21ST Century Ins. Co. v. Superior Court

213 P.3d 972

98 Cal.Rptr.3d 516

47 Cal. 4th 511

21ST CENTURY INSURANCE COMPANY, Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent Silvia Quintana, Real Party in Interest.

No. S154790.

Supreme Court of California.

August 24, 2009.

Luce, Forward, Hamilton & Scripps, Peter H. Klee, John T. Brooks and Charles H. Danaher, San Diego, for Petitioner.

Gibson Robb & Lindh and Joshua E. Kirsch, San Francisco, for National Association of Subrogation Professionals as Amicus Curiae on behalf of Petitioner.

Horvitz & Levy, John A. Taylor, Jr., David S. Ettinger, Encino; Robie & Matthai, James R. Robie, Kyle Kveton and Steven S. Fleischman, Los Angeles, for Association of California Insurance Companies, National Association of Mutual Insurance Companies, Personal Insurance Federation of California, Mercury Casualty Company and Mercury Insurance Company as Amici Curiae on behalf of Petitioner.

No appearance for Respondent.

Law Office of Robert S. Gerstein, Robert S. Gerstein, Los Angeles; Huffman & Kostas, James C. Kostas, David Huffman, San Diego; Law Offices of Sheldon A. Ostroff and Sheldon A. Ostroff, San Diego, for Real Party in Interest.

CHIN, J.

Silvia Quintana (Quintana) was injured in an automobile accident with a third party. She maintained an auto insurance policy with 21st Century Insurance Company (21st Century) that included first party, no-fault medical payment (med-pay) insurance coverage in case of an accident. 21st Century paid Quintana $1,000 under her insurance policy's med-pay provision. Quintana then separately pursued a damages claim against the third party and settled the action for $6,000, which sum represented her total damages. In obtaining the settlement, she incurred approximately $2,000 in attorney fees and costs (collectively attorney fees). Insurance policies typically have, and her policy did have, a provision requiring her to reimburse her insurer for monies she recovered from a third person that duplicated her recovery under her policy. Underlying these provisions, the basic idea is that insureds should not recover the same amount twice, once from their insurance company and again from a third party. In sum, insureds are entitled to be "made whole" from the insurance proceeds and tort recovery, but they are not entitled to a double recovery.

The narrow issue before us in this writ proceeding is whether the made-whole rule includes liability for all the attorney fees insureds must pay in order to obtain medical payment compensation from a third party tortfeasor. The issue arises at the intersection of two well-settled legal doctrines: (1) the made-whole rule, whereby a third party recovery must make the insured whole before he or she is obligated to reimburse the insurance company, and (2) the "common fund" doctrine, whereby a party that benefits from another person's expenditure of attorney fees is required to bear a proportionate share (but not all) of that expenditure.

As we explain, we conclude that although the made-whole rule applies in the med-pay insurance context, and the insured must be made whole as to all damages proximately caused by the injury, liability for attorney fees is not included under the made-whole rule. Those fees instead are subject to a separate equitable apportionment rule (or pro rata sharing) that is analogous to the common fund doctrine we discuss below. We therefore affirm the Court of Appeal's judgment.¹

FACTUAL AND PROCEDURAL BACKGROUND

On December 8, 2003, Quintana suffered injuries in an automobile accident with a third party. Quintana's insurance company, 21st Century, paid her $1,000 under her insurance policy's med-pay provisions. Med-pay coverage pays the insured's reasonable and necessary medical expenses incurred due to an accident up to a relatively low dollar limit, in exchange for relatively low premiums. (See Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263, 270, 37 Cal.Rptr.3d 434 (Progressive West).) The insurer provides coverage on a no fault basis. The coverage is primarily designed to provide an additional source of funds for medical expenses for injured automobile occupants without the burdens of a fault-based payment system. There is no statutory obligation to provide med-pay coverage. (Nager v. Allstate Ins. Co. (2000) 83 Cal.App.4th 284, 289-290, 99 Cal.Rptr.2d 348.)

As noted, Quintana separately sued the third party tortfeasor and settled her action for $6,000. To obtain the settlement, she incurred $2,106.50 in attorney fees. Under its interpretation of the insurance policy's reimbursement provision, 21st Century requested that Quintana repay the $1,000 it had paid her.² Quintana paid 21st Century $600, an amount arrived at by taking the $1,000 med-pay benefits disbursed to her by 21st Century and subtracting attorney fees of $400 (approximately one-sixth of Quintana's total attorney fees of $2,106.50, one-sixth being the relationship between the $1,000 she received from 21st Century and her $6,000 settlement). 21st Century eventually agreed that amount fully satisfied its reimbursement claim, because it accounted for 21st Century's pro rata share of the attorney fees Quintana expended in collecting the damages from the third party tortfeasor.

Quintana subsequently filed a class action lawsuit against 21st Century, alleging four causes of action: (1) violation of Business and Professions Code section 17200, (2) conversion, (3) unjust enrichment, and (4) declaratory relief. Quintana asserted that 21st Century could not lawfully require any reimbursement under its policy terms because she had not been made whole by the third party damages settlement ($6,000) and medical payments received from the insurer ($1,000) when her attorney fees of $2,106.50 were included as part of her made whole recovery. She argues that the made-whole rule requires the insurer to take into account all of the insured's litigation expenses when calculating whether or not the insured's recovery from a third party tortfeasor resulted in a surplus recovery entitling the insurer to some reimbursement. After paying her attorney fees, Quintana recovered a total of $4,893.50 ($6,000 in settlement proceeds plus $1,000 in med-pay proceeds minus $2,106.50 in litigation expenses). She alleged that, because her total gross recovery of $4,893.50 after payment of attorney fees was less than her total damages of $6,000, she had not been made whole.

Quintana sought to represent the class of all "California policyholders, past and present, of [21st Century] who: (1) were not made whole after deducting all attorney fees from the money they received from the resolution of their claims against third party tortfeasors; (2) received an amount from 21st Century that was less than the amount paid by such policyholders for such attorney fees; and (3) paid 21st Century money in response to its demand for reimbursement of payments it paid under the med-pay coverage."

21st Century demurred to the complaint, asserting that Quintana did not state a cause of action because California law includes no attorney fees or costs in the made-whole calculation. 21st Century contended that reimbursement for attorney fees is separately determined under an equitable apportionment rule known as the common fund doctrine and its requirement that an insurer pay a pro-rata portion of attorney fees once the insured recovers his or her damages. In other words, 21st Century claimed that Quintana's interpretation of the made-whole rule conflicted with the common fund doctrine. The trial court overruled the insurer's demurrer.

21st Century filed a petition for writ of mandate with the Court of Appeal challenging the trial court's order. The Court of Appeal issued an order to show cause and ordered 21st Century's writ petition to be considered with four other writ petitions, all filed in the Fourth Appellate District in San Diego County, which raised the identical legal issue against different insurers. The Court of Appeal held that the made-whole rule does not require an insurer seeking reimbursement to consider the attorney fees the insured expended in recouping his or her losses from the tortfeasor. Those expenses, the court held, fall under the common fund doctrine. The court therefore granted 21st Century's petition for writ of mandate and ordered the trial court to vacate its judgment and enter a new order sustaining the demurrer. We granted Quintana's petition for review challenging the Court of Appeal's decision that attorney fees are not properly considered when calculating an insured's liability for reimbursement under the made-whole rule.

Quintana contends that insurance companies are not entitled to reimbursement of payments they made under med-pay policy provisions unless the insured has been reimbursed for 100 percent of its attorney fees. She argues for an interpretation of the made-whole rule that would require that attorney fees be deducted from the total amount recovered in the third party tortfeasor litigation. Quintana urges the court to hold that the made-whole rule is not satisfied when the insured's damages recovery is reduced by its obligation to pay its attorney fees. By contrast, 21st Century contends that neither California case law nor the policy justifications underlying the made-whole rule and the common fund doctrine support Quintana's position. As we explain, we agree with 21st Century.

DISCUSSION

A. Contractual Subrogation and Reimbursement

Med-pay insurers must seek recovery for personal injury claims through contractual reimbursement rights against their insureds, because they are not allowed to assert subrogation claims directly against third party tortfeasors. (Progressive West, supra, 135 Cal.App.4th at p. 272, 37 Cal.Rptr.3d 434.) The rule is based on the premise that personal injury claims are not assignable, and therefore a med-pay insurer generally has no right to sue the tortfeasor directly and has no...