No ‘Common Fund’ Created Where Insurer Takes Contractual Setoff

By Don R. Sampen, published, Chicago Daily Law Bulletin, July 28, 2020

The 2nd District Appellate Court, in the context of underinsured motorist coverage, recently held that the common fund doctrine did not apply to allow an attorney to recover as fees a portion of setoffs from policy limits arguably made possible by the efforts of the insured’s attorney.

The case is Moruzzi v. CCC Services, Inc., 2020 IL App (2d) 190411 (June 10). The insured, Sandra Moruzzi, and her attorney, Kaiser Law, were represented by Lindsay Pickett & Postel LLC. Carlson Law Offices represented the insurer, CCC Services Inc., doing business as Country Preferred Insurance Co.

Moruzzi was injured in a traffic crash and incurred $350,000 in damages. The driver that injured her had liability coverage through Illinois Farmers Insurance in the amount of $100,000. Moruzzi, who was insured by Country, had underinsured motorists coverage of $250,000, and coverage for medical payments of $100,000.

Farmers paid its $100,000 limit without litigation. Country also paid Moruzzi the full $100,000 medical payment under its policy. In computing its UIM obligation, Country then deducted both the Farmers payment and the medical payment from the UIM $250,000 limit and tendered Moruzzi a check for $50,000.

In taking these setoffs, Country relied on certain policy provisions. One provided that the limit for UIM coverage would be reduced by the total payments made by the insurer of the person responsible for the damage, in this case, the $100,000 Farmers payment. No issue arose concerning that setoff. Another provision stated that the amount paid for “damages” under the UIM coverage would also be reduced by any medical payment.

Yet another provision stated that the most Country would pay for UIM coverage to any one person was the lesser of (1) the difference between the UIM limit and the amount paid by the tortfeasor, or (2) the difference between the insured’s damages and the amount paid by the tortfeasor.

Moruzzi contested the $50,000 amount tendered by Country. She took the position that the $100,000 medical payment should have been used to set off her total damages of $350,000, rather than the UIM limit of liability.

In addition, her attorney, Kaiser Law, claimed it was entitled to reasonable attorney fees based on the common fund doctrine. The law firm contended the common fund doctrine applied as the result of a settlement it reached with Farmers and the resulting setoffs taken by Country for the medical payment and the Farmers payment.

On cross-motions for summary judgment, the trial court held in favor of Country. Moruzzi and Kaiser Law took this appeal.

Medical payment setoff

In an opinion by Justice Kathryn E. Zenoff, the 2nd District affirmed in part and reversed in part. She initially addressed the medical payment setoff.

Zenoff observed that some provisions in the Country policy appeared to equate the term “damages” with the amount payable under the policy. At the same time, that term as used in the medical payment reduction clause could be read to mean Moruzzi’s total losses caused by the tortfeasor.

Hence, Zenoff said the term “damages” was ambiguous as used in the policy. The ambiguity required the term to be construed in favor of Moruzzi, such that the medical payment should be applied as a setoff to Moruzzi’s damages rather than to the UIM limit of liability.

Common fund doctrine

Zenoff explained that the common fund doctrine allows an attorney who recovers a common fund for the benefit of persons other than himself or herself to recover a reasonable attorney fee from the fund. For the doctrine to apply as against an insurance company, the attorney must typically show that the fund was created by the attorney’s services, the insurance company did not participate in the fund’s creation, and the insurance company benefited from the fund’s creation.

In finding the doctrine did not apply, Zenoff relied on Baier v. State Farm Insurance Co., 66 Ill. 2d 119 (1977). The Supreme Court there described the doctrine as applying to a fund created by an attorney, which an insurer as subrogee did nothing to create but from which the insurer nonetheless sought to benefit.

In the case here, Zenoff observed that Country was never subrogated to Moruzzi’s rights in the Farmers settlement, and had no ownership interest in the tort recovery, but instead used the Farmers payment and medical payment to reduce its own liability. Kaiser Law nonetheless argued that Country benefited from its work, and it relied on several decisions from the 3rd and 4th Districts in support of its position, including two unreported Rule 23 orders.

Ultimately, Zenoff said she disagreed with the 3rd and 4th District holdings. She emphasized that the Supreme Court recognized the common fund doctrine only in cases where the attorney creates a fund in which others have an ownership interest and are to be reimbursed from that fund.

Thus, she said, in the absence of the subrogation component, the fund is not one that creates the basis for application of the doctrine even if the insurance company is said to have benefited. Rather, the setoffs taken by Country were based on the insured’s contractual obligation to repay the insurer for benefits paid. In practical terms, said Zenoff, Moruzzi and Country owed each other money, and their relationship was as mutual debtors.

The court therefore reversed the trial court and held in favor of Moruzzi on application of the medical payment to total damages rather than to the UIM limit of liability. The court affirmed in favor of Country on application of the common fund doctrine.

Key points

(1)Where “damages” has different meanings in a policy, the term is ambiguous and will be construed to benefit the insured.

(2)The common fund doctrine, according to this court, in regard to an insurance company, typically applies only when the company as subrogee has an ownership interest in the fund created by the efforts of another party’s attorney.