State Supreme Court to answer arbitration questions

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Marlowes, insurance firm dispute centers on allowable discovery

If an auto insurance policy arbitration clause is arguably vague, a question arises of whether the courts or the arbitrators have the right to decide contract interpretation disputes.

In fall, the Wisconsin Supreme Court will hear oral arguments on Marlowe v. IDS Property Casualty Insurance Company (2011 AP 2067), an automobile accident arbitration case that could further clarify the Supreme Court’s earlier ruling in Borst v. Allstate Insurance Company (2006 WI 70).

The Marlowes argue arbitration should be an expedited process that should be shorter and less costly to litigants, with reduced discovery, but still should keep a foot in the court system for contract interpretation in certain circumstances.

IDS contends that once a case has been given over to the arbitration system, arbitrators should be granted substantial authority to decide most issues, including contract interpretation, prior to final award.

In 2010, Mary and Leslie Marlowe’s vehicle was rear-ended by an uninsured motorist. Although damage to the car was not significant, the accident allegedly caused permanent physical injury, and medical claims exceeded $60,000.

The Marlowes turned to their insurance company, IDS, for relief, and the parties agreed to arbitrate the claim. But the process devolved into a time-consuming procedural disagreement over the extent of allowable discovery.

IDS requested discovery, including written discovery and depositions, medical records and independent medical examination, based on Wisconsin Stat. Ch. 804. The Marlowes objected to what they considered a broad discovery request, relying instead on Wisconsin Stat. Ch. 788.07, which limits discovery in arbitration cases to depositions except in limited circumstances.

Relevant sections of the IDS insurance policy arbitration section include:

• “If we and an insured do not agree: a) whether that insured is legally entitled to recover damages; or b) as to the amount of damages which are recoverable by that insured … then the matter may be arbitrated. However, disputes concerning coverage under this part may not be arbitrated.”
• … “Local court rules and restrictions regarding rules of evidence and other matters shall apply.”

When the Marlowes failed to provide the arbitration discovery sought by IDS, the arbitration hearing was canceled, and the insurance company asked the arbiters to rule on the matter. The three-member panel’s initial and supplemental opinion and decision favored IDS, which again turned to the Marlowes for complete discovery compliance.

Instead, the Marlowes responded by filing a circuit court action for declaratory judgment under Wisconsin Stat. Sect. 806.04. Their petition asked the court to de novo look at the insurance contract and arbitration section, determine whether the language was vague and assess to what extent the court’s decision in Borst would control.

The circuit court sided with the Marlowes, ruling the insurance contract language was vague and that Borst required arbitration language to make specific reference to discovery in order to give arbitrators decision-making authority.

The appellate court later reversed that decision, declaring the Marlowes’ circuit court declaratory judgment action indeed had been an interlocutory appeal, and that both Wisconsin and federal law support the proposition that parties postpone court appeals until after an arbitrator’s final award.

The appellate court explained that denying the Marlowes access to interlocutory litigation, in fact, was harmonious with the Borst decision.

“This phrase (the local rules language) arguably refers to the scope of discovery,” the appellate court stated. “… thus, under Borst and Employers, the panel was entitled to interpret the phrase and determine the scope of discovery it allows.”

In the brief to the Wisconsin Supreme Court, the Marlowes reasserted they had not collaterally attacked any arbitration decision because they never had agreed to have the responsibility to establish discovery guidelines given to the arbitrators in the first place.

The trial court was not asked to review the decision of the arbitrators, the Marlowes said, but just to interpret the language in light of the allegedly vague policy wording and the requirements set forth in the Borst decision.

One of the mandates of the Borst opinion, the Marlowes said, is the proposition that under Wisconsin law, arbitration panels do not have the inherent authority to extend the parameters of discovery absent express language in the arbitration agreement. In its responsive Supreme Court brief, IDS argued persuasive U.S. Supreme Court and Wisconsin court decisions concur with the idea that an arbitration panel should be the sole interpreter of arbitration agreements.

Additionally, because the arbitration panel already had issued an opinion and decision on the discovery issue, according to IDS, the trial court should have given deferential treatment to the panel’s decision.

Counsel for IDS also looked at larger public policy implications of a Wisconsin Supreme Court reversal, indicating that arbitration becomes meaningless if any separate decision of any arbitration panel can be separately and independently decided by the circuit court.

IDS points to another distinction between facts in the Borst case and for the Marlowes: In Borst, the moving party waited until after the arbitrator’s final award was entered to file a court appeal, while the Marlowes filed their circuit court appeal before the final arbitration award.