Sherry v. Financial Indem. Co.

• Decision Date: 07 June 2007
• Docket Number: No. 78667-4.,78667-4.
• Citation: 160 P.3d 31,160 Wn.2d 611
• Parties: Kevin SHERRY, Respondent, v. FINANCIAL INDEMNITY COMPANY, Petitioner.
• Court: Washington Supreme Court

160 P.3d 31

160 Wn.2d 611

Kevin SHERRY, Respondent, v. FINANCIAL INDEMNITY COMPANY, Petitioner.

No. 78667-4.

Supreme Court of Washington, En Banc.

Argued March 29, 2007.

Decided June 7, 2007.

Deborah A. Dunlap, McGaughey Bridges Dunlap PLLC, Bellevue, WA, for petitioner/appellant.

David H. Middleton, Federal Way, WA, for appellee/respondent.

Bryan Patrick Harnetiaux, Spakane, WA, for amicus curiae Washington State Trial Lawyers Ass'n.

CHAMBERS, J.

¶ 1 This case requires us to decide two questions. First, we must decide whether the same judge who confirms an arbitration award may also resolve coverage disputes between an insured and an insurer or whether such disputes must be resolved in a separate declaratory judgment action. Second, we must decide when an insured has been "fully compensated," allowing an insurance company to reduce a judgment on an arbitration award to account for insurance benefits the insured has already received.

¶ 2 In this case, the insured and insurer explicitly agreed to have the same judge, who confirmed the arbitration award and reduced it to judgment, also decide whether an offset was appropriate. We conclude that these parties, under the facts of this case, orally amended their pleadings to include a prayer for declaratory relief and that the trial court had authority and jurisdiction to resolve the offset dispute. We also conclude that for purposes of offsetting previously paid personal injury protection (PIP) benefits from underinsured motorist insurance (UIM) benefits, "full compensation" does not mean the amount recoverable under UIM after a reduction for comparative fault. Instead, insureds are fully compensated when they have made a complete recovery of the actual losses suffered as a result of an automobile accident as determined by a court or arbitrator. In this case, the insured will not be fully compensated for his damages as determined by an arbitrator, and the insurance company has no right to an offset. We affirm the Court of Appeals and remand to the trial court for further proceedings consistent with this opinion.

I

¶ 3 In April 2001, Kevin Sherry, a pedestrian, was struck by a car driven by an uninsured motorist.¹ Sherry had UIM and PIP coverage through his own insurer, Financial Indemnity Company (FIC). Under this PIP coverage, FIC paid $10,000 in medical benefits and $4,600 in lost wages soon after the accident.

¶ 4 Sherry and FIC were unable to agree on the proper amount of UIM benefits Sherry was entitled to and took their dispute to arbitration. The arbitrator ultimately held that Sherry had suffered damages of $143,127.92 ($53,127.92 in medical bills and $90,000.00 in general damages). In a written letter accompanying the award, the arbitrator explained that Sherry bore the "lion's share" of fault because he could have simply stepped out of the way of the oncoming car. The arbitrator found that the lion's share of fault was 70 percent and reduced Sherry's damage and award accordingly to $42,938.38.

¶ 5 Sherry moved to confirm the award in Pierce County Superior Court under former RCW 7.04.190 (1943).² FIC asked both the arbitrator and the trial judge to amend the arbitration award to reflect the PIP payments it had already made. While it is not in the record, it appears that the arbitrator declined to amend the award, perhaps believing the question was outside of the scope of the issues arbitrated or that under existing case law, the trial court should decide any offset. Both FIC and Sherry explicitly waived any objection to the trial court's deciding the offset issue during the confirmation action. The parties also agreed that any offset was contingent on FIC paying a share of Sherry's attorney fees.

¶ 6 The trial court acknowledged that the letter of the law seemed to contemplate a separate declaratory judgment action to determine any offset. See Price v. Farmers Ins. Co., 133 Wash.2d 490, 502, 946 P.2d 388 (1997). The judge then concluded the parties waived any objection to his deciding the issue and gave FIC a full offset for previously paid PIP benefits, less a pro rata portion of Sherry's attorney fees expended in acquiring the UIM award. Judgment was entered in favor of Sherry for $34,792.38.³

¶ 7 Sherry appealed. The Court of Appeals ruled that by agreeing to have the trial judge decide the coverage issues, the parties had effectively joined a declaratory judgment action to the action to confirm the award. The court below also held that insurance companies are entitled to take a PIP offset only when insureds are fully compensated for their actual damages, not merely their UIM damages, which may be reduced by the insureds' share of fault.⁴ Since, the court concluded, Sherry had not been fully compensated, FIC was not entitled to an offset. We accepted FIC's petition for review. Sherry v. Fin. Indem. Co., 158 Wash.2d 1025, 152 P.3d 348 (2007), 2007 Wash. LEXIS 11.

II

¶ 8 Only questions of law are presented. Our review is de novo. Parents Involved in Cmty. Schs. v. Seattle Sch. Dist. No. 1, 149 Wash.2d 660, 670, 72 P.3d 151 (2003).

III

¶ 9 We must first decide whether the trial judge improperly considered both the petition to confirm and reduce the arbitration award to judgment and the insurance company's request for an offset in one action. In Price, we held that the confirmation and reduction to judgment of an arbitration award was a special proceeding under former chapter 7.04 RCW (1943), not a proceeding under the trial court's general jurisdictional powers. We concluded that the court did not have authority to consider an offset during an action to confirm an arbitration award and instructed parties to resolve questions outside the scope of arbitration either by negotiation or in a declaratory judgment action. Price, 133 Wash.2d at 502, 946 P.2d 388.

¶ 10 In Price, we were considering a case where, under only the trial court's power to confirm an arbitration award, the parties asked the court to decide legal issues. Id. at 500, 946 P.2d 388. Price never questioned, and in fact explicitly affirmed, that superior courts in Washington have the jurisdiction and power to decide coverage issues. Id. at 497, 502, 946 P.2d 388. We simply held that these general powers were outside the scope of a superior court's statutory power to reduce arbitration awards to judgment. Id. at 497, 502, 946 P.2d 388. Whether, in one proceeding, a trial court could act pursuant both to its general jurisdiction powers and its ministerial power under the arbitration act was not brought before the court that day.

¶ 11 For clarity, it would have been better practice for the parties before us to have pleaded a declaratory judgment action either in this cause of action or another. However, under the facts of this case where neither party objected and both parties treated the matter as if they had joined a declaratory action to a motion to confirm an arbitration award, we agree with the Court of Appeals that the parties have effectively amended their initial pleadings under CR 15(a) to better reflect the actual nature of the case. Cf. Munden v. Hazelrigg III, 105 Wash.2d 39, 46-47, 711 P.2d 295 (1985) (noting trial court may require amended pleadings under similar circumstances). We hold that, where the issues are properly pleaded, a single judge may exercise both the power to confirm an arbitration award and the power to decide what balance is owing after offsets are included. We affirm the Court of Appeals that the trial court had authority and jurisdiction to rule on the offset claim.

IV

¶ 12 We now turn to whether FIC was entitled to offset earlier PIP payments against the arbitrator's UIM award. It is well established in Washington that insureds are not entitled to double recovery, and thus after an insured is "fully compensated for his loss," an insurer may seek an offset, subrogation, or reimbursement for PIP benefits already paid. Thiringer v. Am. Motors Ins. Co., 91 Wash.2d 215, 219, 588 P.2d 191 (1978); see also Hamm v. State Farm Mut. Auto. Ins. Co., 151 Wash.2d 303, 309, 88 P.3d 395 (2004); Safeco Ins. Co. v. Woodley, 150 Wash.2d 765, 770, 82 P.3d 660 (2004); Winters v. State Farm Mut. Auto. Ins. Co., 144 Wash.2d 869, 876, 31 P.3d 1164 (2001) ("the insured must be fully compensated before the insurer may recoup benefits paid"); Mahler v. Szucs, 135 Wash.2d 398, 407, 957 P.2d 632 (1998). But "`[n]o right of subrogation can arise in favor of an insurer against its own insured since, by definition, subrogation exists only with respect to rights of the insurer against third persons to whom the insurer owes no duty.'" Id. at 419, 957 P.2d 632 (quoting Stetina v. State Farm Mut. Auto. Ins. Co., 196 Neb. 441, 243 N.W.2d 341, 346 (1976)). An insurer has no subrogation-like rights against its own insured unless provided for by contract. See Barney v. Safeco Ins. Co., 73 Wash.App. 426, 431, 869 P.2d 1093 (1994) (citing 8A John A. Appleman & Jean Appleman, Insurance Law and Practice § 4902.65, at 282 (1981) overruled in part on other grounds by Price v. Farmers Ins. Co., 133 Wash.2d 490, 946 P.2d 388 (1997)); see also Mahler, 135 Wash.2d at 419, 957 P.2d 632 (quoting Stetina, 243 N.W.2d at 346); Frontier Ford, Inc. v. Carabba, 50 Wash.App. 210, 212, 747 P.2d 1099 (1987) (citing Pendlebury v. W. Cas. & Sur. Co., 89 Idaho 456, 406 P.2d 129 (1965)). Nor does an insurer have a right of offset, setoff, or reimbursement without an authorizing contract provision. See Barney, 73 Wash.App. at 431-32, 869 P.2d 1093 (citing 8A Appleman & Appleman, supra, §§ 4902.65, 5128.75; 12A George J. Couch, Couch Cyclopedia of Insurance Law § 45:652 (Mark S. Rhodes & Ronald A. Anderson, 2d rev. ed.1981)). Thus, there is a two step approach. An insurer is entitled to an offset, setoff, or reimbursement when both: (1) the contract itself authorizes it and (2) the insured is fully compensated by the relevant "applicable measure of damages." Barney, 73 Wash.App. at 429-31, 869 P.2d...