North Carolina Erroneously Interprets How UIM Statute is Applied in Multiple Tortfeasor Scenarios
David S. Coats, Bailey & Dixon, LLP
In the recent case of Lunsford v. Mills, No. 385PA13, 2014 N.C. LEXIS 1202 (December 19, 2014), a matter of first impression, the North Carolina Supreme Court decided when underinsured motorist (UIM) coverage is triggered under the provisions of N.C. Gen. Stat. § 20-279.21 in situations involving multiple tortfeasors. In doing so, the Court appears to have undermined the purposes of the UIM statute and allowed an injured party to recover more than the UIM coverage they bargained for, to the detriment of the UIM insurer.
The facts in Lunsford were that Defendant Mills was operating a tractor-trailer owned by his employer (Crowder) on Interstate 40 when he lost control while rounding a curve, causing the vehicle to collide with a concrete median and flip. Plaintiff Lunsford, a volunteer firefighter, was standing in the highway median attempting to lift Mills over the concrete barrier and carry him to safety when a second accident occurred: Defendant Buchanan, traveling the opposite direction on the Interstate, swerved to the left to avoid the vehicle in front of him (itself slowing due to the tractor-trailer accident) and struck Lunsford, causing him severe bodily injuries. At the time of the accident, Defendants Mills and Crowder were covered under a business auto policy issued by US Fire Insurance Company that carried $1,000,000 in limits. Defendant Buchanan was insured under a personal auto policy issued by Allstate Insurance Company that carried $50,000 in limits. Finally, Lunsford had two policies issued by NC Farm Bureau Insurance Company that carried combined UIM limits of $400,000.
Lunsford filed a negligence action against Mills, Crowder, and Buchanan, claiming that they were jointly and severally liable for his injuries. Lunsford also put his insurer, NC Farm Bureau, on notice of a UIM claim. When Allstate thereafter tendered its $50,000 limits to Lunsford, Lunsford’s attorney demanded that NC Farm Bureau tender its limits on his UIM claim. NC Farm Bureau refused, and Lunsford later settled his lawsuit against Mills and Crowder for $850,000 (out of their $1,000,000 in liability insurance coverage). When Lunsford continued to demand payment of the UIM coverage limits, NC Farm Bureau filed a motion for summary judgment arguing that Lunsford was not entitled to UIM coverage because the total amount of his settlements ($900,000) exceeded the $400,000 in UIM coverage. The trial court disagreed, however, and entered an order requiring NC Farm Bureau to pay Lunsford $350,000 (the $400,000 in UIM coverage minus the $50,000 first received from Allstate on behalf of Buchanan).
NC Farm Bureau appealed the trial court’s ruling, but the North Carolina Court of Appeals affirmed. In doing so, the court relied on the relationship between the “triggering provision” of N.C.
Gen. Stat. § 20-279.21(b)(4) and the statute’s definition of “underinsured highway vehicle.” The former provision provides that “underinsured motorist coverage is deemed to apply when, by reason of payment of judgment or settlement, all liability bonds or insurance policies providing coverage for bodily injury caused by the ownership, maintenance, or use of the underinsured highway vehicle have been exhausted.” (emphasis added). NC Farm Bureau focused on the “all liability bonds or insurance policies” language to argue that, in determining whether UIM coverage is triggered, the insured’s UIM coverage limit must be compared to the sum of all the liability limits of all the at-fault motorists. The Court of Appeals disagreed, however, noting that the term “underinsured highway vehicle” was defined by statute as “a highway vehicle with respect to the ownership, maintenance, or use of which, the sum of the limits of liability under all bodily injury liability bonds and insurance policies applicable at the time of the accident is less than the applicable limits of underinsured motorist coverage for the vehicle involved in the accident and insured under the owner’s policy.” (emphasis added). As the court reasoned, “a” means “one,” and thus UIM coverage is triggered as soon as the insured has recovered under all policies applicable to one underinsured motor vehicle. Consequently, UIM carriers are obligated to “first provide coverage, and later seek an offset through reimbursement or exercise of subrogation rights” against other tortfeasors.
Although the Court of Appeals’s decision was unanimous, the Supreme Court of North Carolina granted NC Farm Bureau’s petition for discretionary review, raising the specter of a reversal. The Supreme Court applied the same logic as the Court of Appeals, however, and the affirmed the trial court’s order requiring payment of NC Farm Bureau’s UIM coverage. In ruling, the court further noted that the purpose of the UIM statute – and the Financial Responsibility Act in general – was “to provide the innocent victim with the fullest possible protection.” Consequently, thecourt stated that “if Farm Bureau’s interpretation were adopted, insureds would be required to pursue all claims, including weak, tenuous ones, against all potentially liable parties, no matter how impractical, before being eligible to collect their contracted-for UIM benefits.” The court rejected NC Farm Bureau’s argument that the plaintiff received a windfall, noting that it could have preserved its subrogation rights against Mills/Crowder’s policy if it had timely advanced its UIM policy limits at the time of plaintiff’s initial settlement with Buchanan.
The Supreme Court’s decision in Lunsford provoked a dissent from Justice Newby. The dissent began by pointing out that the statutory purpose of UIM coverage is to provide a secondary source of recovery for an insured when the tortfeasor has insurance, but those insurance limits are insufficient to compensate the injured party. That purpose was thwarted on the facts in Lunsford, however, when not only did the plaintiff fail to exhaust the liability insurance limits of all the parties that he sued (by accepting a settlement for only $850,000 of Mills/Crowder’s $1,000,000 in limits) but he also received a windfall by receiving $350,000 in UIM benefits in excess of his agreed-upon damages. Justice Newby further argued that the Court of Appeals’s and Supreme Court’s interpretation of the UIM statute was flawed. According to Justice Newby, the definition of an “underinsured highway vehicle” falls within the “activation” provision of the statute, which tells us that UIM coverage is activated when the insured’s UIM policy limits are greater than the liability limits of policies connected with the tortfeasor’ s ownership, maintenance, or use of a highway vehicle. Because the combined liability limits of the jointly and severally liable tortfeasors exceeded the UIM coverage available under Lunsford’s policies, NC Farm Bureau’s UIM coverage was never activated. Justice Newby also rejected the majority’s fear that NC Farm Bureau’s interpretation would require insureds to pursue weak and tenuous claims, noting that Lunsford himself elected to sue multiple tortfeasors whose combined insurance coverage far exceeded the UIM coverage that he paid for. As he reasoned, “having chosen . . . to pursue simultaneously claims against multiple tortfeasors whose combined liability limits far exceeded plaintiff’s own UIM coverage, plaintiff was no longer able to access his UIM policy limits.” Finally, Justice Newby argued that the majority opinion blurred the distinction between a UIM carrier’s right of subrogation (if they advance their UIM limits upon notice of the insured’s settlement with a tortfeasor) and its ability to seek reimbursement from other tortfeasors.
In this author’s opinion, Justice Newby’s dissenting opinion correctly points out the multiple flaws in the Supreme Court’s opinion. As the UIM statute is interpreted by Lunsford, an insured who paid for UIM coverage limits of $400,000 – and thus protected himself only to that amount – was allowed to collect those limits in addition to the $850,000 that he received from other tortfeasors. Meanwhile, an automobile insurance carrier with moderate UIM limits was told that it should have paid those limits to its insured as soon as the insured settled with the tortfeasor with the lowest liability limits, otherwise its right to seek reimbursement of those limits from other tortfeasors was barred. This system, if it is allowed to remain in place, essentially places all of the risk on the UIM insurer, while the insured receives a benefit greater than it bargained for. In this regard, the Court has taken the “remedial nature” of N.C. Gen. Stat. § 20-279.21 a step too far.
This article was originally printed February 22, 2015 and reprinted with permission.