered by the arbitration agreement, unless it involves a question of constitutional or civil rights. Instead, I agree to submit any such dispute to an impartial arbitrator.

VT. STAT. ANN. tit. 12, 5652 (2001).

"Klos v. Polskie Linie Lotnicze, 133 F.3d 164, 168 (2d Cir. 1997) (internal quotation omitted); see also Nelson v. Becton, 929 F.2d 1287, 1293 (8th Cir. 1991) (insurance policies are "classic examples" of adhesion contracts leaving a consumer with "minimal bargaining power").

"USAA Group v. Universal Alarms, Inc., 405 NW.2d 146, 147 (Mich. Ct. App. 1987) (emphasis added) (quoting Wheeler v. St. Joseph Hosp., 133 Cal. Rptr. 775 (Ct. App. 1976); see also Witmer v. Exxon Corp., 434 A.2d 1222, 1228 (Pa. 1981) (finding that contract term is unconscionable requires that the aggrieved party have had no meaningful choice in accepting the challenged provision).

38693 P.2d 1259, 1261 (Nev. 1985). 191d. at 1260.

4Od. at 1260-61. 4'Id. at 1261-62. 42/d. at 1260.

43 Koveleskie v. SBC Capital Mkts., Inc., 167 F.3d 361, 367 (7th Cir. 1999); Seus v. John Nuveen & Co., 146 F.3d 175, 184 (3d Cir. 1998); Witmer v. Exxon Corp., 434 A.2d 1222, 1228 (Pa. 1981).

"Adams v. Merrill Lynch Pierce Fenner & Smith, 888 F.2d 696, 700 (10th Cir. 1989); Surman v. Merrill Lynch Pierce Fenner & Smith, 733 F.2d 59,61 n.2 (8th Cir. 1984). See Obstetrics & Gynecologists v. Pepper, 693 P.2d 1259, 1261 (Nev 1985) (arbitration clause in adhesion contract would be enforceable if it included "plain and clear notification of the terms and an understanding consent"). NOTE that this is only true where the statutory scheme pursuant to which an arbitration agreement is enforced does not exempt adhesion contracts from their effect. See ARK. CODE ANN. 16-108-201(b) (2001); KAN. STAT. ANN. 5-401 (2000); Ky. REV. STAT. ANN. 417.50 (2001).

"Allegations of fraud in the inducement remain as potential means of voiding the arbitration endorsement. As discussed below, the language of the endorsement and the manner in which it is offered to an insured are the only proactive means of addressing such potential allegations. See infra note 76 and accompanying text.

16 Harris v. Green Tree Fin. Corp., 183 F.3d 173, 180 (3d Cir. 1998); Armendariz v. Foundation Health Psychcare Servs., 6 P.3d 669, 692 (Cal. 2000). An exception to this is found in cases where an arbitration provision permits trial de novo of a dispute only when an arbitrator's award exceeds a set amount. Mendes v. Automobile Ins. Co. of Hartford, 563 A.2d 695, 697 (Conn. 1989); Schmidt v. Midwest Family Mut. Ins. Co., 413 N.W.2d 178 (Minn. Ct. App. 1987); Nationwide Mut. Ins. Co. v. Marsh, 572 N.E.2d 1061 (Ohio 1984). The rationale for these holdings is that only an insurance company has motivation to challenge an arbitrator's award above a certain amount, and the de novo clause renders the arbitration agreement inequitable because it makes the mutuality of the arbitration agreement illusory. But cf. Hayden v. Allsate Ins. Co., 5 F. Supp. 649, 653 (trial de novo clause enforceable because only the insured could request arbitration in the first place).

This view is not unanimous among the states. See Allstate Ins. Co. v. Purdy, 606 N.Y.S.2d 535 (Sup. Ct. 1993) (policy term permitting trial de novo of uninsured motorist claim only on award in excess of statutory financial responsibility limits was neither unreasonable nor unconscionable).

"Wright v. Circuit City Stores, Inc., 82 F. Supp.2d 1279, 1280 (N.D. Ala. 2000); see also Michaelski v. Circuit City Stores, Inc., 177 F.3d 634, 636-37 (7th Cir. 1999).

"Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 594 (1991). 49M. at 588.

"Id. at 588, 595.

51 Id. at 595

52 Id at 594.

53 California Motor Transp. CO. v. Trucking Unlimited, 404 U.S. 508, 513 (1972).

54 Wolff v. McDonnel, 418 U.S. 539, 556 (1974)

"Johnson v. Zerbst, 304 U.S. 458, 465 (1938); Jenkins v. Percival, 962 P.2d 796, 799 (Utah 1998); Petersen v. United Servs. Auto. Assn, 955 P.2d 852, 855 n.2 (Wash. Ct. App. 1998).

56Johnson, 304 U.S. at 464; see also DeGroot v. Farmers Mut. Hail Ins. Co., 643 N.E.2d 875, 876 (111. App. Ct. 1994).

57 Under the FAA, a broadly worded arbitration clause creates a presumption that the clause covers disputes offered for arbitration. Collins & Aikman Prods. Co. v. Building Sys., 58 F.3d 16, 20-21 (2d Cir. 1995). Some states are in accord. See, e.g., Phillips v. Parker, 794 P.2d 716 (Nev. 1990); Clark County Pub. Employees Assn v. Pearson, 798 P.2d 136 (Nev. 1990); Nationwide Gen. Ins. Co. v. Investors Ins. Co. of Am., 332 N.E.2d 333, 335 (N.Y. 1975); K.L. House Const. Co. v. City of Albuquerque, 576 P.2d 752 (N.M. 1978).

See, e.g., State Farm Mut. Auto. Ins. Co. v. Coviello, 233 F.3d 710, 717-19 (3d Cir. 2000) (applying Pennsylvania law).

"For instance, in Minnesota, the issue of arbitrability is submitted to an arbitrator if the dispute concerns the scope of the arbitration agreement. Duluth Police Local v. City of Duluth, 466 N.W.2d 36, 39 (Minn. Ct. App. 1991).

'Under the FAA, arbitrability is an issue for the Court's determination. AT&T Tech., Inc. v. Communications Workers of Am., 475 U.S. 643, 649 (1986).

"Maryland Casualty Co. v. Seidenspinner, 512 N.W.2d 186, 188 (Wis. Ct. App. 1994).

62Woog v. Home Mut. Indemn. Co., 340 N.W.2d 863, 865 (Minn 1983); compare Myers v. State Farm Mut. Auto. Ins. Co., 336 N.W.2d 288 (Minn. 1983) with Austin Mut. Ins. Co. v. Templin, 428 N.W.2d 387 (Minn. 1988).

esSee supra note 5.

'Mediterranean Shipping Co. S.A. Geneva v. POL-Atlantic, 229 F.3d 397, 405 n.14 (2d Cir. 2000).

61 See, e.g., Pettinaro Constr. v. Partridge, 408 A.2d 957, 961 (Del. Ch. 1979); Wales v. State Farm Mutual Auto. Ins. Co., 559 P.2d 255, 257 (Colo. Ct. App. 1976) (fact that the legislature itselfhas provided a method of arbitration renders any objection to arbitration on the grounds that it ousts the court of jurisdiction "without merit").

`See, e.g., Hughley v. Rocky Mt. HMO, 927 P.2d 1325, 1331 (Colo. 1996); Friday v. Trinity Universal, 939 P.2d 869, 872 (Kan. 1997); see also litany of decisions in Tarlow v. Gateway Country Store, No. CV 990175198S, 2000 Conn. Super. Ct. LEXIS 1098 (May 2, 2000).

67 Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 938-39 (4th Cir. 1999).

68 Id at 938

69 Id at 938-39

70 Id at 939.

71 Id

72Benner v. Nationwide Mut. Ins. Co., 93 F.3d 1228, 1238 (4th Cir. 1996); see World Ins. Co. v. Perry, 124 A.2d 259, 262 (Md. 1956). Compare Missourri law, which holds that a renewed policy "constitutes a separate and distinct contract for the period of time covered by the renewal." Resolution Trust Corp. v. American Casualty Co., 874 F. Supp. 961, 967 (E.D. Mo. 1995).

"Nationwide Mut. Fire Ins. Co. v. Mekiliesky, 876 F. Supp. 351, 353 (D. Md. 1997); J.A.M. Assocs. v. Western World Ins. Co., 622 A.2d 818, 822 (Md. Ct. Spec. App. 1993) (what is required is a "short, separately attached, and boldly worded modification").

14 See, e.g., Stowe Township v. Standard Life Ins. Co. of Indiana, 507 F.2d 1332, 1337 (3d Cir. 1975) (under Pennsylvania law, when insurer curtails coverage upon renewal without notice to the insured, the insurer is held to the terms of the original policy); Perry v. Economy Fire & Cas. Co., 724 N.E.2d 151, 153-54 (Ill. App. Ct. 1999) (statute required notice of change in coverage on renewal to be provided sixty days before renewal).

"It must be recognized that an offer by mail may be of dubious effect in any event. Directmail solicitations of any kind elicit notoriously low response rates. There is no reason to believe that an insurer's customers will respond in large numbers to an offer by mail regarding arbitration, regardless of how the offer is posed.

"Doctor's Assoc., Inc. v. Stuart, 85 F.3d 975, 979-80 (2d Cir. 1996). But see Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967) (a broadly-worded arbitration agreement may include jurisdiction to determine whether the arbitration agreement was the result of fraud).

"Smith v. Cumberland Group, Ltd., 687 A.2d 1167, 1171 (Pa. Super. Ct. 1996); Battaglia v. McKendry, 233 F.3d 720, 724 (3d Cir. 2000). See also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626-27 (1985).

78Wis. STAT. ANN. 631.85 (West 2000). See also Appleton Papers, Inc. v. Home Indem. Co., 612 NW.2d 760, 770 (Wis. Ct. App. 2000).

790R. REv. STAT. 36.305 (1999).

1Vt. Stat. Ann. tit. 12, 5652(b) (2001); see discussion of clause's utility supra, pp. 11-13.

"For example, if the compensatory award is large, multiplying it by three times and adding that to the compensatory award can result in a sizable recovery for the claimant.

"Lane v. Hughes Aircraft Co., 993 P.2d 388, 393 (Cal 2000)(Brown, J., concurring). 836 P.3d 669, 680-83 (Cal. 2000).

841d. at 682-83.

11121 S. Ct. 1302, 1313 (2001).

MICHAEL J. BRADY

TERRY ANASTASSIOU

Michael J. Brady is a member of the Redwood City California firm of Ropers, Majeski, Kohn & Bentley. He received his undergraduate degree from Stanford University and his J.D. from Harvard Law School. Mr. Brady supervises his firm's appellate and insurance coverage departments. A frequent author and lecturer, he is past-president of the Northern California Association of Defense Counsel, California Academy of Appellate Lawyers, Defense Research Institute, International Association of Defense Counsel, Federation of Insurance & Corporate Counsel where he serves as Vice-Chairman of the Insurance Coverage Section as well as a member of the faculty board of the Federation of Insurance and Corporate Counsel Litigation Management College.

Terry P. Anastassiou is a partner in Ropers, Majeski, Kohn & Bentley and works in the areas of insurance defense, appeals, law and motion, and alternative dispute resolution. He was born in New York, New York, and received his undergraduate degree from George Washington University and his law degree from Santa Clara University School of Law. Prior to joining Ropers, Mr. Anastassiou worked as a legal research attorney for the San Mateo County Superior Court. He has published articles on contractual arbitration and on the use of special masters in complex litigation.

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