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

• Decision Date: 27 July 2011
• Docket Number: No. 10–1220.,10–1220.
• Parties: Stephanie RILEY, Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellee.
• Court: Arkansas Supreme Court

2011 Ark. 256

381 S.W.3d 840

Stephanie RILEY, Appellant,

v.STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellee.

No. 10–1220.

Supreme Court of Arkansas.

June 16, 2011.

Rehearing Denied July 27, 2011.

Nolan, Caddell & Reynolds, P.A., by: Bill G. Horton, Rogers; and Robert S. Tschiemer, Mayflower, for appellant.

Boswell Law Firm, by: W. Lee Tucker, Bryant; and Munson, Rowlett, Moore and Boone, P.A., by: Beverly A. Rowlett and John E. Moore, Little Rock, for appellee.

ROBERT L. BROWN, Justice.

Appellant Stephanie Riley appeals with a proper Rule 54(b) certification the dismissal of Count I of her amended petition for declaratory judgment and complaint, which sought a declaratory judgment that appellee State Farm Mutual Automobile Insurance Company (State Farm) had failed to establish a legal lien or right to subrogation under Arkansas law. We agree that the circuit court erred in dismissing Count I, and we reverse the judgment and remand for further proceedings.

On August 30, 2008, Riley was involved in a car accident with Joshua Carnes. Riley sought and received medical treatment as a result of the accident and notified her carrier, State Farm. On September 5, 2008, State Farm wrote GEICO, the liability carrier for Carnes, about its right to subrogation. On September 10, 2008, Riley's attorney wrote State Farm about its coverage of Riley and asked for any disbursements to be sent to his office. Based on her insurance policy, State Farm paid $5000 in medical benefits on Riley's behalf. ¹ Subsequently, on March 10, 2009, Riley settled her claim with GEICO for $11,500. GEICO issued one check for $6500 payable to Riley and her attorney and one check in the amount of $5000, payable to Riley, her attorney, and State Farm.

On March 11, 2009, Riley sent a letter to State Farm asserting that “by the time [she] pay[s] the costs incurred in prosecuting this action, including attorneys' fees, court costs, and other necessary fees and expenses it appears that she has not ‘been made whole’ in this settlement.” The letter stated that Riley incurred $2069 in medical expenses. Riley requested that State Farm waive its right to subrogation because the law does not allow subrogation in this case. In a letter dated April 9, 2009, State Farm said that the $11,500 settlement from GEICO was sufficient to “fully compensate Ms. Riley for her injuries.” State Farm further offered to reduce its recovery amount on subrogation to $3000.

On April 10, 2009, Riley filed an action for declaratory judgment and a complaint against State Farm. Although it was later amended, the first action had three counts: Count I claimed that State Farm failed to establish a proper lien because no determination had been made that she was made whole, and Counts II and III claimed that State Farm's policy of seeking reimbursement when Riley had not been made whole was a violation of the Arkansas Deceptive Trade Practice Act (ADTPA). During discovery, a dispute arose as to which party had the burden to prove whether Riley was made whole by payments of insurance benefits. State Farm claimed that it had the right to know how Riley determined that she was not made whole by the settlement. Riley, on the other hand, argued that State Farm had to prove that she was made whole before asserting a lien against any proceeds from the settlement with GEICO.

On December 18, 2009, Riley moved for partial summary judgment. In her motion, she stated that State Farm filed a lien on September 5, 2008—when it contacted GEICO—well before she settled with GEICO on March 10, 2009. She claimed that at the time the lien was “filed,” State Farm had no way of knowing whether she would be made whole by the settlement. She maintained that the lien was invalid and in violation of Arkansas law because it was filed without a legal determination by a court that she was made whole. Riley prayed that the circuit court enter summary judgment finding that State Farm's lien on the settlement with GEICO was in violation of Arkansas law and invalid. She further requested that the circuit court proceed to adjudicate the remaining claims of breach of contract, violation of the Arkansas Deceptive Trade Practices Act, and punitive damages.

In its response, State Farm stated that it had never filed a lien but had corresponded with GEICO while Riley's action against Carnes was pending. State Farm claimed that the letter merely notified GEICO that State Farm was asserting its right to subrogation. State Farm further maintained that summary judgment was not proper because there were multiple genuine issues of fact as to State Farm's right of reimbursement.

On January 25, 2010, Riley filed an amended declaratory action to invalidate the lien and complaint. In that action, Count I sought a declaratory judgment that State Farm failed to establish a proper lien. Count I read as follows:

12. The lien or right to subrogation being claimed by the Defendant is not proper pursuant to Arkansas law.

13. “Subrogation is recognized or denied upon equitable principles” and “an insured's right to subrogation takes precedent over that of an insurer, so the insured must be wholly compensated before an insurer's right to subrogation arises; therefore, the insurer's right to subrogation arises only in situations when the recovery by the insured exceeds his or his total amount of damages incurred.” Shelter Mut. Ins. Co. v. Kennedy, 347 Ark. 184, at 188–189, 60 S.W.3d 458 (2001), quoting Franklin v. Healthsource of Arkansas, 328 Ark. 163, 942 S.W.2d 837 (1997).

14. State Farm asserted their right to subrogation from GEICO before ever paying a single medical bill on behalf of the plaintiff.

15. At the conclusion of the settlement with GEICO, State Farm maintained their subrogation rights without seeking a judicial determination as to whether or not the plaintiff was made whole by her settlement with GEICO.

16. Current Arkansas law states that State Farm's right to subrogation does not even exist until the plaintiff has been made whole.

17. In order for State Farm to assert their rights of subrogation, they have the burden of proving the plaintiff received a double recovery and they must meet this burden before they can make any claim of subrogation.

18. State Farm has not sought a determination of whether or not the plaintiff received a double recovery therefore the lien or subrogation rights State Farm has asserted against GEICO are premature and in violation of Arkansas law.

Count II sought injunctive relief prohibiting State Farm from filing an “illegal notice[s] of subrogation” against the proceeds of third-party settlements without first filing suit and asserting their subrogation rights. Count III alleged a violation of the ADTPA, and Count IV alleged bad faith in filing the illegal liens. Count V alleged interference with a contractual relationship because State Farm placed a lien against $5000 of Riley's settlement from GEICO, preventing the full use and enjoyment of the settlement.

In an answer to the amended declaratory judgment action and complaint, filed on February 16, 2010, State Farm responded that Riley had been fully compensated by accepting the $11,500 settlement and that it was entitled to subrogation in the amount of $5000. State Farm admitted, in addition, that it claimed its subrogation rights upon Riley's settlement with GEICO after making its own determination that Riley was made whole.

On February 3, 2010, the circuit court held a hearing on Riley's motion for partial summary judgment. On February 17, 2010, the court entered an order denying that motion. On June 7, 2010, the circuit court entered another order after a status hearing conducted on May 7, 2010. In this order, the circuit court ruled that State Farm had a valid but unenforceable lien and that Riley would have the burden of proving that she had not been made whole by the GEICO settlement. The circuit court also noted that Riley's motion for partial summary judgment had been dismissed without prejudice and “would not be renewed at this time.”

On July 7, 2010, Riley filed a second motion for partial summary judgment, again asserting that State Farm filed an invalid lien on the proceeds from Riley's settlement with GEICO. A hearing on the motion was held on July 21, 2010. On August 16, 2010, the circuit court entered a judgment. The judgment reiterated that Riley's motion for partial summary judgment was denied and that State Farm had a valid but unenforceable lien against the settlement funds. The judgment included the following conclusion: “Upon oral motion of State Farm, Count I, including paragraphs 12 through 18 inclusive, of [Riley]'s First Amended Declaratory Action alleging State Farm's lien is illegal and invalid, is dismissed with prejudice.”

Because the circuit court did not reach the other claims in the case, it entered a certificate pursuant to Arkansas Rule of Civil Procedure 54(b) as part of the judgment. In that certificate, the circuit court found:

When an insurer pays medical benefits to its insured under A.C.A. § 23–89–202(1) as a result of injuries received in a motor vehicle accident, its right of subrogation/reimbursement arises at the time payment is made by operation of law, by contract, and by A.C.A. § 23–89–207 against any future recovery in tort or settlement for the injury. The lien and right of subrogation/reimbursement thus created is contingent on whether the insured has been “made whole” by the recovery or settlement.

The circuit court concluded in the Rule 54(b) certificate that Riley had insurance coverage in the amount of $5000 for medical payments with State Farm. After State Farm paid those benefits to Riley, State Farm notified GEICO on September 5, 2008, that it had made medical payments and would be asserting a subrogation claim. On September 16, 2008, State Farm notified Riley that it would seek reimbursement for amounts paid pursuant to Arkansas Code Annotated section 23–89–207,...