BINDING THE UIM CARRIER TO THIRD PARTY HIGH\LOW
ARBITRATIONS
By Michael A. Bryant
In what seems to go in cycles, there are times when various automobile liability carriers
will offer High\Low Arbitrations to dispose of third party claims against their insureds
for motor vehicle collision cases . These can be welcome solutions for both sides as they
require less time, cost, expert witness involvement, and few if any days in court, thereby
avoiding the hassle of obtaining a trial date and achieving certainty in the setting of a
hearing date. Such arbitrations provide for at least a minimum recovery and avoid big
surprises on the other end, thereby assisting the liability insurer’s goal of protecting its
insured against exposure to an award in excess of the liability coverage. The simple
certainty of the Award makes high\lows quite attractive to both the claimant and the
liability insurer.
For years, attempts have been made to craft High\Low Agreements in a manner that
achieves the further advantage of binding the UIM carrier should the arbitration award
exceed the limits of the liability insurer’s coverage. The basic drafting approach to this
goal has been to provide that after the Award, the claimant has the right to place the UIM
carrier on notice, depending on the result. This approach, however, often was met with
reluctance by the liability insurer, which feared the personal exposure of its insured to the
UIM carrier’s exercise of a right of subrogation. The result was usually a compromise in
which the two parties to the arbitration would be required to remain silent about the
results of the arbitration award except for the claimant’s right to tell the UIM carrier that
a "tentative offer" had been made by the liability carrier for the amount of the award, with
the hope that the UIM carrier would decline to pursue a right of subrogation against the
tortfeasor. If the UIM carrier then chose to substitute its draft, the standard agreement
then required the claimant to waive the UIM claim as a means of protecting the tortfeasor
from personal exposure.
Since courts have been hesitant to embrace "secret" or "collusive" settlement agreements,
any clause that relied upon an event that was agreed to remain undisclosed seemed
potentially dangerous. Particularly with the aggressiveness shown by many UIM carriers,
such clauses were a problem waiting for the right set of facts and parties to seek
advantage at the claimant’s expense. Finally, the approach flies in the face of genuine
rights to UIM coverage that the claimant paid for. A better solution simply awaited the
development of further court rulings and creativity.
In many cases when high\low agreements are offered by a liability carrier, the high is
dictated by the amount of policy the defendant tortfeasor possesses. The insurer is in fact
guaranteeing their insured of never having to face an excess verdict. The question then
comes how to deal with these offers in relationship to the underinsured motorist carrier
and their potential exposure and interest in the matter.
The courts have provided us with a relatively straightforward line of case law to direct
the solution of that issue. In Schmidt v. Clothier, 338 N.W.2d 256 (Minn. 1983), the
Minnesota Supreme Court established the rules for placing an underinsured motorist’s
carrier on notice of the claim being made. The UIM carrier is given the option of
allowing the tentative settlement agreement reached between the claimant and the
liability insurer to go forward with the inevitable signing of a full release of the tortfeasor
or of substituting its draft to the claimant for the one offered by the liability insurer as the
price of protecting any rights the underinsured carrier may have to pursue the tortfeasor.
This is an efficient approach as the UIM carrier must determine within the 30 days of
receiving notice of this choice what it wants to do.
It is submitted that when a claimant is offered a high\low arbitration by a tortfeasor’s
liability insurer, that this technique is merely a unique form of "tentative settlement,"
which uses the arbitration to set the amount of the proposed offer. As such, the same
outcome should apply to the UIM carrier. It must either let the arbitrating parties proceed
with the arbitration and be bound by its outcome on the determination of damages or - -
since the liability insurer was willing to pay up to the "high" - - must substitute its draft
for the "high" in order to protect its own interests against the tortfeasor.
When a liability case has not settled or gone to arbitration, but rather is headed to trial,
the case of Malmin v. Minnesota Mutual Fire & Casualty Comp., 552 N.W.2d 723
(Minn. 1996), allows a claimant to give the UIM carrier notice that a fact finder will be
determining the value of the claim and requiring the UIM carrier at that point to elect
between the option of sitting back and accepting the results reached by the fact finder or
of intervening and participating in the underlying liability action. The case of Butzer v.
Allstate Ins. Co., 567 N.W.2d 534 (Minn. App. 1997), also provides for arbitrations to be
a final solution that binds the UIM carrier to the results of an arbitration specifically in
the same manner as they are bound to a trial.
In walking down this three case path, it is submitted that the UIM carrier may be given
the option of protecting its right to a monetary recovery by submitting a draft, insuring its
interests in a hearing by participating in the arbitration or sitting back and accepting the
overall results. The best way to achieve this solution at the time of being offered a
High\Low Arbitration by the tortfeasor’s insurer is to send the claimant’s UIM carrier a
modified Schmidt v. Clothier letter, like the following:
You are hereby placed on notice pursuant to Schmidt v. Clothier, 388 N.W.2d 256 (Minn.
1983), and American Family v. Baumann, 259 N.W.2d 923 (Minn. 1990), of our
intention to enter into a High\Low Arbitration and arbitrate the case against the
defendant. If you wish to preserve any possible right of subrogation which may arise
against the tortfeasors in this instance, you have thirty (30) days from the date of this
letter to either (1) substitute your draft of the tortfeasor’s liability insurer in the amount of
(high), or (2) pay underinsured motorist benefits to your insured in an amount to be
agreed upon and place the tortfeasor on notice. If neither of these options are exercised by
you within thirty (30) days, the arbitration agreement will be signed for the High\Low
Arbitration.
May this letter also serve as notice of the potential arbitration under Butzer v. Allstate
Ins. Co., 567 N.W.2d 534 (Minn. App. 1997). It will be our intent to bind you, the
underinsured motorist carrier, to any decision by the arbitrator should we exceed the
Defendant’s limits. Pursuant to Malmin v. Minnesota Mutual Fire & Casualty, 552
N.W.2d 723 (Minn. 1996), you have the right to intervene in the arbitration and may this
letter serve as a Malmin notice as to your rights.
We would appreciate hearing from you quickly and if you are able, prior to thirty (30)
days, as to whether or not you wish to substitute your draft in order to preserve any
subrogation rights you may have in the event an underinsured motorist claim is made in
the future, or give us your consent to sign the High\Low Arbitration Agreement and
proceed to arbitration.
There will be different ways that UIM carriers will respond to this letter. Sometimes, they
will just sit back, do nothing or tell you to let them know after the results are achieved.
Sometimes, they will ask to be kept informed of the date of the arbitration, who the
arbitrator is, and other basic information in order to maintain an ongoing file. Sometimes,
they will hire or involve house counsel who will participate in varying degrees. The key
will be the clear way that you lay out what you are doing and what you expect from the
UIM carrier in return. I would suggest the following:
1. Once you have advised your client, you can agree with the UIM carrier that your client
will be bound by the results of the arbitration. Thus, if the Award comes in less than the
third party policy, you will not be making any additio nal UIM claims.
2. Be clear with the UIM carrier that they do have the right to come into the arbitration
and participate if they so choose.
3. Maintain the position that if they believe they have some contractual right to
preventing the arbitration from taking place, they take that action immediately in the time
period that they are allowed under the Schmidt v. Clothier notice. I would submit that any
alternative remedy possessed must include them providing the substituted draft for the
tortfeasor’s limits.
4. Keep an eye out if they claim they will do something and they don’t do it during their
notice period. It should be argued that they forever waived their alternative right. In such
a circumstance, I would be diligent about providing them information as to the arbitration
date, arbitrator, and other select issues as the case moves forward to again point out to the
Court how they just sat on their hands, hoping that the Award would be less than the
tortfeasor’s policy limits and then want to jump in after the fact in order to prevent the
properly obtained judgment.
5. In executing any High\Low Agreement, provide that all the proper notices were given
the UIM carrier in order to preserve those rights that the UIM carrier has chosen not to
substitute. Consequently, the agreement can be entered into with the tortfeasor\defendant.
Sample agreement language I have used is:
The Claimant represents that they have provided the proper underinsured motorist
Schmidt v. Clothier letters to all potential underinsured motorist carriers. Those carriers
have not intervened nor substituted their drafts. Claimant agrees that the Respondent only
is subject to paying the (high) maximum under this agreement. That any claims above
that amount will be collected only against the underinsured motorist coverage available to
the Claimant. That such claims above the liability insurance limits will be made only
against applicable underinsured motorist carriers who have been given notice of this
arbitration and have chosen not to intervene or substitute, thus extinguishing any rights
that they have against the Respondent. Claimant agrees that any award in an amount less
then the maximum stipulated amount should be accepted as conclusive proof of the value
of his damages and he shall, therefore, waive any further claims for UIM benefits.
If all the steps are followed, it is submitted that any collateral attack on the Award by the
UIM carrier will fly in the face of the strong public policy that favors settlements and the
equitable, final disposition of claims. If it chooses not to pay the excess amount of a
properly determined arbitration award of which it had appropriate notice, the UIM carrier
may be seen as attempting to improperly interfere with a contractual agreement between
the claimant and the third party tortfeasor. In the long run, if done properly, it will be a
cost-effective, quick manner in which to resolve your client’s claim while protecting their
UIM rights.
