Hamm v. State Farm Mut. Auto. Ins. Co., 73614-6.

• Citation: 151 Wash.2d 303,88 P.3d 395
• Decision Date: 22 April 2004
• Docket Number: No. 73614-6.,73614-6.
• Court: United States State Supreme Court of Washington
• Parties: Rebecca HAMM, Petitioner, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Respondent.

88 P.3d 395

151 Wash.2d 303

Rebecca HAMM, Petitioner, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Respondent.

No. 73614-6.

Supreme Court of Washington, En Banc.

Argued October 22, 2003.

Decided April 22, 2004.

Graham Lundberg & Perschel, Kenneth Dore, Seattle, for Petitioner.

Reed McClure, William Hickman, Pamela Okano, Todd & Wakefield, Robert Mannheimer, Seattle, Mark Koenig, c/o John Roche, Northport, NY, for Respondent.

Debra Stephens, Gary Bloom, Bryan Harnetiaux, Spokane, for Amicus Curiae (Washington State Trial Lawyers Assn).

FAIRHURST, J.

A no-fault motorist was injured in a car accident with an uninsured motorist (tortfeasor). She recovered both personal injury protection (PIP) benefits and uninsured motorist (UIM)¹ benefits from the same insurance carrier. After arbitration of the UIM claim was complete, the insurance carrier took an offset, in an amount equal to the PIP benefits it previously paid, against the amount it owed in its capacity as UIM carrier. We extend our earlier decisions in Mahler v. Szucs, 135 Wash.2d 398, 957 P.2d 632, 966 P.2d 305 (1998), and Winters v. State Farm Mutual Automobile Insurance Co., 144 Wash.2d 869, 31 P.3d 1164, 63 P.3d 764 (2001), and hold that in order to take a PIP reimbursement offset, the insurance carrier must pay a pro rata share of the legal expenses incurred by the insured to arbitrate the UIM claim.

I. FACTS AND PROCEDURAL HISTORY

In November 1994, Rebecca Hamm was injured in an automobile accident with an uninsured motorist. Hamm qualified as an insured under a policy with State Farm Mutual Automobile Insurance Co. (State Farm) for both PIP benefits and UIM benefits. She received $8,669.71 in PIP benefits from State Farm for medical expenses she incurred as a result of the accident. Rather than pursue her claim against an uninsured motorist, Hamm immediately presented a UIM claim to State Farm. After attempts to settle the UIM claim proved unsuccessful, Hamm pursued arbitration as provided in the State Farm policy. The arbitrator determined that Hamm's total damages, including medical expenses, were $16,000.00. From the $16,000.00 that State Farm owed to Hamm in its capacity as her UIM carrier it offset the amount it previously paid as her PIP carrier, and tendered her a check for the $7,330.29 balance.

The parties disputed the proper amount of the offset, and Hamm eventually brought an action for declaratory relief. The trial court permitted State Farm to offset the total amount of benefits it paid as PIP carrier from the amount of benefits that the arbitrator determined it was obligated to pay as UIM carrier. The trial court, citing Mahler, also required State Farm to pay its pro rata share of the legal expenses (which it set at $6,634.06) that Hamm incurred arbitrating the UIM claim. Because the PIP offset represented approximately 54 percent of the total recovery, State Farm was ordered to pay 54 percent of Hamm's legal expenses.

State Farm appealed the award of pro rata legal expenses, and the Court of Appeals reversed. Hamm v. State Farm Mut. Auto. Ins. Co., 101 Wash.App. 360, 3 P.3d 761 (2000). We accepted Hamm's petition for review, and remanded to the Court of Appeals for reconsideration in light of our recent decision in Winters. Hamm v. State Farm Mut. Auto. Ins. Co., 145 Wash.2d 1032, 42 P.3d 1278 (2002). On remand, the Court of Appeals considered Winters, concluded that it did not apply, and declined to amend its earlier opinion. Hamm v. State Farm Mut. Auto. Ins. Co., 115 Wash.App. 773, 60 P.3d 640 (2002). We once again accepted Hamm's petition for review and now review the Court of Appeals' decision not to apply Winters. Hamm v. State Farm Mut. Auto. Ins. Co., 149 Wash.2d 1017, 72 P.3d 762 (2003).

II. ISSUE

Does the pro rata sharing rule for legal expenses articulated in Mahler (recovery from a fully insured tortfeasor) and in Winters (combined recovery from an underinsured tortfeasor and a UIM carrier) apply when the tortfeasor is uninsured and the insured recovers only from a UIM carrier?

III. ANALYSIS

A. Background

Two separate and distinct types of insurance coverage are involved in this case—PIP and UIM. PIP coverage generally provides benefits for the immediate costs of an automobile accident, including medical expenses and loss of income. UIM coverage, which functions separately from PIP coverage, covers all damages that the insured would have been entitled to receive from the tortfeasor, including the medical expenses, loss of income, and other damages that are also covered by PIP. See RCW 48.22.030(UIM),.085(PIP).

UIM and PIP coverages may overlap with each other and with any potential recovery from the tortfeasor. Although UIM and PIP carriers are permitted to account for any eventual coverage overlap, accounting for overlapping coverage is accomplished differently for UIM carriers than for PIP carriers.

For purposes of UIM coverage, the insurance carrier is said to stand in the shoes of the tortfeasor, and payments made by the UIM carrier are treated as if they were made by the tortfeasor. Britton v. Safeco Ins. Co. of Am., 104 Wash.2d 518, 529, 707 P.2d 125 (1985); Winters, 144 Wash.2d at 880, 31 P.3d 1164. Accordingly, UIM carriers are entitled to set off the amount of any tortfeasor recovery from the amounts owed to an insured under a UIM policy.² Hamilton v. Farmers Ins. Co. of Wash., 107 Wash.2d 721, 728, 733 P.2d 213 (1987) (a UIM carrier "always is allowed to credit the full amount of the tortfeasor's liability coverage against the insured's damages"). UIM carriers do not need to pay a pro rata portion of the legal expenses the insured incurs to arbitrate a UIM claim in order to take a setoff. Dayton v. Farmers Ins. Group, 124 Wash.2d 277, 281, 876 P.2d 896 (1994) ("When a tortfeasor carries insurance, the claimant insured bears his or her own attorney fees in the arbitration proceedings. Thus, when the UIM insurer stands in the shoes of the uninsured tortfeasor, the claimant insured should likewise bear his or her own attorney fees." (citation omitted)).

In contrast, PIP carriers generally contract for a right to receive reimbursement of PIP benefits if an insured recovers from the tortfeasor, a UIM carrier, or both. While the insured pursues her tortfeasor and UIM claims, the PIP carrier provides benefits to cover the insured's immediate costs, such as medical expenses. If the insured subsequently recovers the total amount of her damages from another source (the tortfeasor, her UIM carrier, or both), the PIP coverage becomes redundant. Therefore, when the insured receives full recovery, the PIP carrier may seek reimbursement from its insured for the PIP benefits it previously paid. See Winters, 144 Wash.2d at 876,

31 P.3d 1164 ("the insured must be fully compensated before the insurer may recoup benefits paid").

Pursuant to Mahler and Winters, if the PIP carrier seeks reimbursement from the funds obtained through the insured's efforts, the PIP carrier must pay a pro rata share of the insured's legal expenses. Mahler, 135 Wash.2d at 436, 957 P.2d 632; Winters, 144 Wash.2d at 883, 31 P.3d 1164. As we discuss below, Mahler established this PIP pro rata sharing rule for cases where the tortfeasor is fully insured, and Winters extended the rule to cases where the tortfeasor is underinsured. This case presents the issue of PIP pro rata sharing in cases where the tortfeasor is uninsured.

1. Mahler and the Fully Insured Tortfeasor

In Mahler, the insured was injured by a fully insured tortfeasor. Her medical expenses were initially paid for by her PIP carrier. Subsequently, the insured recovered her full damages, including medical expenses, from the tortfeasor. Once the insured was fully compensated, her PIP carrier sought reimbursement of the PIP benefits it paid. We ruled that a PIP carrier seeking reimbursement from the fund created by the insured must pay a pro rata share of the legal expenses the insured incurred in order to recover from the tortfeasor. Mahler, 135 Wash.2d at 407, 436, 957 P.2d 632.

As explained in Mahler: "This equitable sharing rule is based on the common fund doctrine, which, as an exception to the American Rule on fees in civil cases, applies to cases where litigants preserve or create a common fund for the benefit of others as well as themselves." Id. at 426-27, 957 P.2d 632. The "common fund" in Mahler consisted of the recovery the insured obtained from the tortfeasor only. From this fund, the insured was compensated and the PIP carrier was reimbursed. Because the PIP carrier reimbursed itself from a fund that the insured created, the PIP carrier was obligated to pay a pro rata share of the legal expenses incurred by the insured to create the fund. Id. at 436, 957 P.2d 632.

2. Winters and the Underinsured Tortfeasor

In Winters, the insured, Sarah Winters, was injured by an underinsured tortfeasor.³ Her immediate medical expenses were covered by payments from her PIP carrier. Winters then sought recovery from the tortfeasor and recovered the maximum limits of the tortfeasor's liability coverage. Because the tortfeasor recovery did not fully compensate her, she also pursued a UIM claim.

Unlike the insured in Mahler, Winters was not fully compensated until she recovered from both the tortfeasor and her UIM carrier. Once she was fully compensated, her PIP carrier was able to seek reimbursement for the PIP benefits it paid, subject to its obligation to pay a pro rata share of the legal expenses incurred by Winters in creating the fund. Winters, 144 Wash.2d at 881, 31 P.3d 1164. As explained in Winters, "[t]hese pooled funds became the common fund from which the PIP insurer was able to recoup payments it had made." Id. Winters clarified that the pro rata sharing rule articulated in Mahler is based on equitable principles, not specific policy language, and applies to PIP reimbursements from UIM recoveries as well as from tortfeasor recoveries. Id. at 878-79, 881, 31...