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

• Decision Date: 04 October 2001
• Docket Number: No. 69656-0, No. 70267-5.
• Citation: 31 P.3d 1164,144 Wn.2d 869,144 Wash.2d 869
• Court: Washington Supreme Court
• Parties: Sarah L. WINTERS, a single person, Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a foreign insurance corporation, Respondent. Kyle A. Perkins, Respondent, v. State Farm Mutual Automobile Insurance Company, a foreign corporation authorized to do business within the State of Washington, Appellant.

31 P.3d 1164

144 Wn.2d 869

144 Wash.2d 869

Sarah L. WINTERS, a single person, Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a foreign insurance corporation, Respondent.

Kyle A. Perkins, Respondent, v. State Farm Mutual Automobile Insurance Company, a foreign corporation authorized to do business within the State of Washington, Appellant.

Nos. 69656-0, 70267-5.

Supreme Court of Washington, En Banc.

Argued March 28, 2001.

Decided October 4, 2001.

Murray, Dunham & Murray, Ronald Lewis Unger, Tamara Kristine Nelson, Seattle, amicus curiae on behalf of Mutual of Enumclaw Ins. Co., et al.

Bryan Patrick Harnetiaux, Harbaugh & Bloom, Gary Neil Bloom, Debra Leigh Stephens, Spokane, amicus curiae on behalf of Washington State Trial Lawyers Assoc.

Reed, McClure, Pamela A. Okano, Gailann Y. Stardardter, William Robert Hickman, Seattle, for Petitioner.

Staurset, Wickens, Berneburg, Sean P. Wickesn, Tacoma, LePley & Greig, Patrick

H. LePley, Karen Kathryn Koehler, Bellevue, for Respondent.

CHAMBERS, J.

We are asked to determine whether a personal injury protection insurer should pay a pro rata share of the legal cost incurred by the insured when, by pursuing an underinsured motorist tortfeasor, the insured created a fund from which the personal injury protection insurer recoups benefits previously paid on behalf of its insured. We conclude that the efforts of the Petitioners created a common fund from which the PIP insurance company benefited. We therefore affirm the decision of the Court of Appeals and remand for the trial court to determine the pro rata share of expenses due from State Farm Mutual Automobile Insurance Company (State Farm) in both cases.

FACTS

WINTERS

Sara Winters purchased an automobile insurance policy from State Farm. The single policy contained five separate coverages; each was optional and for each she paid a separate premium. These five separate coverages were: "liability" coverage to indemnify her for any damages she might cause to others; "underinsured motorist" coverage (UIM) to protect her for damages she might suffer from an underinsured motorist; "personal injury protection" coverage (PIP) to pay for medical expenses and other out of pocket expenses she might incur arising out of the use of her vehicle; "property damage" coverage for damage to her own property; and "emergency road service" coverage.

In January 1994, Sarah Winters was injured in a car accident after she was hit head-on by Anna Cunningham and then rear-ended by James Edalgo. Cunningham was insured by Leader National Insurance Company (Leader National), and Edalgo was uninsured. After the accident, State Farm paid Winters $8,271.86 under her PIP coverage for the medical expenses and loss of earnings that she incurred. In addition, Winters sued Cunningham. As a result Cunningham's insurer, Leader National, paid Winters $25,000, representing Cunningham's full policy limits. Because Winters did not pursue legal action against Edalgo, State Farm assigned its rights to subrogation for payments made to Winters to an attorney. State Farm's attorney sued and obtained a default judgment against Edalgo for $8,271.86.¹

Meanwhile, believing that she had not been fully compensated for her injuries, Winters presented a UIM claim to State Farm. The claim was assigned for arbitration. Winters and State Farm agreed that Cunningham and Edalgo were at-fault and that Winters was fault-free. The arbitrator awarded total damages of $40,271, including special medical and wage loss damages of $8,271 and general damages of $32,000.

The parties agreed that under the terms of the UIM policy, State Farm could deduct the $25,000 that had been paid by Cunningham's insurance as a set off against the UIM award. They disagreed on whether State Farm could deduct $8,271 to offset its earlier PIP payments. State Farm unilaterally offset its PIP payments by paying only $7,000 on the UIM award ($40,271 award, less $25,000 liability limits and $8,271 previous PIP payments).

Winters subsequently sued State Farm for an additional $8,271.86, arguing that State Farm was not entitled to offset the PIP benefits it had paid previously by deducting those payments from her UIM award. Alternatively, she requested that State Farm should be entitled to the offset only if it paid a share of the legal expenses incurred in obtaining the settlement and arbitration award. The parties filed cross motions for summary judgment. The trial court granted State Farm's motion for summary judgment and ordered Winters to pay $2,500 of State Farm's attorney fees. Winters appealed. The Court of Appeals held that State Farm had the right to reduce the underinsured motorist award by the amount it paid in PIP benefits, but under Mahler v. Szucs, 135 Wash.2d 398, 957 P.2d 632 (1998), that State Farm must pay a pro rata share of the costs and fees incurred by Winters to recover full compensation for her damages. Winters v. State Farm Mut. Auto. Ins. Co., 99 Wash.App. 602, 616, 994 P.2d 881 (2000). We granted review on the issue of costs and fees.

PERKINS

In May 1995, Kyle Perkins was injured in an automobile accident while driving a vehicle owned by Glenn Smith. Like Winters, Glenn Smith purchased a State Farm automobile policy and paid for separate Liability. UIM and PIP coverages. Smith's policy covered Perkins, who was not at-fault in the accident. Because of his injuries, State Farm paid Perkins $18,480 in PIP benefits.

Perkins settled his claim against the at-fault driver for $25,000, the policy limits of the tortfeasor's liability insurance. The tortfeasor's insurance company, Guaranty National Insurance Co. (Guaranty National), issued two drafts to pay off the judgment: (1) a check for $16,780.14 payable to Perkins, his attorney, and State Farm, and (2) a check for $8,219.86 payable to Perkins, his attorney, and a hospital. The funds for State Farm were held in trust pending the outcome of the UIM case set forth below.

Believing that he had not been fully compensated, Perkins made a claim for UIM benefits from State Farm. An arbitration was held in July 1998. The arbitrator found Perkins had incurred damages totaling $48,000. State Farm tendered Perkins $4,520, representing his $48,000 total damages less credits for a set off of the $25,000 liability limits received from the tortfeasor and for the $18,480 PIP offset for benefits previously paid by State Farm. Perkins rejected the tender, claiming State Farm was required to reduce its PIP offset by one-third to compensate him for a share of his attorney fees pursuant to Mahler, 135 Wash.2d 398, 957 P.2d 632.

Perkins sued State Farm for a declaration that the company was required to contribute toward Perkins's legal costs associated with the recovery of its PIP payments. Both parties filed cross motions for summary judgment and the trial court granted Perkins's motion. State Farm appealed. Division Two of the Court of Appeals certified the case to us after we accepted review in Winters v. State Farm. After we accepted review, we consolidated the two cases.

ISSUE

The only issue presented to this Court is whether a PIP insurer must pay a pro rata share of its insured's attorney fees associated with recovering full compensation from an UIM insurer.

ANALYSIS

For clarity, we will define several terms as they are used in this opinion. First, there are policy provisions that permit an insurer to recover money it has paid to its insured. Traditional "subrogation" is an equitable doctrine involving three parties, permitting one who has paid benefits to one party to collect from another.² Here, for example, State Farm attempted to subrogate benefits paid to Winters from the third party, Edalgo. An insurer does not have a right of subrogation against its own insured. Mahler, 135 Wash.2d 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)). Therefore, insurers often have reimbursement provisions within their policies. "Reimbursement" permits an insurer to be reimbursed by its insured from proceeds that the insured collects directly from the party at-fault. In addition, insurers may be entitled to a credit for sums already received by the insured. A "set off," as used in this opinion, refers to sums paid to the insured by another party. Here the parties agree that State Farm was entitled to a set off for the $25,000 that Winters and Perkins each received from the insurers of the at-fault drivers. An "offset" refers to a credit to which an insurer is entitled for payments made under one coverage against claims made under another coverage within the same policy. Whatever term is used, the insured must be fully compensated before the insurer may recoup benefits paid. Thiringer v. Am. Motors Ins. Co., 91 Wash.2d 215, 219, 588 P.2d 191 (1978); Mahler, 135 Wash.2d at 416-17,957 P.2d 632.

With these definitions in mind, we will address the questions raised by the parties. We agree with the Court of Appeals on the issues before us and have borrowed liberally from Judge Morgan's opinion. State Farm bases its claim for an offset against its obligation to pay UIM benefits based upon its PIP payments to Winters and Perkins. Paragraph 3 of the Limits of Liability section of State Farm's UIM policies issued to Winters and Perkins contains a "Nonduplication-of-Benefits" clause, which provides:

Any amount paid or payable for damages under the first party benefits [PIP] coverage will not be paid again as damages under this [UIM] coverage. This does not reduce the limits of liability of this coverage.

Winters Clerk's Papers (CP Winters) at 227; Perkins Clerk's Papers (CP Perkins) at 89.

The Nonduplication-of-Benefits clause is neither a subrogation nor a reimbursement clause. The Nonduplication-of-Benefits clause purports to be a limitation of UIM coverage.³ In Winters, the Court of Appeals upheld State Farm's offset and Winters did not cross appeal. Perkins did not...