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Applying Common Fund to UIM Claims

Applying Common Fund to UIM ClaimsThe Common Fund Doctrine should be applied in the uninsured motorist setting under the holdings of Lee v. State Farm and the other cases that have described and analyzed the purpose of the Common Fund Doctrine.

After returning from a Burning Man Festival, Crackhead Craig decided to hold a Burning Surfer Man Festival. He constructed a 30-foot man standing on a surfboard out of paper mache. He hoisted the surfer man onto a flatbed trailer attached to his Monster truck and headed off to the north end of Pacific Beach where he and his friends would set fire to the surfer man and sample some of Jimmy “The Bud” Weedman’s medical marijuana.

One of the straps holding surfer man broke and it began rocking back and forth, causing Crackhead to lose control of his vehicle. Crackhead’s Monster truck crossed the centerline and struck a vehicle being operated by Eggshell Eddie causing him severe injuries.

Eggshell retained Attorney Seickem Bulldog to pursue claims against Crackhead Craig. Crackhead had an automobile liability insurance policy issued by Deliverance Insurance Company with policy limits of $100,000 per person and $300,000 per accident. Attorney Bulldog’s $100,000 policy limits demand to Deliverance Insurance was accepted.

Attorney Bulldog thereafter pursued a claim for underinsured motorist (UIM) benefits under Eggshell Eddie’s automobile insurance policy with Allsnake Insurance. The UIM coverage limits were $500,000 per person, $1,000,000 per accident.

Attorney Bulldog submitted a policy limits demand to Allsnake with supporting medical records and other documentation. After several months of negotiations, providing additional records and submitting to a defense medical examination, Allsnake finally agreed to pay its policy limits of $500,000 less the $100,000 credit for Eggshell Eddie’s third-party recovery from Crackhead Craig. The $400,000 was paid by Allsnake.

Attorney Seickem Bulldog thereafter submitted a demand to Allsnake that it pay its proportionate share of the attorney’s fees and expenses incurred to obtain the $100,000 third-party recovery for which Allsnake had received a credit against its UIM obligations. Attorney Bulldog contended that Allsnake had received a benefit from the third-party recovery and the Common Fund Doctrine required it to pay its pro rata share of the attorney’s fees incurred to obtain the $100,000 from Crackhead’s carrier.

Allsnake rejected that demand. Allsnake asserted that absent a controlling statute or an agreement between the parties, the attorney’s fees and expenses incurred by Eggshell Eddie are not recoverable against Allsnake. Allsnake contended that Code of Civil Procedure section 1021 controlled the situation and it provides “except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties; …” Allsnake contended that it did not retain Attorney Bulldog to pursue the claims against Crackhead Craig. Furthermore, it was entitled to reduce its UIM obligations pursuant to Insurance Code Section 11580.2(p)(5).

After the rejection, Attorney Bulldog filed suit for declaratory relief and unjust enrichment against Allsnake Insurance Company. Allsnake’s counsel filed an answer to the complaint. Attorney Bulldog and counsel for Allsnake filed cross-motions for summary judgment based upon stipulated facts. Judge Solomon reviewed the motions and granted the motion for summary judgment by Eggshell Eddie and denied the motion by Allsnake. Allsnake filed a notice of appeal. Attorney Bulldog seeks your opinion on whether the judgment for Eggshell Eddie will be affirmed on appeal.

Applying the Common Fund Doctrine to Underinsured Motorist Claims

When an insurance company pays benefits on a first-party insurance policy to its insured, the insurance company is subrogated to the rights of its insured against any tortfeasor who is liable to the insured for the insured’s damages. (Plut v. Fireman’s Fund Ins. Co. (2000) 85 Cal. App.4th 98, *104.) The concept of subrogation provides the insurer with the right to be put into the position of its insured in order to recover from third parties who are legally responsible to its insured for the loss paid by the insurer. (Id.) Subrogation has its source in equity and arises by operation of law (legal or equitable subrogation). (Sapiano v. Williamsburg Nat. Ins. Co. (1994) 28 Cal.App.4th 533, *537, fn. 1.) Subrogation can also arise out of the contractual language of the insurance policy (conventional subrogation). (Ibid.) Most subrogation provisions in insurance contracts are general and add nothing to the rights of subrogation that arise as a matter of law. (Id. at page *538.)

Insurance companies may not assert a subrogation claim directly against a third-party tortfeasor on its own behalf in personal injury actions. (Fifield Manor v. Finston (1960) 54 Cal.2d 632, *639-640.) In addition, an insurance company may not seek to “gang press” a policyholder’s personal injury attorney into service as a collection agent by suing the attorney to pay it any judgment or settlement proceeds obtained from the third party that passes into the attorney’s hands. (Farmers Ins. Exchange v. Smith (1999) 71 Cal.App.4th 660, *662.) Consequently, to pursue rights of subrogation, insurance companies must either interplead itself into any action brought by the insured against the third-party tortfeasor, or wait to seek reimbursement under the language of its policy from its insured to the extent that the insured recovers money from the third party. (Plut v. Fireman’s Fund Ins. Co. (2000) 85 Cal.App.4th 98, *104; Hodge v. Kirkpatrick Dev., Inc. (2005) 130 Cal.App.4th 540, *548.)

The Common Fund Doctrine is an equitable concept that applies when dealing with subrogation or reimbursement rights asserted by an insurance company after paying firstparty benefits. California courts have analyzed the technical differences between subrogation and reimbursement and have concluded that they are basically the same thing. One court explained it as follows:

As explained by a leading commentator on insurance law, there is a technical difference between subrogation and reimbursement. (16 Couch, Insurance (3d ed. 2000) § 222:2, pp. 222–10 through 222–14.) Subrogation refers to the right of the insurance company to step into the shoes of the insured and assert the insured’s rights against the third party. (Id. at p. 222–11.) Reimbursement refers to the right to receive payment back of what has been expended by the insurance company. (Ibid.) That same commentator, however, acknowledges that those terms are often used interchangeably in the cases. (Ibid.) In California, both the subrogation rights and reimbursement rights of the insurance company fall within the rubric of subrogation. [Citations] (Progressive W. Ins. Co. v. Yolo Cty. Superior Court (2005) 135 Cal.App.4th 263, *273; emphasis added.)

The Common Fund Doctrine limits an insurance company’s ability to recover funds from its insured where the insured obtains a judgment or settlement from a third-party tortfeasor.

The appellate court in Progressive explained the common fund rule as follows:

“‘[W]hen a number of persons are entitled in common to a specific fund, and an action brought by a plaintiff or plaintiffs for the benefit of all results in the creation or reservation of that fund, such plaintiff or plaintiffs may be awarded attorney’s fees out of the fund.’ ” (Lee v. State Farm Mut. Auto. Ins. Co. (1976) 57 Cal.App.3d 458, *467.) “ ‘The bases of the equitable rule which permits surcharging a common fund with the expenses of its protection or recovery, including counsel fees, appear to be these: fairness to the successful litigant, who might otherwise receive no benefit because his recovery might be consumed by the expenses; correlative prevention of an unfair advantage to the others who are entitled to share in the fund and who should bear their share of the burden of its recovery; encouragement of the attorney for the successful litigant, who will be more willing to undertake and diligently prosecute proper litigation for the protection or recovery of the fund if he is assured that he will be promptly and directly compensated should his efforts be successful.’ [Citation.]” (Id. at *467–468.) Under this rule, an insurance company that does not participate in the underlying action must pay a pro rata share of the insured’s attorney fees and costs when it seeks reimbursement from its insured out of funds obtained by the insured from the responsible third party. (Id. at p. 469, 129 Cal.Rptr. 271.) That is, the insurance company’s reimbursement must be reduced proportionately to reflect the attorney fees paid by the insured. (Hartford Accident & Indemnity Co. v. Gropman (1984) 163 Cal.App.3d Supp. 33, *39–40.) (Progressive W. Ins. Co. v. Yolo Cty. Superior Court, supra, 35 Cal. App. 4th at *275-76; emphasis added.)

Consequently, when an insurance company does not participate in the underlying action, the insurance carrier must pay its pro rata share of the insured’s attorney’s fees and expenses when it seeks reimbursement from its insured out of funds obtained by its insured from the responsible third party. (Lee v. State Farm Mut. Auto. Ins. Co., supra, 57 Cal.App.3d at *469.) In other words, the insurance company’s reimbursement right must be reduced proportionately to reflect the attorney’s fees paid by the insured. (Harford Accident & Indemnity Co. v. Gropman (1984) 163 Cal.App.3d Supp. 33, *39-40.)

One case has already applied the common fund doctrine to a carrier’s right to be reimbursed for medical payments benefits paid under an automobile policy. (See Lee v. State Farm Mut. Auto. Ins. Co. (1976) 57 Cal. App.3d 458, *469.)

The Uninsured Motorist Act set forth in Insurance Code Section 11580.2 provides a carrier with a right of reimbursement in the underinsured motorist coverage situation. Insurance Code Section 11580.2(p)(5) provides as follows:

“The insurer paying a claim under this subdivision shall, to the extent of the payment, be entitled to reimbursement or credit in the amount received by the insured from the owner or operator of the underinsured insured motor vehicle or the insurer of the owner or operator.” (Emphasis added.)

Since the Common Fund Doctrine has been adopted in California and has already been applied to the reimbursement rights for medical payments benefits, it should apply equally to the reimbursement rights of a carrier for the third-party recovery obtained from the third-party tortfeasor. Otherwise, the insurance carrier would be unjustly enriched.

Under the Common Fund Doctrine, the insurance carrier would be required to pay a pro rata share of the attorney’s fees incurred to obtain the common fund (the policy limits from the third party) which serves as a reimbursement right to the carrier to reduce its obligations to pay underinsured motorist benefits.

Assuming Eggshell had been required to pay a 33 1/3% fee to Attorney Bulldog from the $100,000, Allsnake would be required to pay a pro rata share of the attorney fee of $33,333.33. To determine the pro rata share, the $100,000 recovery should be divided by the $500,000 total insured damages to determine that Allsnake’s pro rata share is 20%. Consequently, Allsnake would be required to pay $6,666.66 of the attorney’s fees paid by Eggshell Eddie to Attorney Bulldog out of the thirdparty recovery. This formula was recognized and adopted in the concurring opinion in 21st Century Ins. Co. v. Superior Court (2009) 47 Cal.App.4th 511, *535-536.

Although this author has not found any case that has applied the Common Fund Doctrine to the reimbursement rights of a carrier in the UIM setting, the decision in Lee v. State Farm Mut. Auto. Inc. Co. applied the Common Fund Doctrine to the reimbursement rights of medical payments coverage. Insurance Code section 11580.2(p)(5) expressly refers to the offsets as reimbursement or credit and the carrier has clearly obtained a benefit from the efforts of its insured to recover the settlement fund from the third-party insurance policy that served to reduce its UIM liability.

This issue was recently addressed in an unpublished decision by an Illinois appellate court which held that the Common Fund Doctrine applied to the underinsured motorist offset rights of the carrier and required the carrier to pay a proportionate share of the attorney’s fees incurred by its insured to obtain the third-party recovery. (See Tuggle, Schiro & Lichtenberger, P.C. v. Country Preferred Ins. Co., Appellate Court of Illinois, 4th District (December 1, 2015) 2015 WL 7767421.)

Conclusion

In conclusion, the Common Fund Doctrine should be applied in the uninsured motorist setting under the holdings of Lee v. State Farm and the other cases that have described and analyzed the purpose of the Common Fund Doctrine which is to require a carrier to pay a pro rata share of the attorneys fees and expenses incurred to obtain the third-party recovery. However, you should be prepared for a fight since there are no published decisions applying it in the UIM setting.


This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2016). Applying common fund to UIM claims. Trial Bar News, 39(4), 9-10, 26-28.

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