Opinion ID: 2595291
Heading Depth: 3
Heading Rank: 2

Heading: Coughlin Settled for the Full Policy Limits.

Text: The parties do not dispute that AS 28.20.445(e)(1) [5] requires a claimant to exhaust the underlying liability policy limits before pursuing underinsured motorist benefits. [6] What is in dispute is whether Coughlin received policy limits from Colonial. Repeating its argument before the superior court, GEICO asserts that Coughlin did not exhaust Babosky's policy limits because Colonial only paid out $45,000. GEICO argues alternately that Colonial's actual policy limit exceeded $50,000 because Colonial was required to pay costs, interest, and attorney's fees and Coughlin received none of these. We reject both of these arguments. We hold both that Coughlin exhausted Colonial's policy limits when she received $40,000 in cash plus Colonial's agreement to assume responsibility for her $10,000 medical lien and that costs, interest, and attorney's fees are not to be included in determining whether policy limits have been exhausted for the purpose of drawing upon underinsured motorist coverage.
In exchange for signing a settlement releasing Babosky and Colonial from future legal liability, Coughlin received $40,000 in cash from Colonial and Colonial agreed to assume responsibility for GEICO's subrogated $10,000 medical lien. GEICO at some point settled this medical lien with Colonial for $5,000. As a result, Colonial in actuality only paid out $45,000 on Coughlin's claim against Babosky. According to AS 28.20.445(e)(1), uninsured and underinsured motorist coverage cannot be drawn upon until the limits of liability of all bodily injury and property damage liability bonds and policies that apply have been used up by payments, judgments or settlements. In Curran v. Progressive Northwestern Insurance Co., we interpreted this statute to mean that the insured must `exhaust' or `use up' all underlying liability coverage before recovering under [an underinsured motorist] policy. [7] GEICO argues that Curran defeats Coughlin's claim because Coughlin did not exhaust her underlying liability coverage and thus cannot draw on her underinsured motorist policy. But neither fact pattern in Curran, a consolidation of two cases, resembles the present case. In the first fact pattern in Curran, the injured party, who suffered serious injuries in a single-vehicle accident while riding as a passenger with her husband, offered to give both her own insurance company and that of her husband a $50,000 credit against her claims prior to seeking underinsured motorist coverage. [8] But because this proposed credit was not a settlement, judgment, or payment from her husband's insurer, we held that the injured party had not satisfied the requirements of AS 28.20.445(e)(1). [9] In the second fact pattern addressed in Curran, the injured party in a two-vehicle accident was offered a $60,746.03 settlement for a $50,000 insurance policy [10] by the insurance company for the driver of the other car. [11] The injured party refused this settlement offer but eventually settled for $25,000. [12] This amount was far less than the policy limits and consequently precluded the applicability of underinsured motorist coverage. [13] Curran, therefore, is of little assistance in resolving the present issue other than to affirm that policy limits must be exhausted before underinsured motorist coverage can be drawn upon. The present case does not involve Coughlin offering GEICO a credit against her underinsured motorist coverage, whereby she would be able to draw upon her underinsured motorist coverage but reduce her recovery by the amount necessary to exhaust her other claims. We held in Curran that this would defeat the purpose of AS 28.20.445(e)(1) because it would allow a UIM claimant like Curran to bypass the liability insurer altogether and effectively use UIM coverage as primary insurance. [14] Coughlin, however, is making no such attempt here. Coughlin settled her claim for what to her was worth $50,000a $40,000 payment plus payment of the $10,000 medical lien. GEICO claims that the $10,000 medical lien was only worth $5,000 because that is what GEICO settled for with Colonial. However, Coughlin cannot be held responsible for what GEICO ultimately does with the claim. GEICO was under no obligation to settle the claim for $5,000 and could have chosen to pursue the full amount in litigation if necessary. Furthermore, it is unlikely that Coughlin could have settled for more than the combined $40,000 payment and $10,000 medical lien. The facial limit of the Colonial policy was $50,000. The superior court concluded that Coughlin, through her legal counsel, should have known that the medical lien would settle for less than face value because this is common knowledge. But even if true, there is no reason to believe that Colonial would have offered to settle for a $45,000 payment and assumption of responsibility for payment of the $10,000 medical lien, which according to GEICO's reasoning would have resulted in a final payout of $50,000. In effect, the reasoning of the superior court would discourage settlements, a result we wish to avoid, [15] by preventing the assumption of liens as part of a settlement agreement. The ultimate value of the lien cannot be known definitively beforehand, and insurance companies are unlikely to settle claims for potentially more than the face value of the policy limits in the hope that they will be able to settle the assumed lien for less than its stated amount. While it is true that Coughlin could have settled with Colonial for a single payment of $50,000 and then herself paid GEICO the $10,000 reimbursement for the medical payments GEICO made through its policy with her, there is nothing legally requiring Coughlin to do this. The parties reaching the agreement cannot be expected to settle for what would be more than the face value of the policy if the terms of the settlement were fully enforced and collected. The value of the settlement to both Coughlin and Colonial was $50,000 at the time the settlement agreement was reached; that is the measure by which to determine whether Coughlin has exhausted the face value of the Colonial policy.
GEICO argues that even if Coughlin did settle for $50,000, this is less than her full policy limits because it does not include attorney's fees and prejudgment interest which, GEICO contends, would raise Coughlin's actual policy limits well above $50,000. In support of this argument, GEICO relies on cases in which we have held that insurers who contract to pay all litigation costs are required therefore to pay Alaska Civil Rule 82 attorney's fees and prejudgment interest. [16] While the cases that GEICO cites do support this proposition, [17] they are not dispositive of the present case. The cases cited by GEICO and the dissent do not purport to interpret the statutory meaning of policy limits; they simply consider what meaning the term should be given in a particular contractual settingthat is, for purposes of determining the amount that an insurer must tender to satisfy an insured's unqualified demand for policy limits. We have considered items such as attorney's fees and prejudgment interest to be in addition to the face amount of policy limits. [18] They can be considered incorporated into overall policy limits to the extent that insurance companies are legally obligated to pay them, but they do not necessarily bear on the question of whether limits of liability ... have been used up for purposes of AS 28.20.445(e)(1). We conclude that the term limits of liability as used in the statute refers to facial coverage, and not extras. In reaching this conclusion we look to the purpose of the statute: to ensure that UIM coverage is secondary rather than primary coverage while at the same time making the benefit of UIM coverage broadly available. [19] Given the dual purposes of AS 28.20.445(e)(1), it is difficult to believe that the legislature would use the term limits in a sense that would engender litigation and uncertainty in many cases. In such cases as Bohna v. Hughes, Thorsness, Gantz, Powell & Brundin , policy limits is a concept that describes the maximum amount that an insurance company would have to pay under a policy if it went to trial and received an adverse verdict. [20] But the amount of policy limits under this definition is sometimes a guessas where attorney's fees are a percentage of the expected verdict rather than a percentage of the facial coverageand it would be unlikely that the legislature in enacting AS 28.20.445(e)(1) would have intended to incorporate such an uncertain concept in a context where the purpose is not maximization of coverage but the establishment of a definite and readily ascertainable threshold. [21] Indeed, there are strong policy reasons for not including attorney's fees and prejudgment interest in the determination of whether policy limits have been satisfied for the purpose of invoking underinsured motorist coverage. As with the ultimate value of liens, the monetary value of attorney's fees and prejudgment interest is quite speculative. Until the matter is concluded, it may be difficult if not impossible to determine what attorney's fees and prejudgment interest will be. We are wary of starting a new litigation industry centered on disputing attorney's fees for settlement agreements and making sure that no dime is left on the table. This would unjustifiably hinder settlement negotiations by virtually eliminating the possibility of certainty that one has settled for the full face value of one's policy limits. We therefore hold that a policy limit is exhausted for the purposes of invoking underinsured motorist coverage when the full face value of the policy is paid through payments, judgments or settlements, [22] regardless of how payment of attorney's fees and prejudgment interest is resolved. The dissent believes that this ruling will burden the wrong people by transferring to the UIM insurer the expenses of defending the alleged tortfeasor and challenging the plaintiff's damages claims. [23] Consequently, according to the dissent, UIM coverage will become more expensive. [24] We do not anticipate this result. If the plaintiff sustained injuries in excess of the face value of the tortfeasor's policy, that excess remains regardless of whether the plaintiff received attorney's fees and prejudgment interest. Thus, we hold that the policy limits are exhausted when the face value of the policy is paid to the insured; any payment or non-payment of attorney's fees and prejudgment interest is independent of this determination.