Matsyuk v. State Farm Fire & Cas. Co.

• Decision Date: 09 February 2012
• Docket Number: Nos. 84686–3,85012–7.,s. 84686–3
• Citation: 272 P.3d 802,173 Wash.2d 643
• Court: Washington Supreme Court
• Parties: Olga MATSYUK, individually, and on behalf of all those similarly situated, Petitioner, v. STATE FARM FIRE & CASUALTY COMPANY, Respondent.Karen Weismann, Petitioner, v. Safeco Insurance Company Of Illinois, a foreign insurance company, Respondent.

173 Wash.2d 643

272 P.3d 802

Olga MATSYUK, individually, and on behalf of all those similarly situated, Petitioner,

v.STATE FARM FIRE & CASUALTY COMPANY, Respondent.Karen Weismann, Petitioner,

v.Safeco Insurance Company Of Illinois, a foreign insurance company, Respondent.

Nos. 84686–3

85012–7.

Supreme Court of Washington, En Banc.

Argued May 26, 2012.Decided Feb. 9, 2012.

Matthew James Ide, Ide Law Office, David R. Hallowell, Attorney at Law, Seattle, WA, Craig Frazier Schauermann, Scott Alan Staples, Attorney at Law, Vancouver, WA, for Petitioner.

Kenneth E. Payson, Stephen Michael Rummage, Roger Ashley Leishman, Davis Wright Tremaine, LLP, M. Colleen Barrett, Gregory S. Worden, Kevin J. Kay, Barrett & Worden, PS, Seattle, WA, Hozaifa Y. Cassubhai, U.S. District Court, Tacoma, WA, for Respondent.

Bryan Patrick Harnetiaux, Attorney at Law, Gary Neil Bloom, Harbaugh & Bloom, PS, Spokane, WA, George M. Ahrend, Ahrend Law Firm, PLLC, Moses Lake, WA, amicus counsel for Washington State Association for Justice Foundation.STEPHENS, J.

[173 Wash.2d 647] ¶ 1 These consolidated cases invite us to clarify the pro rata fee sharing rule announced in Mahler v. Szucs, 135 Wash.2d 398, 957 P.2d 632, 966 P.2d 305 (1998), and elaborated upon in Winters v. State Farm Mutual Automobile Insurance Co., 144 Wash.2d 869, 31 P.3d 1164 (2001), and Hamm v. State Farm Mutual Automobile Insurance Co., 151 Wash.2d 303, 88 P.3d 395 (2004). This equitable rule is based upon the common fund exception to the well-known “American rule” on attorney fees, and it requires a personal injury protection (PIP) insurer to share pro rata in the attorney fees incurred by an injured person when the recovery benefits the PIP insurer.

¶ 2 The plaintiffs here recovered PIP funds as insureds, under policies held by the tortfeasors, and then incurred attorney fees in recovering from the tortfeasors' liability insurance provided by the same carrier. The insurance companies attempted to offset the funds expended under the PIP policies by reducing the plaintiffs' award under the tortfeasors' liability insurance. Relying on Young v. Teti, 104 Wash.App. 721, 16 P.3d 1275 (2001), the Court of Appeals held that, in this factual scenario, neither plaintiff was entitled to recoup a pro rata share of attorney fees. While Young is on point, it was decided before Hamm and Winters and is inconsistent with those opinions. We therefore reverse the Court of Appeals and hold that the pro rata fee sharing rule applies in this context. We further hold that Karen Weismann is entitled to Olympic Steamship¹ fees on appeal and that Olga Matsyuk's bad faith claim against State Farm Fire and Casualty Company was improperly dismissed.

FACTS AND PROCEDURAL HISTORY

Matsyuk

¶ 3 Matsyuk was injured in an automobile accident while a passenger in a car driven by Omelyan Stemditskyy. Stemditskyy was at fault. As a passenger, Matsyuk was an insured under Stemditskyy's State Farm policy. Matsyuk received $1,874 in PIP benefits. As a claimant, she then sought to recover under Stemditskyy's liability policy provided by State Farm.

¶ 4 Matsyuk apparently reached a settlement with Stemditskyy and State Farm for $5,874, to be paid by State Farm in its capacity as Stemditskyy's liability insurer. State Farm indicated it would seek reimbursement of its previous PIP payments through an offset to the liability payment it was making on Stemditskyy's behalf and provided a check for $4,000 ($5,874 minus $1,874). Matsyuk demanded that State Farm bear a pro rata share of the legal expenses she incurred in obtaining the liability recovery, including the PIP offset. State Farm refused.

¶ 5 Matsyuk brought suit against State Farm for failing to share in her legal expenses, claiming bad faith, conversion, breach of contract, and Consumer Protection Act (ch. 19.86 RCW) violations. State Farm made a motion to dismiss Matsyuk's complaint for failure to state a claim on which relief can be granted under CR 12(b)(6). Matsyuk moved for partial summary judgment on the attorney fees question. The trial court denied the motion for summary judgment and granted State Farm's CR 12(b)(6) motion. Matsyuk appealed to Division One of the Court of Appeals, which affirmed the trial court, relying on Young, 104 Wash.App. 721, 16 P.3d 1275, and distinguishing Hamm, 151 Wash.2d 303, 88 P.3d 395, and Winters, 144 Wash.2d 869, 31 P.3d 1164. Matsyuk v. State Farm Fire & Cas. Co., 155 Wash.App. 324, 332, 229 P.3d 893 (2010). Matsyuk petitioned for review.

Weismann

¶ 6 Weismann was operating her motorized wheelchair when she was struck by motorist Darlene Kangas. Kangas was insured by Safeco. As a pedestrian, Weismann was an insured under Kangas's PIP policy and received $9,012.95 in PIP benefits. Weismann sued Kangas, and Safeco Insurance Company, Kangas's liability insurer. The parties agreed that Weismann's damages totaled $44,521.19. Weismann v. Safeco Ins. Co. of Ill., 157 Wash.App. 168, 172, 236 P.3d 240 (2010). Safeco offered Weismann $35,508.24, representing the difference between $44,521.19 and the money Weismann received in PIP benefits, $9,012.95. Because it offset the PIP amount, Safeco refused to pay a proportionate share of the attorney fees Weismann incurred in recovering from Kangas.

¶ 7 The parties entered into an agreement reserving Weismann's right to bring an action against Safeco on the question of its obligation to pay pro rata attorney fees. The matter proceeded to summary judgment on Weismann's motion. She argued that under Winters, 144 Wash.2d 869, 31 P.3d 1164, and Hamm, 151 Wash.2d 303, 88 P.3d 395, Safeco was required to pay pro rata attorney fees. Safeco made a cross motion for summary judgment, arguing that under Young, 104 Wash.App. 721, 16 P.3d 1275, it was not required to share in Weismann's legal expenses. The trial court agreed with Weismann that Young was no longer good law in light of this court's decisions in Hamm and Winters and granted her motion for summary judgment. It also granted Weismann's motion for attorney fees and costs under Olympic Steamship. Safeco appealed. Division Two reversed, relying on Young and distinguishing it from Hamm and Winters. It also reversed the trial court's award to Weismann of Olympic Steamship attorney fees. We granted Weismann's petition for review and consolidated this case with Matsyuk.

ANALYSIS

¶ 8 The American rule on attorney fees provides that litigants must bear their own legal expenses. But many exceptions to this rule exist, and this court announced one such exception in Mahler, later expanding upon the exception in Winters and then Hamm. These cases recognize the obligation of a PIP insurer to share pro rata in the legal expenses incurred by an injured person in recovering a common fund that accounts for PIP benefits. This has become known as the “ Mahler rule.” Before Winters and Hamm were announced, the Court of Appeals limited the reach of the Mahler rule in Young, concluding that it did not apply in this precise factual scenario, where the PIP and liability insurance are provided by the same insurer. We take this opportunity to disapprove of Young, as its rationale is inconsistent with the Mahler rule. Winters strongly suggests, and Hamm plainly requires, application of the equitable fee sharing rule here. We also reinstate the trial court's award of Olympic Steamship attorney fees to Weismann and reverse the dismissal of Matsyuk's bad faith claim.

A. A common fund is created, thereby triggering the so-called Mahler rule, when the injured party recovers under a PIP policy held by the tortfeasor and also recovers under the tortfeasor's liability policy

¶ 9 An insurer that pays funds to an insured through a PIP policy may seek reimbursement if the PIP insured collects directly from an at-fault party. Winters, 144 Wash.2d at 876, 31 P.3d 1164. When liability insurance is involved, one mechanism for achieving such reimbursement is through an “ ‘offset,’ ” which is “a credit to which an insurer is entitled for payments made under one coverage against claims made under another coverage within the same policy.” Id. Reimbursement is appropriate so long as the injured party is made whole before any right to reimbursement is fulfilled. Id.

¶ 10 When an insured recovers funds from the at-fault party to which an insurer is entitled to reimbursement, those funds may constitute a common fund. The common fund doctrine provides an exception to the American rule on legal expenses. It “applies to cases where litigants preserve or create a common fund for the benefit of others as well as themselves.” Mahler, 135 Wash.2d at 427, 957 P.2d 632, 966 P.2d 305. “ ‘[W]hen one person creates or preserves a fund from which another then takes, the two should share, pro rata, the fees and costs reasonably incurred to generate that fund.’ ” Winters, 144 Wash.2d at 877, 31 P.3d 1164 (quoting Winters v. State Farm Mut. Auto. Ins. Co., 99 Wash.App. 602, 609, 994 P.2d 881 (2000)). “[T]he rule requiring a pro rata sharing of legal expenses is based on equitable principles and not on construction of specific policy language.” Hamm, 151 Wash.2d at 320, 88 P.3d 395 (citing Winters, 144 Wash.2d at 878–79, 31 P.3d 1164).²

1. Overview of Our Cases Applying the Equitable Sharing Rule

¶ 11 This court has applied the equitable sharing rule in a number of contexts in the auto insurance world, beginning with Mahler. A brief review of our decisions is helpful.

Mahler v. State Farm

¶ 12 In Mahler, a no-fault injured person recovered under her State Farm PIP policy and later recovered from the tortfeasor's liability insurance carrier, American States. Mahler, 135 Wash.2d at 406–07, 957 P.2d 632, 966 P.2d 305. State Farm asserted a right to reimbursement for its PIP but maintained it need not share in Mahler's legal expenses incurred in recovering from American States. Id. at 407, 957 P.2d 632, 966 P.2d 305. This court concluded that State Farm was entitled to take...