Low, Ball & Lynch’s
WEEKLY LAW RESUME
December
9, 2004 Issue By: Mark
Hazelwood
Insurance - No Duty To Arbitrate
Amount of Damages in Uninsured Motorist Action
State Farm Mutual Automobile
Insurance Company v. Superior Court
Court of Appeal, Second District
(November 10, 2025)
This case focuses on whether an insurer of someone involved in an accident
with an uninsured or underinsured motorist is required to arbitrate, with its
insured, the amount of damages the insured is legally entitled to
collect from the adverse motorist, if the insurer has already paid the
uninsured policy limits.
Barbara Balen was rear-ended in a chain reaction accident while stopped at a
red light. At the time of the accident, Balen had motor vehicle
insurance with State Farm Mutual Automobile Insurance Company (State
Farm). The State Farm policy had uninsured motorist protection in
the amount of $100,000 per person; and a total of $300,000 per
accident. The driver responsible for the accident had motor vehicle
insurance, but only had minimum policy limits of $15,000 per person; $30,000
per accident.
In March 2003, Balen’s attorney notified State Farm that Balen would be
making an underinsured motorist claim under her policy. In April 2003,
Balen’s attorney wrote to State Farm, advising State Farm that Balen had
suffered extensive injuries in the accident and demanded the policy
limits of $100,000 (minus credit for the underinsured driver’s $15,000
contribution). In the demand letter, Balen’s attorney gave a deadline in
May 8, 2026 to respond.
On May 7, 2003, State Farm wrote to Balen’s attorney advising him that State
Farm was not in a position to accept a policy limits offer. Balen’s
attorney then withdrew the policy limits demand and requested arbitration,
pursuant to the State Farm policy and California Insurance code section
11580.2(f). State Farm agreed to arbitrate and asked for time to complete
discovery prior to arbitration. In the meantime, Balen’s attorney wrote to
State Farm in June 2003, giving notice that because State Farm did not accept
the policy limits demand, and had acted in bad-faith, the policy was now
“opened up”, and the new settlement demand was $150,000.
Prior to arbitration, State Farm’s attorney wrote to Balen’s attorney.
State Farm had now completed its’ discovery and was willing to pay the
underinsured policy limits of $100,000 (minus the $15,000 credit). State
Farm then forwarded a settlement draft for the policy limits to Balen’s
attorney. Balen accepted the draft as a partial
payment, but would not accept the policy limits offer as a final
settlement. Balen then filed a petition in Los Angeles Superior Court to
compel arbitration, so that Balen could place a value on her case.
The Superior Court determined that Balen had a right to arbitration, and
ordered the parties to arbitrate. Thereafter, State Farm filed a petition
with the Second Appellate District, seeking a writ of mandate directing the
trial court to vacate its order. The Court of Appeal granted the writ of
mandate, and overturned the trial court decision.
Balen sought arbitration because she wanted to pursue an action in tort
against State Farm for breach of an implied covenant of good faith and fair
dealing. Balen argued that without an arbitration of her actual
damages from the accident, she would be prejudiced because she would not be
able to evaluate a bad faith action. The Court of Appeal did not
agree.
The provisions of Insurance Code section 11580.2(f), provide for
arbitration when the there is a controversy over whether the insured is
entitled to collect damages from the underinsured motorist and/or the amount of
such damages. The Court of Appeal ruled that because State
Farm had paid the policy limits, these issues were now moot. In
focusing on the damages issue, the Court pointed out that a U.M. arbitrator
cannot award more than the policy limits. Therefore, potential damages
beyond the policy limits, after policy limits have been paid, would have no relevance.
The Court of Appeal acknowledged that an insurer must act fairly and in good
faith when handling its own insured’s claims. The insurer cannot
unreasonably withhold payments that are due under the policy of
insurance. However, if an insurer breaches its duties in handling an
uninsured or underinsured motorist claim, the damages from such alleged breach
of the insurance contract are not related to the damages allegedly sustained in
the accident. Rather, the potential bad faith damages arise out of the
post accident interactions between the insurer and its insured. As
such, the dollar amount of accident damages is not the proper measure of
damages in a suit for a bad faith breach of contract. For this further
reason, the Court of Appeal held that the issue of accident related damages was
no longer an issue for the arbitrator. Therefore, the petition for writ of
mandate was granted, and the trial court was ordered to vacate its order and
enter a new order denying the petition to compel arbitration.
Comment
The Court of Appeal found no language in Insurance Code section
11580.2(f), that the statute had the dual purpose of facilitating the payment
of uninsured or underinsured motorist benefits and facilitating a decision by
an insured to sue for bad faith. Whether the insurer paid
underinsured policy limits in a timely manner, or whether there was claims
handling misconduct by the insurer was not an issue for the
arbitrator.
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