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July 2013

Settlement of Injury Action Against Insured Does Not Bar Claim Against Insurer for Denial of Benefits Under Medical Payments Coverage

The California Court of Appeal, Third Appellate District, recently reversed a trial court order granting an insurer summary judgment in an action for breach of contract and bad faith.  After the insurer settled an injury action against its insured, the claimant sued the insurer based on its denial of additional benefits under the policy’s medical payments provision.  The trial court granted summary judgment to the insurer, but the Court of Appeal reversed, concluding in Barnes v. Western Heritage Insurance Co. that any damages awarded against the insurer would not amount to an impermissible double recovery.

Plaintiff Justin Barnes, a minor, was injured in May 2001 when a table fell on his back while he participated in a school recreational program co-sponsored by the Shingletown Activities Council.  Western Heritage Insurance Co. afforded general liability insurance to the Council at the time.  The policy also included medical payments coverage up to $5,000 per person for medical expenses incurred and reported to Western within one year of an accident, regardless of fault.

Barnes made a claim against the Council based on his injury.  Upon receiving notice, Western advised the school district that its policy afforded medical payments coverage and directed the district to forward the letter to Barnes.  Western did not inform Barnes of the one-year deadline to incur and submit expenses.  In August 2001, Western paid nearly $1,500 under the medical payments provision toward Barnes’ medical expenses.

Barnes, through his mother as guardian, sued the Council and others in May 2002 alleging negligence and premises liability.  Barnes sought general damages and compensation for his medical expenses.  Western retained an attorney to defend the Council.  In December 2002, Barnes sought additional benefits under the medical payments provision for the cost to see a specialist.  Western denied the request in May 2003, citing the coverage’s one-year deadline and disputing additional medical expenses were reasonable or necessary.  This was Barnes’ first notice of the deadline applicable to the medical payments coverage.

Western resolved the injury action on behalf of the Council.  The settlement did not include Western.  Barnes’ mother, as guardian, petitioned the court for approval of the settlement.  She acknowledged in a declaration that the settlement was a reasonable compromise which would bar further recovery for Barnes’ injuries.  The court issued an order approving the settlement in April 2004.

Barnes turned 18 in 2007 and filed suit against Western in 2009 for breach of contract, as an alleged third-party beneficiary of the medical payments provision in the policy, and bad faith.  The trial court granted summary judgment to Western.  The court concluded collateral estoppel barred the action, Barnes could not recover additional sums for the same injuries, and the one-year limitation in the medical payments provision applied.

On June 18, the Court of Appeal reversed in a partially published decision, holding the trial court erred in concluding Barnes’ action seeking additional medical payments coverage would result in an impermissible double recovery.  Rather, the medical payments provision is distinct from the liability portion of the policy and creates an obligation directly to an injured claimant regardless of the insured’s fault.  Western’s fulfillment of its obligations to the Council under the policy’s liability coverage therefore did not extinguish its separate obligations under the medical payments coverage.  Although Barnes received some medical payments benefits, he did not recover in the injury action for alleged wrongful denial of additional benefits, so the lawsuit against Western does not seek double recovery. 

The court criticized an older decision, Jones v. California Casualty Indemnity Exchange (1970) 13 Cal.App.3d Supp. 1, which reached the opposite conclusion based on the collateral source rule.  Under this rule, compensation from a source wholly independent of the tortfeasor (such as from the claimant’s own insurance) is not deducted from the damages a claimant can collect.  But payments by the tortfeasor’s insurance are deducted from the plaintiff’s recovery.  In Jones, the court held the plaintiff could not recover separately against the insurer under the medical payments coverage because the insurance was not wholly independent of the insured defendants. 

The Court of Appeal disagreed with the analysis in Jones.  As in the lawsuit against the insurer in Jones, the plaintiff alleges Western, not its insured, is the wrongdoer.  Western insured the Council and did not issue the policy to provide coverage for its own wrongdoing.  Therefore, the court concluded the collateral source rule does not bar the action by Barnes against Western.

The Court of Appeal concluded that, based on the record, the trial court erred in granting summary judgment to Western.  The court reversed the order granting Western’s motion.

Click here for the opinion.

The opinion in Barnes v. Western Heritage Insurance Co. (June 18, 2013)__ Cal.App.4th __ ; 13 C.D.O.S. 6236 is not final.  The Court of Appeal may modify it on rehearing or the California Supreme Court may order it depublished or grant review.  The latter two events would render the opinion unavailable as legal authority in California courts.

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