Weekly Law Resume - July 3, 2013: Insurance Coverage – Medical Payments Claim Separate From Third Party Claim

by Low, Ball & Lynch
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Barnes v. Western Heritage
Court of Appeal, Third District (June 18, 2013)

Often, a policy of liability insurance (auto or general liability) will have a separate provision providing for medical payments under the policy. This case considered whether settlement of the liability claim absolved the carrier of its responsibilities related to the medical payments claim.

In 2001, when he was 11 years old, plaintiff Justin Barnes was injured by a table falling on his back during a recreational after-school program sponsored by the Shingletown Activities Counsel. Justin made a claim against the Activities Counsel based on the accident. Western Heritage Insurance Company was the carrier for the Activities counsel. After being notified of the claim, Western Heritage informed the school district’s superintendent by letter that the policy provided $5,000 in medical payments coverage to Justin for his injury. Western had the superintendent forward this letter to Justin and his family, but it never disclosed to them a provision that medical bills had to be incurred and reported within 1 year to be reimbursable.

Three months after the accident, Western Heritage paid $1,478 to Justin’s medical care providers up to that date. There was no evidence Justin ever submitted any other bills to Western Heritage. Twelve months after the accident, suit was filed on Justin’s behalf against the Activities Counsel, the School District and others for negligence and premises liability. Western Heritage provided a defense and retained counsel. About a year and a half after the accident, Justin’s counsel informed the defense counsel that Justin was having continuing physical problems and needed to see a specialist. Ultimately, Western Heritage denied this request, for the first time informing Justin’s family that medical expenses had to be incurred and reported within one year of the date of the accident.

Justin and the Activities Counsel eventually settled the personal injury action. The release did not cover Western Heritage. After he turned 18, Justin filed suit against Western Heritage for breach of the implied covenant of good faith and fair dealing and unfair business practice, based on the failure to pay all his medical expenses under the medical payment provisions. Western Heritage filed a motion for summary judgment. The trial court granted the motion, concluding that the action was barred by collateral estoppel because the settlement in the personal injury action resolved the issue of payments due Justin for medical expenses under the policy. It also held that Justin could not seek to recover more than once for the same injury.

The Court of Appeal reversed. The published portion of the case dealt with whether Justin’s medical payments claim amounted to impermissible double recovery. The Court agreed with Justin’s argument that Western’s obligation to indemnify its insured under the liability portion of the insurance policy was separate and distinct from its obligation to pay for medical expenses under a medical payment provision of the same policy. The California Courts had not addressed this precise issue before: whether an injured plaintiff who receives some payment for medical expenses from a tortfeasor’s insurer under the medical payments provision and then settles a personal injury lawsuit against the tortfeasor is thereafter precluded from suing the insurer based on the alleged breach of direct duties owed plaintiff under the medical payments provision of the policy. The Court concluded that an insurer’s obligation to indemnity its insured under the liability portion of the policy is separate and distinct from its obligation to pay for medical expenses under a medical payments provision of the same policy.

As the Court pointed out, Justin’s claim was based on the alleged breach of the obligations Western Heritage owed him under the medical payments provisions of the policy. This provision was divisible from the remainder of the policy and created direct liability on the part of the insurer to an injured person. Here, the record did not show that Justin obtained any recovery for Western Heritage’s alleged wrongful denial of medical payments benefits. By satisfying the settlement in the personal injury action, Western Heritage performed its obligations to the Activities Counsel under the liability portion of the policy, but that obligation was separate and divisible from Western Heritage’s duties under the medical payments provision.

Moreover, there was no language in the policy evincing an intent that payment under the liability provision extinguished Western Heritage’s obligations under the medical payment provision.

Finally, the Court of Appeal held that the collateral source rule was not applicable, because the prior payment by Western was on behalf of its insured, the Activities Counsel, for its alleged wrongdoings, and the claims against Western Heritage were for its own alleged wrongdoings. As such, the prior payment did not inure to the benefit of Western Heritage on the claims against it directly as an offset or bar.

The Court of Appeal reversed the granting of summary judgment.

COMMENT

This case makes clear that the obligations owed on a liability policy to defend and/or indemnify an insured are separate and distinct from those duties owed to someone covered under a medical payments provision of the same policy. Care should be taken to make certain both are handled and resolved properly, or a third party claim has the potential of becoming a first party bad faith claim.

For a copy of the complete decision see: http://www.courts.ca.gov/opinions/documents/C066002.PDF

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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