An insured who is denied coverage under an insurance policy may decide to challenge the insurer’s denial through either litigation or arbitration. An insured may find challenging an insurer’s denial of coverage a formidable task. However, the legislature sought to balance inequities by providing that prevailing insureds may recover attorney fees and costs. The potential to recover attorney fees provides an incentive to an insured to pursue litigation or arbitration against an insurer who denies coverage. Under Haw. Rev. Stat. § 431:10-242, an insured, who successfully challenges the insurance company’s denial of coverage and obtains an order by the court that the insurer pay benefits under the policy, is entitled to recover reasonable attorney fees.
Frequently, however, the coverage dispute is addressed in arbitration rather than through litigation. The Hawaii Supreme Court has determined that an insured who successfully establishes a right to benefits in arbitration is not entitled to attorney fees under Haw. Rev. Stat. § 431:10-242 because the statute requires “a court” order that benefits be paid under the policy. The issue, therefore, is whether after successfully establishing the right to benefits in arbitration, the insured can recover attorney’s fees under Haw. Rev. Stat. § 431:10-242.
In this section, we review the legislative intent behind Haw. Rev. Stat. § 431:10-242. We then survey the appellate decisions addressing the applicability of Haw. Rev. Stat. § 431:10-242 once an arbitration award is made in favor of an insured. Finally, we explore whether attorney fees may be recoverable even when benefits are awarded in arbitration.
A. Haw. Rev. Stat. § 431:10-242 and its Intent.
When an insurance company denies coverage but is ordered by the court to pay benefits under the policy, Haw. Rev. Stat. § 431:10-242 requires reimbursement of an insured’s reasonable attorney’s fees and the costs of suit. The statute provides, in part, “[w]here an insurer has contested its liability under a policy and is ordered by the court to pay benefits under the policy, the policyholder . . . shall be awarded reasonable attorney’s fees and the costs of
suit. . . .”
The legislative intent behind Haw. Rev. Stat. § 431:10-242 and its predecessor, Haw. Rev. Stat. § 431-455, reveals a purpose to provide a remedy for insured individuals who are forced to sue their insurance companies in order to compel insurance coverage. After all, without recovery of attorney fees and costs, an insured will be penalized for seeking only what it was already owed under the insurance contract. In proposing the attorney’s fees provision, the legislature noted,
The purpose of this bill is to require insurance companies to pay reasonable attorney’s fees, the costs of suit. . . when they have denied their liability under an insurance policy and, consequently, have compelled the policyholder . . . to resort to the courts to establish his claim to the policy benefits. The purpose of insurance is partially negated when the person protected by an insurance policy must sue his insurer to collect policy benefits.
Consequently, the legislative intent appears aimed at sparing insureds from the expense of obtaining through the legal means what was owed under the insurance policy.
However, litigation is not the only way insureds and insurers resolve their coverage disputes. Increasingly the insurance contract may require arbitration of coverage disputes or the parties may agree to arbitration. If attorney fees are not available under Haw. Rev. Stat. § 431:10-242 simply because the insured established a right to benefits in arbitration, insurers can successfully avoid the intent of the statute by unilaterally inserting an arbitration provision in their policies.
B. Availability of Attorney’s Fees when Arbitrator Awards Payment of Benefits under Policy.
Four appellate cases address the availability of fees under Haw. Rev. Stat. § 431:10-242 when coverage and payment of benefits to the insured is determined by an arbitrator.
1. Ranger Ins. Co. v. Hinshaw
In Ranger, a tourist was injured while riding on the back of a motorcycle driven by an employee of the insured, Skydive Academy of Hawaii. When the tourist sued, Skydive tendered its defense to Ranger. Ranger provided a defense of the underlying case subject to a reservation of rights. Assigned to the Court-Annexed Arbitration Program (“CAAP”), the parties obtained a sealed arbitration award, which was eventually filed with the circuit court. The case then settled, and Ranger paid a portion of the settlement amount. As part of the settlement, Skydive reserved its claim for attorney’s fees and costs against Ranger.
Skydive then filed a motion for attorney’s fees and costs under various theories, including Haw. Rev. Stat. § 431:10-242. The circuit court denied the motion and Skydive appealed.
In a terse analysis, and despite its conclusion that Skydive was the prevailing party, the supreme court concluded there was no abuse of discretion in denying fees under Haw. Rev. Stat. § 431:10-242. The court reasoned that although Ranger had contested its liability under the policy, “it was not ordered by the court to pay any benefits thereunder. Thus, Haw. Rev. Stat. § 431:10-242 is inapplicable, and we therefore affirm the circuit court’s order in that respect.”
Notably, the insurer in Ranger voluntarily agreed to participate in CAAP, and no court ordered the insurer “pay benefits under the policy” because the parties settled the coverage dispute before any such order was entered. Consequently, the insured’s request for attorney’s fees failed. Although Skydive was able to obtain coverage, it could not recover the fees expended because no court ordered Ranger to pay benefits as required by the literal wording of Haw. Rev. Stat. § 431:10-242.
2. Baldonado v. Liberty Mutual Ins. Co.
Baldonado was shot in the arm while riding in an uninsured vehicle. He filed a claim seeking uninsured motorist coverage under his parents’ policy. The insurer denied coverage. Pursuant to the terms of the policy, the insurer submitted to arbitration to determine (1) whether the insured was legally entitled to recover damages under the policy, and, (2) if so, the amount of damages. The arbitrator decided these issues in favor of Baldonado. The arbitrator did not address the issue of attorney’s fees.
Baldonado, however, submitted a post-hearing motion for attorney’s fees and costs to the arbitrator. Before the arbitrator decided the motion, Baldonado filed a motion in the circuit court to confirm the arbitration award and obtain costs, interest, and attorney’s fees by order of the court. Notwithstanding the title of Baldonado’s motion to confirm, nothing in its body addressed the issue of attorney’s fees and costs. Moreover, Baldonado’s counsel did not appear at the hearing on the motion. Consequently, the circuit court issued an order confirming the arbitration award but denying the motion for attorney fees and costs. Soon thereafter, the insurer paid, and Baldonado accepted, the amount of the arbitrator’s award.
More than two months later, Baldonado moved to remand the case to the arbitrator to decide the issue of attorney’s fees and costs. The motion was denied, as was a subsequent motion for reconsideration. In the meantime, however, the arbitrator issued a supplemental decision awarding Baldonado’s attorney’s fees. The arbitrator’s decision was subsequently vacated by the circuit court.
Baldonado appealed, arguing the arbitration decision was incomplete because it did not address the issue of attorney’s fees and costs. Baldonado’s motion to remand had argued that Haw. Rev. Stat. § 431:10-242 mandated an award of attorney’s fees and costs and the matter was still pending before the arbitrator at the time. The Intermediate Court of Appeals (“ICA”) disagreed. There had never been an agreement for the arbitrator to decide the issues of attorney’s fees and costs of the suit. Moreover, the issue of attorney’s fees and costs was no longer pending before the arbitrator when the remand was sought.
The issues of whether Haw. Rev. Stat. § 431:10-242 applied to arbitration awards and whether the statute authorized the circuit court to award Baldonado’s attorney’s fees were not ruled upon by the circuit court and Baldonado’s appeal was untimely. Consequently, the appellate court refused to consider these issues, holding it lacked jurisdiction.
Labrador v. Liberty Mutual Group
In 2003, the supreme court squarely confronted the attorney’s fee issue left open in Baldonado and held that neither arbitration nor an order to confirm an arbitration award satisfies the requirements of Haw. Rev. Stat. § 431:10-242. In Labrador, a thirteen year-old girl suffered severe facial scarring, when the vehicle, driven by Tolfree, in which the girl was a passenger, swerved to avoid a phantom vehicle. Tolfree’s vehicle was insured by PEMCO. The girl’s parents’ policy with Liberty Mutual included UIM coverage. The Liberty Mutual policy required any dispute as to entitlement to recovery of damages or the amount of damages be submitted to arbitration and that each side should bear the expenses it incurred. Consequently, the insured and Liberty Mutual agreed to binding arbitration.
Liberty Mutual limited the scope of the arbitration to factual and legal issues related to the underlying accident, preserving all issues of coverage for a declaratory action. Liberty Mutual filed a declaratory action maintaining that PEMCO, not Liberty Mutual, was primary and that it was entitled to subrogation. Consequently, the arbitrators issued an award that allocated fault among the various parties in the underlying accident and assessed damages, but that did not address coverage issues. The insured then filed a motion to confirm the arbitration award and for attorney’s fees and costs under Haw. Rev. Stat. § 431:10-242. The insured maintained Liberty Mutual had denied benefits, forcing arbitration to determine issues of liability and damages. The circuit court granted the motion to confirm on the issues of liability and damages but denied the motion for attorney’s fees and costs under Haw. Rev. Stat. § 431:10-242.
The supreme court affirmed the denial of attorney’s fees. The court noted before Haw. Rev. Stat. § 431:10-242 applied, there must be a court action, or “suit,” in which an insurer “has contested its liability under a policy and is ordered to pay benefits under the policy.” Distinguishing arbitration from a “suit,” the court explained the statute allows attorney’s fees and costs “only when such fees and costs arise in a judicial proceeding in which an insurer has contested liability.” The court noted that because the proceeding merely sought confirmation of the underlying arbitration award, the scope of the judicial proceeding is limited to confirming the arbitration award, and “is not one in which the question is whether the insured [sic] must pay benefits under the terms of the insurance policy.” Therefore, Haw. Rev. Stat. § 431:10-242 did not apply.
Significantly, no litigation was ever filed between the parties; each submitted to arbitration. Moreover, coverage issues were not at issue in the arbitration. Finally, Liberty Mutual did not contest its liability under the policy. Therefore, an award under Haw. Rev. Stat. § 431:10-242 was inappropriate because, as stated by the Court, for the statute to apply, there must be a “suit,” and “the suit must be one in which an insurer ‘has contested its liability under a policy and is ordered to pay benefits under the policy.’”
4. Mikelson v. United Services Automobile Association
Even when a court orders the insured is entitled to UIM coverage, he may not recover attorney’s fees while the issue of whether the UIM insurer must “pay benefits” is still to be decided through arbitration, according the Hawaii Supreme Court. Mat Mikelson was involved in a motorcycle accident. The tortfeasor was insured by a bodily injury policy with $20,000.00 of policy limits, which were tendered and paid to Mikelson. Denied coverage by his UIM carrier, he sued his insurer, United Services Automobile Association (“USAA”), claiming he was entitled to UIM coverage. In a bench trial, the circuit court determined there was coverage under the policy. The damages, and indeed the liability, for the underlying accident remained to be determined; theoretically Mikelson could be at fault, or the total damages could be less than $20,000.00. In such a case, although the policy covered Mikelson, he would not have been underinsured, and USAA would not be ordered to “pay benefits” under the policy. The circuit court therefore ordered Mikelson was “entitled to UIM coverage under the Policy for injuries and damages resulting from the . . . accident, including but not limited to whatever UIM payments are determined to be due at arbitration pursuant to the Policy.”
USAA appealed the circuit court’s decision but the supreme court affirmed. The insured then filed a motion in the supreme court seeking attorney’s fees pursuant to Haw. Rev. Stat. § 431:10-242.
The court again adopted a literal reading of Haw. Rev. Stat. § 431:10-242. It noted that as a result of the coverage trial, USAA had not been ordered to “pay benefits,” but the circuit court had merely ordered that the insured was “entitled to UIM coverage.”
Accordingly, USAA had argued, “the court has not ordered payment of such benefits as such amount is yet to be determined through arbitration.” The supreme court agreed that the insured’s motion for fees should be denied based upon the lower court’s “intent to refrain from ordering that benefits be paid to Mikelson, as such payment issue will be decided via arbitration.”
The court left open the issue of a later request for fees under Haw. Rev. Stat. § 431:10-242 if and when the insured succeeded in arbitration regarding the payment issue.
C. Seeking A Court Order to “Pay Benefits” after Successful Arbitration
Mikelson was eventually successful in arbitration and secured benefits under the policy. Could the insured now move for an award of attorney’s fees under Haw. Rev. Stat. § 431:10-242?
Mikelson not only moved to confirm the arbitration award but also specifically moved for an order that USAA “pay benefits” under the policy. USAA opposed the motion, arguing, in part, that Labrador controlled.
The insured distinguished Labrador, however, characterizing Mikelson’s Motion for Order to “Pay Benefits,” not as an isolated court proceeding merely for confirmation of the underlying arbitration award. Instead, the motion was the final stage of continuous litigation between the parties that had included both a trial and arbitration. The Circuit Court action was ongoing and indeed it was in that “suit” that Mikelson brought his motion for an order to pay benefits. Thus the order was issued in the context of a “suit.” The insured argued that granting the motion would serve the legislature’s intent that attorney’s fees be awarded if the “insurer [contested] its liability under the policy but is ordered by the courts to pay benefits under the policy.”
The circuit court granted the order. The matter remains in litigation as of the date of this writing.
D. Conclusion
The Hawaii Supreme Court has adopted a literal interpretation of Haw. Rev. Stat. § 431:10-242, that if taken too far might defeat the statute’s legislative aims of protecting insureds who must turn to legal remedies to obtain what is owed under their insurance contract. As a result, insureds forced to arbitrate under insurance contracts after coverage has been denied must be careful to file a declaratory judgment action and after arbitration obtain an order in the declaratory judgment action that the insurer must pay benefits under the policy. These steps may allow the insured to successfully move for an award of attorney fees under Haw. Rev. Stat. § 431:10-242.
