[No. 73614-6. En Banc.]
Argued October 22, 2003. Decided April 22, 2004.
REBECCA HAMM , Petitioner , v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY , Respondent . [1] Insurance - Underinsured Motorist - Personal Injury Protection - Relationship. For purposes of uninsured/underinsured
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motorist coverage, the insurance carrier is said to stand in the shoes of the tortfeasor, and payments made by the UIM carrier are treated as if they were made by the tortfeasor. Where the insured receives a full recovery for damages sustained in a motor vehicle accident from another source, such as the tortfeasor, the insured's UIM carrier, or both, personal injury protection coverage becomes redundant and the insured's PIP carrier may seek reimbursement from the insured for PIP benefits previously paid. If the PIP carrier seeks reimbursement from funds obtained through the insured's efforts, the PIP carrier must pay a pro rata share of the insured's legal expenses.
[2] Insurance - Uninsured Motorist - Offset - Personal Injury Protection Benefits - Recovery From Own Insurer - Pro Rata Legal Expenses. When an insurer has paid personal injury protection benefits to its insured for medical expenses related to injuries sustained in a motor vehicle accident with an uninsured motorist and the insured subsequently recovers uninsured motorist coverage from the insurer following litigation or arbitration of the claim as the sole recovery and in full compensation for the accident, the insured creates a common fund that is beneficial to the insurer in its capacity as the personal injury protection carrier and out of which the insurer may seek reimbursement of the personal injury protection benefits previously paid. In equity, the insured is entitled to be paid a pro rata share of the legal expenses incurred in creating the common fund before the insurer may take the offset. The insurer's pro rata share of the insured's legal expenses is calculated by dividing the personal injury protection reimbursement by the insured's total damages and multiplying the result by the insured's legal expenses.
MADSEN , J., SWEENEY , J. Pro Tem., ALEXANDER , C.J., and JOHNSON , J., dissent by separate opinions; SANDERS , J., did not participate in the disposition of this case.Nature of Action: An insured sought a declaration concerning the degree to which her insurer could offset uninsured motorist coverage by personal injury protection benefits previously paid. The insured was injured in a motor vehicle accident with an uninsured motorist. The insurer paid personal injury protection benefits to the insured for medical expenses incurred as a result of the accident. Rather than pursue a claim against the uninsured tortfeasor, the insured immediately presented a claim to her insurer for uninsured motorist coverage. The claim was submitted to arbitration, and the arbitrator determined the insured's total damages, including medical expenses. The
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insurer tendered a check to the insured for an amount equal to the insured's total damages minus the personal injury protection benefits previously paid. In the declaratory action, the trial court entered a judgment in which it ruled that the insurer could take the full personal injury protection offset provided that it pay a proportionate share of the insured's legal expenses in arbitrating the claim for uninsured motorist coverage. The Court of Appeals, at 101 Wn. App. 360 (2000), reversed the judgment in part, holding that the insurer was not required to pay a pro rata share of the insured's legal expenses in arbitrating the claim for uninsured motorist coverage. The Supreme Court, at 145 Wn.2d 1032 (2002), granted review and remanded the case to the Court of Appeals for reconsideration in light of Winters v. State Farm Mutual Automobile Insurance Co ., 144 Wn.2d 869 (2001).
Court of Appeals: The court, at 115 Wn. App. 773 (2002), reaffirmed its prior decision, holding that Winters did not apply and that the insurer did not have an equitable duty to pay a pro rata share of the insured's legal expenses to arbitrate her claim for uninsured motorist coverage.
Supreme Court: Holding that the insurer may not take the personal injury protection reimbursement offset against uninsured motorist coverage unless it pays a pro rata share of the legal expenses incurred by the insured to arbitrate her claim for uninsured motorist coverage, the court reverses the decision of the Court of Appeals.
Kenneth Dore (of Graham Lundberg & Peschel, P.S., Inc. ), for petitioner .
William R. Hickman and Pamela A. Okano (of Reed McClure ); Mark R. Koenig ; and Robert A. Mannheimer (of Todd & Wakefield ), for respondent .
Debra L.W. Stephens , Gary N. Bloom , and Bryan P. Harnetiaux on behalf of Washington State Trial Lawyers Association Foundation, amicus curiae .
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FAIRHURST , J . - A no-fault motorist was injured in a car accident with an un insured motorist (tortfeasor). She recovered both personal injury protection (PIP) benefits and uninsured motorist (UIM)«1»benefits from the same insurance carrier. After arbitration of the UIM claim was complete, the insurance carrier took an offset, in an amount equal to the PIP benefits it previously paid, against the amount it owed in its capacity as UIM carrier. We extend our earlier decisions in Mahler v. Szucs , 135 Wn.2d 398 , 957 P.2d 632, 966 P.2d 305 (1998), and Winters v. State Farm Mutual Automobile Insurance Co ., 144 Wn.2d 869 , 31 P.3d 1164, 63 P.3d 764 (2001), and hold that in order to take a PIP reimbursement offset, the insurance carrier must pay a pro rata share of the legal expenses incurred by the insured to arbitrate the UIM claim.
I. FACTS AND PROCEDURAL HISTORY
In November 1994, Rebecca Hamm was injured in an automobile accident with an uninsured motorist. Hamm qualified as an insured under a policy with State Farm Mutual Automobile Insurance Co. (State Farm) for both PIP benefits and UIM benefits. She received $8,669.71 in PIP benefits from State Farm for medical expenses she incurred as a result of the accident. Rather than pursue her claim against an uninsured motorist, Hamm immediately presented a UIM claim to State Farm. After attempts to settle the UIM claim proved unsuccessful, Hamm pursued arbitration as provided in the State Farm policy. The arbitrator determined that Hamm's total damages, including medical expenses, were $16,000.00. From the $16,000.00 that State Farm owed to Hamm in its capacity
«1»UIM is an acronym for either uninsured or underinsured motorist coverage.
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as her UIM carrier it offset the amount it previously paid as her PIP carrier, and tendered her a check for the $7,330.29 balance.
The parties disputed the proper amount of the offset, and Hamm eventually brought an action for declaratory relief. The trial court permitted State Farm to offset the total amount of benefits it paid as PIP carrier from the amount of benefits that the arbitrator determined it was obligated to pay as UIM carrier. The trial court, citing Mahler , also required State Farm to pay its pro rata share of the legal expenses (which it set at $6,634.06) that Hamm incurred arbitrating the UIM claim. Because the PIP offset represented approximately 54 percent of the total recovery, State Farm was ordered to pay 54 percent of Hamm's legal expenses.
State Farm appealed the award of pro rata legal expenses, and the Court of Appeals reversed. Hamm v. State Farm Mut. Auto. Ins. Co ., 101 Wn. App. 360 , 3 P.3d 761 (2000). We accepted Hamm's petition for review, and remanded to the Court of Appeals for reconsideration in light of our recent decision in Winters . Hamm v. State Farm Mut. Auto. Ins. Co ., 145 Wn.2d 1032, 42 P.3d 1278 (2002). On remand, the Court of Appeals considered Winters , concluded that it did not apply, and declined to amend its earlier opinion. Hamm v. State Farm Mut. Auto. Ins. Co ., 115 Wn. App. 773 , 60 P.3d 640 (2002). We once again accepted Hamm's petition for review and now review the Court of Appeals' decision not to apply Winters . Hamm v. State Farm Mut. Auto. Ins. Co ., 149 Wn.2d 1017, 72 P.3d 762 (2003).
II. ISSUE
Does the pro rata sharing rule for legal expenses articulated in Mahler (recovery from a fully insured tortfeasor) and in Winters (combined recovery from an under insured tortfeasor and a UIM carrier) apply when the tortfeasor is un insured and the insured recovers only from a UIM carrier?
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III. ANALYSIS
A.Background
[1]Two separate and distinct types of insurance coverage are involved in this case - PIP and UIM. PIP coverage generally provides benefits for the immediate costs of an automobile accident, including medical expenses and loss of income. UIM coverage, which functions separately from PIP coverage, covers all damages that the insured would have been entitled to receive from the tortfeasor, including the medical expenses, loss of income, and other damages that are also covered by PIP. See RCW 48.22.030 (UIM), .085 (PIP).
UIM and PIP coverages may overlap with each other and with any potential recovery from the tortfeasor. Although UIM and PIP carriers are permitted to account for any eventual coverage overlap, accounting for overlapping coverage is accomplished differently for UIM carriers than for PIP carriers.
For purposes of UIM coverage, the insurance carrier is said to stand in the shoes of the tortfeasor, and payments made by the UIM carrier are treated as if they were made by the tortfeasor. Britton v. Safeco Ins. Co. of Am ., 104 Wn.2d 518 , 529, 707 P.2d 125 (1985); Winters , 144 Wn.2d at 880 . Accordingly, UIM carriers are entitled to set off the amount of any tortfeasor recovery from the amounts owed to an insured under a UIM policy.«2» Hamilton v. Farmers Ins. Co. of Wash ., 107 Wn.2d 721 , 728, 733 P.2d 213 (1987) (a UIM carrier "always is allowed to credit the full amount of the tortfeasor's liability coverage against the insured's damages"). UIM carriers do not need to pay a pro rata portion of the legal expenses the insured incurs to arbitrate a UIM claim in order to take a setoff. Dayton v. Farmers Ins.
«2»We use "setoff" and "offset" as they are defined in Winters : "A 'setoff' . . . refers to sums paid to the insured by another party. . . . 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." Winters , 144 Wn.2d at 876 . "Whatever term is used, the insured must be fully compensated before the insurer may recoup benefits paid." Id .
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Group , 124 Wn.2d 277 , 281, 876 P.2d 896 (1994) ("When a tortfeasor carries insurance, the claimant insured bears his or her own attorney fees in the arbitration proceedings. Thus, when the UIM insurer stands in the shoes of the uninsured tortfeasor, the claimant insured should likewise bear his or her own attorney fees." (citation omitted)).
In contrast, PIP carriers generally contract for a right to receive reimbursement of PIP benefits if an insured recovers from the tortfeasor, a UIM carrier, or both. While the insured pursues her tortfeasor and UIM claims, the PIP carrier provides benefits to cover the insured's immediate costs, such as medical expenses. If the insured subsequently recovers the total amount of her damages from another source (the tortfeasor, her UIM carrier, or both), the PIP coverage becomes redundant. Therefore, when the insured receives full recovery, the PIP carrier may seek reimbursement from its insured for the PIP benefits it previously paid. See Winters , 144 Wn.2d at 876 ("the insured must be fully compensated before the insurer may recoup benefits paid").
Pursuant to Mahler and Winters , if the PIP carrier seeks reimbursement from the funds obtained through the insured's efforts, the PIP carrier must pay a pro rata share of the insured's legal expenses. Mahler , 135 Wn.2d at 436 ; Winters , 144 Wn.2d at 883 . As we discuss below, Mahler established this PIP pro rata sharing rule for cases where the tortfeasor is fully insured, and Winters extended the rule to cases where the tortfeasor is under insured. This case presents the issue of PIP pro rata sharing in cases where the tortfeasor is un insured.
1. Mahler and the Fully Insured Tortfeasor
In Mahler , the insured was injured by a fully insured tortfeasor. Her medical expenses were initially paid for by her PIP carrier. Subsequently, the insured recovered her full damages, including medical expenses, from the tortfeasor. Once the insured was fully compensated, her PIP carrier sought reimbursement of the PIP benefits it
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paid. We ruled that a PIP carrier seeking reimbursement from the fund created by the insured must pay a pro rata share of the legal expenses the insured incurred in order to recover from the tortfeasor. Mahler , 135 Wn.2d at 407 , 436.
As explained in Mahler : "This equitable sharing rule is based on the common fund doctrine, which, as an exception to the American Rule on fees in civil cases, applies to cases where litigants preserve or create a common fund for the benefit of others as well as themselves." Id . at 426-27. The "common fund" in Mahler consisted of the recovery the insured obtained from the tortfeasor only. From this fund, the insured was compensated and the PIP carrier was reimbursed. Because the PIP carrier reimbursed itself from a fund that the insured created, the PIP carrier was obligated to pay a pro rata share of the legal expenses incurred by the insured to create the fund. Id . at 436.
2. Winters and the Underinsured Tortfeasor
In Winters , the insured, Sarah Winters, was injured by an under insured tortfeasor.«3»Her immediate medical expenses were covered by payments from her PIP carrier. Winters then sought recovery from the tortfeasor and recovered the maximum limits of the tortfeasor's liability coverage. Because the tortfeasor recovery did not fully compensate her, she also pursued a UIM claim.
Unlike the insured in Mahler , Winters was not fully compensated until she recovered from both the tortfeasor and her UIM carrier. Once she was fully compensated, her PIP carrier was able to seek reimbursement for the PIP benefits it paid, subject to its obligation to pay a pro rata share of the legal expenses incurred by Winters in creating the fund. Winters , 144 Wn.2d at 881 . As explained in Winters , "[t]hese pooled funds became the common fund from which the PIP insurer was able to recoup payments it had made." Id . Winters clarified that the pro rata sharing
«3» Winters was a consolidated opinion involving two separate cases with two separate insureds (Sarah Winters and Kyle Perkins). For simplicity's sake, only the facts involving Winters are discussed here.
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rule articulated in Mahler is based on equitable principles, not specific policy language, and applies to PIP reimbursements from UIM recoveries as well as from tortfeasor recoveries. Id . at 878-79, 881.
In cases like Winters , where PIP coverage and UIM coverage are provided by the same insurance carrier, the reimbursement to the PIP carrier typically comes in the form of an offset applied to the UIM obligation. Even though the offset appears to result in a reduction to the UIM obligation, the offset functions as a mechanism to account for the PIP reimbursement and is available only when the same insurance carrier provides both PIP and UIM coverage. In cases where the PIP and UIM carriers are separate companies, the PIP carrier remains entitled to receive actual reimbursement, and the UIM carrier remains obligated to pay the entire amount of the UIM award. In such cases, no opportunity for an offset exists. When the PIP and UIM carrier is the same, however, an offset against the UIM obligation is an acceptable mechanism to account for the PIP reimbursement rights. Mahler , 135 Wn.2d at 436 ("Provided the insurer recognizes the public policy in Washington of full compensation of insureds and its other duties to insureds by statute, regulation, or common law, the insurer may establish its right to reimbursement and the mechanism for its enforcement by its contract with the insured.").«4»
Winters also makes clear that Dayton and Mahler are applied separately to an insurance carrier that provides both UIM and PIP insurance to the same insured. Winters , 144 Wn.2d at 882 -83. An insurance carrier that provides both UIM and PIP benefits is not required to pay a pro rata share of legal expenses as UIM carrier in order to take a
«4»Some discussion of so-called "nonduplication of benefits" clauses was present in both Winters and this case. We clarify that such clauses are valid only to the extent they serve as mechanisms to accomplish the PIP right to reimbursement when the same carrier provides PIP and UIM coverage. An insurance company, however, cannot avoid the pro rata sharing principle by characterizing such clauses as a limitation on UIM coverage rather than a reimbursement offset based on previously paid PIP benefits.
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UIM setoff pursuant to Dayton , but is required to pay a pro rata share of legal expenses as PIP carrier in order to take a PIP offset pursuant to Mahler and Winters . Id . The fact that an insurance company providing both PIP and UIM coverage chooses to use an offset from its UIM obligations to account for its PIP reimbursement does not relieve the insurance carrier of its burdens under Mahler and Winters . As the Winters court concluded: "The insured should not be worse off simply because he or she purchased two coverages from the same insurer." Id . at 882.
B.The Pro Rata Sharing Rule Articulated in Mahler and Winters Applies to Uninsured Tortfeasor Cases
[2]In Mahler , the insured was injured by a fully insured tortfeasor and was fully compensated by the funds recovered from the tortfeasor. In Winters , the insured was injured by an under insured tortfeasor and the recovery included funds from the tortfeasor and the insured's UIM carrier. In this case, Hamm was injured by an un insured tortfeasor and recovered only from her UIM carrier. As stated above, the question in this case is whether the equitable principle requiring a PIP carrier to share pro rata in the legal expenses of its insured in order to obtain reimbursement of PIP benefits applies when the insured recovers only from her UIM carrier. We hold that it does and reverse the Court of Appeals.
In its order on remand, the Court of Appeals concludes that "Hamm's UIM carrier received no benefit." Hamm , 115 Wn. App. at 777 (emphasis added). Focusing on State Farm's capacity as UIM carrier, the Court of Appeals decided that Hamm is not entitled to reimbursement from her UIM carrier for the legal expenses she incurred to create the UIM arbitration award. Id . at 778. In doing so, the Court of Appeals applied the rule for UIM carrier setoffs from Dayton rather than the rule for PIP carrier offsets from Mahler and Winters .
The Court of Appeals' conclusions with respect to State Farm's obligations in its capacity as UIM carrier may be
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correct. As in Winters , however, "[t]he question presented here is totally different: whether or not the PIP carrier should pay a pro rata share of legal expenses for its insured in recovering PIP benefits from an UIM insurer." Winters , 144 Wn.2d at 882 . Although the Court of Appeals notes that "[i]t appears that Hamm is seeking to have State Farm pay a portion of her fees in its capacity as PIP carrier," it erroneously concludes that " Winters is distinguishable because Hamm's PIP carrier received no reimbursement," Hamm , 115 Wn. App. at 778 , and "State Farm as UIM carrier received an offset for the PIP payment previously made." Hamm , 115 Wn. App. at 777 n.1.«5»
The offset at issue in this case, just as in Winters , is a benefit to the PIP carrier, not the UIM carrier. The Court of Appeals' decision to the contrary appears to be based on two erroneous mathematical conclusions. First, the Court of Appeals concludes that applying Winters would put State Farm in a worse position than two separate carriers providing PIP and UIM coverage under the same circumstances. Id . at 777 ("an insurance carrier should not be penalized simply because it provides both UIM coverage
«5»The dissent similarly concludes that "State Farm has not recovered or been 'reimbursed' for anything." Dissent at 328. The dissent does not distinguish between State Farm's separate roles as PIP and UIM carrier. Instead, its analysis adopts the dissenting viewpoint in Winters , which is not the law of this state. In Winters , the dissent argued:
The majority contends that the PIP offset served to reimburse State Farm for the PIP payments it had paid. Although State Farm was able to offset the PIP payments it previously paid to Perkins and Winters against its UIM obligation, thus reducing the amount of UIM benefits it had to pay, this cannot be considered a reimbursement. I say that because State Farm has never recovered the PIP benefits it previously paid to Perkins and Winters. Thus, it has not been restored to its pre-accident position. An offset is not a reimbursement nor a recoupment. It simply prevents an insured from receiving a double recovery. In sum, the insurer's offset of the PIP payment against its UIM obligation is not a reimbursement or recoupment of the PIP payment.
Winters , 144 Wn.2d at 885 (Alexander, C.J., dissenting).
The dissent's characterization of the charts in our majority opinion and the dissent's double payment theory do not recognize reimbursement to the PIP carrier and would overrule Winters . The dissent ignores that Winters already rejected the notion that a PIP carrier does not receive reimbursement from UIM payments when the PIP carrier and the UIM carrier are the same company. Id . at 881-82.
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and medical payment coverage through PIP . . . coverage"). Second, the Court of Appeals mistakenly concludes that "[a]s in Dayton , Hamm would be in a better position for having been injured by an uninsured driver than an insured driver if State Farm were required to pay a share of her fees and costs." Id . at 779.
As the tables below demonstrate, an insurance carrier providing both UIM and PIP coverage is not penalized when it is required to pay a pro rata share of legal expenses in order to receive its PIP reimbursement. The following tables compare the position of separate PIP and UIM carriers (table A) with State Farm's position under Winters (table B) and State Farm's position under the Court of Appeals' holding (table C).
Table A
Separate PIP and UIM Carriers, Un insured Tortfeasor
PIP benefits from insurance company A | +$ 8,669.71 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UIM award from insurance company B | + 16,000.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Legal expenses to arbitrate UIM claim | - 6,634.06 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reimbursement to PIP carrier | - 8,669.71 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PIP pro rata share of legal expenses«6» | + 3,582.39 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hamm's total recovery«7» | =$12,948.33 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net combination of PIP and UIM payments«8» | $19,582.39 «6»The formula for calculating a PIP carrier's pro rata share of the insured's legal expenses is "legal expenses multiplied by the ratio obtained by dividing the PIP reimbursement by total damages." Safeco Ins. Co. v. Woodley , 150 Wn.2d 765 , 772-73, 82 P.3d 660 (2004). «7»Hamm's $12,948.33 total recovery represents $8,669.71 in PIP payments, minus $8,669.71 in PIP reimbursement, plus $16,000.00 in UIM benefits, minus $3,051.67 in net legal expenses ($6,634.06 legal expenses reduced by the $3,582.39 contribution from the PIP carrier). «8»The $19,582.39 net PIP and UIM payment total represents $8,669.71 in PIP payments, minus $8,669.71 in PIP reimbursement, plus $16,000.00 in UIM benefits, plus the PIP $3,582.39 pro rata share of legal expenses. Apr. 2004 Hamm v. State Farm Mut. Auto. Ins. Co. 315 Table B PIP and UIM from State Farm, Un insured Tortfeasor
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