The Montana Supreme Court ruled that an insurer's "Other Insurance" clause does not constitute unlawful subrogation. The case is Scheafer v. Safeco Ins. Co., 320 P.3d 967 (Mont. 2014).
Valerie Scheafer was involved in a car crash while driving a work vehicle. She submitted a claim for UIM benefits to her employer's insurer, Mountain West Farm Bureau (Mountain West), and a claim for med pay benefits only to her personal auto insurer, Safeco. Mountain West paid Scheafer the requested benefits. Safeco paid Scheafer $1,000, which was her med pay limit. Upon learning Scheafer was driving a work vehicle at the time of loss, Safeco informed her that her UIM benefits, which she had not requested, would only be available after the exhaustion of her employer's policy with Mountain West.
Scheafer later filed suit against Safeco, alleging Safeco had breached both the policy and the duty of good faith and fair dealing because she had not received a payment for either her med pay or her UIM benefits. She claimed Safeco was engaged in unlawful subrogation because, under the "Other Insurance" clause, Safeco's coverage obligations would only trigger after the exhaustion of another party's policy limits. Scheafer also asserted she had not been paid for "incurr[ing] reasonable and necessary medical expenses and other damages and losses … causally related to the accident." However, there was no indication of the total expenses she incurred or any information concerning what she meant by "other damages and losses."
Safeco responded by filing a motion to dismiss Scheafer's suit for failure to state a claim. The company pointed out that, contrary to Scheafer's allegations, they had issued Scheafer a $1,000 payment for her med pay benefits. Her initial demand letter had not requested UIM benefits even though they were available under her policy.
Safeco also argued Scheafer had misinterpreted and mischaracterized the "Other Insurance" clause as "unlawful subrogation." The provision did not disclaim liability, according to Safeco; it only clarified that Safeco's coverage would be excess, not primary, in certain circumstances.
The trial court granted Safeco's motion to dismiss, and Scheafer appealed. The justices of the Montana Supreme Court sent the case back to the trial court for clarification of a few points and for a determination of the coverage priorities between Mountain West and Safeco. The trial court added a supplementary opinion to its earlier decision that stated the "Other Insurance" provisions in Scheafer's policy "were valid, enforceable, and did not constitute unlawful subrogation" (emphasis added), and ruled that Mountain West's coverage was primary. The trial judges ruled in favor of Safeco a second time, and Scheafer again appealed.
On the second appeal, Scheafer maintained her opinion that the "Other Insurance" provision constituted unlawful subrogation. She said that she had not yet been made whole from the accident, and that Safeco's requirement that other UIM limits be exhausted before its own coverage would trigger constituted unlawful subrogation. She cited multiple cases from the Montana Supreme Court, including Blue Cross & Blue Shield of Mont., Inc. v. Mont. State Auditor, 218 P.3d 475 (Mont. 2009), to support her argument.
In Blue Cross & Blue Shield of Montana, the insurance commissioner rejected a policy exclusion proposed by BCBS that stated the company "would not pay for health care costs of its injured beneficiaries if the beneficiaries received, or were entitled to receive, benefits from any automobile or premises liability policy." BCBS filed suit, but the commissioner's rejection was affirmed first by the trial court, then by the Montana Supreme Court. According to the justices the proposed exclusion "effectively allow[ed] [BCBS] to exercise subrogation before paying anything to its insured" (emphasis added) because it disclaimed the insurer's coverage obligations "if the insured [was] 'entitled to receive' benefits from any other auto or premises liability policy whether or not the insured actually receives any of those benefits, and whether or not the insured has been made whole."
The justices agreed that it would violate public policy for an insurer to seek subrogation before making its policyholder whole. However, they pointed to a curious gap in the case: there was no record of whether Scheafer's medical expenses had met or exceeded Mountain West's policy limits. Scheafer did not disclose how much she had already been paid by Mountain West or the driver of the other vehicle, so there was no way to tell if Mountain West's policy limits had been exhausted. Therefore, it was impossible for the Montana Supreme Court to corroborate Scheafer's claim that she had not been made whole.
The justices also referenced a specific point in the "Other Insurance" clause for UIM in Scheafer's policy that stated "However, any insurance we provide with respect to a vehicle … [y]ou do not own, including any vehicle while used as temporary substitute for your covered auto … [s]hall be excess over any other collectible insurance similar to the insurance provided" by the Safeco policy. (emphasis added).
Safeco argued for the primacy of Mountain West's coverage because Mountain West was the primary insurer for Scheafer's employer, and Scheafer had been driving an employer-owned vehicle when she had the accident. Unlike the BCBS case, Safeco's UIM provision did not disclaim all liability in the presence of other applicable insurance. Rather, it stated that Safeco would pay UIM benefits only after the UIM limits of the other insurance policy had been exhausted. As previously stated, Scheafer had not disclosed the amount of benefits she had been paid by Mountain West, so there was no way to determine whether the Mountain West UIM limits had been exhausted.
The trial court's judgment in favor of Safeco was affirmed.
Editor's Note: Insurers only have to make payments they are obligated to pay. In this case, Safeco made it clear the company did not object to paying UIM benefits to Scheafer so long as the limit of the UIM benefits of her employer's Mountain West policy had been exhausted. However, there was no way to determine whether those limits had been exhausted. Mountain West could not supply the information because it was not a party to the case, and Scheafer had not disclosed the amount herself. Without knowing whether the Mountain West UIM limit was exhausted, there was no way to tell if Safeco was obligated to pay excess UIM limits to Scheafer.
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