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Allstate Insurance Co. v. Sabato

October 3, 2005


On appeal from the Superior Court of New Jersey, Law Division, Hudson County, L-2621-04.

The opinion of the court was delivered by: Lintner, J.A.D.



Submitted September 12, 2005

Before Judges Cuff, Lintner, and Gilroy.

Defendant, Dr. Ulises Sabato, appeals from a Law Division order vacating an alternative dispute resolution award finding plaintiff, Allstate Insurance Company (Allstate), in bad faith. The order also reduced the attorney's fees awarded to Sabato. We dismiss the appeal insofar as it seeks a reversal of the Law Division order vacating the finding that Allstate acted in bad faith. However, we reverse the order reducing defendant's attorney's fees and remand for further proceedings.

Because they are interdependent, we combine the procedural history and relevant facts, which are largely undisputed. Nurya Noriega received treatment from Sabato following a November 1999 automobile accident. At the time of the accident, Noriega was insured for Personal Injury Protection (PIP) benefits under a policy issued by Allstate. After Allstate denied coverage, Sabato took an assignment of Noriega's claim and filed a demand for PIP arbitration with the American Arbitration Association seeking to recover medical expenses totaling $5494.44. An Alternative Dispute Resolution Professional (umpire) was appointed. Allstate defended, claiming that Sabato violated the Patient Records Rule, N.J.A.C. 13:35-6.5(b), requiring physicians to maintain contemporaneous permanent treatment records. Accepting Allstate's defense, the umpire found that Sabato's failure to satisfy the requirements of the Patient Records Rule precluded his recovery of PIP benefits.

Sabato filed an Order to Show Cause and Verified Complaint seeking to vacate the umpire's award. Arguing that N.J.S.A. 39:6A-5.1 and N.J.A.C. 11:3-5.6(d)(1) control and require the use of the Alternative Procedure for Dispute Resolution Act (APDRA), Sabato maintained that the award should be vacated, modified, or corrected because the umpire's decision erroneously applied the law to the issues and facts. N.J.S.A. 2A:23A-13c(5). Finding that there was insufficient evidence to indicate bad faith on the part of Allstate, the judge nevertheless concluded that Allstate had overlooked the records in its possession and had not provided them to its counsel. The judge vacated the award and ordered a remand to an independent umpire other than the one who had entered the previous award.

The new umpire found that Allstate acted in bad faith by allowing its counsel to raise the Patient Records Rule when it had the records in its file and thus knew or should have known that the defense was baseless. He awarded $2771.12 representing Sabato's amended demand, reflecting Allstate's partial payment of the medical bills. The umpire also awarded attorney's fees totaling $7125 and $525, which included the time spent by Sabato's counsel on the Order to Show Cause, as well as the time spent on the second alternative dispute hearing.

Allstate filed an Order to Show Cause and a Verified Complaint seeking to vacate the finding that it had acted in bad faith and reduce Sabato's attorney's fees to include only those incurred for the time spent before the second umpire. Allstate claimed that the umpire had erroneously applied the law to the facts because the issues of bad faith and attorney's fees, which generated the prior Order to Show Cause, were outside the scope of the second dispute resolution proceeding. In response, Sabato asserted that enactment of the Automobile Insurance Cost Reduction Act (AICRA), specifically N.J.S.A. 39:6A-5.1, did not change the standard of review imposed by the Arbitration Act, N.J.S.A. 2A:24-8, which was in effect at the time of Sabato's policy. Therefore, he claimed that the adoption by the Commissioner of Banking and Insurance (the Commissioner) of N.J.A.C. 11:3-5.6(d)(1), affording an expanded right of review under APDRA, was invalid as ultra vires. Sabato also argued that the umpire's award of attorney's fees and costs was proper because they were incurred in successfully prosecuting his claim.

Vacating the finding of bad faith, a second Law Division judge found that the umpire's determination that Allstate acted in bad faith was an erroneous application of the law. She noted the findings of the previous Law Division judge that Sabato had not established that Allstate's inadvertence was bad faith. Limiting the fees to those incurred in the hearing before the second umpire, the judge found that the award of attorney's fees was "directly related to his finding of bad faith" and the previous Law Division judge had not awarded attorney's fees to either party. Following Sabato's appeal, we granted the Commissioner's application to file as amicus curiae.

On appeal, Sabato asserts that the judge erred in reducing his attorney's fees by finding that the umpire erroneously applied the law to the facts in determining that Allstate acted in bad faith. Similarly, he claims that proper application of N.J.A.C. 11:3-5.6 and N.J.S.A. 2A:23A-13 should not have resulted in the reduction of his counsel fees, all of which were incurred in the successful prosecution of his PIP claim. Additionally, Sabato asserts that the Commissioner's adoption of N.J.A.C. 11:3-5.6 insofar as it permits the relaxed standard of review under APDRA is not authorized by AICRA, specifically N.J.S.A. 39:6A-5.1, and unconstitutionally usurps the power of the court by precluding access to the Appellate Division. Finally, he argues, for the first time on appeal, that because the underlying accident occurred on November 4, 1999, the Allstate policy predated the Commissioner's adoption of N.J.A.C. 11:3-5.6, and, therefore the Administrative Code provision should not be applied retroactively.

Allstate maintains that the Law Division judge correctly applied APDRA in vacating the findings of the second umpire and properly applied the law to the facts. Allstate further argues that we should not reach the question of constitutionality because: (1) Sabato is barred from challenging the administrative regulation by the doctrine of equitable estoppel; and (2) it would have prevailed regardless of whether the judge applied the standard of review prescribed by either the Arbitration Act or APDRA. The Commissioner argues that the standard of review set forth in N.J.A.C. 11:3-5.6 represents a valid and constitutional exercise of legislative authority.

We have serious concerns respecting the constitutionality of a statute or administrative provision that limits an insured's access to the Appellate Division based upon an insurer's decision to require dispute resolution in its policy. We need not decide the constitutional issues raised, however, because we are satisfied that reasonable attorney's fees are reviewable by us, notwithstanding APDRA's proscription of appeal, as one of "those 'rare circumstances' where public policy . . . trigger[s] the general supervisory power of the Courts." Weinstock v. Weinstock, 377 ...

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