Cothran v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 07 August 2019
• Docket Number: Opinion No. 27914,Appellate Case No. 2018-000235
• Citation: 427 S.C. 545,831 S.E.2d 919
• Court: South Carolina Supreme Court
• Parties: Wadette COTHRAN and Chris Cothran, Petitioners, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and Robert Tucker, Defendants, of which State Farm Mutual Automobile Insurance Company is the Respondent.

427 S.C. 545

831 S.E.2d 919

Wadette COTHRAN and Chris Cothran, Petitioners,

v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and Robert Tucker, Defendants,of which State Farm Mutual Automobile Insurance Company is the Respondent.

Appellate Case No. 2018-000235

Opinion No. 27914

Supreme Court of South Carolina.

Heard May 29, 2019

Filed August 7, 2019

Charles Logan Rollins II, Hawkins Law Firm, of Spartanburg, for Petitioners.

Robert William Whelan, Charles R. Norris, of Charleston, and C. Mitchell Brown, of Columbia, all of Nelson Mullins Riley & Scarborough, LLP, for Respondent.

JUSTICE FEW :

Section 38-77-144 of the South Carolina Code (2015) provides that no-fault personal injury protection (PIP) insurance coverage "is not subject to a setoff." This appeal requires us to consider whether section 38-77-144 prohibits an automobile insurance carrier from reducing its obligation to pay PIP benefits to its insured by the amount of workers' compensation benefits the insured received for medical expenses. We hold that it does.

I. Facts and Procedural History

Wadette Cothran incurred approximately $40,000 in medical expenses from injuries she received in an automobile accident. Her employer's workers' compensation carrier paid all of her medical expenses. She was also covered by her automobile insurance policy issued to her and her husband Chris by State Farm Mutual Automobile Insurance Company. The State Farm policy provided PIP coverage with a limit of $5,000. However, State Farm refused to pay her any PIP benefits for medical expenses based on a "Workers' Compensation Coordination" provision in the policy. The "Coordination" provision states,

Any Personal Injury Protection Coverage provided by this policy applies as excess over any benefits recovered under any workers' compensation law or any other similar law.

The Cothrans filed this lawsuit against State Farm alleging breach of contract and bad faith refusal to pay insurance benefits.

The circuit court granted summary judgment to the Cothrans on the breach of contract claim, finding the "Coordination" provision violated section 38-77-144. The court of appeals reversed. Cothran v. State Farm Mut. Auto. Ins. Co. , 421 S.C. 562, 808 S.E.2d 824 (Ct. App. 2017). We granted the Cothrans' petition for a writ of certiorari. We reverse the court of appeals, and reinstate the summary judgment.

II. Section 38-77-144

We begin with the text of section 38-77-144.

There is no personal injury protection (PIP) coverage mandated under the automobile insurance laws of this State. Any reference to personal injury protection in Title 38 or 56 or elsewhere is deleted. If an insurer sells no-fault insurance coverage which provides personal injury protection, medical payment coverage, or economic loss coverage, the coverage shall not be assigned or subrogated and is not subject to a setoff.

§ 38-77-144.

We focus on the language "the [PIP] coverage ... is not subject to a setoff." The term "setoff" is not defined in our Insurance code. Therefore, we apply the term's "usual and customary meaning." Perry v. Bullock , 409 S.C. 137, 140-41, 761 S.E.2d 251, 253 (2014). Merriam-Webster defines "setoff" as "something that is set off against another thing" and as "the discharge of a debt by setting against it a distinct claim in favor of the debtor." Setoff , WEBSTER'S NINTH NEW COLLEGIATE DICTIONARY (1988). The term is defined in BLACK'S LAW DICTIONARY as, "A defendant's counterdemand against the plaintiff, arising out of a transaction independent of the plaintiff's claim," and, "A debtor's right to reduce the amount of a debt by any sum the creditor owes the debtor." Setoff , BLACK'S LAW DICTIONARY (11th ed. 2019).

However, the term "setoff" is also commonly used to describe any reduction in the amount a defendant or insurance company would otherwise be obligated to pay on a claim, when the right to the reduction arises as a result of a payment from a third party. Our courts have used the term for this meaning in numerous cases. In Smith v. Widener , 397 S.C. 468, 724 S.E.2d 188 (Ct. App. 2012), for example, the plaintiff filed suit to recover funds she claimed should have been paid to her, but were wrongly paid to other parties. 397 S.C. at 471, 724 S.E.2d at 190. Before trial, the defendant who made the contested payment settled. At the conclusion of trial, the jury found the defendants who received the payment had done so wrongfully, and they must pay the funds to the plaintiff. Id.

These defendants argued the judgment to be entered against them must be reduced by the amount the plaintiff received before trial in settlement. Id. The parties, the trial court, and the court of appeals framed the question as whether the non-settling defendants were entitled to a "setoff" because of this third-party payment. The court of appeals held that "before entering judgment on a jury verdict, the court must reduce the amount of the verdict to account for any funds previously paid by a settling defendant, so long as the settlement funds were paid to compensate the same plaintiff on a claim for the same injury." 397 S.C. at 471-72, 724 S.E.2d at 190. The court described this as a "setoff" that arises by operation of law. 397 S.C. at 472, 724 S.E.2d at 190 (citing Ellis v. Oliver , 335 S.C. 106, 111, 515 S.E.2d 268, 271 (Ct. App. 1999) ). See also Rutland v. S.C. Dep't of Transp. , 400 S.C. 209, 217, 734 S.E.2d 142, 146 (2012) (finding the trial court properly reduced a jury verdict against one defendant by the amount paid in settlement by different defendants, and calling that a "set-off"); Huck v. Oakland Wings, LLC , 422 S.C. 430, 436, 813 S.E.2d 288, 291 (Ct. App. 2018) (stating, "A nonsettling defendant is entitled to credit for the amount paid by another defendant who settles," and calling that a "setoff" (quoting Welch v. Epstein , 342 S.C. 279, 312, 536 S.E.2d 408, 425 (Ct. App. 2000) )); Ellis , 335 S.C. at 109, 515 S.E.2d at 270 (addressing whether a defendant was entitled to a "set-off" to reduce the judgment against him by the amount a third party paid the plaintiff for his medical expenses).

A setoff, therefore, takes two primary forms. The first—not applicable here—is when person A's obligation to pay person B is reduced by the amount of B's obligation to A, regardless of whether the corresponding obligations arose from the same transaction or subject matter. See Setoff , BLACK'S LAW DICTIONARY . The second—which is applicable here—is when A's (State Farm's) obligation to pay B (Wadette) is reduced by the amount of C's (workers' compensation carrier's) payment to B, where A's and C's obligations to pay did arise from the same transaction or subject matter.

The Legislature obviously intended to use the term "setoff" in this second form—as we did in Rutland , and the court of appeals did in Huck , Smith , Welch , and Ellis —when it drafted section 38-77-144.¹ In the context of PIP coverage, we can envision no situation in which an insured's obligation back to the insurer could reduce the insurer's obligation to the insured. Rather, the only thing that could ever be set off against PIP coverage is a third-party payment, such as a payment from a tortfeasor or the workers' compensation benefits Wadette received. Because "setoff" is not a situation that could arise under the first definition, the term becomes relevant in section 38-77-144 only under the second definition.

This discussion allows us to frame the issue before us more precisely. In section 38-77-144, the Legislature intended—at least in part—to prevent an insurance company that sells PIP coverage from reducing the amount of PIP it is obligated to pay because the insured received a third-party payment for the same expenses. If State Farm's "Coordination" provision has this effect, it is a setoff, and it violates the section.

Through its "Coordination" provision, State Farm attempts to designate the policy holder's opportunity to recover workers' compensation benefits as the policy holder's primary source of repayment for medical expenses. If the workers' compensation benefits equal the medical expenses—as occurred here—or if the difference between workers' compensation benefits received and the total medical expenses is less than the policy limit for PIP coverage, the "Coordination" provision becomes effective.² In the latter example, State Farm's obligation to pay PIP benefits would be reduced, but not eliminated. In the former example—as occurred here—the effect of the provision is that State Farm pays no PIP benefits. In this case, State Farm's obligation to pay PIP coverage to Wadette is reduced—eliminated, in fact—by the amount her employer's workers' compensation carrier paid her for medical expenses. In other words, the "Coordination" provision is a setoff.³

State Farm attempts to avoid this straightforward analysis by relying on this Court's opinion in State Farm Mutual Automobile Insurance Co. v. Richardson , 313 S.C. 58, 437 S.E.2d 43 (1993), and in particular our statement "the Legislature intended the set-off prohibition^{[4 ]} ... to apply only to the tortfeasor," 313 S.C. at 61, 437 S.E.2d at 45. The court of appeals agreed with State Farm that Richardson is controlling. Cothran , 421 S.C. at 569, 808 S.E.2d at 828. We do not agree Richardson may be read as expansively as State Farm argues and the court of appeals held. Richardson involved a different policy provision and a different set of facts. If Richardson is to control this case, it must be because the reasoning is applicable here, not simply because the words we chose to explain our reasoning—when read out of context—might appear to restrict the effect of the statute. As we will explain, the reasoning of Richardson is not applicable in this case.

The question in Richardson was whether section 38-77-145, see supra note 4, invalidated a policy provision that prevented the stacking of PIP benefits from two automobile policies issued by the same insurer. 313 S.C. at 59, 437 S.E.2d...