SET-OFFS

Farmers Auto. Ins. Ass’n v. Coulson, 402 Ill. App. 3d 779, 931 N.E.2d 1257, 342 Ill. Dec. 74 (5th Dist. 2010) – The defendant, Kassandra Coulson, was seriously injured when a vehicle owned and operated by Robert Roy drove through the window of a Subway restaurant, striking Coulson and two other customers inside. The driver, Roy, was insured by State Farm with a bodily injury liability limit of $50,000. State Farm paid Coulson $24,000 to settle her claim (and the other

$26,000 to settle other injured persons’ claims). Coulson settled with the property owner and franchisee for $410,000.

At the time of the accident, Coulson was covered as a family member under her stepfather’s automobile insurance policy issued by Farmers. The policy contained underinsured (“UIM”) coverage of $300,000 per person and $500,000 per occurrence. Coulson made a demand for the UIM per person limits under the policy.

Farmers declined to pay benefits arguing that the policy contained a set-off provision which obligated Farmers to pay at the most $300,000 minus “any amounts paid by others who may be legally responsible for (insured’s) bodily injuries.” Thus, Farmers argued that it owed Coulson nothing under this provision because it was entitled to a set-off in the amount of the payments Coulson already received from the at-fault driver, property owner, and franchisee, which totaled

$434,000.

Farmers filed a declaratory judgment action. The set-off provision in the UIM policy provided the following: “The limit of liability for this coverage should be reduced by all sums paid because of the ’bodily injury’ by or on behalf of persons or organizations who may be legally responsible.”

The trial court found that the language of the policy was clearly a set-off provision allowing Farmers to reduce the amount payable under the policy’s UIM provision by all the sums paid on or on behalf of persons or organizations who may be legally responsible, which in that case was

$434,000. Thus, the court granted Farmers’ Motion for Summary Judgment. Coulson appealed.

On appeal, Coulson argued that the set-off provision in her insurance policy with Farmers was ambiguous. Generally, an ambiguous term in an insurance policy will be construed against the insurer and in favor of the insured. However, the Appellate Court declined to address this argument because it found that the set-off provision allowing Farmers to set-off the amounts paid by the property owner and franchisee would violate Illinois public policy and was, therefore, void.

The Appellate Court, Fifth District, initially examined the Hoglund decision, an Illinois Supreme Court decision rendered in 1992, which examined a nearly identical set-off provision in an uninsured policy written by State Farm. In Hoglund v. State Farm Mut. Auto Ins. Co., 148 Ill. 2d 272, 592 N.E.2d 1031, 170 Ill. Dec. 351 (1992) (a decision involving two cases consolidated on

appeal), the plaintiffs were both injured while they were passengers in an uninsured vehicle whose driver collided with another insured vehicle. The drivers of the other insured vehicles each had bodily injury policy limits of $100,000 and paid this amount to each of the plaintiffs. The plaintiffs, each alleging they suffered damages in excess of the $100,000 filed claims against their seeking the policy limits under the uninsured provisions. The State Farm policy, like the applicable Farmers policy in the case at bar included the following set-off provision: “Any amount payable under this coverage shall be reduced by any amount paid or payable to or for the insured: a. by or for any person or organization who is or may be held legally liable for the bodily injury to the insured.” State Farm argued that this language supported a set-off in each case due to the $100,000 bodily-injury limits recovered by the plaintiffs from each of the insured drivers.

The Court disagreed, finding that a literal interpretation would allow for a reduction by any amount paid to the insured by any party. The Court held that applying a literal interpretation of this set-off provision would frustrate the public policy of placing the injured party in the same position as if the uninsured driver had been insured pursuant to the Uninsured Motorist Statute.

The Hoglund Court went on to say that uninsured motorist policies are intended to provide coverage for damages caused by uninsured motorists. To apply the set-off literally would deprive the insured of the benefit of the uninsured coverage for which she paid premiums to State Farm. The Hoglund Court noted that the purpose of a set-off is to prevent a double recovery by the insured. Hence, State Farm was allowed a set-off only to the extent necessary to prevent a double recovery.

Relying on the Hoglund Court’s analysis, the Farmers Court found that to allow Farmers to set off the amounts that are unrelated to the underinsured motorist coverage would deny Coulson the very protection against an underinsured motorist for which her stepfather had paid premiums.

Coulson’s stepfather paid premiums for $300,000 in underinsured motorist coverage. The at-fault driver, Roy, was an underinsured motorist who paid only $24,000 to Coulson. The property owner and the franchisee were not underinsured motorists, and their payments to Coulson to resolve their alleged liability for her injuries are irrelevant to the amount Coulson can recover under the applicable UIM provision in the Farmers policy. If Farmers were allowed to deduct the amounts paid to Coulson by the property owner and the franchisee, this would frustrate the public policy of placing Coulson in the same position as if Roy had been fully insured. Because Coulson’s claim would not result in a double recovery in contravention to public policy, the Court found that Coulson could recover up to $276,000 under her stepfather’s UIM policy with Farmers.

Zdeb v. Allstate Ins. Co., 404 Ill. App. 3d 113, 935 N.E.2d 706, 343 Ill. Dec. 698 (1st Dist. 2010) – While walking on a sidewalk, Elizabeth Zdeb was struck by a car driven by Kamil Scislowicz. Zdeb claimed serious injuries following the accident, claiming over $200,000 in damages. Scislowicz’s insurance company, State Farm, paid Zdeb its bodily injury liability limits of $50,000. Zdeb asserted a claim under the UIM provision of her policy with her insurer, Allstate, for $50,000, the difference between her UIM limits and the amount she received from State Farm.

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The Allstate policy provided UIM coverage with a $100,000 limit for bodily injury and medical payment coverage of $50,000. Zdeb paid separate premiums for the UIM and medical payment coverages, as is typically done in an automobile policy. The limits of liability section of the policy declaration included the following set-off provision:

Damages payable will be reduced by:

1. all amounts paid by or on behalf of the owner or operator of the uninsured auto or anyone else responsible. This includes all sums paid under the bodily injury or property damage liability coverage of this or any other auto insurance policy.

2. all amounts payable under any workers’ compensation law, disability benefits law, or any similar automobile medical payments coverage. (Emphasis added.) Zdeb, 404 Ill. App. 3d at 115.

Since Allstate had paid Zdeb $38,952.53 pursuant to the med pay provision, and since Zdeb had received $50,000 from State Farm, Allstate claimed a total set-off of $88,952.53. Allstate then tendered $11,047.47 to Zdeb to resolve her UIM claim.

Zdeb sought a declaration in circuit court that she was entitled to $50,000 in UIM benefits. She argued that the med pay coverage was a separate and distinct portion of the policy for which she had paid a premium. She claimed that as a general rule, a set-off is only allowed to prevent double recovery. Allstate filed a motion for summary judgment, claiming the applicable set-off provision in the policy unambiguously allowed Allstate to set-off the medical payments made to Zdeb. The trial court agreed with Allstate, and further found that after the set-off, Zdeb was placed in the same position had she recovered $100,000 in liability coverage from the at-fault driver’s insurer, which is consistent with the purpose of UIM coverage. Zdeb filed an appeal.

On appeal, Zdeb did not argue that the set-off provision was ambiguous, but rather, argued that Allstate violated public policy when it set-off the medical payments. The Court examined the Illinois Supreme Court case of Sulser, which construed the legislative intent for providing underinsured motorist coverage. Sulser v. Country Mut. Ins. Co., 147 Ill. 2d 548, 591 N.E.2d 427, 169 Ill. Dec. 254 (1992). The Sulser Court articulated the public policy behind the statute: “to place the insured in the same position he would have occupied if injured by a motorist who carried liability insurance in the same amount as the policyholder.” The Court held that under Sulser, Allstate’s set-off provision did not violate public policy.

The Court then examined Adolphson v. Country Mut. Ins. Co., 187 Ill. App. 3d 718, 543 N.E.2d 965, 135 Ill. Dec. 397 (3d Dist. 1989). In Adolphson, the Court addressed whether the insurer could set-off medical payments coverage from its UIM coverage. The Adolphson Court found

“[n]othing in the (underinsured motorists) statute prevents the insurer from reducing its liability

by amounts paid under other coverages in the same policy.” The Court further found the applicable set-off provision was unambiguous, and thus, the insurer was entitled to the set-off.

In Zdeb, the Appellate Court found nothing in the statute to prevent Allstate from claiming the set-off of medical payments since the policy expressly authorized the set-off. The set-off did not prevent plaintiff from recovering $100,000, the amount she would have been entitled to if the at-fault driver would have had $100,000 bodily injury liability limits. Therefore, the Appellate Court upheld the trial court’s judgment in favor of Allstate, holding that the Allstate policy was consistent with public policy and therefore valid.

II. ARBITRATION