Offsetting Third Party Recoveries Against UIM Benefits

Some insurance policies contain an offset provision in which UIM benefits are reduced by the amount paid to the insured by a third-party or organization that may be held legally liable for the actual injury where the third-party or organization is not the tortfeasing driver.

In the recent case of Elliott v. Geico Indem. Co., 231 Cal.App.4th 789, 180 Cal.Rptr.3d 331 (2014) Geico’s third-party offset provision in its UIM coverage was called into question by the insured.

In the Elliott case, the insured, Christina Elliott, brought a UIM claim under her Geico policy as a result of her husband’s wrongful death when his motorcycle was struck by a truck driven by a drunk driver, Lesa Shaffer, who was returning home from her job at Peterson’s Corner, a restaurant and bar in Nevada City. Shaffer, the drunk tortfeasor, had bodily injury liability insurance limits of $15,000 per person. The owners of Peterson’s Corner had general liability coverage. The underlying wrongful death case was settled with Shaffer’s insurer paying its $15,000 per person limits, and Peterson’s Corner Restaurant and Bar paying $250,000.00. Following the settlement with the tortfeasor, Elliott submitted a claim to Geico for $85,000 of UIM benefits ($100,000 UIM coverage limits minus $15,000 recovered from Shaffer’s insurer). Because Elliott recovered more than the $100,000 of UIM coverage under the Geico policy in the settlement Geico took the position that when the amount of actual recovery from the tortfeasor was deducted from the UIM coverage limits under Geico’s policy, Geico deducted that amount from the UIM coverage leaving a zero balance. Therefore, Geico denied Elliott’s claim.

Geico relied upon its policy which stated in relevant part: “when bodily injury is caused by one or more motor vehicles under this coverage, our maximum liability for providing underinsured motorist coverage shall not exceed the insured’s underinsured motorists coverage limits, less the amount paid to the insured by or for any person or organization that may be held legally liable for the injury.”

Elliott sued Geico for breach of contract and breach of the covenant of good faith and fair dealing. Geico moved for summary judgment arguing that its policy offset provision had been taken, nearly word-for-word, from the CAL. INS. CODE §11580.2, subdivision (p)(4), which had been held by the California courts to require UIM benefits to be reduced, not only by the amount recovered from the negligent driver’s insurer, but also by the amount recovered from a third-party tortfeasor. Elliott opposed the motion principally arguing that her interpretation of the policy’s UIM coverage was not based on the language of the policy itself, but rather on a document she received from Geico along with the policy which purported to explain UIM benefits. That explanatory document did not reference deductions for third-party recoveries. The trial court granted Geico’s motion for summary judgment. The Court found that the explanatory attachment for UIM coverage was not part of the policy. The California Court of Appeals affirmed the trial court’s determination.

On appeal, the California Court of Appeals first noted that while generally it was true that ambiguities in insurance policies were construed against the insurer, where the language in the policy was the creation of the California Legislature, that principle did not apply. In that situation, the statute and, therefore, the insurance policy provision issued in conformity therewith, was to be construed to implement the intent of the Legislature and was not construed strictly against the insurer. The Court then addressed and rejected Elliott’s claims presented on appeal. First, regarding the UIM explanatory form, the Court held that the form was not one of the documents listed in the policy as part of the insurance contract and, therefore, the form was not part of the insurance contract.

Next, the Court rejected Elliott’s claim that the Geico policy was ambiguous.

The Court rejected Elliott’s reliance on the doctrine of reasonable expectations under California law. In rejecting the application of the reasonable expectation doctrine, the Court found that it was well-settled in California that the doctrine of reasonable expectations of coverage only came into play where there was an ambiguity in the insurance policy. Having concluded that the Geico policy was unambiguous regarding its ability to deduct from the UIM coverage limits the amount paid on behalf of the owners of Peterson’s Corner in settlement of Elliott’s wrongful death case, the Court found that it did not need to delve into Elliott’s arguments concerning her reasonable expectations of coverage.