ARBITRATION IN PENNSYLVANIA

June, 2006

Andrew J. Gallogly

HARRISBURG OFFICE

P.O. Box 932

Harrisburg, PA 17106-0932

717-975-8114

PITTSBURGH OFFICE

310 Grant Street

The Grant Building

Suite 1500

Pittsburgh, PA 15219-2203

412-281-4256

SCRANTON OFFICE

The Oppenheim Building

409 Lackawanna Avenue

Suite 3C

Scranton, PA 18503

570-342-4231

MARGOLIS EDELSTEIN

Andrew J. Gallogly, Esquire

The Curtis Center, 4th Floor

Independence Square West

Philadelphia, PA 19106-3304

(215)922-1100

FAX (215)922-1772

agallogly@margolisedelstein.com

CENTRAL PA OFFICE

P.O. Box 628

Hollidaysburg, PA 16648

814-224-2119

WESTMONT OFFICE

P.O. Box 2222

216 Haddon Avenue

Westmont, NJ 08108-2886

856-858-7200

BERKELEY HEIGHTS OFFICE

Three Connell Drive

Suite 6200

Berkeley Heights, NJ 07922

908-790-1401

WILMINGTON OFFICE

1509 Gilpin Avenue

Wilmington, DE 19806

302-777-4680

Introduction

The arbitration of claims can take several different forms in Pennsylvania,

but can be generally categorized as either compulsory judicial arbitration

(mandated by court rules with respect to civil suits in which the damages

allegedly at issue are less than a prescribed dollar amount) or contractual

arbitration (in which the parties have previously agreed to arbitrate their disputes

outside of the judicial system).

Compulsory judicial arbitration was created as a means of efficiently

disposing of smaller civil cases and conserving judicial resources by requiring as a

first step that such cases be tried before a panel of three local court-appointed

attorneys, with the understanding that any party can later appeal from the

decision and obtain a new trial.

Contractual arbitration is a means of bypassing the judicial system and is

voluntary in the sense that the parties have entered into an agreement to resolve

some or all their disputes in that fashion. Where claims are subject to contractual

arbitration, there is generally no right to a new trial before the courts and the

extent to which judicial review is available to set aside legal errors by the

arbitrators depends upon whether the terms of the contract call for common law

arbitration, for arbitration under the Act of 1980, or for arbitration under the Act

of 1927.

Compulsory Judicial Arbitration

The Pennsylvania Judicial Code contains provisions authorizing each Judicial

District in the Commonwealth to adopt rules calling for the compulsory arbitration

of civil cases at 42 Pa.C.S. § 7361, and most, if not all state courts have now

adopted such programs, which have proven very successful in expediting the trial

and disposition of civil cases. The Judicial Code language is essentially only an

“enabling” statute, leaving it to the Supreme Court of Pennsylvania to adopt

appropriate Rules of Civil Procedure and the local Common Pleas courts to adopt

their own consistent Local Rules. The statute does, however, set the basic

parameters with respect to the types of cases to be submitted to arbitration based

upon the amount of damages claimed. The Code also establishes the automatic

right of any dissatisfied party to appeal from the arbitration award and to demand

a trial de novo, after which the case will ultimately be assigned for trial to a judge

(and a jury where requested) thus avoiding any claim that such compulsory

arbitration proceedings would violate a litigant’s Constitutional right to a trial by

jury. The outcome of a judicial arbitration proceeding is, in that sense, non-

binding provided a timely appeal is filed.

In that regard, the enabling language of the Judicial Code indicates that,

where prescribed by general rule or rule of court, “civil matters or issues therein

as shall be specified by rule shall first be submitted to and heard by a board of

three members of the bar of the court”, after which the statute states that

arbitration is not permitted with respect to any action involving title to real

property and then establishes the basic guidelines as to the jurisdictional limits for

arbitration, stating that no matter may be referred to arbitration where the

amount in controversy, exclusive of interest and costs, exceeds either $50,000 (in

larger judicial districts embracing first, second or third class counties, or home

rule counties) or $35,000 (in any other judicial district.) The jurisdictional limits

of compulsory arbitration in the Pennsylvania state courts vary considerably with,

for example, all cases involving up to $50,000 being referred to arbitration in

Philadelphia, Montgomery, Lehigh, Bucks, and Lancaster Counties, whereas the

limit is set at $35,000 in Dauphin County, $30,000 in York and Lackawanna Counties

and surprisingly only $25,000 in Allegheny County despite the size of that judicial

district based in Pittsburgh.

Qualifications of Arbitrators

The Pennsylvania Rules of Civil Procedure governing compulsory arbitration

generally provide for a list of available arbitrators to be compiled in a manner to

be prescribed by local county rule from attorneys actively engaged in the practice

of law primarily in the judicial district in which the court is located, that the board

of arbitrators is to consist of a panel of three such attorneys chaired by one having

at least 3 years experience at the bar. The Rules also require that each arbitrator

take an oath of office, state that no board shall contain more than one attorney

from the same firm, and call for the withdrawal of any arbitrator where the

circumstances are such that a judge would be disqualified from hearing the case

[Pa.R.C.P. No. 1302].

Scheduling of Hearings

The state rules leave it to the local rule making power of the county

Common Pleas courts to establish procedures for fixing the date, time and place

of arbitration hearings, provided that no less than 30 days written notice is given

to the parties or their attorneys of record [Pa.R.C.P. No. 1303].

Procedures for setting hearing dates do vary widely in Pennsylvania by local

practice, with some judicial districts, such as Philadelphia, automatically assigning

an arbitration hearing date on the date any suit identified as an arbitration matter

is filed, either by complaint, or writ of summons, setting the hearing to take place

approximately 9 months later and stamping the hearing date on the suit papers

themselves. In Pittsburgh (Allegheny County) no date is assigned if the suit is filed

by writ of summons only, but a hearing date will be assigned automatically upon

the filing of the plaintiff’s complaint.

Under the local rules of some counties, the courts do not automatically fix

a date for arbitration and generally do not set hearing dates until they are asked

to do so. For example, arbitration hearings in Bucks, Lancaster and York Counties

are not scheduled until a party files a praecipe to place the case on the arbitration

list or a judge orders that a case be referred to arbitration. In Lehigh County, the

local rules provide for cases to be listed for arbitration hearings upon the filing of

a praecipe by any party, but also allow adverse parties to demand an additional

120 days in which to complete discovery unless the case has been pending one year

or more. In Montgomery County, the local rules provide for the scheduling of

hearings upon the filing of a praecipe for arbitration, but require that an

arbitration praecipe be signed by all counsel and unrepresented parties and that

a court conference be scheduled to address the issue if anyone refuses to sign. In

Harrisburg (Dauphin County) no hearing date is set until one of the parties files a

certificate of readiness and that party must give the other parties 30 days notice

of his intent to do so, after which a hearing date is set by the chairman of the

panel, rather than by the court.

The consequence of local rules such as those in Philadelphia and Pittsburgh

where hearing dates are assigned automatically by the courts either immediately

when a lawsuit is filed, or soon after, is that the parties are allowed only a limited

period of time in which to complete discovery prior to arbitration and that period

can become even more limited when there are delays in effectuating service of

the suit papers upon the defendants. To ensure that adequate time is available for

the completion of necessary discovery in such cases, it is imperative that suits be

promptly assigned to defense counsel.

Conduct of Hearings

With regard to procedure at hearings, Rule 1304 states that, except as

otherwise provided, the arbitrators shall conduct the hearing in conformity with

Rule 1038, governing non-jury trials.

However, consistent with the purpose of providing a quick and cost-effective

means of disposing of smaller cases, Rule 1305 then relaxes evidentiary standards

in order to permit the parties to present certain evidence in documentary form

which would ordinarily require live testimony. Probably the most significant

procedural aspect of the arbitration rules is that they allow for the

introduction such things as damage estimates, lost earnings documentation,

bills, and expert testimony in the form of written reports, rather than forcing

parties to incur the expense of presenting witnesses to authenticate such

documents or live expert testimony, provided notice of the intent to offer

the reports and copies of the reports are provided to opposing counsel at

least 20 days prior to the hearing. Specifically, Rule 1305 permits the following

documents to be admitted:

• bills or other documents evidencing charges incurred;

• records of businesses, government departments, agencies or offices,

subject to statutory restrictions, provided they would be admissible in evidence

if authenticated by a records custodian;

• records and reports of hospitals and licensed health care providers;

• expert reports and c.v.’s;

• written estimates of value, damage to, cost of repair of or loss of property

(if accompanied by a statement of the party offering it as to whether the property

was repaired and, if so, whether repairs were made in full or in part and by whom,

with a copy of the bill);

• documentation of lost earnings in the form of written reports prepared by

employers of earning rates, lost time from work or lost compensation.

Consistent with the parties’ right to appeal for a trial de novo if unhappy

with the award, the Rules state that no hearing transcript will be prepared unless

a party does so at his own expense. Where a transcript of an arbitration hearing

is prepared and an appeal is later filed, the testimony can be utilized at trial

subject to the Rules of Evidence and the Rules of Civil Procedure. Among other

things, any party can offer the prior testimony of an adverse party as substantive

evidence. The testimony taken at an arbitration hearing should also be admissible

for purposes of impeachment with respect to any witness at trial.

Delay Damages

One procedural issue which may arise in actions for bodily injury, death or

property damage involves the manner in which an arbitration panel is to receive

evidence with respect to claims for “delay damages” under Rule 238. Briefly,

delay damages (consisting of interest added to any compensatory damage award

at the rate of prime plus one percent) may be added to any award or verdict

under certain circumstances where a defendant failed to make a written

settlement offer to the plaintiff, or the plaintiff’s recovery was more than 125%

of the amount of such an offer. While this is an oversimplification of the Rule, the

important thing for purposes of this discussion is that a plaintiff’s entitlement to

delay damages is dependent upon whether a written settlement offer was made

by the defendant, when it was made and how the offer compares mathematically

to the amount of damages awarded. Because an arbitration panel should

otherwise not be made privy to information regarding the parties’ pre-trial

settlement negotiations, this presents some procedural problems.

The Explanatory Notes to Rule 1306 indicate that the arbitration panel

clearly should not have any knowledge regarding prior settlement negotiations

when arriving at its basic award since this would be prejudicial to the defense and

suggest two alternatives, one being for the panel to conduct a second hearing on

delay damages, while the other would be for the parties to submit the relevant

information regarding any offer of settlement in a sealed envelope which is not to

be opened by the panel until after its basic award has been reached.

Although the Explanatory Notes indicate that this procedure is left to local

rule, Rule 238(d)(1) itself now contains language outlining what should be the

controlling procedure with respect to delay damages at arbitration in all judicial

districts, indicating that a party seeking such damages must provide at least 20

days advance written notice of his intent to do so prior to the hearing, that a

party opposing that request must state his objections in writing at least 10 days

prior to the hearing and that each party is to submit a sealed envelope containing

the plaintiff’s request and the defendant’s statement to the arbitration panel at

the time of the hearing, to be reviewed by the panel immediately upon making its

award. Rule 238 further provides that, if a defendant opposes a request for delay

damages, the board may hold a hearing on the issue.

Failure to Appear

If a plaintiff fails to appear for an arbitration hearing either in person or by

counsel, Rule 1304(a) provides that the panel “shall” enter an award for the

defendant. The same rule permits a plaintiff to avoid that result by instead

taking a voluntary non-suit in the case, but this would not be an attractive option

in any case where the statute of limitations has already expired.

Rule 1303(a)(2) also permits trial courts to adopt by local rule a provision to

be included in the arbitration hearing notice to the effect that, if one or more

parties are not present at the time set for an arbitration hearing, the matter may

be heard at the same time and date by a judge without the absent party, or parties

and stating that there is no right to a trial de novo on appeal from a decision

entered by a judge. This rule would appear to be aimed at litigants or attorneys

who are not inclined to participate in the arbitration process in good faith and

would otherwise simply fail to appear and then file an appeal for a new trial. To

discourage such behavior, it would permit a judge to enter a judgment against the

absent party such as a non-suit against the plaintiff, or a default against the

defendant from which no appeal for a trial de novo would exist. The party against

whom such action is taken would then be required to petition to set aside the non-

suit or open the default. Arbitration panels do not have the power to enter

compulsory non-suits or default judgments themselves.

Some courts have addressed this issue by other means through local rules.

In Philadelphia, for example, in addition to adopting the language set forth above,

the local rules provide that if all parties fail to appear for a hearing without having

previously obtained a continuance or advised the manager of the arbitration center

that the case has been settled, a judgment of non pros (failure to prosecute) will

be entered against the plaintiff.

The Award

Rule 1306 provides that an arbitration panel shall make an award

“promptly” after a hearing, disposing of all claims for relief and separately

stating any award of delay damages. The award is to be signed by all or a

majority of the arbitrators and a dissenting vote can be noted on the award, but

with no further comment.

Awards are to be docketed immediately, notice is to be mailed to all

parties or their attorneys and any monetary damage award is also to be

entered on the judgment index, creating a lien on any real property titled to

the defendant in the county and the Rules provide that the judgment lien shall

continue during the pendency of any appeal [Rule 1307(b)].

If no appeal is filed within 30 days of the docketing of the award, the

court is to enter judgment on the award upon the filing of a praecipe to enter

judgment [Rule 1307(c)]. It has been held that an unappealed arbitration

award can have a collateral estoppel effect. Ottaviano v. SEPTA, 361 A.2d 810

(Pa.Super. 1976).

If there is an “obvious and unambiguous” error in mathematics or in the

language of an award, a party may make application to the court within the 30

days permitted for filing an appeal to “mold” the award to correct such errors,

as it would mold a jury verdict. The filing of such an application stays all

proceedings including the running of the appeal period. Once the application is

decided, any party may appeal for a new trial within either 30 days from the

docketing of the award, or 10 days of the disposition of the application,

whichever is later [Rule 1307(d)]. It should be noted that the court’s ability to

mold an award is limited. As stated in the Explanatory Notes to Rule 1307, this

remedy is a rare one which is confined to obvious and unambiguous errors in

language or mathematics - if an award is “unintelligible or ambiguous or subject

to alternative interpretations, an aggrieved party can only appeal.”

An appeal is accomplished by filing a notice of appeal and payment of the

fee prescribed by the local rules within 30 days from the entry of the award on

the docket [Rule 1308] and an appeal by one party is deemed an appeal by all

parties as to all issues [Rule 1309].

Because both the Judicial Code and the Rules of Civil Procedure call for a

trial de novo on appeal from arbitration, any local rule which purports to limit

the scope of a subsequent trial is invalid. See, e.g., Weber v. Lynch, 346 A.2d

363 (Pa.Super. 1975), affirmed, 375 A.2d 1278 (Pa. 1977), (holding that local

rule prohibiting a party from calling a witness at trial who did not testify at

the arbitration hearing did not permit the “full consideration of the case

anew” which a trial de novo requires and that the right to a new trial

“includes the right to proceed to trial with no evidentiary limitations”).

Although the relaxed evidentiary standards prescribed by the rules with

regard to compulsory arbitration matters will not generally apply to a

subsequent trial, the current rules allow for the same documents described in

Rule 1305 (e.g., expert reports, damage estimates, etc.) to be offered into

evidence by any party without further proof if the plaintiff stipulates that the

amount of recoverable damages on the appeal will be $15,000 or less

(increasing to $25,000 effective July 1, 2006) at least 30 days before the case is

listed for trial and serves notice of the intention to offer the documents [Rule

1311.1].

Federal Court Arbitration

Similar compulsory arbitration provisions exist under the Local Rules of the

U.S. District Court for the Eastern District of Pennsylvania, though arbitration

proceedings are ultimately voluntary in the Western District and no arbitration

provisions appear in the Local Rules for the Middle District of Pennsylvania.

In the Eastern District, compulsory arbitration is governed by Local Rule

53.2. In order to maintain a civil action in federal court based upon the diversity

of citizenship of the parties at all, there is a minimum amount in controversy

requirement of $75,000, which serves to eliminate many small cases from the

outset. Therefore, the Eastern District Local Rules set a much higher jurisdictional

limit for arbitration matters than that in state court. Specifically, the

jurisdictional limit below which cases are assigned to compulsory arbitration is

$150,000, exclusive of interest and costs, though provision is also made for the

parties to submit cases involving greater sums to the arbitration program by

agreement.

All cases are presumed to involve less than $150,000 unless plaintiff’s

counsel files a certification to the contrary within 10 days of the docketing of the

suit in federal court, or a defendant asserting a counterclaim or cross-claim files

such a certification. A judge may also order a case exempt from arbitration upon

finding that the objectives of such a proceeding (providing a speedier and less

expensive alternative to a traditional trial) would not be realized due to the

complexity of the legal issues, or because legal issues predominate over factual

issues, or for other good cause.

Arbitration dates are to be set approximately 120 days from the date an

answer is filed. As in state court, the three arbitrators are selected by the court

from a list of eligible attorneys and the rules further provide that the Clerk is to

select, insofar as reasonably practical, one arbitrator whose practice is primarily

for plaintiffs, another for defendants and a third member whose practice does not

fit either category.

Unlike state court practice, arbitrators in the Eastern District have the

authority to alter the date and time of hearings provided the new date is within 30

days of that set by the court. Any continuance beyond 30 days must be approved

by the assigned judge.

Also unlike state court practice in some counties, in which the parties are

not told who the arbitrators will be prior to appearing at the hearing, the District

Court judge issues an order prior to the arbitration date which identifies the

arbitrators before whom the case will be tried.

If a party fails to appear, the arbitrators may proceed in his absence.

However, if a party fails to participate in the arbitration “in a meaningful

manner”, the rule states that the court may impose appropriate sanctions

including the striking of any demand for a trial de novo by that party.

The Federal Rules of Evidence control the admissibility of evidence at

arbitration and there is no express provision in the Eastern District Local Rules as

there is in state court for any exceptions with respect to the introduction of

evidence such as damage estimates or expert witness reports.

A demand for a trial de novo must be filed within 30 days of the docketing

of the arbitration award, after which the case is to be placed on the trial

calendar, and if it does not appear that it will be reached for trial within 90 days,

the judge is to request that the matter be reassigned to a judge whose calendar

would allow the case to be tried within 90 days. Rule 53.2 provides that, at the

new trial, the court shall not admit any evidence to indicate that there was a

previous arbitration hearing unless otherwise admissible under the Rules of

Evidence.

Although arbitration is ultimately voluntary in the Western District of

Pennsylvania, it should be noted that Local Rule 16.2.4 initially directs nearly all

civil actions for damages in which jurisdiction is based upon the diversity of

citizenship of the parties (with the exception of civil rights cases, prisoner cases

and Social Security matters) to the court’s arbitration program, though it allows

any party to withdraw or “opt-out” of the program by filing a notice that the party

does not consent to arbitration with the clerk within 10 days after the filing of the

answer of the defendant, or that of any third-party defendant. As in the Eastern

District, the rule also provides that a judge may order that a case be exempted

from arbitration due to complex legal issues, a predominance of legal over factual

issues, or for other good cause.

Western District Local Rule 16.2.5 indicates that the clerk will establish an

arbitration hearing date after an answer has been filed which is to be

approximately 150 days after the date the answer was filed. The hearing notice

will also advise the parties that they have only 120 days from the date the answer

was filed in which to complete discovery unless the assigned judge orders

otherwise. Where a third-party defendant is involved, the hearing notice is not to

be sent until it has filed an answer.

After completion of discovery, the Western District rules provide for the

filing of pretrial statements, after which the judge to whom the case is assigned

is to issue an order setting the date and time of the hearing. If a party has already

filed a motion for summary judgment, a motion to dismiss, a motion for judgment

on the pleadings, a motion to join necessary parties or “other motion”, Rule 16.2.5

provides that the order setting the hearing date shall not be issued until the court

has ruled on the motion.

Although the rules generally call for the arbitrators to be randomly selected

by the clerk of court, they also contain provision for the parties to select the

arbitrators by agreement from the court’s approved list.

The Western District local rules are similar to those of the Eastern District

with regard to the conduct of hearings, the failure of parties to participate in a

“meaningful manner”, the award and the right to demand a trial de novo within

30 days of the date on which the award is entered on the docket.

Contractual Arbitration

While there are many forms of contractual arbitration, that which claims

personnel are most likely to encounter in Pennsylvania outside of the context of

inter-company arbitration (and the only sort addressed in this article) can be found

in the context of uninsured (UM) and underinsured (UIM) motorist claims, with

respect to which automobile insurance policies ordinarily contain clauses calling

for arbitration when the parties are unable to agree upon the liability of the

uninsured or underinsured motorist, or the amount of damages recoverable. In

fact, for some years, the Pennsylvania Insurance Department effectively mandated

that such clauses be included in auto insurance policies by refusing to approve of

policy forms which did not contain them, however, it should be noted that the

courts have now held that the Department lacks legal authority for that position,

with the result that arbitration clauses should now be optional. Insurance

Federation of Pa. v. Department of Insurance, 889 A.2d 550 (Pa. 2005).

There is considerable variation in UM/UIM arbitration clauses and the terms

of the policy can have a significant impact upon both the scope of the issues

subject to arbitration (some of them expressly excluding insurance coverage

issues, for example) and the extent to which arbitration award is subject to

judicial review (ranging from no meaningful judicial review absent fraud on the

part of the arbitrators to full judicial review with regard to errors of law).

It should be noted that very few arbitration agreements provide for any

party to demand a trial de novo if dissatisfied with the outcome of the

proceedings, though it has been held in Pennsylvania that a UM/UIM arbitration

clause which permits an appeal for a trial de novo when an arbitration award

exceeds the minimum compulsory coverage limits of $15,000 is void as being

contrary to public policy. Zak v. Prudential, 713 A.2d 681 (Pa.Super. 1998).

Instead, the primary distinction between the various forms of arbitration

involves the extent to which the arbitration provisions of the policy permit a party

to turn to the courts for relief in modifying, correcting or vacating an award.

Most UM/UIM arbitration clauses contain language allowing either party to

appoint an arbitrator and to demand arbitration, after which the other party must

appoint its arbitrator within a period of 30 days, after which those two arbitrators

are to select a third. Unlike the situation with compulsory judicial arbitration

proceedings in which a panel is appointed entirely and somewhat randomly by the

court, the arbitrators selected by each party in the context of UM/UIM claims,

while required to be impartial, sometimes tend to be more partisan in practice.

If the parties, through their arbitrators, are unable to agree upon a third

arbitrator, or if one of the parties (typically the insurer) fails to appoint its own

arbitrator in a timely fashion, either may be appointed on petition by the court,

a result which is generally to be avoided in at least some counties, where the

talent pool from which the judges appoint UM/UIM arbitrators often seems to

consist primarily of underemployed attorneys who, by and large, are more likely

than not to be plaintiff-oriented. There are times, however, when the list of third

arbitrators proposed by the claimant’s arbitrator is so horrendous that it is better

to take one’s chances on a court appointed neutral if compromise proves

impossible.

Scope and Effect of Contractual Arbitration Clauses

While it has been held that arbitration agreements do not divest a court of

jurisdiction, such agreements are binding upon the parties and will be enforced

absent proof of duress, fraud or unconscionability. Lytle v. CitiFinancial Services,

Inc., 810 A.2d 643 (Pa.Super. 2002); Reinhart v. State Auto. Ins. Ass’n., 363 A.2d

1138 (Pa.Super. 1976). Orders compelling a party to submit to arbitration are

considered interlocutory and are not immediately subject to appeal. Erie

Insurance Exchange v. Midili, 675 A.2d 1267 (Pa.Super. 1996). It should also be

noted that UM/UIM arbitration provisions are binding not only upon the carrier and

named insureds, but are also binding upon other parties claiming benefits by virtue

of their insured status under the policy. Johnson v. Pennsylvania National Ins.

Cos., 594 A.2d 296 (Pa. 1991).

Any ambiguity as to the scope of an arbitration agreement appearing in an

insurance contract will be construed against the insurer as the party which drafted

the policy. National Grange Mutual Ins. Co. v. Kuhn, 236 A.2d 758 (Pa. 1968).

Thus, where a UM/UIM arbitration clause calls for the arbitration of all

disputes regarding the liability of an uninsured or underinsured motorist or the

amount of damages recoverable without further elaboration, the courts have held

that such provisions also require that issues of insurance coverage be submitted to

the arbitrators. Brennan v.General Accident Fire and Life Assurance Corp., 574

A.2d 580 (Pa. 1990). It is only where the policy language expressly removes

insurance coverage issues from the scope of the arbitration agreement, or clearly

states that the arbitrators are to decide only tort liability and damages issues that

an insurer or claimant can successfully litigate such issues in the courts. Henning

v. State Farm, 795 A.2d 994 (Pa.Super. 2002); Nationwide v. Cosenza, 258 F.3d 197

(3d Cir. 2001).

Arbitration of disputes with respect to UM or UIM claims can also be avoided

where it is claimed that a particular policy provision is contrary to legislative

intent, administrative intent, or public policy. Davis v. GEICO Ins. Co., 454 A.2d

973 (Pa. 1982).

Arbitration panels do not have jurisdiction to consider claims against an

insurer for statutory “bad faith” in connection with its handling of a UM/UIM claim.

Nealy v. State Farm Mutual Auto. Ins. Co., 695 A.2d 790 (Pa.Super. 1997). Nor do

they have jurisdiction over disputes relating to UM/UIM settlement agreements or

their enforcement. Nationwide v. Moustakidis, 830 A.2d 1288 (Pa.Super. 2003).

Nor does an arbitration panel have authority to award delay damages pursuant to

Pennsylvania Rule of Civil Procedure 238. Younkin v. Nationwide Ins. Co., 807

A.2d 275 (Pa.Super. 2002), appeal denied, 825 A.2d 1262 (Pa. 2003).

Common Law vs. Statutory Arbitration

The scope of judicial review of arbitration decisions is dependent upon

whether the arbitration clause calls for common law or statutory arbitration, and

if statutory arbitration is specified, whether the agreement provides for arbitration

pursuant to the former Act of 1927 or the Act of 1980. Those three types of

arbitration are subject to widely varying standards of finality and judicial review.

Which law governs a particular arbitration agreement is determined by

examining the language of the contract. Wingate Construction Co. v. Schweizer

Dipple, Inc., 213 A.2d 275 (Pa. 1965).

Common Law Arbitration

This is effectively the “default setting” in the sense that it will apply if the

agreement is silent as to which form of arbitration is appropriate, unless the

parties subsequently agree, expressly or by implication, that some form of

statutory arbitration will apply. Brennan, supra.

Common law arbitration is the most restrictive form in that awards are

fully binding upon the parties. The arbitrators are the final judges of law and

fact and their award will not be disturbed for mistake of either. Runewicz v.

Keystone Insurance Co., 383 A.2d 189 (Pa. 1978).

The only basis for a court to disturb such an award is where it can be shown

that a party was denied a fair hearing or that there was fraud, misconduct or

corruption on the part of the arbitrators, or some other irregularity which caused

the arbitrators to issue an unjust, inequitable, and unconscionable award.

Brennan, supra; 42 Pa.C.S. §7341.

A party seeking to establish that it was denied a fair hearing, or that their

was fraud, corruption, or misconduct must do so by “clear, precise and indubitable

evidence”. Allstate Insurance Co. v. Fioravanti, 299 A.2d 585 (Pa. 1973).

To establish fraud, misconduct, or corruption on the part of the arbitrators,

it must be shown that there was actual fraud, involving collusion with one of the

parties, or misconduct intended to create a fraudulent result. It is not enough to

argue that the arbitrators were prejudiced or partial, or that they reached an

award so unjust that it constitutes constructive fraud. Nor can an irregularity be

found simply upon a showing that an incorrect result was reached. Mellon v.

Travelers Ins. Co., 406 A.2d 759 (Pa.Super. 1979). Merely showing that an award

was “blatantly at odds with the contract involved”, without more, cannot support

a finding of misconduct sufficient to set an award aside. Runewicz v. Keystone Ins.

Co., 383 A.2d 189 (Pa. 1978).

Act of 1980

Somewhat less restrictive in terms of judicial review is statutory arbitration

under the Act of 1980, also known as the Uniform Arbitration Act, 42 Pa.C.S. §

7301, et seq., which applies whenever it is specifically referenced in the

arbitration clause, when the policy simply makes reference to “statutory

arbitration” without specifically referencing the Act of 1927, or in the unusual

circumstance where an arbitration clause mentions both statutes. Cotterman v.

Allstate Ins. Co., 666 A.2d 695 (Pa.Super. 1995).

The Act of 1980 provides for limited judicial review of arbitrators’ decisions

upon application of any party only for fraud or misconduct as at common law, or

where:

• There was “evident partiality” on the part of a neutral arbitrator;

• There was “corruption or misconduct” on the part of any arbitrator;

• The arbitrators exceeded their powers;

• The arbitrators refused to postpone a hearing upon good cause

being shown, or refused to hear material evidence, or otherwise so

conducted the hearing as to substantially prejudice the rights of a

party; or

• There was no agreement to arbitrate.

42 Pa.C.S. § 7314(1).

Most significantly, as is the case with common law arbitration, it should

be noted that alleged errors of law on the part of the arbitrators cannot be

cited as a basis for challenging their decision in the courts under the Act of

1980. In that regard, the statute provides that, “The fact that the relief awarded

by the arbitrators was such that it could not or would not be granted by a court

of law or equity is not a ground for vacating or refusing to confirm the award.”

42 Pa.C.S. § 7314(2). If an arbitration panel disregards or misinterprets insurance

policy or statutory language, fails to adhere to judicial precedent, or commits any

other legal error in reaching its decision, the parties are essentially stuck with the

result.

Act of 1927

Although the Act of 1927 was repealed and replaced in 1980 by the Uniform

Arbitration Act, it has been held that parties remain free to agree to arbitrate

disputes according to the former Act of 1927, which provides the broadest scope

of judicial review. Nationwide Mutual Ins. Co. v. Heintz, 804 A.2d 1209 (Pa.Super.

2002), appeal denied, 818 A.2d 505 (Pa. 2003); Pantelis v. Erie Ins. Exchange, 890

A.2d 1063 (Pa.Super. 2006). Under the terms of the current statue, the Act of

1927 will apply whenever the agreement was made prior to the effective date of

the Uniform Act and provided for statutory arbitration (not something which is

likely to happen at this point) or when the arbitration agreement expressly

provides for arbitration pursuant to the former provisions of the Act of 1927. 42

Pa.C.S. § 7302(d).

While the Act of 1927 contained provisions for vacating awards in cases

of fraud, corruption, misconduct, partiality, and the like, by far the most

significant aspect of agreements calling for arbitration in accordance with that

former statute is that arbitrators’ decisions are subject to full judicial review

with respect to errors of law.

In that regard, the Act of 1980 provides that a court which is asked to review

an arbitration award made under the Act of 1927 may “modify or correct” the

award where it is “contrary to law and is such that had it been the verdict of

a jury the court would have entered a different judgment or a judgment

notwithstanding the verdict.” Heintz, supra, citing Krakower v. Nationwide

Mutual Ins. Co., 790 A.2d 1039 (Pa.Super. 2001); 42 Pa.C.S. § 7302.

As noted in Heintz, parties seeking relief from erroneous arbitration awards

should be careful to caption their petitions as petitions to “modify or correct” the

award, rather than as petitions to “vacate” the award, since the current statute

authorizes only modification or correction for legal errors. Under the former Act

of 1927, courts “vacated” awards where they were the result of corruption, fraud,

partiality, misconduct or abuse of power, but “modified or corrected” awards

where they resulted from legal error.

While grounds for “vacating” an award are limited under the Act of 1927, the

Superior Court recently did so and ordered a full de novo hearing when a UM

arbitration panel improperly excluded evidence regarding the amount paid by the

claimant’s workers’ compensation carrier, which had a subrogation right under

recent amendments to the Pennsylvania Motor Vehicle Financial Responsibility

Law. It appears that the court was unable to modify or correct the award because

it was unable to determine how the arbitrators arrived at their damages figure and

whether it would have differed had they received the evidence of the workers’

compensation payments. Ricks v. Nationwide Insurance Co., 879 A.2d 796

(Pa.Super. 2005), appeal denied, 2006 Pa. LEXIS 222 (March 15, 2006).

Qualifications of Arbitrators

Regardless of which form of UM/UIM arbitration is called for under the

policy, the arbitrators must, at least in theory, be impartial.

Where the arbitration clause refers to “disinterested” arbitrators, it has

been held that an arbitrator must recuse himself if he has an ongoing attorney-

client relationship with one of the parties, or has previously represented one of

the parties at any time, with no showing of actual bias being required. Bole v.

Nationwide Ins. Co., 379 A.2d 1346 (Pa. 1977), (holding that, because a common

law arbitration award cannot be reversed for either a mistake of law or fact, it

is “best to avoid even a hint of impropriety where a contract calls for a

‘disinterested’ arbitrator”) ; Donegal Insurance Co. v. Longo, 610 A.2d 466

(Pa.Super. 1992).

However, at least in cases where the arbitration agreement refers only to

“competent” arbitrators, it has been held that prior representation of a party (in

that case 23 years previously) will not by itself result in an arbitrator’s

disqualification, or support a petition to vacate an award. Sheehan v. Nationwide

Ins. Co., 779 A.2d 582 (Pa.Super. 2001), appeal denied, 792 A.2d 1254 (Pa. 2001).

It has been held that an arbitrator is not disqualified from serving merely

because he has provided services to a party as an arbitrator on other occasions.

To disturb an arbitration award on the basis of partiality, a more direct

relationship between a party to an arbitration proceeding and the arbitrator must

be shown, such as the existence of a prior employer-employee or attorney-client

relationship. Land v. State Farm Mutual Ins. Co., 600 A.2d 605 (Pa.Super. 1991).

Conduct of Hearings

Arbitration agreements rarely address the procedures governing arbitration

hearings in any significant way and while some arbitration clauses state that local

rules of procedure and evidence will apply, there are technically no “local”

procedural rules applicable to contractual arbitration proceedings, the Uniform

Arbitration Act contains few provisions relating to the manner in which statutory

arbitration proceedings are to be conducted and the Judicial Code has even less

to say regarding procedures in common law arbitration matters. This lack of

procedural rules, coupled with the limited scope of judicial review discussed

previously, provides wide latitude to arbitration panels, with the result that the

procedures governing contractual arbitration hearings are in large measure those

which the arbitrators choose to adopt.

Where statutory arbitration is involved, the Uniform Arbitration Act does

contain language indicating that a party has the right to be represented by counsel

(42 Pa.C.S. § 7308) and providing that the powers of arbitrators shall be exercised

by a majority of the panel unless otherwise prescribed by the agreement (§ 7306).

The Act also contains limited provisions pertaining to the conduct of

hearings, indicating that the arbitrators shall determine the time and place of the

hearing and provide not less than 10 days prior written notice to the parties either

personally, or by registered or certified mail; that the arbitrators may adjourn the

hearing from time to time as necessary, and may postpone the hearing on their

own motion, or at the request of a party for good cause shown; that the arbitrators

may hear and decide the case notwithstanding a party’s failure to appear; that the

parties have the right to be heard, to present material evidence and to cross-

examine witnesses; that all arbitrators shall conduct the hearing, but only a

majority is required to determine any issue or render a final award, and that any

party may arrange for obtaining a stenographic transcript of the hearing to serve

as part of the “record” at its own expense (§ 7307).

The arbitrators are afforded power to issue subpoenas for the attendance of

witnesses and production of documents or other evidence (which are enforceable

by the courts) and “may” permit depositions to be taken for use as evidence of

witnesses who cannot be served with subpoenas or are unable to attend a hearing,

in addition to being given the power to administer oaths (§ 7309). Although the

provisions of the Judicial Code pertaining to statutory arbitration proceedings are

not generally applicable to common law arbitration matters, this particular section

of the Code governing statutory arbitration is incorporated as being applicable to

common law arbitration matters at 42 Pa.C. S. §7342. Beyond that, the

Subchapter of the Judicial Code dealing with common law arbitration is silent with

regard to the procedures governing arbitration hearings.

The lack of provisions for formal discovery in such matters and the scope of

the discretion afforded to arbitrators with respect to procedural issues is

illustrated by the Supreme Court’s decision in Harleysville Mutual Casualty Co. v.

Adair, 218 A.2d 791 (Pa. 1966), in which an insurer sought to enjoin an arbitration

hearing from proceeding because the arbitrator refused to direct the claimant to

respond to discovery in the form of interrogatories citing the “cooperation clause”

of its policy and a provision requiring an insured to submit to examinations under

oath. The Court held that such pretrial or prehearing discovery was not available

under the terms of the arbitration agreement (which provided for arbitration under

the rules of the American Arbitration Association), or under the terms of the Act

of 1927, which only provided for depositions with the approval of the arbitrator.

The Court stated that the insurer, through its own arbitration agreement, had

voluntarily surrendered the right to invoke the procedures available in an action

at law and that the right to pretrial discovery is not obligatory as an essential of

due process to a valid arbitration proceeding, adding that the Act of 1927 provided

a complete method of obtaining relief by appeal to the court to vacate, modify or

correct an award.

The Superior Court has also held that the question of whether UM claimants

must appear for depositions fell within the exclusive jurisdiction of the arbitrators

in Savage v. Commercial Union Ins. Co., 473 A.2d 1052 (Pa.Super. 1984), citing

Adair for the proposition that the discovery procedures indigenous to an action at

law cannot be equated to those applicable to arbitration proceedings. The

question of whether an insured must submit to depositions or examinations under

oath as a condition precedent to pursuing claims for UM benefits was one for the

arbitrators to decide, and if the insurer believed that it had been denied a fair

hearing as a result of an adverse ruling from the arbitrators on that issue, it could

later appeal to the court to vacate or modify the award.

Still more recently, it was held by the Superior Court that arbitrators have

exclusive jurisdiction to either grant or deny an insurer’s request for an

examination under oath of a UIM claimant in Cotterman v. Allstate Ins. Co., 666

A.2d 695 (Pa.Super. 1995). The insurer in that case sought to modify, correct or

vacate an award of UIM benefits in excess of its policy limits, basing its request in

part on the refusal of the arbitrators to direct the claimant to appear for an

examination under oath, to which it claimed entitlement under the terms of its

policy. The court rejected the insurer’s contention that the refusal of the

arbitrators to allow the claimant’s deposition was “contrary to law” and warranted

an order vacating the award since the arbitration proceeding was subject to the

Act of 1980, rather than the Act of 1927. The court also held that the arbitrators’

refusal to permit the deposition did not amount to “misconduct” on the part of the

arbitrators which would warrant vacating the award on that basis. The court also

held that, under the standards of judicial review of awards under the Act of 1980,

it could not “modify” the award to conform to the liability limits of the policy

since modification of awards is confined to situations in which the complaining

party can demonstrate that the award was miscalculated, the arbitrators based the

award on a matter which was not submitted to them, or the award was deficient

in form.

The Award

The Uniform Arbitration Act also provides that the award is to be in writing

and signed by all arbitrators joining in the award (§ 7310) and it has been held that

an award signed by only one arbitrator is invalid and a nullity. Jackson v. GEICO

Ins. Co., 612 A.2d 1071 (Pa.Super. 1992), appeal denied, 636 A.2d 634 (Pa. 1993);

Goeller v. Liberty Mutual Ins. Co., 568 A.2d 176 (Pa. 1990). The same section of

the statute indicates that the award is to be delivered to each party personally, or

by registered or certified mail, or as prescribed in the arbitration agreement and

shall be made within the time fixed by the agreement, or by order from a court

should one of the parties petition for such relief.

The Act also allows the arbitrators to make modifications or corrections to

an award for any “evident miscalculation of figures”, any “evident mistake in the

description of any person, thing or property referred to in the award”, or where

the panel “awarded on a matter not submitted to them and the award may be

corrected without affecting the merits of the decision”, or for the purpose of

clarification either (1) upon application of any party, or (2) at the direction of a

court where a petition to confirm, vacate or modify an award has been filed (§

7311). It has also been held that a court , when deciding whether to enforce an

arbitration award, can resubmit an award to the arbitrators for clarification

despite the fact that no party had filed a petition to modify the award. McIntosh

v. State Farm Fire & Casualty Co., 625 A.2d 63 (Pa.Super. 1993).

To the extent that awards are subject to judicial review, the Act contains

provisions regarding the filing of petitions for the modification, correction or

vacating of awards (§§ 1715, 1717, 1719) and also provides for the entry of orders

confirming arbitration awards, as well as for the entry and enforcement of

judgments on awards (§§ 7313, 7316).

Briefly, any petition to modify, correct or vacate an award must be filed

within 30 days after delivery of the award to the petitioner and such petitions are

generally to be filed with the court of the county in which the arbitration was

held. This is true with regard to common law arbitration awards as well. 42 Pa.

C.S. §7342(b). If neither party moves to challenge an award by means of filing a

petition to modify, correct or vacate the award within 30 days, it is final and a trial

court can properly confirm the award and enter judgment upon application of the

prevailing party. Hall v. Nationwide Mutual Ins. Co., 629 A.2d 954 (Pa.Super.

1993), appeal denied, 641 A.2d 588 (Pa. 1994). In fact, if a party fails to file a

petition challenging an award within the prescribed 30 days, a court is required to

enter judgment pursuant to the award. Sage v. Greenspan, 765 A.2d 1139

(Pa.Super. 2000). Notwithstanding the 30 day period permitted for challenging an

arbitration award, it should be noted that the Pennsylvania courts have held that

post-judgment interest runs from the date of the arbitration award, not from the

date on which the award is confirmed and judgment is entered by a court.

Cotterman v. Allstate Ins. Co., 666 A.2d 695 (Pa.Super. 1995).

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