Court Assesses Offsets Against Employee’s Underinsured Claim

By Don R. Sampen, published, Chicago Daily Law Bulletin, April 16, 2024

The 7th U.S. Circuit Court of Appeals, construing Illinois law, recently held that an employee injured in an automobile accident was entitled to recover underinsured coverage from his employer’s automobile liability policy, subject to certain reductions.

The reductions consisted of the amount of payment by the at-fault driver’s insurer and the employee’s workers’ compensation recovery, but subject to a credit for the amount paid to satisfy a workers’ comp lien.

The case is Hartford Accident & Indemnity Co. v. Zhen Feng Lin, No. 22-2776, 2024 U.S. App. Lexis 7577 (April 1). The insurer, Hartford, was represented by Wilson Elser Moskowitz Edelman & Dicker LLP of Chicago. Sinson Law Group of Chicago represented the employee, Zhen Feng Lin, and his wife.

Lin was injured in a car accident in 2017 while making a delivery for his employer, Win Win Seafood Wholesale LLC. He eventually received a $100,000 settlement by the at-fault driver’s insurer, to which Hartford made no objection, but he had to pay about $73,000 to release the workers’ comp lien on the settlement. In addition, Lin was awarded $301,000 in workers’ compensation benefits.

Lin’s injuries, however, exceeded these amounts, and he sought recovery of underinsured motorist benefits under his employer’s automobile coverage with Hartford. The policy provided up to $1 million in such benefits.

But the policy stated that in the absence of a settlement agreement between Lin and Hartford, the benefits were to be reduced by the amounts paid by anyone else obligated to pay damages and by workers’ comp benefits.

Because the parties disagreed about the amount of Lin’s damages and amount of reductions from the $1 million underinsured limit, Hartford filed this declaratory action. Lin filed a counterclaim seeking, among other things, arbitration under the policy and claiming bad faith by Hartford. He requested arbitration with respect to both Hartford’s policy obligations and its alleged bad faith.

The district court ordered arbitration but limited it to the issue of Lin’s damages. The arbitration panel subsequently calculated his damages at $1.06 million. Based on that calculation, the district court, on summary judgment, found Hartford liable for underinsured benefits of $1 million less the $100,000 settlement with the at-fault driver, and less the $301,000 workers’ comp benefits, but with a credit to Lin for the $73,000 paid to release the workers’ comp lien.

The court thus required Hartford to pay about $672,000 in underinsured motorist benefits. It also dismissed Lin’s bad faith claim. Both sides appealed.

Bad Faith Issues

In an opinion by Judge Doris L. Pryor, the 7th Circuit affirmed. She first addressed Lin’s argument that he should have been allowed to arbitrate his bad faith claim. She observed that arbitration is a creature of contract, and in this case the policy’s arbitration clause was limited to the amount of damages recoverable by an insured. Because it did not include bad faith issues, Lin had no right to have those issues arbitrated.

Pryor then took up Lin’s counterclaim for bad faith. He argued that Hartford had an obligation to promptly adjust his claim for underinsured benefits and took far too long in doing so. Pryor wrote, however, that nothing in the policy itself set a timetable for determining benefits, and that the delays incurred were not unreasonable.

She noted, for example, that the parties initially agreed to hold Lin’s claim in check until after settlement was reached with the other driver and the workers’ compensation benefits were determined. Thereafter the parties disputed how the policy’s reductions clause was to apply, followed by the district court litigation and arbitration in December 2021. Under these circumstances, Pryor found that bad faith sanctions were not warranted.

Reduction of Workers’ Comp Payments

Turning to the calculation of underinsured benefit reductions, Pryor analyzed whether the workers’ comp payments were properly applied as a reduction. Under the policy language they served as a reduction “except in the event of a settlement agreement” between Hartford and its insured. Lin argued that Hartford’s “no objection” to his settlement with the at-fault driver constituted just such a “settlement” between him and Hartford.

Pryor disagreed, finding that a “settlement” under the policy required agreement on both liability and amount of damages. Hartford’s “no objection” to Lin’s settlement with the other driver did not qualify, said Pryor, among other reasons because there was no agreement between him and Hartford at that time — prior to the arbitration — regarding his damages. The workers’ comp payments therefore could be used to reduce Lin’s underinsured benefits.

Credit for Lien Release Payment

She then addressed Hartford’s argument that Lin should not be credited with the $73,000 amount for the workers’ comp lien release. Relying on Acuity v. Decker, 2015 IL App (2d) 150192, Pryor disagreed with Hartford.

That case held that when an insured pays to release a lien arising from litigation with a tortfeasor, the amount paid is no longer a part of the insured’s workers’ comp award. The amount of the payment should therefore be credited back to the insured in determining amounts otherwise payable under the policy. In sum, since Lin’s workers’ comp benefits were effectively reduced by $73,000, that amount should be subtracted from the $301,000 in workers’ comp payments used to reduce the underinsured benefit under the policy.

The court therefore affirmed the district court’s determination of the underinsured benefits to be paid in the amount of $672,000.

Key Points

• Whether an insured’s claim of bad faith against an insurer is appropriate for arbitration turns on the policy language regarding what matters may be arbitrated.
  
• Depending on the policy language, an insured’s workers’ compensation payments by his or her employer may be used to reduce the underinsured policy benefits to which the insured may be entitled under the employer’s automobile policy.
  
• An insured’s payment to release a workers’ comp lien on recovery from a tortfeasor should be credited back to the insured where workers’ comp payments otherwise are used to reduce the insured’s right to underinsured benefits under an automobile policy.