DATE RENDERED: 7/13/2007

In this case, the COA held that a workers compensation carrier has no subrogation claim against the claimant’s underinsured motorist benefits.

The single question in this appeal is whether the Circuit Court erred in summarily dismissing the subrogation claim of appellant, G&J Pepsi-Cola Bottlers, Inc., for workers’ compensation benefits paid to appellee, Nicholas Fletcher. This appeal was held in abeyance pending resolution by the Supreme Court of Kentucky of the issues advanced in Cincinnati Insurance Company v. Samples, 192 S.W.3d 311 (Ky. 2006). Having fully considered those supplemental briefs, the original briefs filed in this appeal, and the record, the COA affirmed the circuit court dismissal.

Fletcher was seriously injured in a car accident and received workers compensation benefits. Fletcher sued Urmson, the at fault driver, and Ohio Casualty, his personal automobile insurance carrier, for underinsured motorist’s (“UIM”) benefits. Fletcher subsequently amended his complaint to add a UIM claim against United States Fire Insurance Company (“US Fire”), the insurer of his employer G&J’s fleet of vehicles. Finally, G&J intervened to assert a $370,000.00 subrogation claim for workers’ compensation benefits paid to Fletcher as a result of the same automobile accident.

The primary issue became whether G&J could assert a subrogation claim against the benefits Fletcher was seeking from US Fire and Ohio Casualty. COA answered no.

Relying upon the language of KRS 342.700(1) and the rationale set out in State Farm Mutual Insurance Company v. Fireman’s Fund American Insurance Company, 550 S.W.2d 554 (Ky. 1977), the circuit court concluded that the employer’s statutory subrogation rights extend only to recovery of benefits paid “from the other person in whom legal liability for damages exists” in other words, the tortfeasor.

Applying the holding in State Farm, the trial court noted that the payment of benefits by a UIM carrier is the performance of a contractual obligation, not the payment of damages by the person in whom legal liability rests. Thus, the trial court granted the motion for summary judgment because it found no case or statute which would permit G&J to assert its subrogation claim against the amounts paid under the two separately purchased UIM policies.

The COA first prefaced it discussion of the merits of G&J’s appeal with a reiteration of the the analysis set out in State Farm v. Firemen’s Fund concerning the nature of UIM benefits and the genesis of an employer’s subrogation rights. The following analysis was from that earlier UM decision, and since the appellate courts analyze UIM and UM similarly, the Judge Knopf’s analysis is addressed (as it incorporates the analysis from Justice Palmore):

KRS 342.055 [now KRS 342.700(1)], the subrogation statute, provides that “the other person in whom legal liability for damages exists” quite clearly refers to the third-party tortfeasor who is liable at common law. A payment made in performance of a contractual obligation is not a payment of “damages.” Hence the liability of an insurance company under its uninsured motorist coverage cannot be the “legal liability for damages” mentioned in KRS 342.055.

Moreover, the satisfaction of an injured party’s claim by his own insurance company under its uninsured motorist coverage does not inure to the benefit of the uninsured motorist. His liability is not extinguished, and it may be enforced by both the carrier which has paid workmen’s compensation benefits and the carrier which has paid under the uninsured motorist coverage.

To hold that the contractual rights of an insured party under the uninsured motorist clause of an automobile liability insurance policy must inure to the benefit of a workmen’s compensation carrier to the extent of compensation paid or payable to him would confer upon the compensation carrier an additional right which it does not have under the subrogation statute. The injured party, or the person under whose insurance policy he is defined as an “insured,” has no obligation to his employer’s compensation carrier to carry any automobile liability insurance or underinsured motorist benefits whatever.

In the absence, therefore, of a statute or agreement to the contrary, what can be the source of the compensation carrier’s right to have the benefits of such insurance? The answer, we think, is that there is none.

Judge Knopf also emphasized that this result does not deprive the employer of its subrogation rights; it can still look to the tortfeasor as provided for in KRS 342.700(1).

The import of that distinction is that KRS 342.700 operates as “a limitation on the rights of the worker that is attendant to his right to collect workers’ compensation benefits” and is not a defense personal to the tortfeasor.

The purpose and intent of the uninsured and underinsured motorist statute is to treat the insured victim as if the tortfeasor is insured. Hence, the UM and UIM carrier stands in the wrongdoer’s shoes for purposes of paying damages.

KRS 304.39-320(2) requires “every insurer” to make available upon request UIM coverage to pay “for such uncompensated damages as he may recover on account of injury due to a motor vehicle accident because the judgment recovered against the owner of the other vehicle exceeds the liability policy limits thereon . . . .”

In other words, the UIM carrier is liable only for damages for which the insured would have been compensated but for the fact that the tortfeasor was underinsured. It follows that if the underinsured tortfeasor could not be held liable for an item of damages, that item is not “uncompensated damages” payable by the UIM carrier.

The UIM carrier is liable for damages only to the extent to which the underinsured tortfeasor is or could have been held liable.

Thus, it is clear that the holding in Samples is directed to the question of what damages an injured employee may recover from his own or his employer’s UIM carrier; it neither addresses nor changes the law regarding an employer’s subrogation rights as set out in State Farm v. Fireman’s Fund.

The COA noted that while Samples makes clear that the UIM carrier’s liability is measured by the liability of the tortfeasor, it does not follow that payments made under a UIM contract are the payment of legal damages in the traditional sense. While the UIM carriers may stand in the shoes of the tortfeasor for the sole purpose of making the injured party whole, the UIM contract does not provide an additional right of subrogation not provided for in KRS 342.700(1).

Because the COA concluded that as a matter of law G&J is not entitled to subrogation against the UIM carriers, there was no error in failing to conduct an evidentiary hearing to resolve a factual question.

By Michael Stevens

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