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 additional 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.

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