Opinion ID: 2588595
Heading Depth: 2
Heading Rank: 1

Heading: Is the Arbitration Clause in the Insurance Contract Enforceable?

Text: In 1975 the Idaho legislature enacted the Uniform Arbitration Act, IDAHO CODE § 7-901 et seq. (1998). Under the act arbitration and agreements to arbitrate are encouraged and given explicit recognition as effective means to resolve disputed issues. Arbitration generally offers an inexpensive and rapid alternative to prolonged litigation. It also serves to alleviate crowded court dockets. Loomis, Inc. v. Cudahy, 104 Idaho 106, 108, 656 P.2d 1359, 1361 (1982) (footnotes omitted). Idaho Code § 7-901 provides: A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist in law or in equity for the revocation of any contract. In Loomis we stated that grounds for revocation are mutual agreement or a condition that vitiates the agreement ab initio, such as fraud, mistake, or duress. Because unconscionability is also a ground for voiding a contract, Smith v. Idaho State Univ. Fed. Credit Union, 114 Idaho 680, 760 P.2d 19 (1988), it can also be a basis for revoking an agreement to arbitrate. Pursuant to the Uniform Arbitration Act, a court can, on appropriate grounds, invalidate either a written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit a controversy to arbitration. In this case, there was no written agreement between Ms. Lovey and BlueShield to submit their controversy to arbitration. Rather, there was an arbitration clause in their written insurance contract. Thus, she seeks to invalidate that arbitration clause, not the insurance contract as a whole. States may not invalidate arbitration agreements under state law, whether of legislative or judicial origin, that is applicable only to arbitration provisions. Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996). [1] Rather, the validity of either a contract to arbitrate or an arbitration provision in a contract must be determined under contract defenses that are generally applicable to all contracts. Id. When reviewing an unconscionability determination made by the trial court, we must accept the factual findings made by the trial court, as long as they are supported by substantial, competent evidence. Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997). Whether, under those facts, a contractual provision is unconscionable is a question of law over which this Court exercises free review. Id.; Opportunity, L.L.C. v. Ossewarde, 136 Idaho 602, 38 P.3d 1258 (2002). Courts do not possess the roving power to rewrite contracts in order to make them more equitable. Smith v. Idaho State Univ. Federal Credit Union, 114 Idaho 680, 760 P.2d 19 (1988). Equity may intervene to change the terms of a contract if the unconscionable conduct is serious enough to justify the court's interference. Id. While a court of equity will not relieve a party from a bargain merely because of hardship, yet he [or she] may claim the interposition of the court if an unconscionable advantage has been taken of his [or her] necessity or weakness. 114 Idaho at 684, 760 P.2d at 23 (quoting 28 AM.JUR.2d Equity § 24 (1966)). It is not sufficient, however, that the contractual provisions appear unwise or their enforcement may seem harsh. Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997). For a contract or contractual provision to be voided as unconscionable, it must be both procedurally and substantively unconscionable. Id. Procedural unconscionability relates to the bargaining process leading to the agreement while substantive unconscionability focuses upon the terms of the agreement itself. Id. Procedural unconscionability may arise when the contract was not the result of free bargaining between the parties. Northwest Pipeline Corp. v. Forrest Weaver Farm, Inc., 103 Idaho 180, 183, 646 P.2d 422, 425 (1982). Indicators of procedural unconscionability generally fall into two areas: lack of voluntariness and lack of knowledge. Lack of voluntariness can be shown by factors such as the use of high-pressure tactics, coercion, oppression or threats short of duress, Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997), or by great imbalance on the parties' bargaining power with the stronger party's terms being nonnegotiable and the weaker party being prevented by market factors, timing, or other pressures from being able to contract with another party on more favorable terms or to refrain from contracting at all, East Ford, Inc. v. Taylor, 826 So.2d 709 (Miss.2002). Lack of knowledge can be shown by lack of understanding regarding the contract terms arising from the use of inconspicuous print, ambiguous wording, or complex legalistic language, Id.; the lack of opportunity to study the contract and inquire about its terms, Id.; or disparity in the sophistication, knowledge, or experience of the parties, Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997). Substantive unconscionability focuses solely upon the terms of the contract or provision at issue. Hershey v. Simpson, 111 Idaho 491, 725 P.2d 196 (Ct.App.1986). The contract or provision is substantively unconscionable if it is a bargain that no person in his or her senses and not under delusion would make on the one hand and that no honest and fair person would accept on the other. Id. Factors to consider include whether the contract or provision is one-sided or oppressive. Walker v. American Cyanamid Co., 130 Idaho 824, 948 P.2d 1123 (1997). [2] When determining whether a contractual provision is unconscionable, the court must consider the purpose and effect of the terms at issue, the needs of both parties and the commercial setting in which the agreement was executed, and the reasonableness of the terms at the time of contracting. Id.; Hershey v. Simpson, 111 Idaho 491, 725 P.2d 196 (Ct.App.1986). The district court found that the arbitration clause in BlueShield policy in this case was procedurally unconscionable for several reasons. The district court noted that this was an adhesion contractan agreement between two parties of unequal bargaining strength, expressed in the language of a standardized contract, written by the more powerful bargainer to meet its own needs, and offered to the weaker party on a take-it-or-leave-it basis. As the district court correctly stated, however, an adhesion contract cannot be held procedurally unconscionable solely because there was no bargaining over the terms. [3] Adhesion contracts are a fact of modern life. They are not against public policy. As this Court stated in Hansen v. State Farm Mutual Automobile Insurance Company, 112 Idaho 663, 669-70, 735 P.2d 974, 980-81 (1987) (citations and footnotes omitted): Hansens also argue that the arbitration provision should be found unenforceable because the contract in question is an adhesion contract and therefore there is no bargaining with insurance companies over the terms. We find this argument to be without merit. It appears to be nothing more than an argument that arbitration clauses in such contracts should be held void as against public policy. However, the legislature has expressly declared that public policy favors arbitration provisions in written contracts. If the legislature had intended to exempt certain types of contracts from the provisions of the Uniform Arbitration Act, it could have done so.... Additionally, the arbitration clause has again presumably been approved by the Director of the Department of Insurance, to whom the legislature has delegated the authority and responsibility for approving insurance contract terms. The district court concluded, however, that BlueShield's use of an adhesion contract constituted procedural unconscionability because [t]he sheer necessity of health insurance distorts free market forces because it limits a consumer's ability to `shop around' in search of favorable policy contracts with more favorable terms. BlueShield's use of an adhesion contract may constitute procedural unconscionability if Ms. Lovey was prevented by market factors, timing, or other pressures from being able to contract with another party on more favorable terms or to refrain from contracting at all. East Ford, Inc. v. Taylor, 826 So.2d 709 (Miss.2002). There is nothing in the record, however, to support the district court's statement. There is no showing that all other health insurers in the relevant market area also include similar arbitration clauses in their insurance policies. The district court's conclusion, unsupported by evidence in the record, that Ms. Lovey had limited ability to investigate other health insurance contracts cannot support a finding of procedural unconscionability. The district court also stated that as often occurs with many adhesion contracts, Ms. Lovey did not have an opportunity to read the insurance contract before she paid the premium. She submitted a premium payment with her insurance application, and, after BlueShield accepted her application, it sent her a copy of the insurance policy. That procedure does not provide a basis for finding procedural unconscionability, however. There is no evidence that Ms. Lovey requested, but was denied, an opportunity to review a copy of the policy before applying for the insurance coverage. The policy for which she applied was identical to the policy she had purchased four months earlier. Therefore, she had approximately four months to review the terms of the policy before submitting her application. The district court's decision that the arbitration clause was unconscionable was also based upon the fact that BlueShield did not give Ms. Lovey a reasonable explanation of the arbitration provision and what it might mean to her financially. There is no contention, however, that the arbitration provision was ambiguous or that its wording included complex legalistic language, nor is there any evidence that Ms. Lovey asked any questions about what the provision meant. BlueShield's failure to offer unsolicited explanations to the various provisions in its insurance contract is not a factor indicating procedural unconscionability. Finally, the district court also held that a finding of unconscionability was supported by the fact that the arbitration clause was hidden in the insurance contract. The court stated: The clause, tucked away on page seventeen, paragraph twenty-one, deep in the text of the twenty-five-page health insurance contract, is not readily apparent to the consumer. Moreover, the lettering of paragraph twenty-one is indistinguishable from the lettering in surrounding paragraphs, effectively camouflaging the text of the arbitration clause amid a sea of identically formatted provisions of often lesser significance. The insurance contract was twenty-five pages in length. There can be no requirement that an arbitration clause appear on a particular page of the contract. Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996). All of the terms of the insurance policy were printed in the same size font. Each provision was separately numbered, titled, and set off by spacing from the preceding and following provisions. The arbitration clause was as follows: 21. ARBITRATION Any controversy or claim arising out of or relating to this Policy, or the breach thereof, shall be settled by arbitration in accordance with the applicable rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held at such place as may be selected by mutual agreement. All fees and expenses of the arbitration shall be borne by the parties equally. However, each party to the arbitration proceeding shall bear the expenses of its own counsel, experts, witnesses, and preparation and presentation of proofs. There were three other contractual provisions on the same page. The two provisions preceding the arbitration clause were entitled Notice of Claim and Claims Appeal Process, and the following provision was entitled Time Limit on Certain Defenses. The arbitration clause was not inconspicuous or hidden among other terms in the contract. The district court's conclusion to the contrary is clearly erroneous. The district court found that the arbitration clause was substantively unconscionable because it provided that the parties must pay their own costs and attorney's fees incurred in the arbitration. The district court concluded that if Ms. Lovey prevailed in the arbitration, she would not receive a meaningful award because the costs she incurred would substantially reduce the $30,000 to $40,000 she was seeking in unpaid medical expenses. Ms. Lovey's counsel submitted an affidavit in which she estimated that the costs Ms. Lovey may incur in the arbitration could be $2,400 for taking six depositions, a minimum of $6,000 in fees for two expert witnesses, $400 for preparing exhibits, $100 for photocopying, and $100 for witness travel expenses, for a total of $9,000. If Ms. Lovey litigated her claim in court, and prevailed, she would be entitled to recover approximately $6,900 of that sum as costs as a matter of right. [4] If she litigated her claim in court and lost, she would have to pay her own costs and the costs as a matter of right incurred by BlueShield. The provision in the BlueShield policy regarding the payment of the costs related to arbitration is not substantively unconscionable. It is neither one-sided nor oppressive. It applies equally to both parties. If the matter were litigated in court, the prevailing party would be entitled to an award of court costs within the limits provided by Rule 54(d)(1) of the Idaho Rules of Civil Procedure. If it is arbitrated, the parties must each pay their own costs. Section 7-910 of the Uniform Arbitration Act grants arbitrators the authority to make an award of costs, unless the parties' agreement provides otherwise. Wolfe v. Farm Bureau Ins. Co., 128 Idaho 398, 913 P.2d 1168 (1996). The statute expressly permits the parties to contract regarding the awarding of costs. The legislature could have provided that the prevailing party in the arbitration is entitled to an award of costs, but it did not do so. A provision that the parties will each pay their own costs is not unconscionable. The district court also held the arbitration clause void on the ground that arbitration in this case would be prohibitively expensive because Ms. Lovey must bear her costs in the arbitration. According to the district court, her anticipated costs of arbitration, when considered in light of the $30,000 to $40,000 that she hoped to recover, made it unlikely that she would pursue her claim. The district court based its decision upon Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000), in which the United States Supreme Court recognized that an agreement to arbitrate may be unenforceable if large arbitration costs precluded the party from effectively vindicating the party's federal statutory rights in the arbitral forum. In Green Tree, the Court held that the plaintiff had failed to show the likelihood of incurring such costs, and therefore reversed the decision of the Court of Appeals that had held the arbitration agreement unenforceable due to the anticipated high cost of arbitration. We have never previously held that the prohibitive cost of arbitration could be a basis for invalidating an agreement to arbitrate, and we decline to do so in this case. If Ms. Lovey prevails in the arbitration, she will be entitled to an award of attorney's fees by the district court, assuming that she filed this action before BlueShield requested arbitration and complied with the provisions of Idaho Code § 41-1839. Emery v. United Pac. Ins. Co., 120 Idaho 244, 815 P.2d 442 (1991). As we stated in Wolfe v. Farm Bureau Insurance Co., 128 Idaho 398, 403, 913 P.2d 1168, 1173 (1996), [T]he limit on the arbitrator's power to award attorney fees in arbitration does not restrict the court's power in a lawsuit filed to collect amounts due under an insurance policy to award attorney fees incurred during arbitration pursuant to I.C. § 41-1839. When compared with the damages she is seeking, Ms. Lovey's anticipated costs will not preclude her from effectively vindicating her rights. Even if we were to adopt the defense to arbitration recognized in Green Tree, it would not make the arbitration clause unenforceable in this case.