Indiana Court of Appeals Holds Auto Insurers Do Not Get a Setoff Against Underinsured Motorist Limits for MedPay Payments

The Indiana Court of Appeals recently held that automobile insurers do not get a setoff against underinsured motorist (UIM) limits above the statutory minimum of $50,000.00 for payments made by insurers under medical payments coverage (MPC). In Erie Ins. Exch. v. Craighead, Olivia Craighead (Craighead) was injured in a single-vehicle car crash while riding as a passenger. She pursued a claim against the driver, and the driver’s insurance company paid her $50,000 in liability coverage and $5,000 in MPC. Craighead also pursued a claim against her own insurance company, Erie Insurance Exchange (Erie). Craighead had $100,000 in UIM coverage and $5,000 in MPC under her policy with Erie. Erie paid the $5,000 in MPC but disputed the amount of the remaining UIM coverage after setoffs pursuant to Craighead’s policy with Erie, which provided that the limit of UIM coverage available would be reduced by liability payments and MPC payments.

Erie claimed Craighead’s $100,000 UIM coverage should be set off by both the $50,000 liability payment and the $10,000 in MPC payments, thereby making the available UIM coverage $40,000. While recognizing Erie was entitled to a setoff for the $50,000 liability payment, Craighead claimed she was entitled to the remaining $50,000 in UIM coverage with no setoff for the $10,000 MPC payments. After Erie refused to pay the undisputed $40,000 in UIM coverage absent agreement by Craighead to release her claim for the additional $10,000 in coverage, Craighead filed a lawsuit against Erie for both breach of contract and bad faith. After Craighead filed suit, Erie reversed its previous position and paid Craighead the undisputed $40,000 in UIM coverage.

Both parties moved for summary judgment in the trial court. Erie argued it acted in accordance with Indiana law and not in bad faith in enforcing the MPC setoff policy provision. Craighead argued the MPC setoff policy provision violated Indiana law and there was a genuine issue of material fact as to whether Erie acted in bad faith. The trial court denied Erie’s motion for summary judgment but granted Craighead’s motion for partial summary judgment, finding a setoff from Craighead’s UIM coverage for the $10,000 MPC payments was not permissible. Erie appealed.

Under Indiana law, Indiana Code § 27-7-5-2(a) states that automobile insurers must provide uninsured motorist (UM) and UIM coverages unless an insured rejects such coverages in writing, and any UIM coverage cannot be less than $50,000. The UM/UIM law is a “mandatory coverage, full-recovery, remedial statute,” which is legally considered part of every automobile insurance policy. Indiana Code § 27-7-5-5(c) of the UM/UIM law deals with “limitations on coverage,” and provides that the maximum amount payable for bodily injury under UIM coverage is the lesser of (1) the difference between the “amount paid in damages” by the liable party and the per person UIM limit, or (2) the difference between the total amount of damages and the amount paid by the liable party.

On appeal, Erie argued that the UM/UIM law only prevented a setoff from the minimum $50,000 required for UIM coverage, whereas Craighead argued it is the amount of UIM coverage purchased, i.e., the limit, that cannot be set off, not the statutory minimum. Agreeing with Craighead, the Indiana Court of Appeals noted that Indiana Code § 27-7-5-5(c) provides the starting point for calculating the maximum amount payable under UIM coverage as the per person UIM limit, not the statutory minimum, and that the $50,000 amount in Indiana Code § 27-7-5-2(a) is only the statutory minimum of UIM coverage that must be provided and nothing more. The Court further found, while distinguishing prior cases, that MPC payments do not qualify as an “amount paid in damages” under Indiana Code § 27-7-5-5(c), as they are no-fault payments independent of any wrongdoing. Accordingly, the Court found that Erie’s policy provision allowing the UIM coverage to be set off by MPC payments violated Indiana Code § 27-7-5-5(c).

As to Craighead’s bad faith claim, Erie argued it reasonably relied on the MPC setoff provision in its policy and did not exert an unfair advantage over Craighead by initially refusing to provide the undisputed $40,000 in UIM coverage. Under Indiana law, insurers have a duty to deal with their insureds in good faith, which includes refraining from causing an unfounded delay, making an unfounded refusal to pay policy proceeds, exercising an unfair advantage to pressure an insured into settlement, and deceiving an insured. A good faith dispute as to the value of a claim and even poor judgement and negligence do not rise to the level of bad faith; rather, there must be a showing of conscious wrongdoing. Based upon the facts in the case, the Court found at least one genuine issue of material fact, namely, whether Erie acted in bad faith by refusing to pay the undisputed $40,000 in UIM coverage for around a year while conditioning payment on Craighead releasing her claim as to the disputed $10,000 in UIM coverage.

You can read the full opinion here.