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

• Decision Date: 29 February 2000
• Docket Number: No. 23396-7-II.,23396-7-II.
• Citation: 994 P.2d 881,99 Wash.App. 602
• Court: Washington Court of Appeals
• Parties: Sarah L. WINTERS, Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Respondent.

994 P.2d 881

99 Wash.App. 602

Sarah L. WINTERS, Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Respondent.

No. 23396-7-II.

Court of Appeals of Washington, Division 2.

February 29, 2000.

Harold E. Winther, Harold E. Winther P.s., Edgewood, for Appellant.

Martin Lowell Ziontz, Peizer, Richards & Ziontz, Seattle, for Respondent.

MORGAN, J.

Three questions are presented. (1) After a PIP insured has fully recovered his or her damages, does a PIP insurer have a right to reimburse itself for its earlier PIP payments by deducting the amount of such payments from a UIM award, assuming its policy so provides? (2) Does a PIP insurer maintain this right even if it elects to subrogate against the at-fault tortfeasor? (3) Is a PIP insurer's right conditioned on its paying a pro rata share of costs and fees that the PIP insured reasonably incurred to recover full compensation? The answer to each question is yes.

On January 30, 1994, Winters was hit head-on by Anna Cunningham, then rear-ended by James Edalgo. Winters was injured.

Cunningham had liability insurance with Leader National Insurance Company. Her limits were $25,000. Edalgo was uninsured.

Winters had personal injury protection coverage (PIP) and underinsured motorist coverage (UIM) through State Farm. Her PIP and UIM limits exceeded the amounts in issue here.

The Winters-State Farm policy provided that State Farm could recover its PIP payments from money recovered by the insured, provided the insured was fully compensated first. Using "we" to mean State Farm, the policy stated that "[w]e are to be repaid our payments ... out of any recovery[,]"¹ but that "[o]ur right to recover our payments applies only after the insured has been fully compensated for the bodily injury, property damage or loss."² The policy also stated that "[a]ny amount paid or payable for damages under the first party benefits coverage will not be paid again as damages under this [UIM] coverage."³

The Winters-State Farm policy also provided that State Farm would share in the expenses of obtaining a recovery under certain circumstances. The policy stated:

If the insured recovers from the party at fault and we share in the recovery, we will pay our share of the legal expenses. Our share is that per cent of the legal expenses that the amount we recover bears to the total recovery.[⁴]

Four proceedings took place after the accident. (1) State Farm paid Winters or her health care providers $8,271 under its PIP coverage. (2) Winters sued Cunningham. She settled for $25,000⁵ and was paid that amount by Leader National. She did not share this recovery with State Farm.⁶ (3) State Farm or its assignee sued Edalgo, recovering a default judgment for $8,271, plus interest. The record does not show whether the judgment has been paid.⁷ (4) Winters presented a UIM claim to State Farm. She and State Farm agreed that Cunningham and Edalgo were at fault, and that she was fault-free. The arbitrator awarded total damages of $40,271, including special damages of $8,271 and general damages of $32,000. The parties agreed that State Farm could deduct $25,000, representing Cunningham's liability limits. They disagreed on whether State Farm could deduct $8,271, representing recoupment of its earlier PIP payments. State Farm unilaterally recouped 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).

In June 1997, Winters sued State Farm for an additional $8,271. She claimed, in effect, that State Farm had no right to reimburse itself for its PIP payments by deducting those payments from her arbitration award. She also claimed, in the alternative, that State Farm had no right to reimburse itself unless it paid a pro rata share of the fees and costs she had reasonably incurred to litigate against Cunningham and arbitrate against State Farm (in other words, unless State Farm paid a pro rata share of the fees and costs she had reasonably incurred to recover her total damages). The trial court granted State Farm's motion for summary judgment and ordered Winters to pay $2,500 of State Farm's attorney fees.

I.

Winters contends that State Farm had no right to unilaterally recoup its PIP payments from the UIM award. We disagree.

A PIP insurer has a right to be reimbursed for PIP payments made to a fault-free PIP insured, at least where its policy so provides.⁸ A PIP insurer may not enforce this right before the PIP insured has been fully compensated, but it may enforce the right after the PIP insured has been fully compensated.⁹ When the right is otherwise enforceable, a PIP insurer may implement it by claiming against settlement proceeds in the hands of the insured;¹⁰ by suing the tortfeasor in a separate action;¹¹ or, in a UIM case, by offsetting its previous PIP payments against a UIM award.¹² The underlying ideas are (1) that the fault-free PIP insured should be restored to his or her pre-accident position; (2) that the fault-free PIP insurer should be restored to its pre-accident position; and (3) that restoring the PIP insured to its pre-accident position is more important than restoring the PIP insurer to its pre-accident position.¹³

Here, State Farm's policy provided for reimbursement of PIP payments out of a UIM award, so long as Winters was fully compensated first. The policy provided that State Farm would be repaid its PIP payments "out of any recovery[,]"¹⁴ but "only after the insured has been fully compensated for the bodily injury, property damage or loss."¹⁵ The policy also provided that "[a]ny amount paid or payable for damages under [PIP] coverage will not be paid again as damages under this [UIM] coverage."¹⁶ In addition, State Farm reimbursed itself only after Winters had been fully compensated. By the time it took the $8,271 out of the UIM award, Winters had received her total damages of $40,271 ($8,271 in PIP payments, $25,000 in liability proceeds, and $7,000 in UIM proceeds). We conclude that State Farm was entitled to reimburse itself in the manner that it did—subject to Section III of our discussion.

II.

Winters contends that State Farm lost its right to reimbursement by attempting to subrogate against Edalgo. We disagree.

As already noted, Washington's public policy is to return the PIP insurer to its pre-accident position, provided that the PIP insured is fully compensated first. This is a corollary of the more general proposition that the loss should be borne by the person at fault, as opposed to the fault-free PIP insured or the fault-free PIP insurer.¹⁷ When we allow a PIP insurer to reimburse itself, we allow it to pay the insured's medical bills once rather than twice, but we do not return it to its pre-accident position; it will still have paid the bills once. To return the PIP insurer to its pre-accident position, we additionally must allow it to recover the amount of the insured's bills from the at-fault tortfeasor. A PIP insurer's right to reimbursement is not affected by bringing a subrogation suit against the at-fault tortfeasor, and State Farm's right was not affected by its suit against Edalgo.

III.

Winters contends that even if State Farm has the right to reclaim its PIP payments by offsetting them against her UIM award, it must pay its "pro rata share of the legal costs and expenses, including attorney's fees, incurred by [her] in the prosecution of [her] liability and UIM claims."¹⁸ This is true, she says, because "[t]he arbitration award of $40,271.86 created the common fund from which the defendant ... withheld ... its PIP advancements."¹⁹ The common fund doctrine provides that when 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.²⁰

Two recent cases implicate the common fund doctrine. In Mahler v. Szucs,²¹ a fault-free plaintiff was injured in an auto accident. Her damages totaled $24,000.²² The PIP insurer made PIP payments of $4,000. Thereafter, the plaintiff obtained liability proceeds of $24,000, an amount equal to her total damages. In accordance with Thiringer v. American Motors Insurance Company,²³ holding that a PIP insurer can obtain reimbursement only after the PIP insured is compensated, the PIP insurer then claimed $4,000 of the liability proceeds as reimbursement for its PIP payments. The plaintiff agreed to share the liability proceeds—she would take $20,000 and the PIP insurer could take $4,000—on condition that the PIP insurer pay a pro rata share of the fees and costs that she had reasonably expended to obtain the liability proceeds.²⁴ The PIP insurer disputed the condition, but the Supreme Court upheld it. Although the court relied primarily on the language of the policy before it, it also seems to have reasoned that the plaintiff generated a fund of money from the tortfeasor (i.e., the liability proceeds); that the plaintiff was being compensated for her damages out of that fund ($20,000); and that the PIP insurer was being reimbursed out of that fund ($4,000). Thus, each party was benefiting from the fund, and each party was obligated to pay its pro rata share of the fees and costs reasonably incurred to generate the fund, in accordance with the "equitable sharing rule" known as "the common fund doctrine."²⁵ Given that the policy language and the common fund doctrine yielded the same result, the court did not reach whether the common fund doctrine could be "varied by contract."²⁶

In Peterson v. Safeco,²⁷ the plaintiff received $4,000 in PIP payments from his own PIP insurer. He later recovered his total damages of $20,000 from the adequately insured tortfeasor.²⁸ The PIP insurer then sought $4,000 of the $20,000 as reimbursement for its earlier PIP payments. The plaintiff responded in part that if he had to reimburse the insurer, the insurer had to pay its pro rata share of the fees and costs he had reasonably expended to...