Monday, June 12, 2017

The Alcauter case, continued: A detour for Direct Auto (why arbitrators' awards usually exceed trial results in arbitration cases)

This post is the second in a series of three. For part one, scroll down or click here.

We will, I promise, get to a discussion of why sanctions were imposed by the trial court and affirmed by the Appellate Court in American Access Casualty Co. v. Alcauter, 2017 IL App (1st) 160775. But I wanted to discuss insured non-cooperation cases generally first.

And, yesterday, we left off with the case of Direct Auto Ins. Co. v. Reed, 2017 IL App (1st) 162263. In Direct Auto, addressing a situation similar to Alcauter where the insured failed to show up for the arbitration and an order was subsequently entered barring the insured from rejecting the award, the Appellate Court expressly held, 2017 IL App (1st) 162263, ¶37, “substantial prejudice to an insurer does not automatically flow from the issuance of a debarring order preventing the insured from rejecting an unfavorable arbitration award.”

I left off with the suggestion that the Direct Auto court may have inadvertently confused matters when it added, 2017 IL App (1st) 162263, ¶38, “In so holding, we do not foreclose the possibility that an insurer might, under the circumstances of a particular case, be able to demonstrate actual, substantial prejudice from the issuance of a debarring order itself. But such a showing must be based on evidence that the insured would have obtained a better result at the trial than the insured obtained at arbitration.” In this installment, I submit that this showing may not be as difficult to make as this language might suggest.

In the Arbitration Reporter, the Law Bulletin Company “summarizes Cook County civil cases tried after the mandatory arbitration award was rejected.” In particular, this publication highlights, in each case, how the jury verdict differed from the arbitration award.

I am not a subscriber to that publication. But I do know that, at least at one time, defendants (meaning defendants’ insurers) typically did obtain better results at trial than at mandatory arbitration. The data, as compiled by the Arbitration Reporter, was brought up—pointedly—at a training seminar for Cook County arbitrators some years ago (I’ve been an arbitrator since the program started here). The presenters complained that the attorney-arbitrators were more generous to their colleagues in the plaintiffs’ bar than jurors drawn randomly from the voting rolls.

A lot of arbitrators, myself included, could agree that there was some anecdotal support for this contention: Arbitrators come from all areas of legal practice; some have never set foot in a courtroom. Attorneys with little or no courtroom experience were sometimes inclined to believe in the old ‘three-times-specials’ rule. Younger practitioners may have heard of this creature but liken it to a unicorn or dragon – mythical beasts that are wonderful to think about but which really never existed. Alas (or thankfully, depending on your background), the three-times-specials rule was more like the passenger pigeon or the dodo: It did exist once, but was hunted into extinction.

But the unwarranted generosity of some—a few—arbitrators was not the only, or even the major cause of the discrepancy. Rather, the difference in results is directly attributable to the differences in how medical damages evidence comes into the respective proceedings.

Illinois Supreme Court Rule 90(c) allows for the streamlined admission of medical records and bills at arbitration hearings; they merely have to be included in the 90(c) ‘package’ served on all counsel of record more than 30 days prior to the hearing. No doctor or other medical professional has to come in and explain or defend the records; the party offering the bills has only to specify whether they are, or are not, paid (paid bills carrying with them a legal presumption of reasonableness). Granted, the 2002 comments to Rule 90(c) do state, in pertinent part, “Regardless of the presumptive admissibility of the documents, the arbitrators will be required to apply the tests under established rules of evidence otherwise relating to admissibility and credibility and to determine, fairly, the weight to be given such evidence.” But, as a practical matter, in the typical arbitration case, there is not a lot of competing evidence or testimony to measure the bills and records against. In the ordinary arbitration case, the bills come in automatically and serve as the starting point for any award.

By contrast, at trial, a plaintiff has no such shortcuts available. As the Appellate Court explained recently in Klesowitch v. Smith, 2016 IL App (1st) 150414, ¶45, citing to both Arthur v. Catour, 216 Ill.2d 72 (2005), and Wills v. Foster, 229 Ill.2d 393 (2008), for support), in Illinois, “When evidence is admitted, through testimony or otherwise, that a medical bill was for treatment rendered and that the bill has been paid, the bill is prima facie reasonable. If the bill has not been paid, a plaintiff can establish reasonableness by introducing the testimony of a person having knowledge of the services rendered and the usual and customary charges for such services. Once the witness is shown to possess the requisite knowledge, the reasonableness requirement necessary for admission is satisfied if the witness testifies that the bills are fair and reasonable. The court in Wills did not overrule or abrogate Arthur, and under Arthur, when medical bills are discounted, a plaintiff cannot make a prima facie case of reasonableness based on the bill alone, because she cannot truthfully testify that the total billed amount has been paid. Instead, she must establish the reasonable cost by other means—just as she would have to do if the services had not yet been rendered, e.g., in the case of required future surgery, or if the bill remained unpaid” (internal citations and quotation marks omitted).

At trial, therefore, a doctor or other medical professional will have to testify in order for the medical bills to be admitted. If the medical professional can not also demonstrate that he or she “possessed knowledge of the usual and customary charges for” the services provided, any unpaid portion of the bills might not get in at all (2016 IL App (1st) 150414, ¶47). The necessity and efficacy of the treatment provided, the witness’s qualifications and training, his or her biases or prejudices, interests, the thoroughness of his or her examination, whether his or her findings were based solely on the plaintiff’s complaints or whether there was objective support for these findings – all of these will be fair game for cross examination of the medical professional.

Small wonder, then, that where testimony is required for the admission of medical bills instead of allowing them in automatically, plaintiffs’ awards might go down from the amounts awarded in arbitration.

In any event, to respond to the Direct Auto opinion, an insurer might be ‘actually and substantially prejudiced’ when its insured, after being duly noticed, fails to cooperate by appearing for arbitration because, in that case, the insurer will not be allowed to reject an arbitration award. Even where the insured has nothing particularly substantive (or helpful for the defense) to offer on liability (as in the case of a rear-end accident, for example), the inability to reject the award deprives the insurer of the opportunity to challenge, and perhaps reduce, plaintiff’s damages claim at trial. The difference between Rule 90(c) and the ordinary rules of evidence alone supports this argument. If the statistical pattern identified by the Arbitration Reporter some years ago still holds, this argument would be all the more compelling.

I would suggest that an insurer making this argument would be in a stronger position if it admitted liability, or at least admitted negligence, prior to the arbitration in the underlying case. An insurer later asserting the non-cooperation of its insured could point to that admission as evidence that its strategy was always to limit damages to an appropriate amount. The insured’s failure to appear for arbitration frustrates the implementation of this strategy if the insurer is prevented, on account of the insured’s failure to appear, from rejecting the arbitration award and proceeding to trial. Of course, in a case where liability is, or should be, admitted, defense counsel should seek to excuse the insured’s appearance at arbitration in advance, thereby preserving the insurer’s right to reject and avoiding any coverage inquiry.

In Alcauter, the issue of prejudice to the insurer was never reached; the case turned on whether the insured’s absence at the arbitration was really the result of his refusal to cooperate. A failure to cooperate should be established, in light of the insured’s contractual duties, by showing proof of notice to the insured, coupled with the fact of the insured’s nonattendance.

But, in Alcauter the insurer’s ‘proof’ of notice was entirely procedural. The same attorney whose affidavit had described the normal office procedures testified at trial. And, at trial, this attorney admitted that he had no personal recollection of this particular case (2017 IL App (1st) 160775, ¶14).

Meanwhile, the underlying plaintiff/judgment creditor put on proof that the insured could not have attended the arbitration even if he wanted to: Jose Alcauter was, at the time of the arbitration, in stir. In durance vile. Incarcerated.

This evidence called into question not only whether the insured was guilty of non-cooperation, it also raised doubts about whether the alleged office procedures had been followed. And, then, when the attorney for the underlying plaintiff/judgment creditor advised the court that proof of the insured’s incarceration had been bundled up and sent to the insurer’s coverage counsel before trial and coverage counsel proceeded to trial anyway without bringing that little factoid up in any way – well, that’s when we get, finally, to the Rule 137 discussion. That will be the subject of our next post.

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