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Supreme Court Decision Provides Insurers Latitude to Argue Offset in UM/UIM Arbitrations

By Brian Harris

Could in Turn Provide "Reasonable Basis Defense" in Bad Faith Litigation

In what one would think would provide additional ?reasonable basis? cover for an insurer in bad faith litigation, the Pennsylvania Supreme Court last month ruled in Tannenbaum v. Nationwide Insurance Company that an insurer could successfully argue income loss benefits provided under both group plan and personal disability  policies could be used to offset what would otherwise  be recoverable income loss benefits in UM/UIM arbitrations.   In so doing, the Court begain its analysis by examining § 1722 of the Motor Vehicle Financial Responsibility Law, entitled ?Preclusion of Recovering Required Benefits? which provides:

In any action for damages against a tortfeasor, or in any uninsured or underinsured motorist proceeding, arising out of the maintenance or use of a motor vehicle, a person who is eligible to receive benefits under the coverages set forth in this subchapter, or workers' compensation, or any program, group contract or other arrangement for payment of benefits as defined in section 1719 (relating to coordination of benefits) shall be precluded from recovering the amount of benefits paid or payable under this subchapter, or workers' compensation, or any program, group contract or other arrangement for payment of benefits as defined in section 1719. (emphasis added)

 Justice Saylor, in writing for the majority, held that under simple wording of the statute, the leglislative purpose was to  to remediate spiraling insurance costs.  The disability benefits at issue received by Tannenbaum, he found,  fell within with the group/program  arrangement classification within § 1722 and, therefore,  having fallen into such a  classification,  precluded their  re-recovery in a UM/UIM proceeding as Nationwide had successfully  argued in a UM/UIM arbitration in that case. 

Trial court and Superior court rulings reversing a panel of arbitrators? offset consistent with Nationwide?s argument were reversed, and the court held, ?in summary under section 1722?s plain terms, an insured?s recovery under UM/UIM policies may be offset by group/program/arrangement benefits including disability benefits purchased in whole or in part by the insured at least so long as those benefits are not subject to subrogation.? 

So, how and why does an opinion dealing with UM/UIM arbitration and the Pa.M.V.F.R.L. belong in a blog dealing with insurance bad faith?  Because six to seven  out of every ten bad faith claims I am asked to defend arise out of the handling of UM/UIM claims, and claims handling, including UM/UIM claims handling, is the factual focus of all fad faith claims. The law affecting how those claims are to be handled  is in  a constant state of flux,  and the Tannenbaum decision represents a recent and a significant pronouncement in terms of the litigation of UM/UIM claims. 

It is fairly widely considered now, and has been for some years,  that UM/UIM proceedings are adversarial as between an insurer and an insured.  See, e.g., Condio v. Erie Insurance Exchange, 899 A.2d 1136, 2006 Pa. Super. 92.  As such, insurers are entitled to look after their interests,  at least to the same degree that they are required to look after the interest of their insureds.  The courts are bound, therefore, from time to time, to  take up the question of whether and how an insurer is entitled to argue damages defenses in UM/UIM proceedings.  Tannenbaum presented the specific question of whether , if an insured is receiving income loss benefits from a group or disability plan, those benefits could  and should be used to offset income loss benefits under a UM/UIM policy which are recoverable in a UM/UIM settlement or arbitration, and, consequently whether, in the context of a bad faith analysis, whether it is reasonable for an insurer is reasonable to make such an argument.  

Assuming, of course, in the particular case considered, there is evidence of such collateral sources of income loss benefits, and that benefits were paid under such collateral sources, such evidence combined with the rather clear pronouncement in the Tannenbaum case would appear to provide sufficient cover for insurers to make the argument that there is a valid basis to claim an  offset pursuant to 75 Pa.C.S.A § 1722.  It would further appear that such an argument can be made now, both during the UIM settlement negotiation and arbitration proceedings. 

I welcome feedback from readers, along with any suggestions for topics you would like to see discussed in this space.  Please e-mail me at chaddick@dmclaw.com.

Full post as published by The Legal Intelligencer Blog on June 25, 2010 (boomark / email).