Barnett v. American Family Mut. Ins. Co.

• Decision Date: 11 January 1993
• Docket Number: No. 91SC464,91SC464
• Citation: 843 P.2d 1302
• Parties: Gale F. BARNETT and Gary Barnett, Petitioners, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Respondent.
• Court: Colorado Supreme Court

Page 1302

843 P.2d 1302

24 A.L.R.5th 885

Gale F. BARNETT and Gary Barnett, Petitioners, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Respondent.

No. 91SC464.

Supreme Court of Colorado En Banc.

Jan. 11, 1993.

As Modified on Denial of Rehearing

Feb. 1, 1993.

Frederick W. Newall, Colorado Springs, for petitioners.

Kane, Donley & Shaffer, Thomas Kelly Kane, William A. Palmer, Colorado Springs, for respondent.

Wilcox, Ogden & Cox, P.C., Ralph Ogden, Denver, for amicus curiae Colorado Trial Lawyers Ass'n.

Justice VOLLACK delivered the Opinion of the Court.

Petitioners Gale F. and Gary Barnett (the Barnetts) petition from the court of appeals decision in American Family Insurance Co. v. Barnett, 821 P.2d 853 (Colo.App.1991). The court of appeals found that a limit of payable benefits clause in the Barnetts' automobile insurance policy was valid, and was properly applied to set off Social Security Disability Insurance (SSDI) benefits received for injuries which Gale Barnett (Barnett) sustained in an accident. We reverse and remand with directions.

I.

Gale and Gary Barnett were insured under a contract of liability insurance, policy No. 05-001426-01, with American Family Mutual Insurance Company (American Family). The policy took effect on December 22, 1983. The Barnetts' policy with American Family contained uninsured-underinsured motorist (UM/UIM) coverage for bodily injury of $100,000 for each person and $300,000 for each accident. The damage recovery provision of the Barnetts' policy provided in pertinent part:

We will pay damages for bodily injury which an insured person is legally entitled to recover from the owner or operator of an uninsured motor vehicle or an underinsured motor vehicle. The bodily injury must be caused by accident and arise out of the use of the uninsured motor vehicle or the underinsured motor vehicle.

(Emphasis omitted.) The policy also contained a section entitled "Limits of Liability," which provided:

Any amounts payable will be reduced by:

1. A payment made by the owner or operator of the uninsured motor vehicle or organization which may be legally liable.

2. A payment under the Liability coverage of this policy.

3. A payment made or amount payable because of bodily injury under any workers' compensation or disability benefits law or any similar law.

(Emphasis omitted and added.)

On March 17, 1984, the Barnetts were involved in an automobile accident with Robert Scott Minson (Minson), an underinsured motorist, who was driving a car owned by Lulubelle Morton (Morton). Barnett, who was a passenger in the car driven by her husband, was seriously injured as a result of the accident. Barnett stopped working on April 2, 1985.

On March 11, 1987, Barnett filed an application for Social Security Disability Insurance (SSDI) benefits based upon a disability due to neck, back, and hip injuries which were allegedly caused by the car accident.

On August 20, 1987, the Barnetts initiated a personal injury action against Minson for the injuries Barnett received in the accident and for a loss of consortium for Gary Barnett. Like the Barnetts, Morton and Minson were insured under an American Family policy. The liability insurance policy was in Morton's name for the amount of $50,000.

On September 22, 1988, a Federal Administrative Law Judge found Barnett disabled, and awarded her SSDI benefits to be retroactively applied to April 2, 1985, the date she stopped working. Barnett was awarded SSDI benefits of approximately $430 a month for herself and an additional $170 a month for her children under sections 416(i) and 423 of the Federal Social Security Act, 42 U.S.C. §§ 401-433 (1988).

The Barnetts settled the personal injury action against Morton and Minson for $50,000, the liability limit under Morton's casualty policy. American Family contends, and the Barnetts do not dispute, that the Barnetts' settlement with Minson is set off from the underinsured motorist benefits limits of $100,000, leaving a total additional coverage of $50,000 available to the Barnetts. The Barnetts placed American Family on notice that they would initiate a claim through the arbitration process for underinsured motorist benefits under policy No. 05-001426-01.

American Family initiated a declaratory judgment action, requesting a court determination of whether the SSDI benefits may be set off from the underinsured motorist benefits available to Barnett. American Family filed a motion for summary judgment in which it argued that the award from the Social Security Administration should be set off from any award made by the arbitration panel in the underinsured motorist claim pursuant to the Colorado collateral source limitation statute, § 13-21-111.6, 6A C.R.S. (1987) ("collateral source statute"), and subsection (3) of the "Limits of Liability" section of the American Family contract, which provides for the set-off of benefits payable under "any ... disability benefits law or any similar law" ("the subsection (3) set-off clause").

The Barnetts answered and filed a motion for summary judgment, arguing that the subsection (3) set-off clause in the insurance policy is void because it contravenes public policy. The Barnetts also argued that applying the collateral source statute to this accident would unconstitutionally violate the contracts clause and their rights to due process and equal protection.

In a written order dated February 6, 1990, the trial court allowed the set-off. The trial court held that the subsection (3) set-off clause in the insurance policy was valid, and that the collateral source statute, as applied to the facts of this case, does not violate either the United States or Colorado constitutions. Accordingly, the trial court granted American Family's motion in full and stated that American Family may submit the SSDI benefits received by Barnett to the arbitration panel for set-off under either the insurance policy or the collateral source statute.

The court of appeals affirmed the trial court's finding that the set-off of the SSDI benefits was valid. The court of appeals found that the set-off was proper under the subsection (3) set-off clause in the insurance policy, and, consequently, it did not address the question of whether the collateral source limitation statute is unconstitutional.

We granted certiorari to review the holding of the court of appeals that the uninsured motorist statute, § 10-4-609, 4A C.R.S. (1987), allows an insurance company to reduce the $100,000 in uninsured/underinsured motorist coverage which was purchased by the Barnetts, and which American Family was required by section 10-4-609(2), 4A C.R.S. (1987), to offer, by the amount of SSDI benefits received by the insured as a result of the injuries for which she claims uninsured/underinsured motorist benefits. Barnett, 821 P.2d 853. We reverse the judgment of the court of appeals and remand the case for further proceedings.

II.

American Family argues that Barnett's SSDI benefits should be set off from the UM/UIM benefits available to Barnett under the policy in accordance with the subsection (3) set-off clause in the contract. The Barnetts contend that the subsection (3) set-off clause in the American Family policy contravenes public policy because it undermines the purpose of the UM/UIM statute to prevent inadequate compensation to tort victims such as the Barnetts, and because it would minimize rather than maximize UM/UIM coverage.

Relying upon Perkins v. Riverside Insurance Co. of America, 141 Mich.App. 379, 367 N.W.2d 336 (1985), the court of appeals held that American Family could reduce the Barnetts' UM/UIM motorist coverage by the amount of SSDI benefits Barnett received for injuries caused by the same accident. American Family Ins. Co. v. Barnett, 821 P.2d 853 (Colo.App.1991).

We disagree with the holding of the court of appeals. We first find that Perkins should not have been applied. Further, we find that the subsection (3) set-off clause, with respect to the set-off of SSDI benefits, is void in contravention of public policy in this case. The subsection (3) set-off clause violates the General Assembly's intention that UM/UIM coverage "provide an insured with benefits to the extent necessary to recover for loss caused by a negligent and financially irresponsible motorist, subject to policy limits." Kral v. American Hardware Mut. Ins. Co., 784 P.2d 759, 765 (Colo.1989).

A.

In finding that the subsection (3) set-off clause was valid, the court of appeals relied on Perkins, which was predicated upon both a Michigan statute and Michigan case law requiring personal protection insurance benefits to be set off by state and federal governmental benefits. Perkins, 367 N.W.2d 336; see Mich. Comp. Laws § 500.3109(1) (1982); see also Wolford v. Travelers Ins. Co., 92 Mich.App. 600, 285 N.W.2d 383 (1979). Perkins is not the appropriate standard to apply in this case because Colorado does not statutorily require governmental benefits to be set off against UM/UIM benefits.

Unlike the Michigan statute, the Colorado Auto Accident Reparations Act, §§ 10-4-701 to -723, 4A C.R.S. (1987) (the No Fault Act), does not require insurance benefits to be set off by either federal or state governmental benefits as a general rule. Colorado does, however, require that benefits recovered under the Workers' Compensation Act of Colorado be set off against No Fault benefits. § 10-4-707(5), 4A C.R.S. (1987). This section provides:

When a person injured is a person for whom benefits are required to be paid under the "Work[ers'] Compensation Act of Colorado", the coverages described in section 10-4-706(1)(b) to (1)(e) shall be reduced to the extent that benefits are actually available and covered under said act within the time period for payment of benefits under this part 7 prescribed by section 10-4-708.

Given that the Colorado statute does not expressly address whether SSDI benefits, like Workers' Compensation benefits, should be...