The insurer for a driver who caused a collision in Davidson County won’t be able to use the injured plaintiff’s underinsured motorist coverage to reduce the amount of the judgment owed to the plaintiff, the North Carolina Supreme Court has ruled in a case of first impression that figures to have significant ramifications for the state’s insurance industry.
The court’s unanimous decision overturns a 2017 ruling by the state’s Court of Appeals.
William Hairston and Ashwell Harward were involved in a car crash in 2009. In 2014, a jury deemed Harward negligent and awarded Hairston $263,000 in damages, which exceeded the limits of Harward’s liability policy. Hairston had a UIM policy with Erie Insurance Exchange, which sent him a check for $145,000 to make up the difference while also waiving its right to sue Harward to try to recoup the money.
Harward argued that since Erie had forsaken any claim to the money, the $145,000 should be deducted from the amount he owed, in order to prevent Hairston from collecting a double recovery, which the law generally disfavors. Superior Court Judge Joseph Crosswhite granted the motion for a credit and reduced the amount of the judgment against Harward. A divided Court of Appeals later affirmed the ruling.
On appeal, Hairston argued that the decision to trim the judgment violated the collateral source rule, which prevents a court from reducing a plaintiff’s recovery to account for money received from some source totally independent of the defendant (like a health insurer paying the plaintiff’s medical bills, for instance).
The Supreme Court had never before considered whether UIM insurance is a collateral source of funds. Justice Sam Ervin, writing for the court, said that it was a close question, but that treating the proceeds as a collateral source was more consistent with the policy considerations underlying the rule.
Ervin wrote that any decision the court made would inescapably lead to a windfall of sorts for one side or the other. The court said it was better to bestow this benefit upon a plaintiff who wisely chose to purchase UIM coverage than on a defendant who failed to purchase enough liability coverage to compensate the plaintiff for his injuries.
“As is the case with certain of the other sorts of payments that have been held to be subject to the collateral source rule, the payment that Erie made to plaintiff resulted from plaintiff’s foresight in deciding to acquire underinsured motorist coverage,” Ervin wrote. “A decision that a plaintiff must credit the payment that he or she receives as a result of the decision to purchase such optional coverage … strikes us as likely to discourage North Carolina citizens from purchasing uninsured motorist coverage, a result that would have obvious deleterious consequences.”
Had Erie attempted to assert its rights against Harward, the whole issue of a windfall would disappear, Ervin said, and the court saw no reason to treat Harward differently simply because Erie opted to waive its rights against him rather than pursue them.
The Dec. 7 decision brings North Carolina in line with the law in the overwhelming majority of states that have considered the issue and treated UIM proceeds the same way. It also clarified that the collateral source rule is a substantive rule of law governing damages, whereas the Court of Appeals had held in its opinion that its purpose is to exclude evidence of payments made to the plaintiff by other sources.
Doug Maynard of Maynard & Harris in Winston-Salem, John Bloss of Higgins Benjamin in Greensboro, and James Roane of Greensboro represented Hairston.
Maynard said that had the ruling gone the other way, it would have created an incentive for insurers to try to game the system. Most UIM policies allow policyholders to arbitrate any dispute with their carrier, but only if the at-fault driver’s liability insurer has tendered their full policy limits. In the record on appeal, Maynard included evidence that, in at least some cases, UIM carriers have explicitly agreed to waive their rights in exchange for the liability carrier’s promise not to tender their policy limits.
“What was going on a lot, and it’s really hard to prove, is that tortfeasors’ insurance companies were trying to use the person they caused the injury to, and their UIM, an excess liability carrier,” Maynard said. “You can’t do that now. It’s clear that the only person who benefits from the UIM policy now is the person who purchased it.”
Maynard contended that there’s no reason for a UIM carrier to waive its subrogation rights except to deprive an insured of their right to arbitrate under the policy. As a result, he said, the ruling would lead to much far agreements of this sort, and more disputes going to arbitration rather than to trial.
“It basically will cause the liability carriers to treat their policyholders fairly, and the UIM carriers to treat their policyholders fairly,” Maynard said.
Kent Hamrick and Ann Rowe of Davis & Hamrick in Winston-Salem represented Harward. Hamrick declined to comment on the court’s ruling.
The 30-page decision is Hairston v. Harward (Lawyers Weekly No. 010-099-18). The full text of the opinion is available online at nclawyersweekly.com.
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