Court: Supreme Court of Kansas; May 24, 1991; Kansas; State Supreme Court
In the case of Allied Mutual Insurance Company v. Kevin S. Gordon et al., the Kansas Supreme Court addressed an appeal by State Farm Mutual Automobile Insurance Company regarding a judgment that awarded $99,621.55 in underinsured motorist benefits to Robert Harding. Harding also cross-appealed the denial of attorney fees in the context of the underinsured motorist action. The incident involved a collision caused by Kevin Gordon, a 16-year-old who ran a stop sign, resulting in serious injuries to Harding, who was employed at the time and received workers' compensation benefits from State Farm Fire and Casualty.
Allied Mutual Insurance Company initiated an interpleader action to resolve potential claims against Gordon, depositing its policy limit of $60,000 for distribution among claimants. Harding responded by cross-claiming against Gordon and Orville West for negligence, and also sought underinsured motorist benefits from State Farm Mutual, which he argued should be $100,000 minus any damages he recovered from Gordon. State Farm Mutual contended that State Farm Casualty had a subrogation interest due to the workers' compensation benefits provided to Harding.
The legal framework included K.S.A. 1990 Supp. 44-504(b), allowing employers to claim a lien on any recovery by an injured worker who has received workers' compensation benefits. Harding's policy with State Farm Mutual defined uninsured motor vehicle coverage to include underinsured vehicles, setting the stage for the court's decision regarding the applicability of benefits and the subrogation claims by State Farm Casualty.
Harding's insurance policy includes a $100,000 limit for uninsured motor vehicle liability per person, while Gordon's policy has a limit of $60,000, classifying Gordon as an underinsured motorist. The policy specifies that coverage for bodily injury is the lesser of: 1) the difference between the policy's per person limit and any amounts received from liable parties, or 2) the difference between the insured's bodily injury damages and amounts received from liable parties. Coverage is reduced by any payments made under liability coverage or workers' compensation. Notably, there is no coverage for bodily injury to insured individuals who accept settlements that prejudice the insurer's recovery rights, unless written consent is provided. Additionally, if benefits are paid under underinsured motorist coverage, the insurer is subrogated to the insured's recovery rights against liable parties. K.S.A. 40-287 establishes that the insurer can pursue recovery from any settlement resulting from the insured's claims against responsible parties. To enforce subrogation rights, K.S.A. 1990 Supp. 40-284(f) requires that a tentative settlement notice be sent to the underinsured motorist insurer, which then has 60 days to substitute its payment for the settlement. Harding's counsel sent certified letters to State Farm Mutual, notifying them of the $60,000 settlement offer, but State Farm did not intervene or make any payment. Subsequently, Gordon offered a consent judgment totaling $180,000, reflecting an estimated $200,000 in damages with 90% fault assigned to him and 10% to another party.
Harding accepted an offer on June 6, 1988, from Farmers Insurance to settle for $20,000, with Farmers waiving any claims to an interpled $60,000. He notified State Farm Mutual of this settlement on June 8, 1988, and indicated a hearing for the acceptance of the judgment was set for June 17, 1988. State Farm Mutual chose not to intervene or approve the settlement but believed it was unnecessary for the judgment entry in favor of Harding against Gordon. Harding released his claims against West and Farmers, who were dismissed with prejudice. Farmers issued a check for $20,000, payable to State Farm Casualty, which was tied to a workers' compensation settlement requiring payments to State Farm under its subrogation lien. A hearing on the acceptance of the judgment occurred on June 17, 1988, resulting in a judgment against Gordon favoring Harding. The court ordered the interpled funds of $60,000 plus interest to be paid to State Farm Casualty on July 1, 1988, after State Farm Mutual was notified but did not attend the hearing. On July 6, 1988, Harding's claims against West were dismissed, and on July 7, 1988, State Farm Casualty received the interpled funds totaling $62,267.81.
The pretrial statement for the trial between Harding and State Farm Mutual outlined issues regarding the construction of State Farm's policy on underinsured motorist coverage, whether Harding was "paid" the total of $80,000, and if he forfeited his claim to underinsured benefits by settling with West without notifying State Farm. Harding argued he was not "paid" that amount since the funds went directly to State Farm Casualty, asserting entitlement to the full underinsured motorist benefits of $100,000. Conversely, State Farm Mutual contended Harding had received $80,000, which should reduce his recoverable benefits to $20,000, and claimed that he forfeited his right to benefits by failing to notify them of the settlement.
The district court found that State Farm Mutual had not made any payments regarding uninsured or underinsured motorist coverage at the time of the settlement with West/Farmers, and thus had no subrogation rights. Additionally, it concluded that State Farm Mutual waived its subrogation rights against Gordon due to its inaction in response to demands made by Harding.
A subrogated underinsured insurer's ability to collect liability benefits for damages owed by a different insured person contradicts the intent of underinsured motorist insurance and Kansas public policy. Kevin S. Gordon is identified as the negligent party responsible for the payments, and subrogation rights are limited to him. State Farm Mutual Automobile Insurance Company's 'consent-to-settle' exclusion is deemed unauthorized and unenforceable under K.S.A. 40-284(e)(5). Following notice of a settlement on June 8, 1988, State Farm Mutual did not assert any subrogation rights but later attempted to modify settlement documents, which constituted written consent to the settlement and waived any claim that it voided underinsured motorist coverage. State Farm is estopped from claiming forfeiture of benefits. After proper notice under Haas v. Freeman, State Farm had the option to intervene but chose not to, thus being bound by settlements made by Robert L. Harding.
The court determined that the total damages for Harding, amounting to $99,621.55, were distinct from any workers’ compensation benefits received, detailing various components of damages such as pain and suffering, medical costs, and loss of income. Although the court awarded this amount plus interest, attorney fees were denied as inappropriate in underinsured motorist cases. The Court of Appeals upheld the district court's findings as sufficient and rejected State Farm's claims regarding the inadequacy of findings, waiver of subrogation rights, and issues concerning prejudgment interest and attorney fees.
The Court of Appeals upheld the district court's decision to award prejudgment interest on an unliquidated claim against Gordon, noting that neither Harding nor State Farm Mutual challenged this aspect. The Court found that State Farm Mutual’s insurance policy entitled Harding to underinsured motorist benefits of $100,000 minus any payments received from liable parties, including an $80,000 payment made to State Farm Casualty due to its subrogation lien. The Court determined that this payment effectively constituted payment to Harding, as the tortfeasors' debt to Harding was extinguished when the payment was directed to State Farm Casualty.
The Court concluded that the $80,000 payment was for the same damages covered under State Farm Mutual's policy, allowing Harding to claim the difference between the payment and the policy limit, resulting in a balance of $20,000. The Court also affirmed the district court's ruling that Harding's settlement with West did not preclude recovery from State Farm Mutual, clarifying that the liable party for underinsured motorist coverage was Gordon, who was found to be 90% at fault for the accident.
With total damages of $200,000 established and no additional recovery available from West due to the settlement amount, State Farm Mutual was not harmed by the settlement. Lastly, the Court of Appeals identified the district court's error in denying attorney fees, stating that such fees are permissible under K.S.A. 40-256 in underinsured motorist cases.
The Court of Appeals upheld the district court's decision not to award attorney fees to Harding, concluding that State Farm Mutual's denial of payment was justified. Despite the district court's reliance on an incorrect rationale, the appellate court affirmed the correctness of the judgment, noting the existence of a good faith controversy regarding State Farm's liability, which also led to the denial of Harding's attorney fees during the appeal.
The case centers on whether amounts paid by a tortfeasor's insurer under a workers' compensation lien should be deducted from the insured's underinsured motorist coverage limits. The State Farm Mutual policy covers damages for bodily injury that an insured is entitled to collect from an uninsured motorist, which the court found applicable in Harding's case. The policy states that the maximum payment to any insured is the lesser of two amounts related to the insured's damages and payments received from liable parties.
Additionally, the policy specifies that any amount payable will be reduced by sums paid under workers' compensation law for the same damages. Harding contended that the policy's terms implied that he must receive the payment directly, which did not happen due to State Farm Casualty's subrogation lien. However, the court disagreed, recognizing State Farm Casualty's claim under the lien as valid, given the workers' compensation benefits previously paid to Harding. The appellate court referenced relevant statutes, emphasizing the employer's right to subrogation under the Workers Compensation Act, which allows recovery from third parties and establishes a lien for the employer against such recoveries.
Judgments, settlements, or recoveries obtained by an injured worker prior to the completion of compensation or medical aid payments will have any excess amount credited against future compensation or medical aid payments. The Court of Appeals interprets this statute to indicate that a worker must recover from a tortfeasor for a subrogation right to arise. In this case, Harding's recovery of $80,000 from tortfeasors Gordon and West established State Farm Casualty's subrogation claim, as Harding's acknowledgment of payment confirms he received this amount from the tortfeasors, not gratuitously from their insurance. The court also noted that Harding’s counsel treated the settlement process as involving both a recovery from the tortfeasors and a corresponding satisfaction of State Farm Casualty's subrogation claim.
The language within the policy reduces liability for bodily injury by amounts paid for the same damages, regardless of whether those amounts are paid directly to the insured or a third party. Harding negotiated settlements that included a $60,000 payment to State Farm Casualty, which the court found relevant to the underinsured motorist coverage. The Court of Appeals rejected the district court's view that workers' compensation payments were for different damages, concluding instead that they were for the same injuries from one accident. Thus, the $80,000 received was applicable to the damages covered by underinsured motorist coverage. The court supported the offset of the $60,000 against Harding’s underinsured motorist coverage. It also examined the enforceability of the coverage limitation provision regarding an additional $20,000 paid by West’s insurer, confirming that Gordon was the tortfeasor responsible for the accident.
A vehicle collision involved three parties: West, Harding, and Gordon. West had liability coverage of $50,000 and paid Harding $20,000 for damages he caused, fully satisfying his liability. However, Harding later obtained a $180,000 judgment against Gordon, an underinsured motorist, but only received $60,000 from him, leaving an outstanding judgment of approximately $120,000. Under K.S.A. 40-284(b), Harding qualifies for underinsured motorist benefits despite the payment from West. Harding illustrates a hypothetical scenario where if West had paid $40,000 or more, he would be ineligible for underinsured motorist benefits, despite an uncompensated judgment against Gordon.
The case references Stewart v. Capps, where the court addressed a similar issue regarding setoff provisions in insurance policies. Capps had a policy that included a setoff clause reducing uninsured motorist benefits by amounts paid under liability coverage. The Court of Appeals ruled the setoff provision unenforceable under K.S.A. 40-284(e) and against public policy, emphasizing that statutory provisions govern insurance policy terms. The court stated that K.S.A. 40-284 must be liberally construed to ensure financial protection for insured parties against negligent uninsured motorists. The precedent set in Van Hoozer v. Farmers Insurance Exchange reinforced this by invalidating provisions that attempted to reduce uninsured motorist coverage, leading to a legislative amendment allowing reductions only for workers' compensation benefits. Stewart concluded that valid setoff provisions must be explicitly enumerated in K.S.A. 40-284(e) to be enforceable, ensuring that injured parties could access the total liability and uninsured motorist coverage limits in accident cases involving negligent drivers.
An injured passenger may recover damages up to the limits of both liability and uninsured motorist coverage. Uninsured motorist coverage is designed to protect motorists who are not at fault when the responsible party lacks insurance. Typically, this coverage provides rights against an insurer equivalent to those against an uninsured tortfeasor. Exclusions and limitations are defined in K.S.A.1990 Supp. 40-284(e), but any attempt by insurance policies to limit the mandated uninsured motorist coverage is invalid. Harding contends that State Farm Mutual's policy incorrectly reduces recoverable amounts based on payments made by other liable parties. The purpose of uninsured motorist coverage is to compensate innocent victims harmed by uninsured drivers, and it should be interpreted broadly to fulfill this protective aim. Under K.S.A.1990 Supp. 60-258a, each tortfeasor is accountable for their share of damages based on fault, and since joint and several liabilities are no longer applicable in Kansas, each tortfeasor's obligations are independent, suggesting that underinsured motorist benefits should also be treated separately. The Court of Appeals ruled that Harding's settlement with West’s insurance did not breach State Farm Mutual's policy, affirming that the liability for underinsured motorist coverage rested with Gordon, the tortfeasor. Harding argues that only payments from Gordon’s insurer should reduce underinsured motorist benefits, not those from other insured tortfeasors, as his coverage limit matches his liability limit of $100,000. The only valid exclusions or limitations to this coverage stem from K.S.A. 40-284(e) or reductions due to the limits of the other vehicle's bodily injury coverage, neither of which applies to payments from another fully insured tortfeasor.
State Farm Mutual contends that the current case is distinct from Stewart due to differences in the types of coverage involved. In Stewart, the reduction pertained to liability and uninsured motorist coverage from the same policy, whereas the current case involves an insured seeking underinsured motorist benefits after receiving payments from two underinsured drivers. State Farm argues that its policy is not limiting and is less restrictive than permissible under K.S.A.1990 Supp. 40-284(b), which mandates underinsured motorist coverage above the limits of the bodily injury coverage of other drivers. The relevant limits from the other drivers were $60,000 (Gordon), $50,000 (West), and $100,000 (Harding). State Farm claims that since Gordon's and West's combined limits exceed Harding's limit, its policy isn't required to provide coverage.
However, the argument is flawed because K.S.A. 40-284(b) and the policy reference the singular "owner or operator," suggesting that each driver's policy should be evaluated individually, rather than in combination. The comparative fault statute (K.S.A.1990 Supp. 60-258a) establishes that each tortfeasor is only liable for their share of fault, without joint liability implications. The right to collect uninsured motorist benefits is based solely on the fault of the uninsured motorist, irrespective of the negligence of others. K.S.A.1990 Supp. 40-284(a) requires policies to cover the damages the insured is entitled to recover from uninsured drivers.
The issue of joint and several setoff was not raised in lower court proceedings, as the district court found that all payments from the tortfeasors' liability carriers went to State Farm and were not set off against the underinsured coverage. The $180,000 judgment against Gordon remained unaffected by a separate $20,000 payment from West. Conversely, the Court of Appeals interpreted the policy to apply joint and several liability principles, effectively reducing the $100,000 underinsured motorist coverage by any payments made by liable parties, ultimately determining that the insured was entitled to a net benefit of $20,000 after considering the $80,000 received from Gordon and West.
Under K.S.A. 1990 Supp. 40-284(b), State Farm Mutual's policy is required to provide underinsured motorist coverage that compensates for the difference between Harding's bodily injury coverage limit of $100,000 and Gordon's limit of $60,000, resulting in a minimum coverage of $40,000. The policy's provision allowing a reduction of payouts based on amounts received from other tortfeasors violates the mandatory underinsured motorist coverage requirement. Previous court rulings have established that any insurance policy provisions that condition or limit this coverage are void. The Court of Appeals' decision regarding this setoff provision is reversed.
Additionally, Harding contends that the Court of Appeals incorrectly deducted amounts for property damage and towing from the underinsured motorist coverage, arguing that these do not pertain to bodily injury. State Farm Mutual counters that there is no evidence showing reimbursement for these damages from a workers' compensation carrier. The court finds that without proof of such reimbursement, the reduction should not occur. Lastly, the issue of whether attorney fees should be awarded is referenced under K.S.A. 40-256, which allows for such awards against insurance companies in relevant judgments.
If an insurance company refuses to pay a claim without just cause, the court may award the plaintiff reasonable attorney's fees, which can be collected as part of the costs. However, if the insurance company makes a tender before the lawsuit begins, costs are not allowed if the amount recovered does not exceed that tender, as per K.S.A. 40-256. The Court of Appeals determined that K.S.A. 40-256 applies to underinsured motorist cases, contrary to the district court's ruling. Nevertheless, the Court concluded that attorney fees should not be awarded because State Farm Mutual's denial of payment was justified and not made without just cause. The determination of whether an insurance company's refusal to pay is justified depends on the specific facts of each case. If there is a good faith legal controversy regarding liability or if a reasonable factual basis exists for the denial, attorney fees cannot be awarded. The Court upheld the district court's judgment, affirming in part and reversing in part, instructing the district court to enter a judgment of $40,000 for Harding against State Farm Mutual, with interest as previously determined.
