Willis v. Continental Cas. Co., Civ. A. No. 85-445 MMS.

• Decision Date: 10 December 1986
• Docket Number: Civ. A. No. 85-445 MMS.
• Citation: 649 F. Supp. 707
• Parties: William WILLIS, Sr., Edna V. Willis and Willis Chevrolet, Inc., a Delaware corporation, Plaintiffs, v. CONTINENTAL CASUALTY COMPANY and CNA Insurance Companies, foreign entities, Defendants.
• Court: U.S. District Court — District of Delaware

649 F. Supp. 707

William WILLIS, Sr., Edna V. Willis and Willis Chevrolet, Inc., a Delaware corporation, Plaintiffs, v. CONTINENTAL CASUALTY COMPANY and CNA Insurance Companies, foreign entities, Defendants.

Civ. A. No. 85-445 MMS.

United States District Court, D. Delaware.

December 10, 1986.

Harold Schmittinger and William D. Fletcher, Jr., of Schmittinger & Rodriguez, P.A., Dover, Del., for plaintiffs.

Mason E. Turner, Jr., of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Del., for defendants.

MURRAY M. SCHWARTZ, Chief Judge.

This diversity action arises from a dispute between plaintiffs William Willis, Sr., his wife, Edna, and Willis Chevrolet, Inc. ("Willis Chevrolet") and their no-fault automobile insurers, Continental Casualty Co. and CNA Insurance Companies ("CNA"), concerning the defendant's liability for lost wages under a PIP policy. Plaintiffs have moved for summary judgment on Count I of the complaint, asking the court to find CNA liable on the policy as a matter of law. Advancing alternative theories, they argue that either Willis Chevrolet has been subrogated to its employees' claims for lost earnings, or under the "collateral source" doctrine Mr. and Mrs. Willis may recover directly from CNA. The motion of Willis Chevrolet will be denied because a material factual issue remains for trial. However, the alternative motion of Mr. and Mrs. Willis will be granted.

FACTS

Willis Chevrolet purchased a one-year insurance policy from CNA in August, 1983, with standard and added personal injury coverage totaling $110,000 per person and $320,000 per accident. Docket ("Dkt.") 1, Exhibit A. Delaware's mandatory no-fault law, 21 Del.C. § 2118 ("§ 2118"), requires coverage for medical expenses, funeral expenses, loss of earnings, and substitute service expenses. Willis Chevrolet paid the $8601 premium, and was the named insured along with William Willis. Willis Chevrolet, a new and used car dealership, is a close corporation, owned by William Willis, Sr., and his two sons. William Willis, Sr., was president and general manager of the dealership until he retired in September, 1985; Edna Willis worked part-time as a bookkeeper.

On November 11, 1983, Mr. and Mrs. Willis were severely injured in a motor vehicle accident. Mr. Willis was hospitalized until April, 1984, and has subsequently undergone further operations and treatment. Mrs. Willis was also hospitalized for a substantial period. CNA fully paid all medical expenses. Both returned to work in April, 1984, although Mr. Willis did so on a limited basis for a number of months. During the period of their disability, Willis Chevrolet continued to pay their full salaries which totaled $155,491.40 for Mr. Willis and $2,557.72 for Mrs. Willis. The company did not hire replacements during their convalescence, and never informed CNA that the salaries were being paid. The decision to continue paying the Willis' salaries was never presented to a corporate officer or formally approved by the corporation.

Prior to the accident, Willis Chevrolet had continued wage payments to eight disabled employees for periods ranging from three to 27 weeks. There was no written policy of continuing salaries, and the authorization was made by Mr. Willis, based on his assessment of the value and experience of the employee.

On November 29, 1984, plaintiffs requested reimbursement from CNA for lost wages, up to the policy limit of $110,000 in the case of Mr. Willis. Defendant denied the request on June 6, 1985, after which plaintiffs brought suit in this Court.

ANALYSIS

Because this action arises under the Court's diversity jurisdiction, 28 U.S.C. § 1332, the Court is required to apply the law of the forum state to the parties' claims. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Delaware state law on subrogation and the collateral source rule will control the outcome.

I. Subrogation

Plaintiffs' first argument is founded on the traditional equitable principle of subrogation: "... the substitution of one person in the place of another with reference to a lawful claim or right." 73 Am.Jur.2d Subrogation, § 1. Willis Chevrolet asserts that it has been subrogated to the rights of Mr. and Mrs. Willis to recover for lost wages under the CNA insurance policy. The subrogation right arises from the company's policy of continuing salaries for disabled employees. According to Willis Chevrolet, this policy created an enforceable contract right against it by Mr. and Mrs. Willis, and therefore it was bound to pay their wages during the term of disability. Because they would have been able to claim lost earnings from CNA in the absence of the Willis Chevrolet personnel policy, the company argues it should be allowed to assume Mr. and Mrs. Willis' rights against the insurer to recoup the wage payments.

Delaware courts have long recognized that "subrogation is a creature of equity, historically cognizable in our Court of Chancery." Phillips v. Liberty Mutual Insur. Co., 43 Del.Ch. 436, 235 A.2d 835, 838 (1967). The subrogation right is triggered when a person pays off the debt or satisfies the claim of a second person. Although not a party to the original transaction, subrogation allows "the equitable substitution of another person in the place of the lienholder or preferred claimant to whose original rights he succeeds in relation to the claim paid." Olivere v. Taylor, 31 Del.Ch. 53, 65 A.2d 723, 726 (1949) (Chancellor Harrington). "The right of a person making such an advance to subrogation depends on: (1) his being secondarily liable, or (2) the necessity of acting to protect his own interests, or (3) an agreement that he is to have security." 73 Am. Jur.2d Subrogation, § 11.

Although Delaware courts accept the subrogation doctrine, the state's no-fault statute also governs the insurance policy, which may affect application of the common law subrogation right. Section 2118(f) provides insurers a right of subrogation to the claims of the insured against the tortfeasor, up to the policy limits, but is silent with respect to a third party's subrogation rights as against the no-fault insurer. Defendants argue the statute's failure to explicitly grant third parties the right to bring subrogated claims bars Willis Chevrolet's suit.

The Delaware Supreme Court has considered two cases involving third party subrogation claims against no-fault insurers, but neither case directly addressed the factual circumstance of an employer's subrogation claim for payment of lost wages to an injured employee. The Court is mindful that "the State's highest court is the best authority on its own law," Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1783, 18 L.Ed.2d 886, and those decisions provide important guidance in analyzing plaintiffs' subrogation claim.

In International Underwriters v. Blue Cross, 449 A.2d 197 (Del.Supr.1982), Blue Cross paid the insured under a general health care policy. A no-fault insurance policy providing payment for medical expenses, written by International Underwriters, also covered the insured. After Blue Cross paid the medical expenses, it asserted a subrogated claim against International Underwriters for reimbursement. International Underwriters argued that § 2118(f) granted no-fault insurers exclusive rights to be subrogated to an insured's claims, thereby barring third parties from asserting subrogated claims against a no-fault insurer. Id. at 198. The Delaware Supreme Court squarely rejected that argument, holding the no-fault insurer is ultimately liable for all of the insured's claims without reference to whether they are asserted by the insured or a subrogee. Id. at 200.

In State Farm Mut. Auto. Ins. v. Kulow, 483 A.2d 1121 (Del.Supr.1984), two members of the armed forces and their wives sued a no-fault carrier on behalf of the United States to recover the cost of their medical care. The injured persons, as military employees, were entitled to receive free medical services from the government. State Farm argued that, under the insurance policy and § 2118, it was liable only for the insured's out-of-pocket expenses "incurred," which were non-existent. Id. at 1124. The Delaware Supreme Court rejected that argument, holding that the insured need not be personally liable for the cost of treatment for those expenses to be "incurred" and thereby recoverable from the no-fault insurer.

Kulow and International Underwriters resolve two important questions regarding Willis Chevrolet's subrogation claim. First, a third party as the subrogee of the insured can successfully sue a no-fault insurer. Second, the insured person need not be directly liable for the claimed expense so long as that person would have incurred the expense but for the payment by the subrogee. The two cases also establish an important guideline concerning the relationship between the insured and the subrogee. In Kulow, the Court states, "There is no appreciable difference between Blue Cross' contractual obligation to pay medical costs in that case and the statutorily mandated obligation of the federal government to pay the plaintiff-insured's medical costs in this case." 483 A.2d at 1124 (emphasis supplied). The Delaware Supreme Court's focus on the obligation the subrogee owes to compensate the insured, even with the availability of no-fault insurance, presents this Court with a pivotal fact that must be ascertained in reviewing Willis Chevrolet's subrogation claim.

Willis Chevrolet argues that the company's "longstanding policy" was to continue the salaries of certain valuable employees who were disabled. It points to eight employees who received their wages despite being disabled. See Dkt. 25A at 10. Plaintiff asserts that Mr. and Mrs. Willis were two of the most important employees of the company, and therefore the company simply continued to implement its wage continuation policy with these two employees without any need for formal corporate...