Greed Succeeds But Still Not Enough
Alabama has an interesting procedure when dealing with underinsured motorist (UIM) benefits. If the Underinsured Motorist’s insurer offers its limits and the UIM insured does not want to accept the offer the UIM insurer can pay the amount of the offer to its insured and opt out of the case. The UIM insured, as a result, has the benefit of the offer and can take the chance of trial. If a win at trial they keep give the UIM insurer the amount collected and keep any excess. The problem arises when the trial gives them less than the offer.
In State Farm Mut. Auto. Ins. Co. v. Brown, — So.3d —-, 2015 WL 5918750 (Ala.Civ.App., 10/09/2015) Insureds brought action against automobile insurer to recover underinsured motorist (UIM) benefits for punitive damages not covered by tortfeasor’s liability policy, even though insurer had advanced liability coverage limits to insureds. State Farm Mutual Automobile Insurance Company (“State Farm”) appeals from a judgment entered by the Mobile Circuit Court against State Farm and in favor of Jacqueline Brown and Cleo Brown.
The Browns sued John Joseph Kramer, seeking compensatory and punitive damages after the Browns had been involved in an automobile accident with Kramer. The Browns were insured by a State Farm policy, which provided underinsured-motorist (“UIM”) coverage for the Browns. Accordingly, the Browns also named State Farm as a defendant, seeking to recover UIM benefits. Kramer’s liability insurer, USAA Casualty Insurance Company (“USAA”), offered to pay the Browns $200,000, which represented the policy limits of Kramer’s policy, in full settlement of the Browns’ claims against Kramer.
State Farm, pursuant to the Alabama Supreme Court case Lambert v. State Farm Mutual Automobile Insurance Co., 576 So.2d 160 (Ala.1991), agreed to pay the Browns the $200,000 offered by USAA in order to secure its subrogation rights against Kramer. In doing so, State Farm substituted its funds for the $200,000 the Browns would have received in settlement from USAA. State Farm also elected to “opt out” of the litigation between the Browns and Kramer.
The Browns’ claims against Kramer proceeded to trial, and the jury rendered a verdict in favor of the Browns in the total amount of $90,000, which consisted of $80,000 in compensatory damages and $10,000 in punitive damages. Kramer’s liability policy with USAA did not provide coverage for punitive damages. Accordingly, USAA deposited a total of $80,000 with the trial court.
The Browns conceded that State Farm was entitled to the $80,000 based on the substitute payment it had made. A dispute, however, arose between the Browns and State Farm regarding the $10,000 punitive-damages award.
According to the Browns, because Kramer’s liability policy excluded coverage for punitive damages, Kramer was uninsured for such damages, and, thus, they argued, State Farm was required to pay $10,000 to the Browns pursuant to the Browns’ UIM coverage. State Farm, on the other hand, asserted that the Browns were entitled to retain all of the $200,000 that State Farm had advanced to the Browns which exceeded the total verdict by $110,000. Thus, State Farm argued, the Browns had already recovered more than the total amount of the verdict, and State Farm was not required to pay an additional $10,000.
The trial court agreed with the Browns and entered a judgment against State Farm in the amount of $10,000, plus interest. State Farm appealed.
USAA offered to pay the Browns $200,000 in full settlement of all of the Browns’ claims. State Farm advanced those funds to the Browns. At that point, the Browns had recovered all the funds to which they ultimately became legally entitled as a result of the jury’s verdict. Indeed, the Browns recovered more than the amount to which they were legally entitled, as State Farm concedes that the Browns had the right to keep the entire $200,000 advance made. Accordingly, we agree with State Farm’s argument that it was not required to pay the Browns an additional $10,000.
In Alabama, Omni Insurance Co. v. Foreman, 802 So.2d 195 (Ala.2001), holds that UIM benefits can include punitive damages that are owed by an underinsured tortfeasor. In the present case, although the Browns were legally entitled to recover punitive damages from Kramer, the Browns unquestionably received, pursuant to State Farm’s advance, more than the total sum of damages to which they were entitled.
Neither the letter nor the spirit of the Uninsured Motorist Act supports an additional award to the Browns of $10,000 from State Farm. By making an advance payment in accordance with Lambert, a UIM carrier assumes the risk that it may not be fully reimbursed by the tortfeasor’s liability-insurance carrier, but it does not assume the risk that it will become obligated to pay the insured UIM benefits for damages for which the insured has already been fully indemnified.
Thus, the trial court’s judgment against State Farm was reversed.
The procedure set up by the Alabama Supreme Court Worked. State Farm took a chance that the tort case the Browns’ brought was worth $200,000 or more. The Browns agreed and took their case to trial only to get a verdict of $90,000, $10,000 of which was punitive damages. They demanded an extra $10,000 from State Farm although they had already received more than the judgment and even convinced the trial court. The Court of Appeal used logic and law and refused to allow a bonus when the UIM insureds had already been fully indemnified.
Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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Mr. Zalma’s new e-books “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;” “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.
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