Amerisure Mutual Insurance v. Global Reinsurance Corporation of America

FIRST DIVISION
March 15, 2010

No. 1-09-0820

AMERISURE MUTUAL INSURANCE COMPANY and ) Appeal from the
AMERISURE INSURANCE COMPANY, ) Circuit Court of
) Cook County.
Plaintiffs and Counterdefendants- )
Appellees, )
)
v. ) No. 08 CH 42242
)
GLOBAL REINSURANCE CORPORATION OF )
AMERICA, f/k/a Gerling Global )
Reinsurance Corporation of America, )
) The Honorable
Defendant and Counterplaintiff- ) Rita M. Novak,
Appellant. ) Judge Presiding.

JUSTICE LAMPKIN delivered the opinion of the court:

This case involves a dispute over attorney fees awarded by

an arbitration panel pursuant to section 155 of the Illinois

Insurance Code (Code) (215 ILCS 5/155 (West 2006)). Amerisure

Mutual Insurance Company and Amerisure Insurance Company

(Amerisure) were awarded $1,556,709.27 in damages plus interest

and attorney fees for the underlying reinsurance claim against

Global Reinsurance Corporation of America, f/k/a Gerling Global

Reinsurance Corporation of America (Global). Global challenged

the propriety of the section 155 attorney fee award in circuit

court. The circuit court affirmed. On appeal, Global contends

the attorney fee award should be vacated where the arbitration
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panel either exceeded its powers or committed a gross error of

law on the face of the award by awarding attorney fees pursuant

to section 155.

FACTS

Effective July 1, 2001, Amerisure and Global entered an

“Umbrella Quota Share Reinsurance Agreement,” a/k/a the treaty,

wherein Global agreed to reinsure a number of Amerisure’s

outstanding umbrella insurance policies. Pursuant to article 24

of the treaty, the parties agreed to arbitrate disputes.

According to Amerisure, in May 2006, it billed Global for a

reinsurance claim valued at approximately $1.5 million. In

response, Global made a number of requests to review documents

related to the claim. Amerisure complied with the requests;

however, Global never notified Amerisure of its intent with

regard to the claim. On December 27, 2006, Amerisure sent a

letter to Global demanding arbitration because Global refused to

pay the claim. Amerisure demanded “the amounts due under” the

treaty, in addition to “interest, costs and exemplary damages.”

Pursuant to their treaty, the parties appointed a three-person

panel to hear the dispute in Chicago, Illinois. According to the

choice-of-law provision in article 24 of their treaty, the

parties agreed Illinois law governed.

In October and November 2007, in prearbitration filings and

meetings, Amerisure expressly informed the panel it was seeking

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attorney fees.1 On November 20, 2007, Global submitted a letter

response to the panel. In relevant part, Global argued:

“[T]he Panel has no authority to award [attorney]

fees to either party because both parties have not

requested them ***, the arbitration agreement does not

authorize the Panel to award them, and there does not

appear to be any statute that would support such an

award.”

Global supported its argument by citing article 24 of the

parties’ treaty, Rule 43(d) of the American Arbitration

Association’s (AAA) Supplementary Procedures for the Resolution

of Intra-industry United States Reinsurance and Insurance

Disputes (Rule 43(d))2, and Illinois law.

Following discovery, Amerisure filed a prehearing brief on

September 22, 2008, arguing for the first time that its claim for

attorney fees was supported by section 155 of the Code, which

punishes an insurer for vexatious and unreasonable actions or

1
Amerisure maintains it requested attorney fees from “the

beginning,” noting it listed “costs” and “exemplary damages” in

its initial arbitration demand. Global does not take issue with

the timing of Amerisure’s request for attorney fees.
2
The parties agreed to waive all AAA rules except Rule

43(d).

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delays. Amerisure filed a memorandum in support of its argument.

Global responded by filing its own prehearing memorandum, arguing

that section 155 did not apply to reinsurance relationships and

therefore could not support Amerisure’s attorney fee claim.

On October 16, 2008, the parties’ attorneys and at least one

panel member participated in a teleconference. During the

teleconference, Amerisure said it was seeking attorney fees under

reinsurance law in general and Illinois law in particular.

The arbitration hearing was held from October 20, 2008, to

October 24, 2008. Amerisure referred to a list of examples of

Global’s bad faith conduct, as outlined in its prehearing brief.

Amerisure reiterated that it was seeking attorney fees based upon

section 155 of the Code. Then, when one of the panel members

asked what law controlled the dispute, Amerisure replied that

section 155 controlled, but that the panel should otherwise “fill

in the intersperses in the parties’ agreement with reinsurance

custom and practice.” Amerisure continued, “[t]hat’s my

understanding of the derivation of the utmost good faith rule, so

the parties do not have to put in their contracts all kinds of

provisions you see in a classic Wall Street M & A agreement.

That’s what custom and practice do.”

The record contains a document prepared by Amerisure

entitled “Proposed Findings and Conclusions.” The document is

not signed by the panel or either of the parties. However, in

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the document, Amerisure proposed that “[Global’s] refusal to pay

the [underlying] loss is unreasonable and vexatious within the

meaning of Section 155, because [Global] was uncooperative, acted

contrary to its duty of utmost good faith and forced Amerisure to

demand arbitration, depriving Amerisure of indemnification.”

On November 10, 2008, the panel awarded Amerisure the

principal disputed amount of $1,556,709 plus interest and

attorney fees. The panel said, “[Global] is hereby ordered to

pay by December 10, 2008, [Amerisure’s attorney] fees as billed

and paid in an amount not to exceed $1,500,000 based on the

finding by this panel of [Global’s] violation of its duty of

utmost good faith to [Amerisure].” (Emphasis added.) Global

timely paid the principal amount plus interest, but did not pay

the attorney fees.

On November 12, 2008, Amerisure moved to confirm the award

pursuant to the Uniform Arbitration Act (Act)(710 ILCS 5/1 et

seq. (West 2006)). On December 4, 2008, Global filed an answer

and a counterapplication to reject the award of attorney fees.

In its answer, Global admitted that Amerisure alleged Global

engaged in bad-faith conduct and that Amerisure sought fees

pursuant to section 155. In its counterapplication, Global

alleged the panel exceeded its authority by awarding fees: (1)

on a theory not submitted; (2) where not authorized by the

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parties’ arbitration agreement; (3) where the parties

“collectively did not vest the [p]anel with authority to decide

the issue”; (4) where section 155 does not authorize fees in a

reinsurance case; (5) where only a court and not an arbitration

panel may award section 155 attorney fees; (6) where Illinois

does not provide a legal basis for awarding fees based on a

violation of the duty of utmost good faith; and (7) where Rule

43(d) does not authorize the award.

On December 19, 2008, Global filed a motion for summary

judgment, alleging the panel exceeded its authority in awarding

the attorney fees because the award was not given based upon the

theory advanced by the parties, i.e., section 155 of the Code,

and it was not otherwise authorized by Illinois law. Moreover,

Global alleged the panel did not have the authority to award

attorney fees pursuant to section 155 because the statute only

authorizes courts to award fees. In the alternative, Global

claimed a gross error of law appeared on the face of the award.

On January 12, 2009, Amerisure filed a response to Global’s

motion for summary judgment. Amerisure alleged Global waived its

ability to challenge the arbitrability of attorney fees by

failing to file a petition before a court pursuant to section 2

of the Act (710 ILCS 5/2 (West 2006)) and by participating in

arguments before the panel regarding whether Amerisure was

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entitled to section 155 fees. Moreover, Amerisure alleged the

panel did not exceed its powers in awarding attorney fees,

maintaining “a vexatious and unreasonable delay of payment is

part and parcel of a violation of the duty of utmost good faith,

which the arbitration clause placed squarely before the [p]anel

for decision.” Amerisure additionally alleged there was no gross

error of law on the face of the panel’s award.

On March 16, 2009, Amerisure filed an answer to Global’s

counterapplication to reject a portion of the award, denying

Global’s allegations and asserting the affirmative defenses of

waiver and proper jurisdiction.

The circuit court denied Global’s motion for summary

judgment, finding the panel did not exceed its authority and no

gross error of law appeared on the face of the award.

Specifically, the court said:

“There [is], it seems to the Court, some overlap

with regard to the issue of whether or not the Panel

exceeded its authority and whether or not the Panel

made a gross error in law because it seems to the Court

that based on the entire record, I am really not able

to say that the Panel exceeded its authority in that it

was deciding an issue that was not permitted to decide

under Illinois law.

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I know [the Panel] didn’t use the words Section

155.

I know [the Panel] used a term that [the Panel]

was probably more familiar with as a result of its

expertise in reinsurance, but it seems to the Court

that given the entire record, which is that the primary

dispute and the briefs and the arguments were all about

whether Section 155 of the Illinois Insurance Code

applied.

I cannot find, frankly, in good faith, that the

Panel exceeded its authority.

It may, in fact, have [not] used precise and

specific terms that are embodied in Section 155, but

certainly the sentiment is expressed in that award.

And given the fact that that wasn’t heartfelt, the

parties’ arguments with regard to [attorney] fees, I

can’t find that the Panel exceeded its authority.

Secondly, I think that the question of the gross

error or the gross misapplication of the law, in fact,

is a harder hurdle to overcome for any person or entity

contesting an arbitration award.

It seems to the Court that the recent decisions of

our Appellate Court, including the First District

Appellate Court which are binding on this Court[,]

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really give the Panel broad berth in making judgment

calls about what the appropriate law is and really

admonished the Courts by their actions, if not by their

words, that it should not disturb an arbitration award

just because it may disagree with the application of

law.

So, while this might be an odd posture for a Court

which normally reviews questions of law de novo, it is,

it seems to the Court, clear from the Appellate Court’s

direction that this is territory that the Court is not

permitted to tread on except in those extreme

circumstances.

I don’t find that those extreme circumstances

exist in this case.

I know that there are two decisions cited, one

from the First District and one from the Fifth

District, involving questions of whether Section 155

applies to reinsurance agreements, but it seems to the

Court that ultimately the law in Illinois on that issue

is in flux, and that there is not a clear precedent

that clearly defines the scope of that provision, which

would presumably bind the Arbitration Panel applying

Illinois law.

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But I don’t think that the law is that clear, well

defined.

And I certainly can’t find, given that situation,

that the Panel committed a gross misapplication or

gross error of law.”

On March 25, 2009, the court granted Amerisure’s motion to

confirm the arbitration award, entering judgment against Global

for $861,176 in attorney fees and $27,217.04 in interest. Global

appeals.

DECISION

Global contends the circuit court erred in denying its

motion for summary judgment where the arbitrators exceeded their

contractual and statutory authority by awarding attorney fees to

Amerisure and committed a gross error of law in doing so.

We review a circuit court’s ruling on a motion for summary

judgment de novo. Neiman v. Economy Preferred Insurance Co., 357

Ill. App. 3d 786, 793, 829 N.E.2d 907 (2005). Summary judgment

is proper where the pleadings and documents on file, viewed in a

light most favorable to the nonmoving party, demonstrate there is

no genuine issue of material fact and the moving party is

entitled to judgment as a matter of law. Neiman, 357 Ill. App.

3d at 793.

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“Judicial review of an arbitration award is more

limited than the review of a trial court’s decision.

[Citation.] Because the parties have agreed to have

their dispute settled by an arbitrator, it is the

arbitrator’s view that the parties have agreed to

accept, and the court should not overrule an award

simply because its interpretation differs from that of

the arbitrator. [Citation.] There is a presumption

that the arbitrator did not exceed his authority

[citation], and a court must construe an award, if

possible, so as to uphold its validity [citation]. A

court has no power to determine the merits of the award

simply because it strongly disagrees with the

arbitrator’s contract interpretation. [Citation.]

Also, a court cannot overturn an award on the ground

that it is illogical or inconsistent. [Citation.] In

fact, an arbitrator’s award will not even be set aside

because of errors in judgment or a mistake of law or

fact. [Citation.]” Galasso v. KNS Cos., 364 Ill. App.

3d 124, 130, 845 N.E.2d 857 (2006).

The parties agree Illinois law applies in this case because

the situs of the arbitration was Chicago. Section 12(a) of the

Act provides that an award “shall” be vacated under very limited

circumstances. See 710 ILCS 5/12(a) (West 2006). In relevant

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part, an award “shall” be vacated where the “arbitrators exceeded

their powers.” 710 ILCS 5/12(a)(3) (West 2006). In addition,

our supreme court has determined that courts have the power to

vacate an arbitration award when a gross error of law appears on

its face. Lee B. Stern & Co. v. Zimmerman, 277 Ill. App. 3d 423,

425, 660 N.E.2d 170 (1995), citing Board of Education v. Chicago

Teachers Union, Local No. 1, 86 Ill. 2d 469, 477, 427 N.E.2d 1199

(1981).

I. Authority for the Award

Global contends the panel exceeded its authority in awarding

attorney fees to Amerisure.

Amerisure contends Global waived review of this contention

because it failed to challenge the arbitrability of attorney fees

in the circuit court during the pendency of the arbitration.

Amerisure relies on section 2 of the Act (710 ILCS 5/2 (West

2006)) and Galasso for support.

Global contends it did not commit waiver because it agreed

Rule 43(d) of the AAA authorized the panel to award attorney fees

if permitted by Illinois law; however, it timely argued before

the panel that Illinois law provided no authority to award the

attorney fees in this case. We agree.

The parties here have a contractual right to limit the

awarding of attorney fees in an arbitration proceeding. “A

contractual right with respect to arbitration can be waived as

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can any other contract right.” Ure v. Wangler Construction Co.,

232 Ill. App. 3d 492, 498, 597 N.E.2d 759 (1992); see also First

Health Group Corp. v. Ruddick, 393 Ill. App. 3d 40, 52, 911

N.E.2d 1201 (2009) (a party cannot “sit silent, wait until an

adverse award issued, and then first argue that the arbitrator

did not have the authority even to hear the claim”). “Waiver of

a contract term may occur when a party conducts itself in a

manner which is inconsistent with the subject clause, thereby

indicating an abandonment of its contractual right.” Ure, 232

Ill. App. 3d at 498-99 (the defendant waived his right to consent

to consolidation by waiting until the joint arbitration convened

and objecting for the first time during opening statements).

However, if a party makes a timely objection, i.e., at the

earliest possible time, “the issue will be preserved for judicial

review, even if the party then participates in the subsequent

arbitration proceeding.” First Health Group Corp., 393 Ill. App.

3d at 49; see Ure, 232 Ill. App. 3d at 499.

Here, Global preserved the attorney fee issue for judicial

review with its timely objections. Initially, in response to

Amerisure’s announcement that it intended to seek attorney fees

without specifying its basis for the fees, Global said:

“[T]he Panel has no authority to award [attorney]

fees to either party because both parties have not

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requested them ***, the arbitration agreement does not

authorize the Panel to award them, and there does not

appear to be any statute that would support such an

award.”

Then, once Amerisure expressly articulated that it was relying on

section 155 to support its attorney fee claim, Global argued in

its prehearing brief and at the hearing that section 155 does not

allow arbitration panels to award attorney fees in reinsurance

actions.

Despite Global’s consistent objections, Amerisure claims

Global waived review of this issue because Global did not bring a

section 2 petition to stay the arbitration and challenge the

arbitrability of the attorney fees before a court. We disagree.

Because Global does not dispute the arbitrability of attorney

fees but, rather, the applicability of section 155 to the instant

reinsurance action, Global was not required to bring an

arbitrability challenge.

Section 2 of the Act provides:

“On application, the court may stay an arbitration

proceeding commenced or threatened on a showing that

there is no agreement to arbitrate. That issue, when

in substantial and bona fide dispute, shall be

forthwith and summarily tried and the stay ordered if

found for the moving party. If found for the opposing

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party, the court shall order the parties to proceed to

arbitration.” 710 ILCS 5/2(b) (West 2006).

Section 2 is permissive. “On application” indicates the

challenging party has a choice whether to “apply” for review of

the arbitrability of an issue. 710 ILCS 5/2(b) (West 2006). If

the party so decides to challenge arbitrability, the circuit

court “may” stay an arbitration. 710 ILCS 5/2(b) (West 2006).

Amerisure’s reliance on Galasso to support its contention

that Global had to file a section 2 petition to avoid waiver is

misplaced. In Galasso, an arbitration panel awarded attorney

fees pursuant to the Attorneys Fees in Wage Actions Act

(Attorneys Fees Act) (705 ILCS 225/0.01 (West 2002)) based on a

finding that the appellees were employees under the Illinois Wage

Payment and Collection Act (820 ILCS 115/1 et seq. (West 2002)).

Galasso, 364 Ill. App. 3d at 132. On appeal, the appellant

contended the panel exceeded its authority because the fees were

not part of the parties’ employment agreements or permitted by

the Attorneys Fees Act, and therefore were not arbitrable.

Galasso, 364 Ill. App. 3d at 132. The appellant, however, did

not submit a section 2 petition to challenge the arbitration

agreement nor did the appellant object, at any point during the

arbitration, to the arbitrability of the fees sought. Galasso,

364 Ill. App. 3d at 133. Furthermore, in asking the circuit

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court to vacate the award, the appellant argued that, in addition

to the panel’s award not being authorized by contract or

permitted by the statute at issue, it improperly included fees

related to other claims. Galasso, 364 Ill. App. 3d at 133. This

court found the appellant conceded before the circuit court that

the arbitrator could resolve the issue of attorney fees.

Galasso, 364 Ill. App. 3d at 133. As a result, this court held

the appellant forfeited its argument. Galasso, 364 Ill. App. 3d

at 133.

Contrary to Amerisure’s argument on appeal, Galasso does not

stand for the proposition that a party must utilize section 2 in

all instances to preserve an issue for judicial review. Rather,

Galasso noted that matters relating to preliminary questions of

arbitrability, like the scope of arbitrable issues or the

validity of an employment agreement between the disputing

parties, should be decided by arbitrators rather than courts in

accordance with Illinois public policy favoring arbitration as a

means of dispute resolution. Galasso, 364 Ill. App. 3d at 128-

130. Nevertheless, Galasso acknowledged that section 2 provided

a procedure to a party to petition the circuit court to determine

arbitrability questions where a party challenges the existence of

an arbitration agreement. Galasso, 364 Ill. App. 3d at 129-130.

Relevant to this appeal, Galasso ruled the defendant forfeited

review of his argument that the arbitrator exceeded his authority

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by awarding attorney fees because the defendant neither submitted

a section 2 petition to the court nor raised an objection before

the arbitrator. Galasso, 364 Ill. App. 3d at 132-33. Thus, we

reject Amerisure’s contention that arbitration parties must

utilize section 2 to preserve issues for judicial review.

Furthermore, Galasso is distinguishable from the case at

bar. In the instant case, as we stated, Global was not required

to submit a section 2 petition where it was not challenging the

arbitrability of the panel’s authority to award attorney fees in

general. Global simply contested whether the panel had the power

to award attorney fees to Amerisure based on section 155.

Moreover, in contrast to the Galasso appellant, Global, as

discussed above in detail, clearly objected in a timely manner to

the panel’s authority to award attorney fees pursuant to section

155. First Health Group Corp., 393 Ill. App. 3d at 48-49; see

Ure, 232 Ill. App. 3d at 499. Accordingly, Global did not waive

its challenge to the panel’s authority to award the fees pursuant

to section 155.

Turning to the substance of this appeal, Global contends the

arbitrators exceeded their authority because (1) they awarded

attorney fees on a basis the parties did not submit for

resolution, and (2) Illinois law does not authorize arbitrators

to award section 155 attorney fees.

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Although an arbitration panel need not disclose its basis

for an award (Edward Electric Co. v. Automation Inc., 229 Ill.

App. 3d 89, 100, 593 N.E.2d 833 (1992)), the instant panel did.

The arbitrators awarded attorney fees “based on a finding of ***

[Global’s] violation of its duty of utmost good faith to

[Amerisure].”

Insurers have an implied duty to use good faith in

representing their insureds. Pekin Insurance Co. v. Home

Insurance Co., 134 Ill. App. 3d 31, 33, 479 N.E.2d 1078 (1985).

An insurer violates that duty when it acts in a vexatious,

unreasonable, or outrageous manner. Pekin Insurance Co., 134

Ill. App. 3d at 34. More specific to the instant appeal, the

reinsurance industry imposes the duty of utmost good faith. See

Northwestern Mutual Life Insurance Co. v. Amerman, 119 Ill. 329,

338, 10 N.E. 2d 225 (1887).

“[R]einsurance relationships are governed by the

traditional principle of ‘utmost good faith’ (‘uberrima

fides’). [Citations.] ‘Utmost good faith ...

requires a reinsurer to indemnify its cedent for losses

that are even arguably within the scope of the coverage

of the reinsured, and not to refuse to pay merely

because there may be another reasonable interpretation

of the parties’ obligations under which the reinsurer

could avoid payment.’ ” Commercial Union Insurance Co.

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v. Seven Provinces Insurance Co., 217 F.3d 33, 43 (1st

Cir. 2000), quoting United Fire & Casualty Co. v.

Arkwright Mutual Insurance Co., 53 F. Supp. 2d 632, 642

(S.D.N.Y. 1999).

Global focuses much of its energy on arguing that the panel

exceeded its authority because it awarded the attorney fees based

on a violation of the duty of utmost good faith, which was not a

basis submitted by Amerisure or briefed by the parties. The

record, however, establishes that Amerisure requested attorney

fees based on both section 155 of the Code and the practices of

the reinsurance industry, which, as just described, include the

duty of utmost good faith.

A review of the portions of the pleadings and the

arbitration hearing transcript included in the record on appeal3

demonstrates the parties and the panel members repeatedly

referred to the reinsurance custom of utmost good faith. Global

admits such in its reply brief. In fact, during the hearing,

Amerisure urged the panel to rely on its reinsurance expertise,

specifically referencing the “utmost good faith rule,” in

3
The arbitration record was originally sealed by agreement

of the parties; however, the circuit court dissolved its order

during the proceedings and ordered the parties to file future

filings in the “usual fashion.”

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conjunction with section 155 in making its decision. Global did

not object then, or at any point when Amerisure referenced the

duty of utmost good faith. And, Amerisure consistently argued

before the panel that it was entitled to section 155 attorney

fees based on Global’s conduct in violation of the duty of utmost

good faith.

We recognize a violation of the duty of utmost good faith

does not, in itself, provide a basis for awarding attorney fees.

However, Illinois does recognize that allowing the recovery of

damages incurred as a result of unreasonable delays in the

settlement of insurance claims will encourage insurers to act

with the utmost good faith in resolving disputes. Calcagno v.

Personalcare Health Management, Inc., 207 Ill. App. 3d 493, 505,

565 N.E.2d 1330 (1991) (finding an insurer that paid the

underlying claim prior to being sued still may be held liable for

section 155 fees where the insurer unreasonably delayed settling

the claim). The instant record demonstrates that the terms

“violation of the duty of utmost good faith” and “vexatious and

unreasonable delay pursuant to section 155” were consistently

used, if not interchangeably, then as counterparts throughout the

arbitration. This was not, as Global contends, similar to Quick

& Reilly, Inc. v. Zielinksi, 306 Ill. App. 3d 93, 101, 713 N.E.2d

739 (1999), where the arbitrators in that case exceeded their

authority because they awarded attorney fees based on a statute

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not presented by the parties. Here, the panel did not exceed its

authority in considering the reinsurance industry duty of utmost

good faith in its ultimate award.

Nevertheless, we do find that the panel exceeded its

authority because it relied on Illinois law as the basis for

awarding attorney fees; however, Illinois law is clear that

section 155 of the Code does not authorize arbitrators to award

attorney fees.

Section 10 of the Act (710 ILCS 5/10 (West 2006)) provides:

“Unless otherwise provided in the agreement to

arbitrate, the arbitrators’ expenses and fees, together

with other expenses, not including attorney’s fees,

incurred in the conduct of the arbitration, shall be

paid as provided in the award.” (Emphasis added.)

This court has interpreted the statute to mean:

“[A]bsent a contrary provision in the arbitration

agreement, the Act authorizes arbitrators to assess all

fees and costs associated with an arbitration

proceeding, except for attorney fees. With respect to

attorney fees, the statute neither permits nor

prohibits the arbitrators’ assessment of attorney fees.

Rather, the Act delegates this decision to the parties.

As such, an arbitrator’s authority to assess attorney

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fees derives solely from the agreement to arbitrate.”

Lee B. Stern & Co., 277 Ill. App. 3d at 426.

Moreover, “ ‘[P]arties are only bound to arbitrate those issues

which by clear language they have agreed to arbitrate;

arbitration agreements will not be extended by construction or

implication.’ ” Lee B. Stern & Co., 277 Ill. App. 3d at 427-28,

quoting Flood v. Country Mutual Insurance Co., 41 Ill. 2d 91, 94,

242 N.E.2d 149 (1968).

Here, the parties’ arbitration agreement did not expressly

provide for attorney fees; however, in relation to the agreement

to arbitrate, the treaty said “except as provided ***,

arbitration shall be based upon the procedures of the American

Arbitration Association insofar as applicable.” In addition, the

treaty said “[t]he arbitrators shall not be obliged to follow

judicial formalities or rules of evidence except to the extent

required by governing law -– that is, the state law of the situs

of the arbitration ***; they shall make their decisions according

to the practice of the reinsurance business.”

Rule 43(d)(2) of the AAA provides three bases upon which an

arbitration panel may award attorney fees: (1) “if all parties

have requested such an award”; (2) if “it is authorized by law”;

or (3) if it is authorized by “their arbitration agreement.”

Both parties did not request attorney fees, only Amerisure did,

and, as stated, the arbitration agreement did not expressly

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provide for attorney fees. Therefore, the parties agreed to

arbitrate only those attorney fees authorized by Illinois law, as

the chosen forum.

Section 155 of the Code provides, in relevant part:

“(1) In any action by or against a company wherein

there is in issue the liability of a company on a

policy or policies of insurance or the amount of the

loss payable thereunder, or for an unreasonable delay

in settling a claim, and it appears to the court that

such action or delay is vexatious and unreasonable, the

court may allow as part of the taxable costs in the

action reasonable attorney fees.” 215 ILCS 5/155 (West

2006).

A court’s primary objective in interpreting a statute is to

give effect to the intent of the legislature. Harshman v.

DePhillips, 218 Ill. 2d 482, 493, 844 N.E.2d 941 (2006). The

best indicator of the legislators’ intent is the plain language

of the statute. Harshman, 218 Ill. 2d at 493. When a statute’s

language is clear and unambiguous, we will give it effect without

resorting to other aids of construction. Harshman, 218 Ill. 2d

at 493.

In interpreting section 155, this court has said:

“Section 155 is intended to penalize vexatious

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delay or rejection of legitimate claims by insurance

companies. If the insurance company vexatiously delays

or rejects legitimate claims, it is responsible for the

expense resulting from the insured’s efforts to

prosecute the claim. [Citation.] When an insured must

resort to bringing a declaratory action against the

insurer in order to enforce its right to coverage in an

underlying lawsuit, the insured may recover section 155

attorney fees incurred in both the underlying case and

the declaratory action. [Citation.]” (Emphasis

added.) Estate of Price v. Universal Casualty Co., 334

Ill. App. 3d 1010, 1012, 779 N.E.2d 384 (2002).

Since the statute was implemented in 1937, it has designated

the court as the authority to allow section 155 attorney fees.

Moreover, this court has held that a party may not “recover

attorneys fees under section 155 by way of an arbitration

proceeding.” American Service Insurance Co. v. Passarelli, 323

Ill. App. 3d 587, 591, 752 N.E.2d 635 (2001). Relying on the

plain language of the statute, this court found the insured

improperly attempted to recover attorney fees from an arbitration

panel when the fees may only be awarded by a circuit court.

Passarelli, 323 Ill. App. 3d at 591. Specifically, the

Passarelli court relied on the language of section 155: “ ‘the

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court may allow as part of the taxable costs in the action

reasonable attorney fees’ and that such an award is allowable if

‘it appears to the court that such action or delay is vexatious

and unreasonable.’ ” (Emphasis in original.) Passarelli, 323

Ill. App. 3d at 591, quoting 215 ILCS 5/155(1) (West 1998); see

McGee v. State Farm Fire & Casualty Co., 315 Ill. App. 3d 673,

681, 752 N.E.2d 635 (2000) (“[w]hether an insurer’s conduct is

vexatious and unreasonable is a matter committed to the circuit

court’s discretion”); see also Estate of Price v. Universal

Casualty Co., 322 Ill. App. 3d 514, 517-18 (2001) (when

determining whether an insurer is subject to section 155, a

circuit court must consider the totality of the circumstances).

More recently, in Smith v. State Farm Insurance Cos., 369

Ill. App. 3d 478, 485, 861 N.E.2d 183 (2006), this court said a

section 155 claim “is only proper in court and not in arbitration

proceedings, as the statute vests the court with the discretion

to determine the award.” (Emphasis added.) We found in Smith

that the plaintiff’s section 155 action was not authorized by

statute and was not “covered under the scope of an arbitration”

because “section 155 itself vests the court with discretion to

determine the award, if any, in a matter brought pursuant to it.”

(Emphasis added.) Smith, 369 Ill. App. 3d at 485 (holding a

release agreement following arbitration did not bar the plaintiff

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from filing a subsequent section 155 claim in a circuit court).

The arbitrators were required to recognize the parties’

contractual agreement that limited the arbitrators’ authority to

award attorney fees in conformance with Illinois law. When the

arbitrators awarded attorney fees based on section 155, they did

so in violation of Illinois law.

Amerisure relies on Beatty v. Doctor’s Co., 374 Ill. App. 3d

558, 871 N.E.2d 138 (2007), to support its contention that

Illinois courts have allowed arbitrators to award section 155

attorney fees. Amerisure’s reliance, however, is misplaced.

In Beatty, the plaintiff’s amended complaint in the circuit

court alleged the defendant failed to defend and indemnify the

plaintiff in a professional liability action, and sought, inter

alia, attorney fees pursuant to section 155. Beatty, 374 Ill.

App. 3d at 560. The parties eventually agreed to arbitrate, and

the circuit court issued a consent order in which the parties

agreed to binding arbitration for those matters raised in the

plaintiff’s amended complaint. Beatty, 374 Ill. App. 3d at 565.

The arbitrators then awarded attorney fees pursuant to section

155, and the award was confirmed. Beatty, 374 Ill. App. 3d at

561-62.

On appeal, the defendant primarily contended the arbitrators

grossly erred in finding it acted vexatiously and unreasonably

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pursuant to section 155. Beatty, 374 Ill. App. 3d at 564. The

Fifth District held it was outside the scope of the court’s

review to reanalyze the arbitrators’ determination because the

facts upon which the decision was based did not appear on the

face of the award. Beatty, 374 Ill. App. 3d at 564. In

addition, the Fifth District held Passarelli was distinguishable

because the parties mutually consented to arbitrate the issue of

section 155 attorney fees. Beatty, 374 Ill. App. 3d at 565.

We find Beatty inapplicable to the case at bar where it is

narrowly limited to its facts. Beatty never addressed the

arbitrator’s authority under Illinois law to award section 155

attorney fees because judicial review was essentially forfeited

where the parties agreed to arbitrate all matters alleged in the

amended complaint, including the claim for attorney fees under

section 155. Beatty, 374 Ill. App. 3d at 565. We find no

indication in Beatty that the appellant timely argued to the

arbitrators that Illinois law did not authorize them to award

section 155 attorney fees.

Here, in contrast, Global consistently argued in a timely

manner that section 155 fees could not be awarded. As discussed

in detail above, Amerisure and Global entered a standard

arbitration agreement when they first contracted, agreeing to

arbitrate only those attorney fees authorized by Illinois law.

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Section 155 does not provide arbitrators with the authority to

award attorney fees; the plain language of the statute reserves

that authority to circuit courts. 215 ILCS 5/155 (West 2006).

Therefore, the instant arbitrators were not authorized under

Illinois law to award attorney fees pursuant to section 155.

We are not persuaded by Amerisure’s argument that

Passarelli is distinguishable simply because the parties there

did not have an arbitration agreement and were forced to

arbitrate their uninsured motorist claim based on the Code. The

Passarelli holding that section 155 fees may only be awarded by a

court, not an arbitration panel, applies regardless of the method

by which the parties entered arbitration. And, we find

Amerisure’s reliance on Father & Sons, Inc. v. Taylor, 301 Ill.

App. 3d 448, 703 N.E.2d 532 (1998), to be misplaced. The statute

at issue there was the Consumer Fraud and Deceptive Business

Practices Act (815 ILCS 505/10a(e) (West 1996)). We need not

turn to other construction aids, such as the comparative language

of another statute, to interpret the clear and unambiguous

language of section 155. Harshman, 218 Ill. 2d at 493.

We do not come to our decision lightly, without

consideration of the deference given to arbitrators and the

public policy behind arbitration. However, the instant case is

an extraordinary one where the arbitrators awarded attorney fees

based on a statute which clearly reserves the authority to award

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such fees to the courts. This was a gross error of law, as we

discuss in the next section. A panel exceeds its authority when

“ ‘all fair and reasonable minds would agree that the

construction of the contract made by the arbitrator was not

possible under a fair interpretation of the contract.’ ” Garver

v. Ferguson, 76 Ill. 2d 1, 9-10, 389 N.E.2d 1181 (1979), quoting

M. Pirsig, Some Comments on Arbitration Legislation & the Uniform

Act, 10 Vand. L. Rev. 685, 706 (1957). We conclude that standard

has been met here.

We need not address whether section 155 applies to

reinsurance relationships because, even assuming, arguendo, it

does, the arbitrators did not have the authority to award

attorney fees pursuant to the statute.

II. Gross Error on the Face of the Award

Amerisure contends that any error by the arbitrators in

interpreting or applying section 155 was merely a mistake of law,

and, thus, not a sufficient ground to vacate the attorney fee

award. We disagree because this appeal does not involve a mere

dispute concerning the arbitrators’ statutory interpretation but,

rather, the awarding of attorney fees contrary to clear Illinois

law.

“Errors of judgment in law are not grounds for vacating an

arbitrator’s award when the interpretation of the law is

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entrusted to the arbitrator.” Board of Education v. Chicago

Teachers Union, Local No. 1, 86 Ill. 2d 469, 477, 427 N.E.2d 1199

(1981). “Only where it appears on the face of the award (and not

in the arbitrator’s opinion) that the arbitrator was so mistaken

as to the law that, if apprised of the mistake, the award would

be different may a court review the legal reasoning used to reach

the decision.” Board of Education, 86 Ill. 2d at 477.

Here, on its face, the arbitrators awarded attorney fees

based on Global’s violation of the duty of utmost good faith.

However, in Illinois, the “American” rule only allows a

successful litigant to recover attorney fees if authorized by the

parties’ agreement or statute. Krantz v. Chessick, 282 Ill. App.

3d 322, 329, 668 N.E.2d 77 (1996). The parties here did not

contract for the awarding of fees, by an arbitration panel or

otherwise, in the event of a violation of the duty of utmost good

faith. Amerisure does not cite, and our research has not

revealed, any statute providing fees in that event. Moreover,

Illinois does not recognize a bad-faith exception to the

“American” rule for attorney fees. Krantz, 282 Ill. App. 3d at

330. Since there is no methodology in the parties’ agreement or

under Illinois law for awarding attorney fees due to a violation

of the duty of utmost good faith, we find the panel was so

mistaken that if apprised of the law it would have made a

different decision.

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Accordingly, we may review the arbitration record, as we

previously did when analyzing whether the panel exceeded its

authority by considering a matter not raised by the parties.

Board of Education, 86 Ill. 2d at 477. As the record

demonstrated, the panel awarded the attorney fees based on

section 155 in conjunction with the reinsurance practice of the

duty of utmost good faith. Significantly, the parties admit that

Passarelli was never submitted or argued to the panel during the

arbitration proceedings. Moreover, neither party apprised the

panel of Smith. Passarelli and Smith clearly establish that

Illinois law has consistently held that arbitrators do not have

the authority to award section 155 attorney fees. And, as

discussed above, Beatty does not detract from that consistent

statement of Illinois law. The failure to provide the

arbitrators with an accurate argument concerning Illinois law on

this issue resulted in the panel being so mistaken as to the law

that, if apprised of the mistake, the award would have been

different.

CONCLUSION

We respectfully reverse the circuit court’s summary judgment

finding in favor of Amerisure and vacate that part of the

arbitrators’ order awarding attorney fees.

Judgment reversed; award vacated in part.

HALL, P.J., and PATTI, J., concur.

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REPORTER OF DECISIONS - ILLINOIS APPELLATE COURT

AMERISURE MUTUAL INSURANCE COMPANY and AMERISURE
INSURANCE COMPANY,

Plaintiffs and Counterdefendants-Appellees,

v.

GLOBAL REINSURANCE CORPORATION OF AMERICA, f/k/a Gerling
Global Reinsurance Corporation of America,

Defendant and Counterplaintiff-
Appellant.

No. 1-09-0820

Appellate Court of Illinois
First District, FIRST DIVISION

March 15, 2010

Justice Bertina E. Lampkin authored the opinion of the court:

Presiding Justice Hall and Justice Patti concur.

Appeal from the Circuit Court of Cook County.
The Hon. Rita M. Novak, Judge Presiding.

COUNSEL FOR APPELLANT
Hinshaw & Culbertson LLP, Chicago, IL 60601
OF COUNSEL: Edward K. Lenci, Fritz K. Huszagh and
Christine Olson McTigue

COUNSEL FOR APPELLEES
DLA Piper LLP, Chicago, IL 60601
OF COUNSEL: Stephen W. Schwab, Holly M. Spurlock
and Amanda L. Fox

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