APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-
MARTIN McSHANE,
Plaintiff-Respondent/
Cross-Appellant,
v.
NEW JERSEY MANUFACTURERS
INSURANCE COMPANY,
Defendant-Appellant/
Cross-Respondent.
_________________________________________________
Argued January 26, 2005 - Decided February 24, 2005
Before Judges Wefing, Payne, and C.S. Fisher.
On appeal from Superior Court of New Jersey,
Law Division, Middlesex County, L-6606-03.
Richard A. Jagen argued the cause for
appellant/cross-respondent (Connell Foley
attorneys; Mr. Jagen of counsel and on the
brief).
Dean Anglin argued the cause for respondent/
cross-appellant.
The opinion of the court was delivered by
PAYNE, J.A.D.
This appeal raises the issue of whether a tortfeasor's policy limits of $100,000
or those limits as reduced to $90,831.60 through recovery by the injured claimant's
insurer on its subrogated claim for property damage payments must be credited against
the claimant's underinsured motorist (UIM) coverage for purposes of calculating the UIM benefits
available to a claimant whose bodily injury claim exceeds all available insurance recovery.
We hold under the contract at issue in this case that only the
amount paid to the insured as damages for bodily injury can be credited
against his own UIM policy benefits.
The issue arises from the following facts: Plaintiff Martin McShane was seriously
injured in a motor vehicle accident when he was rear-ended by a truck
driven by Gerald Dealmedia and owned by Rainbow General Construction Co. Rainbow had
purchased combined single-limit liability insurance from Progressive Insurance Company providing $100,000 in coverage.
McShane was covered as a spouse by a policy that his wife had
purchased from defendant New Jersey Manufacturers Insurance Company (NJM) that included UIM coverage
with limits of $300,000 combined single limit, as well as property damage coverage.
Separate premiums were paid for the two coverages.
Because his car had been totaled, McShane sought benefits under the collision coverage
provided by NJM. Payments in the amount of $7,607.48 were made to Ford
Motor Credit Co. as lessor and in the amount of $3,287.52 to McShane's
wife as lessee. NJM then recovered $9,168.40 through inter-company subrogation from Rainbow's carrier,
Progressive. Five hundred dollars of that amount was paid to Carol McShane as
reimbursement for the policy deductible. Because NJM had received the salvage value of
the car as well as the subrogation recovery, it actually received $423.40 in
excess of its loss from the transactions.
Following institution of suit, the remainder of Progressive's $100,000 policy coverage ($90,831.60) was
paid by it to McShane, with the authorization of NJM,
See footnote 1
in settlement of
McShane's bodily injury claim. Thereafter, in a separate action, McShane settled with NJM
for the "limits of his UIM coverage." However, a dispute arose as to
the treatment of the $9,168.40 paid by Progressive to NJM as a property
damage subrogation recovery. NJM's counsel contended: "Your client received $100,000.00 from the tortfeasor,
therefore, there is $200,000.00 available to your client." McShane's counsel took the position
that McShane had only received $90,831.60 and that NJM had received the remainder.
McShane, claiming $209,168.40 to be due him because of the lesser credit against
his UIM policy limits that he claimed to be proper, moved against NJM
to enforce a settlement in that amount. NJM opposed the motion, arguing that
it only owed $200,000. The trial judge ruled in favor of McShane, finding
that he reasonably expected and was entitled to recovery of the amount by
which NJM's UIM coverage limits exceeded his settlement. The court therefore entered a
judgment enforcing a settlement between NJM and McShane in the amount of $209,168.40.
NJM has appealed, and we affirm. McShane has cross-appealed from the trial court's
denial of counsel fees. However, at oral argument before us, McShane's counsel elected
not to pursue the counsel fee claim, which we now dismiss.
The UIM provisions of NJM's policy provided:
We will pay compensatory damages which an insured is legally entitled to recover from the owner or operator of an . . . underinsured motor vehicle because of:
1. Bodily injury sustained by an insured and caused by an accident; and
2. Property damage caused by an accident . . . .
The policy's limits of liability stated:
With respect to an accident with an underinsured motor vehicle, the limit of
liability shall be reduced by all sums:
1. Paid because of the bodily injury or property damage by or on
behalf of persons or organizations who may be legally responsible. This includes all
sums paid under Part A of this policy [liability coverage]; and
2. Paid because of the property damage under Part D of this policy
or any similar coverage under any other policy.
Also relevant to this appeal are the policy's subrogation provisions, which stated:
If we make a payment under this policy and the person to or
for whom payment was made has a right to recover damages from another,
we shall be subrogated to that right. That person shall do:
1. Whatever is necessary to enable us to exercise our rights; and
2. Nothing after loss to prejudice them.
Of overriding relevance are statutory provisions pertaining to UIM coverage, which provide that:
For the purpose of this section (1) "underinsured motorist coverage" means insurance for
damages because of bodily injury and property damage resulting from an accident arising
out of the ownership, maintenance, operation or use of an underinsured motor vehicle.
The limits of underinsured motorist coverage available to an injured person shall be reduced by the amount he has recovered under all bodily injury liability insurance or bonds.
[N.J.S.A. 17:28-1.1(e).]
The New Jersey Supreme Court has held that subrogation is an equitable device
designed to compel "the ultimate discharge of an obligation by the one who
in good conscience ought to pay it." Standard Accident Ins. Co. v. Pellecchia,
15 N.J. 162, 171 (1954). In an insurance context, it fulfills the dual
purposes of avoiding unjust enrichment to an insured who obtains recovery for the
same injury from both his insurer and the tortfeasor and, in the absence
of such double recovery, of precluding the tortfeasor from escaping all liability for
damages that the tortfeasor has caused. Ibid.
With these principles in mind, we turn to the underpinnings of UIM coverage,
which is not designed to afford complete coverage to persons injured by motor
vehicle accidents, Bauter v. Hanover Ins. Co.,
247 N.J. Super. 94, 96 (App.
Div.), certif. denied,
126 N.J. 335 (1991) but, nonetheless, to provide "as much
coverage as an insured is willing to purchase, up to the available limits,
against the risk of an underinsured claim." Gambino v. State Farm Ins. Co.,
348 N.J. Super. 204, 207 (App. Div. 2002) (quoting Nikiper v. Motor Club
of America Cos.,
232 N.J. Super. 393, 399 (App. Div.), certif. denied,
117 N.J. 139 (1989)).
In the present case, McShane's wife contracted for UIM coverage in the amount
of $300,000. She also contracted for and paid a separate premium for collision
insurance. Benefits were paid under the collision coverage provisions of the policy, and
NJM received full reimbursement for them. NJM never attempted to set off those
benefits against McShane's UIM coverage. We assume NJM's inaction arose from the fact
that it had been made whole by its recovery from Progressive. However, we
find as well that it would have been statutorily precluded from doing so.
N.J.S.A. 17:28-1.1(e) permits the reduction of available UIM limits only by the amount
that the insured "has recovered under all bodily injury liability insurance or bonds."
See footnote 2
This particular recovery arose from McShane's own first-person collision coverage.
Fortuitously, the tortfeasor in McShane's case was covered by a combined single-limit Progressive
policy, so that when NJM exercised its inter-company subrogation rights, having paid collision
insurance benefits, that reduced the liability coverage available to McShane from $100,000 to
$90,831.60. Acceptance of that amount did not signify any voluntary determination on McShane's
part to compromise his claim, in which case it would be appropriate to
treat the settlement for UIM purposes as if it were for $100,000. McShane
merely accepted the entirety of the coverage available to the tortfeasor at the
time the settlement was reached. There remained a claim for bodily injury that
exceeded both the full liability limits of the tortfeasor's policy and his own
UIM coverage.
See footnote 3
Significantly, this is not a situation in which McShane sought to or did
receive duplicate benefits (despite the payment to his wife under the collision provisions
of the policy), nor is it one in which the tortfeasor escaped liability
entirely. For those reasons, subrogation's rationales do not justify NJM's position. To apply
them in this circumstance as justification for recovery by NJM would be both
"inappropriate and unjust." Charnecky v. American Reliance Ins. Co.,
249 N.J. Super. 91,
94 (App. Div. 1991), aff'd o.b.,
127 N.J. 188 (1992), overruled on other
grounds, Frazier v. New Jersey Mfrs. Ins. Co.,
142 N.J. 590 (1995).
As a matter of mathematics, it is immaterial whether the $9,168.40 was deducted
from Progressive's policy limits, reducing by that amount the $100,000 that NJM sought
to credit against McShane's UIM limits, or whether the $9,168.40 was simply subtracted
from those UIM limits. In either case, the remaining available coverage would be
$200,000. Yet, as we have already demonstrated, NJM was not statutorily entitled to
set off its collision payments against McShane's UIM coverage. We find no reason
to apply N.J.S.A. 17:28-1.1(e) differently when considering the amount by which McShane's policy
should be reduced as the result of his settlement with the tortfeasor. As
McShane has argued before us, that recovery was limited to $90,831.60, and his
recovery should be reduced by no more than that amount. Cf. Gambino, supra,
348 N.J. Super. at 208-11 (in a multi-claimant case, interpreting N.J.S.A. 17:28-1.1(e) to
require a credit against UIM insurance only in the amount actually recovered by
each claimant from the tortfeasor when the tortfeasor's policy limits have been exhausted
by the multiple recoveries); Calabrese v. Selective Ins. Co.,
297 N.J. Super. 423,
434-35 (App. Div. 1997), overruled on other grounds, Magnifico v. Rutgers Cas. Ins.
Co.,
153 N.J. 406 (1998); Filippatos v. Selective Ins. Co. of Am.,
241 N.J. Super. 236, 237 (App. Div. 1990).
Our statutorily-based determination accords, as well, with principles of equitable subrogation, which we have recognized as applicable in circumstances in which neither statute nor contractual language dictate a different result. In accordance with those principles, we held in Providence Washington Ins. Co. v. Hogges, 67 N.J. Super. 475 (App. Div. 1961) that an insured must be made whole before an insurer can obtain reimbursement from him for benefits paid or can be subrogated to his rights against a tortfeasor. In Hogges, the insured had obtained collision benefits from his insurer following an automobile accident. Thereafter, without notice to the insurer, he filed suit against the tortfeasor for bodily injury and property damage, but lost. When the insurer learned of the civil suit, it sued Hogges to recover the amount of collision benefits paid, alleging that its subrogation rights had been impaired by the insured's actions. We disagreed, finding inapt the insurer's analogy to the impairment occurring when an insured, after obtaining benefits from his own carrier, executes a general release to the tortfeasor. We stated, when construing a subrogation clause See footnote 4 similar to that in the present case:
The insurer argues, in effect, that even though the insured was not obliged to notify it when he sued for personal injuries, when he added the count for property damage he became obligated to do so, and the mere breach of that obligation entitles plaintiff [the insurer] to the refund of its payment. . . . We perceive no merit in plaintiff's position. Subrogation is an offspring of equity, and its equitable principles apply even when the subrogation is based on contract, except as modified by specific provisions in the contract. Here we have only the general clause quoted. Under such a clause, in case of doubt the interests of the insured come first. In the absence of express terms in the contract to the contrary, he must be made or kept whole before the insurer may recover anything from him or from a third party under its right of subrogation. Against the insured, as well as against third parties, there may be recovery by the insurer (again, subject to the express terms of the contract) 'only if the cause is just and enforcement is consonant with reason and justice.' Standard Accident Insurance Co. v. Pellecchia, 15 N.J. 162, 172 (1954); board of Education, Township of Woodbridge v. Kane Acoustical Co., Inc., 51 N.J. Super. 319, 327 (App. Div. 1958).
[Hogges, supra, 67 N.J. Super. at 482.]
See also Culver v. Ins. Co. of No. Am.,
221 N.J. Super. 493,
500-503 (App. Div. 1987) ("As a matter of equitable principle, the right of
subrogation does not arise until the injured party has been made whole."), rev'd
on other grounds,
115 N.J. 451 456-57 (1989).
We recognize in this context that under the precedents that we have cited
earlier, the relief available to an insured is limited by the amount of
UIM insurance for which the insured contracted. However, we find no decision in
a UIM context that interferes with an insured's right to be made whole
within these narrowed bounds. Cf. Werner v. Latham,
332 N.J. Super. 76, 79
(App. Div. 2000) (holding that when a settlement with a tortfeasor does not
fully compensate the claimant for his injuries, a health insurer's contractual reimbursement rights
must yield to the claimant's right to a full recovery).
See footnote 5
Were we to
hold otherwise, McShane would not receive the full benefits for which his wife
bargained, and the reasonable expectations of the insured as to available coverage would
not be fulfilled.
Reduced to its simplest terms, the issue in this case is whether an
insurer should be made whole at the expense of the insured when no
statute or contract dictates that result. As the Supreme Court of Kentucky found
in an uninsured motorist context:
Granting priority to the uninsured motorist carrier would place the burden of loss
squarely on the shoulders of the party least able to bear the loss
[the claimant] and would defeat the age old, underlying principles of subrogation. On
the other hand, granting the injured insured, not fully compensated, priority over the
insurance carrier places the risk of loss on the entity paid to assume
such risk.
[Wine v. Globe Am. Cas. Co.,
917 S.W.2d 558, 562 (Ky. 1996).]
As our Supreme Court has noted, some recognition exists for each of the
following rules pertaining to the right to subrogation recoveries: (1) the insurer is
the sole beneficial owner of a claim against a tortfeasor and is entitled
to full recovery, even if it exceeds the amount paid to its insured;
(2) the insurer is entitled to be reimbursed, with any remaining amount accruing
to the insured's advantage; (3) the recovery must be prorated between insurer and
insured; (4) the insured must be made whole before any reimbursement to the
insurer; and (5) the insured is entitled to the full recovery. See Culver,
supra, 115 N.J. at 458 n.2 (quoting Robert Keeton, Insurance Law § 3.10(a)). However,
the vast majority of jurisdictions have required that the insured be made whole
before the insurer obtain the benefit of a recovery through subrogation. See, Elaine
M. Rinaldi, Apportionment of Recovery Between Insured and Insurer in a Subrogation Case,
29 Tort & Ins. L.J. 803 (Summer 1994). See also Roger M. Baron,
Subrogation: A Pandora's Box Awaiting Closure,
41 S.D.L.Rev. 237 (1996).
We have no occasion here to discuss the various contexts in which the
majority position has been adopted (which extend well beyond the realm of UIM
insurance), or to urge that position be adopted in any circumstance other than
the one before us. We do, however, find no equitable basis to hold
in this case, simply because NJM depleted the tortfeasor's liability limits by its
subrogation recovery, that McShane should be denied the full UIM recovery that he
has claimed. It is not McShane who should bear the risk of loss
in this insurance context; that risk properly belongs to NJM.
The judgment of the trial court is affirmed. Plaintiff's cross-appeal is dismissed.
Footnote: 1
See Longworth v. Van Houten,
223 N.J. Super. 174, 193-94 (App. Div.
1988) (establishing procedures for recovery on UIM claims).
Footnote: 2
The statute defines UIM coverage to include both bodily injury and property
damage protection. However, it limits offsets to recoveries on account of bodily injuries.
Footnote: 3
This matter did not proceed to UIM arbitration. However, NJM has never
taken the position that McShane's injuries did not entitle him to a total
bodily injury recovery of $300,000.
Footnote: 4
The clause provided:
In the event of any payment under this policy, the company shall be
subrogated to all the insured's rights of recovery therefor against any person or
organization and the insured shall execute and deliver instruments and papers and do
whatever else is necessary to secure such rights. The insured shall do nothing
after loss to prejudice such rights.
Footnote: 5
We distinguish those cases in which reimbursement rights are statutorily mandated. See
Frazier, supra, 142 N.J. at 605 (finding that UM benefits are not conceptually
different from direct recovery from a tortfeasor, and thus that the statutory mandate
of the workers' compensation lien applies to both); Knox v. Lincoln Gen. Ins.
Co.,
304 N.J. Super. 431, 437 (App. Div. 1997) (finding that the PIP
statute requires that the carrier be made whole even though reimbursement may reduce
the insurance available to the claimant).