O'Donnell v. State Farm Mut. Auto. Ins. Co.

• Court: Court of Appeal of Michigan
• Writing for the Court: T. M. BURNS; V. J. BRENNAN; BASHARA
• Citation: O'Donnell v. State Farm Mut. Auto. Ins. Co., 245 N.W.2d 801, 70 Mich.App. 487 (Mich. App. 1976)
• Decision Date: 04 August 1976
• Docket Number: Docket No. 25429
• Parties: Heather Elizabeth O'DONNELL et al., Plaintiffs-Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois Insurance Corporation, Defendant-Appellee. 70 Mich.App. 487, 245 N.W.2d 801

Page 801

245 N.W.2d 801

Heather Elizabeth O'DONNELL et al., Plaintiffs-Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois Insurance Corporation, Defendant-Appellee.

Docket No. 25429.

70 Mich.App. 487, 245 N.W.2d 801

Court of Appeals of Michigan.

Aug. 4, 1976.

Released for Publication Oct. 8, 1976.

[70 MICHAPP 492] Calder & Kirkendall by Robert E. Logeman, Ypsilanti, forplaintiffs-appellants.

DeVine & DeVine by Allyn D. Kantor, Ann Arbor, for defendant-appellee.

Before BASHARA, P.J., and V. J. BRENNAN and T. M. BURNS, JJ.

T. M. BURNS, Judge.

Plaintiffs are the wife and children of Gary O'Donnell, who was fatally injured in an automobile accident. Mr. O'Donnell was covered by a no-fault automobile insurance policy issued by the defendant, and plaintiffs are dependents of decedent for purposes of survivor's loss benefits.

Decedent's insurance policy provided that the maximum survivor's loss benefits would not exceed $1,000 per 30-day period and that the amount payable by the insurance company would be reduced by amounts paid or payable to the survivors under state or federal law.

Plaintiffs were entitled to the maximum benefits of $1,000 per 30-day period for three years after decedent's death as permitted by the no-fault act, M.C.L.A. § 500.3108; M.S.A. § 24.13108. From the monthly maximum benefits amount, however, defendant deducted $560, the sum plaintiffs received in social security benefits. This deduction was made pursuant to M.C.L.A. § 500.3109(1); M.S.A. § 24.13109(1), which provides as follows:

[70 MICHAPP 493] 'Benefits provided or required to be provided under the laws of any state or the federal government shall be subtracted from the personal protection insurance benefits otherwise payable for the injury.'

Plaintiffs thus received $440 per month instead of the $1,000 per month figure set out in the insurance policy.

Plaintiffs filed a complaint in circuit court alleging the defendant breached the insurance contract by not paying the full $1,000 per month in benefits. Plaintiffs also sought a declaration of rights relative to the constitutionality of § 3109 of the no-fault act, which provides for the deduction of governmental benefits from the personal protection insurance benefits.

Defendant filed a motion for summary judgment, alleging that plaintiffs failed to state a claim upon which relief could be granted in that the reduction of benefits under the policy was in compliance with state law. Defendant also asserted that the policy constituted a contract between private parties and that, since no state action was involved, no claim of constitutional violation could be maintained.

The trial court granted defendant's motion for summary judgment. The order stated that the complaint failed to state a cause of action for the reasons that no breach of any provision of the contract was alleged, and that defendant, in complying with the no-fault act, was not engaged in state action and, therefore, any claim that the contract itself was unconstitutional was not supported as a matter of law.

On appeal, plaintiffs argue that the trial court erred reversibly in granting summary judgment and contend that § 3109 of the no-fault act is unconstitutional.

[70 MICHAPP 494]

I

It is argued that M.C.L.A. § 500.3109(1); M.S.A. § 24.13109(1) violates the equal protection guarantees of the U.S. and Michigan Constitutions. This Court has recently enunciated the standard for review of legislation claimed to be so defective. See Shavers v. Attorney General, 65 Mich.App. 355, 237 N.W.2d 325 (1975). Cf. Manistee Bank & Trust Co. v. McGowan, 394 Mich. 655, 232 N.W.2d 636 (1975), and Fox v. Employment Security Commission, 379 Mich. 579, 153 N.W.2d 644 (1967).

Generally, legislative classification should be presumed valid, as the Legislature has broad discretion in distinguishing between different classes. 'The Legislature must be free to experiment without being required to attain 'mathematical nicety' in its formulation of remedies to social and economic problems'. Manistee Bank & Trust Co. v. McGowan, supra, 394 Mich. at 680, 232 N.W.2d at 647. But legislative classification must not be arbitrary or unreasonable, it must be germane to the object of the legislation, and it must be made uniform in its operation upon all persons of the class to which it naturally applies. Fox v. Employment Security Commission, supra.

'Even under the minimum scrutiny test applied when innovative legislation is challenged on equal protection grounds, the legislation must be examined to see if its classifications are reasonable, and bear some reasonable relationship to the object of the legislation. While it is not the judiciary's task to second-guess legislative wisdom or to speculate on the possibility of more precise line-drawing by the Legislature, the decision on reasonableness cannot be avoided.' Shavers v. Attorney General, supra, 65 Mich.App. at 369, 237 N.W.2d at 333.

In the Shavers v. Attorney General challenge of [70 MICHAPP 495] the no-fault act, Judge Gilmore of the Wayne County Circuit Court found that § 3109(1) violates the equal protection clauses of the U.S. and Michigan Constitutions. In this Court's decision in Shavers, we vacated that ruling because the question was not properly justiciable. In the instant case, however, we are squarely faced with a 'case of actual controversy' concerning the validity of § 3109(1).

The effect of § 3109(1) is to reduce nofault benefits by any compensation paid under any state or Federal laws, such as workmen's compensation and social security benefits. Thus, no-fault recovery is reduced by governmental collateral sources but not by any private insurance sources. The basic purpose of no-fault is to insure the compensation of persons injured in automobile accidents. But the effect of § 3109(1) is to allow both no-fault benefits and private insurance benefits to those who have such private insurance, yet it reduces no-fault benefits by any benefits received under a governmental program. Thus, those who have no private insurance or who cannot afford such insurance receive fewer benefits because of that fact. We find this section to be patently unreasonable and discriminatory.

Presumably, the purpose of § 3109(1) is to reduce the overall cost of the no-fault program by eliminating duplicative recovery. If the insurer has to pay less, he can charge less. As recognized in Shavers, the reduction of the cost of insurance is a proper basis for legislative classification, and prohibitive cost was a problem that needed solution. But the fact that a problem exists does not permit arbitrary means of solving it and assuming that § 3109(1) does reduce costs, such savings alone do not justify an essentially arbitrary classification. [70 MICHAPP 496] Manistee Bank & Trust Co. v. McGowan, supra, 394 Mich. at 677, 232 N.W.2d 636. Cf. Grace v. Howlett, 51 Ill.2d 478, 283 N.E.2d 474 (1972).

Section 3109(1) is very broad--it covers any collateral governmental source. Nofault systems in other states include collateral source set-off provisions, but in Illinois and Florida, for example, the set-off provisions apply only to workmen's compensation benefits. It might be argued that the latter type of set-off provision is reasonable because the workmen's compensation benefits are provided without cost to the beneficiary, while private collateral source benefits are not. ¹ Cf. Grace v. Howlett, supra, Chief of Justice Underwood, dissenting. The argument is persuasive. Section 3109(1), however, is not limited to governmental benefits provided without cost to the beneficiary. The provision requires the reduction of recovery by benefits which are in a very real sense 'paid for' by the 'insured', such as under social security, or benefits which are in the nature of employee benefits to government employees and veterans. ² In this case the beneficiary's no-fault benefits[70 MICHAPP 497] are reduced by governmental insurance the insured has paid for but not by private insurance for which he has paid. While this raises a fundamental due process issue (see E.g., Flemming v. Nestor, 363 U.S. 603, 80 S.Ct. 1367, 4 L.Ed.2d 1435 (1960), the principal evil of § 3101(1) is its arbitrary application. Those who can afford private insurance to supplement no-fault benefits are permitted duplicative recovery while those who cannot afford such are denied duplicative recovery.

An analogous problem has existed under the uninsured motorist systems. Courts have held that policy exclusions reducing an insured's recovery by amounts paid out of workmen's compensation funds or under disability benefit laws are invalid and against public policy. See E.g., Allied Mutual Insurance Company v. Larriva, 19 Ariz.App. 385, 507 P.2d 997 (1973). ³ In Travelers Insurance Co. v. National Farmers Union Property & Casualty Co., 252 Ark. 624, 632, 480 S.W.2d 585, 591 (1972), the court stated:

'The right claimed by NFU (the insurer) would simply provide it with a windfall in the case of one covered by the workmen's compensation laws. The purpose of the Uninsured Motorist Act was to protect the insured, not the insurer.' ⁴

In Bowser v. Jacobs, 36 Mich.App. 320, 194 N.W.2d 110 (1971), this Court was concerned with the constitutionality of a section of the Motor Vehicle Accident Claims Act which prevented [70 MICHAPP 498] those covered by workmen's compensation from recovering under the Act. The plaintiffs were injured while in the course of their employment, by uninsured motorists. They received workmen's compensation and sought recovery against the uninsured motorist fund. The Secretary of State sought dismissal of the suits, relying upon a section of the Act which barred recovery by an injured person if he was covered by workmen's compensation. It was demonstrated that those who had private insurance coverage were not similarly barred from recovery against the fund. This Court struck down the legislative...