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Medical Payments Offsets and Reimbursement Rights

Auto insurance policies frequently provide rights of reimbursement or credit rights.

Eggshell Eddie and his girlfriend, Chastity Goodness, were driving up the Pacific Coast Highway one Sunday afternoon when they stopped and watched the kite surfers at Torrey Pines State Beach. After enjoying the views, Eggshell and Chastity decided to have lunch in Del Mar. Eggshell drove his vehicle out of the parking lot onto Pacific Coast Highway where he was confronted with a vehicle coming straight at him in his lane of travel. The other driver was Crackhead Craig, who was illegally passing another vehicle by crossing over the double yellow lines. The two vehicles collided. Eggshell and Chastity suffered serious injuries.

Eggshell and Chastity retained Sickem Bulldog to represent them in their claims against Crackhead Craig. Eggshell and Chastity used the medical payments coverage of Eggshell’s automobile policy to cover their copayments of their medical bills. Eggshell’s carrier, Allsnake Insurance, paid $10,000 in medical payments coverage for Eggshell’s medical expenses and another $10,000 for Chastity’s medical expenses.

Crackhead Craig had a minimum limits liability insurance policy of $15,000 per person and $30,000 per accident issued by Saturn Insurance. Sickem Bulldog made a policy limits demand upon Saturn for both Eggshell and Chastity. Saturn accepted the policy limits demand and paid its full policy limits of $30,000.

Sickem Bulldog filed a claim for underinsured motorist benefits with Allsnake for Eggshell and Chastity. Eggshell had uninsured/underinsured motorist coverage of $100,000 per person and $300,000 per accident. Sickem Bulldog submitted a settlement demand to Allsnake Insurance where he allowed a credit for the third party recovery of $15,000 for each of the demands by Eggshell and Chastity. Sickem demanded $85,000 for Eggshell and $85,000 for Chastity. Allsnake acknowledged that the value of the claims fell within the range of $200,000 to $250,000. However, Allsnake contended that it was entitled to an additional credit against its underinsured motorist coverage for the $20,000 in medical payments paid by Allsnake to, or on behalf of, Eggshell and Chastity. Sickem Bulldog disputed that contention.

Allsnake tendered $75,000 each to Eggshell and Chastity, which represented the full underinsured motorist coverage after reduction for their third party recoveries and also less the $10,000 medical payments already paid to, or on behalf of, Eggshell and to Chastity. Sickem and Allsnake agreed that the $75,000 settlement payments to Chastity and Eggshell could be cashed under a full reservation of rights for them to pursue Allsnake for the $20,000. Sickem sued Allsnake for the $20,000 and asserted causes of action for breach of contract, declaratory relief, and breach of the implied covenant of good faith and fair dealing. The issue was whether Allsnake was entitled to a set off for the payments made under the medical payments coverage against its obligations to pay the underinsured motorist benefits.

Analysis of Medpay Offsets

Most automobile policies are offered with medical payments coverage. Medical payments coverage is intended to cover medical expenses without reference to fault and “irrespective of the legal liability of the insured.” (Ins. Code §108(b).) In fact, medical payments coverage will pay for medical expenses that are covered even for injuries resulting from the willful misconduct of the operator of the vehicle covered by the policy. (Turner v. Mannon (1965) 236 Cal.App.2d 134, *139.) A sample medical payments provision will provide the following: 

We will pay reasonable expenses incurred for necessary medical and funeral services because of bodily injury caused by accident and sustained by a covered person . . . “Covered person” as used in this Part means: 

(1)     You or any family member while occupying or as a pedestrian when struck by a motor vehicle . . . 

(2)     Any other person while occupying your covered auto.” 

Since medpay insurance covers medical expenses “incurred” by an insured, the benefits are payable even if those expenses are covered by other insurance such as health insurance. (Feit v. St. Paul Fire & Marine Ins. Co. (1962) 209 Cal.App.2d Supp. 825, *828.) In addition, medpay benefits are available to pay medical expenses that are paid by Medicare. It is irrelevant that the patient may not be obligated to pay for such medical services because Medicare providers agree not to charge the patients directly. They are still considered expenses “incurred” by the insured. (Holmes v. California State Auto. Ass’n (1982) 135 Cal.App.3d 635, *639.)

Most auto policies also provide the insurer with the right to be reimbursed for medical expense payments out of any recovery obtained by the insured. (Zubia v. Farmers Ins. Exch. (1993) 14 Cal.App.4th 790, *794.) The right to reimbursement also applies to medpay benefits paid to or on behalf of a passenger in the vehicle. (Mercury Cas. Co. v. Maloney (2003) 113 Cal.App.4th 799, *803.) However, the right to recover the medpay benefits from any third-party recovery is limited by the Made Whole Doctrine. Under the Made Whole Doctrine, the carrier is precluded from seeking reimbursement until the insured has been made whole. (See 21st Century Ins. Co. v. Superior Court (2009) 47 Cal.4th 511, *519; Progressive West Ins. Co. v. Superior Court (2005) 135 Cal. App.4th 263, *281.) An insured is only made whole when he or she has been fully compensated for all bodily injury or property damage caused by the tort feasor. Attorney’s fees incurred by the insured to obtain such damages are not considered in the analysis of whether the insured has been made whole. (21st Century Ins. Co. v. Superior Court, supra, at *515.) Insurance Code section 11580.2(e) permits insurance carriers to provide in the policy or by endorsement that it may reduce the amounts “paid or due to be paid” for uninsured or underinsured motorist coverage. (Hervey v. Mercury Cas. Co. (2010) 185 Cal.App.4th 954, *965.) Insurance Code section 11580.2(e) provides as follows:

(e) The policy or endorsement added thereto may provide that if the insured has valid and collectible automobile medical payment insurance available to him or her, the damages that the insured shall be entitled to recover from the owner or operator of an uninsured motor vehicle shall be reduced for purposes of uninsured motorist coverage by the amounts paid or due to be paid under the automobile medical payment insurance. (Emphasis added.) 

Insurance Code section 11580.2(e) simply means that the medpay benefits paid by an insurance company can be applied to reduce the value of the insured’s total claim, but not the UM/UIM coverage limits.  In the situation of Eggshell Eddie and Chastity Goodness, their claims had a value of at least $200,000 each.  Allsnake would be entitled to a credit of the $20,000 in medpay benefits paid against that $200,000, but not against its UIM coverage limits. Consequently, Allsnake was not entitled to the credit and its interpretation of its policy was in direct contravention of Insurance Code section 11580.2(e).

Sickem Bulldog filed a motion for summary adjudication on the declaratory relief action requesting the court to declare that Allsnake was not entitled to reduce its UIM coverage by the medpay benefits that it had paid. Judge Solomon granted the motion. Allsnake settled the case two weeks later for seven figures. The exact amount was made confidential under the terms of the settlement agreement.

Conclusion

Auto insurance policies frequently provide rights of reimbursement or credit rights. It is important to know when those rights actually apply and the limitations imposed upon them. The medpay offset reduces only the value of the insured’s total claim for UM/UIM benefits and not the actual UM/UIM coverage limits themselves.


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. (2017). Medical payments offsets and reimbursement rights. Trial Bar News, 40(2), 9-10, 28.

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