Can’t Stack Underinsured Motorist Claims In Illinois When There is only One Underinsured Motorist Insurer
The Illinois Court of Appeal was called upon to determine whether the trial court properly granted summary judgment in favor of State Farm Mutual Automobile Insurance Company (State Farm) in Phillip R. Katz v. State Farm Mutual Automobile, 2012 IL App 110931 (Ill.App. Dist.1 02/07/2012). Phillip R. Katz filed an amended complaint against State Farm claiming that he was owed additional underinsured motorist benefits under three insurance policies issued to him by State Farm. At issue is:
(1) whether State Farm is Katz’s excess underinsurer;
(2) whether the circuit court properly calculated the applicable setoffs to Katz’s underinsured motorist benefits; and
(3) whether State Farm’s conduct in denying Katz’s claims of additional underinsured motorist benefits was unreasonable and vexatious such that Katz is entitled to damages under provisions of the Illinois Insurance Code.
On February 26, 2008, Katz was involved in an automobile accident. At the time of the accident, Katz was the named insured on three automobile policies issued by State Farm. The relevant provisions of these policies are identical and each included underinsured motorist benefit coverage limits of $250,000 per person. At the time of the incident, Katz was driving a vehicle owned by his employer and insured by Sentry Select Insurance Company (Sentry). The underinsured motorist coverage under the Sentry policy included coverage limits of $50,000 per person. The other vehicle involved in the accident, driven by Gregory Belt, was also insured by State Farm and contained a primary liability policy limit of $100,000 per person.
Katz filed the underlying personal injury lawsuit against Belt in the circuit court of Du Page County. In settlement of the underlying action, State Farm tendered its primary liability policy limits of $100,000 under Belt’s policy to Katz. The settlement order allocated 60%, or $60,000, of the $100,000 settlement amount to Katz and 40%, or $40,000, to Katz’s spouse in compensation for her loss of consortium claim.
Katz also received a workers’ compensation benefit, of which $47,654.08 was paid to Katz and was available for setoff. Sentry paid Katz $2,345.92 under its policy. Although Sentry is not part of this appeal, it appears from the record that Sentry applied a setoff for the workers’ compensation benefits Katz received. Sentry’s policy limit for underinsured motorist benefits was $50,000. After applying the workers’ compensation setoff of $47,654.08 to the policy limits, $2,345.92 of underinsurance motorist benefits remained to be tendered to Katz.
State Farm, under the policies it issued to Katz, paid him $161,876 in underinsured motorist benefits. This amount is $88,124 less than State Farm’s underinsured motorist coverage limits of $250,000 under the polices issued to Katz.
On May 3, 2010, Katz filed his amended complaint for declaratory judgment and attached as exhibits the three policies issued to him by State Farm. In his amended complaint, Katz characterized Sentry as the primary underinsurance policy and State Farm as the excess underinsurance policy. Katz stated that Sentry had already tendered him the benefits it owed him, after it applied a set-off for Katz’s workers’ compensation benefits. Katz sought to have State Farm pay him “the remaining benefit available of $88,124 arising out of the occurrence of February 26, 2008.” Katz pointed to the following policy language in the State Farm policy to support his position:
“If There Is Other Underinsured Motor Vehicle Coverage- Coverage W:
* * *
2. Subject to item 1 above, any coverage applicable under this policy shall apply:
a. on a primary basis if the insured sustains bodily injury while occupying your car, or while not occupying a motor vehicle or trailer.
b. on an excess basis if the insured sustains bodily injury while occupying a vehicle other than your car.”
On July 7, 2010, State Farm filed its motion for summary judgment. In its motion, State Farm argued that Katz did not have an underinsured motorist claim under the Sentry policy because the primary liability limit on Belt’s car in the underlying lawsuit was more than the underinsured motorist limits of the Sentry policy. Specifically, the primary liability limit for the insurance on Belt’s car was $100,000, whereas the Sentry policy contained a $50,000 underinsured motorist limit. State Farm argued that under the Sentry policy, Katz did not have a claim for underinsured motorist coverage. In its motion for summary judgment, State Farm also contended that it had already paid more than it owed under its own policy with Katz.
State Farm contended that under the terms of its policy $100,000 must be subtracted from the $250,000 policy limit. The $100,000 setoff represents the settlement of the underlying action.
State Farm also argued that an additional setoff of $47,654.08 applied because its policy states that workers’ compensation benefits shall reduce the amount of underinsured motorist benefits available. According to State Farm, Katz was entitled to receive $102, 345.92 under the underinsured motorist policy. This conclusion represents the total underinsurance motorist benefit after subtracting both the $100,000 Katz received from the Belt settlement and the $47,654.08 in workers’ compensation benefits Katz received from the $250,000 policy limit.
State Farm stressed that since it had already paid Katz $161,876, it “owes him nothing.”
On November 18, 2010, Katz filed his cross-motion for summary judgment and response to State Farm’s motion for summary judgment. In his motion, Katz maintained that Sentry was the primary underinsurer and State Farm was the excess underinsurer. Katz argues that both polices may be stacked so that he is able to claim $50,000 worth of underinsurance benefits from Sentry and $250,000 worth of underinsurance benefits from State Farm.
The trial court granted State Farm’s Motion and this appeal followed.
Katz argues that aggregating or “stacking” the two benefits together provides him with an underinsurance benefit of $300,000. Katz maintains that any setoffs applied to the underinsurance benefits should first be applied to Sentry, as the primary underinsurer, and then any extra setoff applied to State Farm’s policy, as the excess underinsurer.
The legislative purpose behind underinsured motorist coverage is to place the insured in the same position he would have occupied if the tortfeasor had carried adequate insurance. According to the definition of underinsured motorist in Sentry’s policy, Belt, the tortfeaser, cannot be considered an underinsured motorist because his primary liability policy limit of $100,000 is greater than the $50,000 limit of coverage provided by Sentry under the underinsured motor vehicle provision of its policy.
The Court of Appeal disagreed with Katz’s characterization of State Farm as the “excess underinsurer” because the Sentry policy, which Katz believes is the primary underinsurer, does not apply in this case. State Farm cannot be considered to be providing excess coverage where it is the only coverage. Therefore, the Court of Appeal held that State Farm’s policy provides the only underinsurance coverage in this case. As the only provider of underinsurance coverage, State Farm is entitled to apply any applicable setoffs regardless of Sentry’s actions.
The language of State Farm’s policy allows for a setoff for workers’ compensation benefits. Based on our conclusion that State Farm does not owe any additional benefits, Katz’s final argument, that State Farm’s conduct in denying his claim for an additional $88,124 in underinsured motorist benefits was unreasonable and vexatious such that he is entitled to damages under the statutes failes because a defendant cannot be liable for violation of the bad faith statute where no benefits are owed.
The Court of Appeal failed to deal with the 600 pound gorilla in this case — that State Farm overpaid the Katz claim. Finding in its favor they allowed Katz to keep the overpayment because State Farm failed to ask the court to return its overpayment.
When an insured files a complaint for declaratory relief seeking more than that to which he is entitled only to learn he was paid too much he should not be allowed to keep the overpayment. The amount may not be worth filing a suit for its return now that the case has gone through the appellate process.
Insurers, in the same situation as State Farm in the Katz case, should always stand for its rights and if it believes it has overpaid a claim should cross complain for return of the overpayment.
© 2012 – Barry Zalma
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.
He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.
Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.