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The Policy
ISBA Insurance Law Section Council
Scott A. Blumenshine
Copyright 2023

Illinois Supreme Court passes on a ripe opportunity to protect insurance consumers. Phoenix Insurance Company v. Martha Rosen, Docket No. 110679 (Il. Sp. Ct. 2011). The Court held that the trial de novo provision in underinsured motorist auto insurance coverage is valid and enforceable because it is not against public policy and it is not unconscionable.

I. Facts

This case is another chapter in the book of insurance consumers who experience delay, denial and defense at the claims stage. It is a story that demonstrates the frustration of non-binding arbitration. Martha Rosen paid Phoenix Insurance Company for $500,000.00 in underinsured motorist coverage. In 2001, a driver seriously injured Ms. Rosen. The driver had only $25,000.00 in liability coverage.  Phoenix disputed Ms. Rosen’s claim, so the case was tried at an arbitration hearing. The arbitrators issued Ms. Rosen a $382,500.00 award. Phoenix Insurance Company then rejected the award pursuant to the trial de novo provision contained in the Rosen auto policy.

II. Procedural History

             The trial court dismissed Ms. Rosen’s challenge to the validity of the trial de novo provision. The appellate court reversed the trial court and ruled that the trial de novo provision was unenforceable. The appellate court found that the provision “unequivocally favors the insurer over the insured because the insurance company is unlikely to appeal a low binding arbitration award while very likely to appeal a high award.”  The appellate court also found that the provision violates “the public policy considerations in support of arbitration” by increasing the time and costs required to settle the dispute.  Phoenix appealed to the supreme court.

 III. The Opinion

In analyzing whether an agreement violates public policy, the court cited precedent that it must "determine whether the agreement is so capable of producing harm that its enforcement would be contrary to the public interest." It noted that the court has a long tradition of “upholding the right of parties to freely contract.” The court stated: “[I]t should be remembered that it is to the interests of the public that persons should not be unnecessarily restricted in their freedom to make their own contracts." The opinion noted that an agreement will not be invalidated unless it is clearly contrary to what the constitution, the statutes, or the decisions of the courts have declared to be the public policy of Illinois, or unless it is "manifestly injurious to the public welfare." Those seeking to have an agreement invalidated carry a "heavy burden" of demonstrating a violation of public policy.

The court predictably cited its own opinion upholding the trial de novo provision found within uninsured motorist coverage: “In relation to the judicial branch, the General Assembly, which speaks through the passage of legislation, occupies a ‘superior position’ in determining public policy.”  Reed v. Farmers Insurance Group, 188 Ill. 2d 168, 720 N.E.2d 1052 (1999). The court stated it had "strictly adhered to the position that the public policy of the state is not to be determined by the varying opinions of laymen, lawyers or judges as to the demands of the interests of the public." Thus,"[W]hen the legislature has declared, by law, the public policy of the State, the judicial department must remain silent, and if a modification or change in such policy is desired the law-making department must be applied to, and not the judiciary, whose function is to declare the law but not to make it." Reed, 188 Ill. 2d at 175.

The opinion identified the public policy of the state by referring to various legislation and the policy promoted by the legislation: the Illinois Financial Responsibility Act – liability insurance is required to protect the public by ensuring compensation for those injured in auto collisions; the Illinois Insurance Code – uninsured and underinsured motorist coverage insurance is required to protect the public by ensuring compensation for  those injured in car crashes with uninsured and underinsured motorists; and the Illinois Arbitration Act – efficient and economic resolution of disputes is desirable.

The court ruled that the Reed decision controlled, that the trial de novo provision in the underinsured motorist coverage was essentially legislatively mandated and thus valid. Although the Insurance Code does not mandate trial de novo in the underinsured motorist statute, it does mandate trial de novo in the uninsured motorist statute. The court noted precedent that the uninsured and underinsured motorist statutes are inextricably linked and, thus, language in the uninsured motorist statute is to be implied in the underinsured motorist statute. In sum, the Rosen court decided that the trial de novo provision in the Phoenix policy was valid, enforceable and not violative of Illinois public policy.

IV. Criticism of opinion

a. Myth of “Freedom of Contract” in consumer insurance transactions

The opinion relies in part on a “freedom of contract” analysis. The court lays out the freedom of contract concept as a foundation of its decision. The freedom of contract concept, however, is invalid in the insurance policy setting. “No freedom of contract exists” in uninsured motorist coverage. Menke v. Country Mut. Ins. Co., 78 Ill.2d 420, 401 N.E.2d 539 (1980) (dissent) (emphasis added).  “Insureds have no choice in negotiating this aspect of the policy.” Reed v. Farmers Ins. Group, 188 Ill.2d 168, 720 N.E.2d 1052 (1999) (dissent). The freedom of contract law interpretation “is not appropriate in insurance disputes.” Freedom of Contract in Insurance, Susan Randall, Volume 14, Connecticut Insurance Law Journal 107 (2007-2008).

The opinion cites the “freedom of contract” principle.  The phrase “freedom of contract” conjures images. Perhaps one sees a vendor and a customer at a flea market haggling over a sale price for a trinket, or, a seller and purchaser of a house going back and forth on terms, or, maybe bankers and lawyers hammering out a corporate merger.  But does an insurance policy purchase look or feel like a freely negotiated agreement between equals? When was the last time anyone negotiated policy language in an auto insurance coverage? The insured certainly is empowered to decide whether to purchase the policy and in what coverage limits. It is difficult, however, to envision an insured using freedom of contract to negotiate policy language.  The Court’s reliance on the concept is unjustified.

b. Prior Illinois judicial statements that “freedom of contract does not exist” with trial de novo provision

Former Illinois Supreme Court Justice Clark articulated the rationale for liberal construction of uninsured motorist coverage:

Insurance companies have a tremendous fund of knowledge, rightfully gained, regarding insurance practices, the nature of claims, the types of disputes and the number of private ordering arrangements that can be made. The insurance consumer cannot match this information. Nor can the insurance consumer match the bargaining power of the insurance companies. The power of insurance companies was enhanced by the legislature's command to provide uninsured motorist coverage of a specified amount in each policy written. No freedom of contract exists in this situation, since one cannot be a self-insurer with respect to injuries caused by uninsured motorists. Thus, the insured must purchase the coverage on terms drafted by the insurance company. Menke v. Country Mut. Ins. Co., 78 Ill.2d 420, 401 N.E.2d 539 (1980) (dissent) (emphasis added).

Former Illinois Supreme Court Justice Bilandic, joined by Justices Heiple and Harrison, similarly explained why freedom of contract is an inappropriate method of analyzing the trial de novo provision:

Insureds have no choice in negotiating this aspect of the policy. Section 143a thereby operates in an arbitrary and discriminatory manner in favor of insurance companies to the detriment of insured individuals. The statute therefore violates due process. Reed v. Farmers Ins. Group, 188 Ill.2d 168, 720 N.E.2d 1052 (1999). Justice Bilandic dissenting and joined by Justices Heiple and Harrison) (emphasis added).

c. Insurers Sell Consumers Peace of Mind

Insurance companies market images such as solid protection and peace of mind. Think of the language they use to sell: A good neighbor, good hands, a piece of the rock. If you are convinced of the company’s reliability, you buy. The agent takes your application, the underwriting department sets your premium, and the accounts receivable department accepts your premium payments and invests your payments for its own understandable profit purposes. Insurers receive your money. What did you receive? A promise – a promise to compensate you if and when you have a loss.  This is the peace of mind most people desire. The testing ground for the insurer is when the insured has a loss and files a claim with the insurer. The game is on when the insured suffers a loss and needs the insurance company to fulfill its promise.

d. Non-binding Arbitration Wastes Time and Money

The arbitration policy of promoting affordable speedy resolution of disputes is eliminated by insurer use of the trial de novo provision. The arbitration policy of efficient economical resolution of disputes is obliterated by insurer use of the trial de novo provision, because after an arbitration hearing, an insurer can go to trial de novo, then appeal and appeal again. The underinsured motorist claimant can be forced to wait longer and spend more money to get a result than a tort claimant. This open ended process undermines the underinsured motorist policy of placing the insured in the same position as the tort claimant. Non-binding arbitration is an anathema to arbitration purposes of efficient and economical resolution of disputes.

e. Analogy to other contracts of adhesion invalid 

The court does not even concede that insurance policies are contracts of adhesion. It mentions that contracts of adhesion exist in other consumer agreements and are not necessarily invalid. Insurance, however, is different than other consumer items. In all the examples cited, the consumer is immediately obtaining products or services.  Examples cited are rental cars, land, cell phones, furnishings and appliances. In all the examples cited by the court, the consumer presently receives the benefit of the bargain – the car, the land, the cell phone, the furniture, the stove. The insurance consumer, however, simply receives a promise. Insurance is not a product, and it is not truly a service. If it is a service, it is a service provided only upon some future potential event. In case of underinsured motorist coverage, the potential future event is an injury at the hands of underinsured motorist. The court’s analogy to other contracts of adhesion is not supportive of its decision.

The only negotiation in a policy purchase is the type of coverage and the coverage limits. Negotiation of policy language does not occur. The insurer gives you a price quote and you say yes or no. When you say yes, the insurer gives you a policy containing terms that they draft. The policy terms may be unconscionable, against public policy, or otherwise unjust, but you have to accept them. Insurance policy terms are take or leave it – they are terms of adhesion. You could go from one insurance company to another, but the underinsured motorist coverage policy terms will be the same. The policy is a form. The forms are approved by the State. When people buy insurance they say they are “covered.” The problem is that consumers did not negotiate terms such as a trial de novo after arbitration.

f. Claim finality needed

The law can reasonably impose some degree of finality to the insurer’s obligation and the insured’s claim for benefits. It is unreasonable for an insured to pay for insurance, sustain injuries and then have to arbitrate and then litigate its claim with its insurer ad infinitum. The trial de novo dramatically tilts the field in favor of the insurer and against the injured insured because it exponentially expands the time and cost for claim resolution. It also provides the insurer negotiation power as it knows that it can wait while the injured insured needs compensation.

Indeed, the Supreme Court’s willingness to accept non-binding arbitration in Rosen is inconsistent with some of its prior opinions:

"Arbitrators are judges chosen by the parties to decide the matters submitted to them, finally and without appeal. As a mode of settling disputes it should receive every encouragement from courts of equity. If the award is within the submission, and contains the honest decision of the arbitrators, after a full and fair hearing of the parties, a court of equity will not set it aside for error either in law or fact. A contrary course would be a substitution of the judgment of the Chancellor in place of the judges chosen by the parties, and would make an award the commencement, not the end, of litigation." Garver v. Ferguson, 76 Ill.2d 1, 389 N.E.2d 1181 (1979)  citing Burchell v. Marsh, 58 U.S (17 How.) 349 (1854).

With a trial de novo, an arbitration award is just what the court warned against – an arbitration award as the commencement not the end of litigation.

g. Supreme Court is the government branch qualified to declare public policy on rules relating to insurance disputes

The Supreme Court is comprised of lawyers who are now justices. The membership is educated, trained and experienced in litigation and dispute resolution. The legislature is not so populated and cannot be said to occupy a superior position to the judiciary in evaluating insurance policy terms that go to the heart of insurance claim procedures. The justices, and not state senators and representatives, know precisely what a trial de novo provision means for both insurers and insureds. The supreme court’s failure to step up in way to invalidate trial de novo seems unnecessarily passive.

With the Rosen decision, insurers are further emboldened to insert oppressive, unequal, and unjust policy language that has a harsh result. The court has abdicated its authority to invalidate insurance policy language on the basis that the legislature has approved such language. Wherefore the brilliant system of checks and balances inserted in the constitution?  Lobbyists besiege the legislature. The idea that the Illinois State Legislature conducted a thoughtful and balanced debate on the trial de novo provision is not persuasive. The Supreme Court is often the last or only source of justice for the powerless, the weak and the disenfranchised. Insureds need the court to protect them against oppressive legislation and insurance policy terms.

In this world, when a person is seriously injured or killed, immediate financial and medical needs arise. Seriously injured people and their families have medical and pharmaceutical costs. If the seriously injured is unable to work, they probably need income to pay living expenses. Landlords, utility companies, hospitals, pharmacies, and bill collectors do not happily wait to get paid. People buy insurance to comply with the law. People also buy auto insurance to obtain that piece of mind that insurers peddle with the images of a good neighbor, good hands and a rock. Why does the insurance purchaser get thrown into an unacceptably time consuming and costly litigation process? The answer is most likely insurance industry lobbyists who persuaded legislators to insert the provision in the Insurance Code. As the court notes, although other states have deemed trial de novo as oppressive, only Illinois has legislation on the provision. The fact that two major insurers have corporate headquarters in Illinois does not seem coincidental with Illinois being the only state with insurance legislation that many high courts have invalidated.


The Supreme Court had an opportunity to assert its authority as the government branch capable of evaluating the trial de novo provision. It had an opportunity to weigh in on behalf of the vast auto insurance consuming population with no lobbyists in Springfield. The court has a vastly superior knowledge of litigation and civil disputes. Its membership is comprised of lawyers with a long history as practicing lawyers and jurists. Its membership certainly has a far more complete knowledge of the adverse effects on insureds in having to battle their insurers, first in arbitration, and then in the trial courts and appellate courts. Consider Ms. Rosen. Ten years after her injury, she has not been compensated. She did not freely contract for that possibility. She contracted for some peace of mind and finality to her compensation claim. If the high court had avoided a freedom of contract analysis, and exerted its prerogative to find unconscionability, the trial de novo provision would be invalidated. The result would be that Ms. Rosen and others would be able to obtain some measure of finality to their underinsured motorist claims.

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