Status Update: Rule 414 Application at Policy Arbitrations

Since its inception in October 2011, there has been no clear answer on whether North Carolina Rule of Evidence 414 applies to UM/UIM policy arbitrations. Unfortunately, as the law currently stands there is still no clear answer.

The problem arises from the language found in the standard UM/UIM policy, which reads that arbitration will be subject to the “usual rules of procedure and evidence in the county and state where the arbitration is held.” Plaintiff’s lawyers argue that despite this language, the Revised Uniform Rules of Arbitration as adopted in North Carolina, do not provide for the application of the North Carolina Rules of Evidence. Defense lawyers argue that the language in the policy should be given its literal interpretation and, therefore, the North Carolina Rules of Procedure and Evidence should apply.

Historically, the ambiguity in the law has led to one of two things happening at arbitration: (1) the lawyers will throw out all the Rules of Evidence and arbitrate the case as if no rules apply whatsoever; or (2) the lawyers agree to disagree and each side submits what they believe to be the “correct and admissible” medical expense amount. There is now a rise in a third course of action, which is to apply to the Court for a determination on the application of Rule 414 at arbitration.

Under the first method, the defense lawyer accepts the argument that the Rules of Evidence do not apply at the arbitration, which opens the door for the defense lawyer to admit collateral source information into evidence, such as, whether Plaintiff has health insurance and the amounts paid by that insurer for Plaintiff’s medical care.

The problem with this approach is that the Collateral Source Rule, which typically prohibits a defendant from reducing plaintiff’s medical expense damages based on payments made from third parties outside of the tort system, i.e., health insurers, is a common law doctrine. Thus, the Collateral Source Rule is not an articulated Rule of Evidence adopted by the legislature. Indeed, its roots in fairness to the Plaintiff, in that a Plaintiff not be prejudiced by whether Plaintiff took steps to mitigate his or her costs in the event of an injury, are not relevant to the fact that a defendant may have been negligent and proximately caused Plaintiff damages. As such, arguing under this first approach is arguably a band-aid fix to a larger issue.
Under the second approach, the plaintiff’s lawyer and the defense lawyer effectively agree to disagree. As a result, the plaintiff’s lawyer submits “plaintiff’s medical expenses,” and the defense lawyers submits “defendant’s version of plaintiff’s medical expenses” (applying Rule 414 to Plaintiff’s expenses) and the arbitration panel is left to figure out what amounts they want to consider and why. Generally, it has been my experience that most arbitration panels wind up trying to reach some compromised opinion on what amount of medical expenses to consider for a claimant.

Neither of these methods answers the question. Instead, these methods just create a work around.
Whether the Rules of Evidence should apply at a policy arbitration has been addressed, however, by the North Carolina Court of Appeals.

In Capps v. Virrey, plaintiff filed a lawsuit against a named uninsured tortfeasor and plaintiff’s own uninsured motorist carrier, Nationwide Mutual Insurance Company (“Nationwide”) seeking damages for personal injuries. 184 N.C. App 267, 68-69 (2007) Plaintiff served written discovery in the form of Interrogatories, Request for Production of Documents and Requests for Admission on Nationwide and the parties participated in mediation where there was an impasse. Only after the impasse at mediation, did plaintiff then make a written demand for binding arbitration. Id. Nationwide rejected plaintiff’s demand and plaintiff filed a motion to compel arbitration. Id. At the hearing on plaintiff’s motion to compel arbitration, Nationwide argued that because plaintiff took advantage of discovery not generally available had plaintiff elected binding arbitration from the outset, plaintiff effectively waived his contractual right to binding arbitration. In response, plaintiff argued that the discovery practices he availed himself of are the same available to him had he elected binding arbitration. The trial court sided with Nationwide and denied Plaintiff’s motion to compel. Plaintiff appealed. Id.

In reaching their holding, the Court of Appeals in Capps addressed the interpretation of language found in most Uninsured and Underinsured Motorist Policies with respect to arbitration. That language typically states that “[u]nless the insured and we agree otherwise, arbitration will take place in the county and state in which the insured lives.” Id. at 271.

A plain reading of this language may lead defense counsel to argue that because the insured is a North Carolina resident and arbitration will be taking place in North Carolina, the usual rules of evidence should apply and, therefore, Rule 414 applies at arbitration. Indeed, I have made this same argument on several occasions. However, in Capps, the Court of Appeals reviewed this language and held

the unambiguous language in the arbitration agreement at issue here states that “[a]rbitration will be subject to the usual rules of procedure and evidence” in the county and state where the insured lives and where the arbitration will take place. This language clearly refers to the rules and procedures set forth in the Uniform Arbitration Act, not the “usual rules” of civil procedure and evidence. Id.

Based on this holding, the Capps decision sides with argument often put forth by the Plaintiff’s bar, i.e., that the Revised Uniformed Rules of Arbitration govern the arbitration proceeding and, therefore, because Rule 414 is a Rule of Evidence, it is inapplicable at the arbitration hearing. Indeed, in further support of its holding, the Capps holding goes on to say

Parties agree to arbitrate in order to avoid the costs and delays associated with litigation, specifically the costs and delays inherently incurred in civil discovery. Applying the Rules of Civil Procedure and Evidence to arbitration negates the very purpose for agreeing to arbitrate. The procedural and evidentiary rules governing judicial proceedings do not apply to arbitrations absent plain and unambiguous language in the arbitration agreement that those rules apply. Id. at 272.

Thus, the Capps decision appears to clearly hold that the North Carolina Rules of Civil Procedure and Evidence are not to be applied at policy arbitrations.

However, the Capps decision was not focused on the application of Rule 414, but instead on the procedural process of participating in discovery under the Rules of Civil Procedure versus the Uniform Arbitration Rules. Additionally, Capps was heard prior to Rule 414 becoming law and was based on the application of the Uniform Rules of Arbitration as the existed prior to January 1, 2004. As such, the application of Rule 414 at a UM or UIM policy arbitrations has not been specifically addressed by North Carolina Appellate Courts.

As to the third course of action referenced above, in 2016, upon an insurance carrier’s Motion to Establish Applicable Law, a Mecklenburg County Superior Court Judge ruled that to allow a plaintiff to recover more in damages than the amount needed to restore her to her original position “would be contrary to the substantive law in North Carolina.” Thus, the court ruled that the application of Rule 414 is so intertwined with North Carolina substantive law that it must be followed (at arbitration) in order to give full effect to North Carolina’s policy against double recovery.

I suspect the issue of the applicability of Rule 414 at policy arbitrations in a “post 414 era” will eventually find its way to the appellate courts. However, for the time being, the Capps decision appears to be the most controlling precedent, although it appears that Capps has not successfully persuaded the trial court in at least one decision.

If you have questions regarding a Rule 414 issue or related issue, please feel free to reach out to the lawyers at Snyder Lucente, PLLC at 704-910-5856.