Travelers Companies v. Liberty Mutual Insurance Co.

Annotate this Case
TRAVELERS_COS_V_LIBERTY_MUTUAL_INS.94-579; 164 Vt 368; 670 A.2d 827

[Filed 09-Nov-1995]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.

                                No. 94-579

The Travelers Companies                     Supreme Court

                                            On Appeal from
                                            Lamoille Superior Court

Liberty Mutual Insurance Company,           June Term, 1995
Gary Cole, d/b/a Cole Turf Company
and Gary Cole, Individually

Alan W. Cook, J.

John J. Boylan, III, of Boylan & Bowen, Springfield, for plaintiff-

Mark H. Kolter of Darby Laundon Stearns & Thorndike, Stowe, for

PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.

       ALLEN, C.J.   Plaintiff workers' compensation insurer sought a
  declaratory judgment establishing its right to reimbursement for
  compensation benefits paid to defendant Gary Cole after he received
  underinsured motorist benefits from his employer's liability carrier.  The
  Lamoille Superior Court granted Cole's motion for summary judgment.  We

       Gary Cole was seriously injured in a motor vehicle collision in
  Morrisville while in the course of his employment with the Cole Turf
  Company, his own sod farming business.  The accident was caused solely by
  the negligence of an underinsured motorist.  Because Cole's injuries arose
  out of and in the course of his employment, plaintiff, which provided
  workers' compensation insurance for Cole Turf Company, paid various
  workers' compensation benefits to and on behalf of Cole.

       At the time of the accident, Cole was also covered by a personal
  automobile insurance policy he had purchased from Agway Insurance Company,
  which had $250,000 of underinsured motorist (UIM) coverage.  Cole's
  business had an automobile policy issued by Liberty Mutual 


  Insurance Company, which provided UIM coverage of $500,000.  The
  tortfeasor's automobile insurance policy provided $100,000 of liability
  coverage.  Stacking the two underinsured motorist policies provided total
  available UIM coverage of $750,000, leaving the amount of potential
  underinsurance liability in this case at $650,000.
       Plaintiff consented to Cole's settlement with tortfeasor's carrier for
  its $100,000 policy limit and was reimbursed $50,000 for workers'
  compensation benefits paid pursuant to an agreement between plaintiff and
  Cole.  In that agreement, plaintiff reserved the right to claim
  reimbursement for further compensation benefits paid out of any recovery
  Cole might obtain from his employer's UIM coverage.

       Plaintiff's workers' compensation payments to Cole exceeded the
  initial $50,000 from the tortfeasor's policy by $126,500.  Cole received
  $147,000 of UIM benefits from his personal UIM policy with Agway and
  $160,000 from his employer's policy with Liberty Mutual, resulting in total
  liability policy and UIM proceeds of $357,000.  Plaintiff seeks
  reimbursement of $126,500 out of the $160,000 recovery from Liberty Mutual.

       After plaintiff brought a declaratory judgment action seeking payment
  of this amount, the parties stipulated to the facts, agreed to an escrow of
  UIM proceeds, and filed cross-motions for summary judgment.  The sole issue
  at trial and here on appeal is whether the UIM proceeds received from the
  business's policy are available to reimburse plaintiff for the workers'
  compensation benefits it paid to Cole.  

       The statute at issue is 21 V.S.A. Sec. 624, which states in relevant

              (a) Where the injury for which
         compensation is payable under the provisions
         of this chapter was caused under circumstances
         creating a legal liability to pay the
         resulting damages in some person other than
         the employer, the acceptance of compensation
         benefits or the commencement of proceedings to
         enforce compensation payments shall not act as
         an election of remedies, but the injured
         employee or the employee's personal
         representative may also proceed to enforce the
         liability of such third party for damages in
         accordance with the provisions of this
         section. . . .  


                              *       *       *

              (e) In an action to enforce the liability
         of a third party, the injured employee may
         recover any amount which the employee or the
         employee's personal representative would be
         entitled to recover in a civil action.  Any
         recovery against the third party for damages
         resulting from personal injuries or death
         only, after deducting expenses of recovery,
         shall first reimburse the employer or its
         workers' compensation insurance carrier for
         any amounts paid or payable under this chapter
         to date of recovery, and the balance shall
         forthwith be paid to the employee . . .  and
         shall be treated as an advance payment by the
         employer on account of any future payment of
         compensation benefits. 

   (Emphasis added.)

       Noting that this Court has not yet decided the question, the trial
  court ruled that UIM benefits from the employer's liability carrier are not
  subject to a lien in plaintiff's favor under Sec. 624(e), principally because
  they are first-party, not third-party, obligations.  The court noted that
  this was essentially the ruling in two earlier superior court cases raising
  substantially the same question and was, as Cole had argued, the decision
  in a majority of precedents from other jurisdictions that had considered
  the question.  This appeal followed.

       We reverse because, on its face, the Vermont statute requires a
  contrary result.  First, it is important to state what this case is not
  about. This case is not about the legislative policies underlying Sec. 624. 
  The statute establishes the right of a workers' compensation carrier to be
  reimbursed for payments to an insured employee who obtains personal damages
  for injury from a third party.  The economic and social considerations
  underlying the legislative choice to favor the compensation carrier in this
  manner are concerns for the Legislature, not this Court.  By requiring
  reimbursement of workers' compensation carriers, the statute thereby
  operates to lower the cost of workers' compensation insurance. 
  Nevertheless, because policymaking is the province of the Legislature, our
  task is to construe the statute with the aid of the usual rules of

       Cole first argues that the employer's UIM carrier was not a "third
  party" within the meaning of Sec. 624, relying both on the text of the statute
  and on cases from other jurisdictions 


  which hold that the UM/UIM carrier does not fall within particular
  definitions of third parties.  This is a common theme in the "majority
  rule" cases.  Typical is Rhodes v. Automotive Ignition Co., 275 A.2d 846
  (Pa. Super. Ct. 1971), where the court held that the workers' compensation
  carrier should not have been reimbursed out of the deceased employee's UM
  policy award, because the UM carrier was not a third party.  Id. at 848. 
  The court relied, however, on a state statute providing as follows:
         "Where the compensable injury is caused in
         whole or in part by the act or omission of a
         third party, the employer shall be subrogated
         to the right of the employe[e], his personal
         representative, his estate or his dependents,
         against such third party to the extent of the
         compensation payable under this article by the
         employer . . . ."

  Id. (quoting P.L. 736 Sec. 319 (1915), as amended, 77 P.S. Sec. 671 (1970)
  (current version at Pa. Stat. Ann. tit. 77, Sec. 671 (1992))).  Under this
  statute, the third party was the uninsured motorist who struck and killed
  plaintiff's decedent.  This definition contrasts sharply with the concept
  of third person in Sec. 624(a), which permits the employee and the workers'
  compensation carrier to recover where a legal liability to pay damages is
  created in "some person other than the employer."  Later references to
  "third party" in Sec. 624 relate back to the phrase "some person other than
  the employer," as there is nothing in the text or context of the section
  that would suggest a different definition.  

       In sum, it is clear that, within Sec. 624, "third party" means a party
  who is not (1) the workers' compensation carrier, (2) the injured worker,
  or (3) the employer, notwithstanding that in many other contexts an
  agreement between an insurer and an insured would be described as one
  between first and second parties, with the phrase "third party" referring
  to one who was a stranger to the contract.  Thus, we hold that a workers'
  compensation insurer who has paid out benefits is entitled to reimbursement
  from UM/UIM payments made by an employer's liability carrier.  This holding
  is consistent with St. Paul Fire & Marine Ins. Co. v. Surdam, 156 Vt. 585,
  590, 595 A.2d 264, 266 (1991), where we held:


         When a third party is found responsible in a
         personal injury action for damages suffered by
         the worker, the worker is not permitted double
         recovery from both the insurer and third party
         for the same injury.  Rather, the law evens
         out the consequences by permitting the carrier
         to recoup the benefits it paid the worker. 

       Cole also argues that the UIM payments were not "damages" within the
  meaning of Sec. 624(a), (e).  Again, this argument appears in the cases
  propounding the majority rule and other superior court precedents cited by
  the trial court.  See, e.g, Knight v. Insurance Co. of North America, 647 F.2d 127, 129 (10th Cir. 1981); March v. Pekin Ins. Co., 465 N.W.2d 852,
  854 (Iowa 1991); Wincek v. Town of West Springfield, 506 N.E.2d 517, 519
  (Mass. 1987).   

       In each of these cases, the notion that UIM payments cannot be damages
  arises from the proposition that UM/UIM policies are contracts and that the
  concept of damages is associated with torts.  "Courts have pointed out that
  `a payment made in performance of a contractual obligation is not a payment
  of damages.'"  Knight, 647 F.2d  at 129 (quoting State Farm Mut. Ins. Co. v.
  Fireman's Fund American Co., 550 S.W.2d 554, 557 (Ky. 1977)).  "[W]e think
  it clear that the Legislature used `damages' to denote the money payable by
  a tortfeasor who is liable for injuries caused by his tortious act." 
  Wincek, 506 N.E.2d  at 519.  

       In none of these cases does a court report that any of the UM/UIM
  statutes involved defines UM or UIM payments as damages, though courts
  concede that damage amounts are integrally related to the determination of
  the proper amount of UM/UIM payments.  See, e.g., March, 465 N.W.2d  at 854
  ("Although Pekin's obligation to March is measured by the damages wrought
  by the tortfeasor, Pekin's payment to March is not thereby transformed from
  a contractual payment to one for damages.").

       Vermont's UM/UIM statute is unique among the statutes brought to our
  attention by the court or the parties' briefs.  23 V.S.A. Sec. 941(f) states:

              For the purpose of this subchapter, a
         motor vehicle is underinsured to the extent
         that its personal injury limits of liability
         at the time of an accident are less than the
         limits of uninsured motorists coverage
         applicable to any injured party legally
         entitled to recover damages under said
         uninsured motorist coverage.  


  (Emphasis added.)  Thus, the Vermont statutes equate uninsured
  motorist payments with damages.  Because there is no difference in concept
  between uninsured and underinsured motorist recoveries, this
  characterization applies equally to the latter.  The theoretical divide
  between contract and tort that underlies many of the majority-rule cases
  simply does not apply here.  Our view is reinforced by the insuring
  agreement of the UIM policy, which obligates the UIM carrier to pay all
  sums the insured is entitled to recover as damages from the owner or
  insurer of the underinsured vehicle.

       Cole next argues that a workers' compensation insurer can no more take
  privately purchased underinsured motorist benefits than it can take other
  private health, life, disability, or indemnity benefits payable to an
  injured worker.  The simple response to Cole's argument is that UM/UIM
  coverage is unlike other privately purchased insurance, and allowing a
  workers' compensation insurer to treat a UM/UIM award as a recovery from
  the tortfeasor is a rational way to achieve the Legislature's policy goals. 
  Although Cole's argument suggests a constitutional infirmity, no cases hold
  that a reimbursement scheme like Vermont's is constitutionally

       An insurer may not sell and an insured may not purchase an automobile
  liability insurance policy in Vermont without UM/UIM insurance.  23 V.S.A.
  Sec. 941(a).  Unless the policyholder otherwise directs, UM/UIM coverage will
  equal liability coverage.  An automobile liability policyholder who is also
  covered by workers' compensation insurance knows that if he or she is some
  day injured in a non-work-related accident, only the purchase of an
  appropriate amount of UM/UIM coverage will guarantee that a damage award
  against a tortfeasor will be fully realized.  The policyholder is also
  presumed to know that, under Vermont law, if an accident is work-related
  and workers' compensation is paid, some portion of UM/UIM benefits will be
  assigned to the compensation carrier as reimbursement for the workers'
  compensation payment.  These potential outcomes become part of the
  risk/cost analysis that the policyholder uses to determine the personally
  optimum amount of UM/UIM coverage to purchase.  Thus, the 


  policyholder who purchases UM/UIM insurance cannot reasonably expect a
  windfall based on the happenstance of whether the tortfeasor is uninsured,
  underinsured, or adequately insured and whether the accident is
  work-related or not.  Vermont law requires a policyholder to purchase a
  minimum of UM/UIM coverage, and allows a policyholder to purchase more
  coverage if he or she desires additional protection against loss, but the
  law also places the policyholder on notice that recovery will never exceed
  actual damages.
       Nor can it be argued that a policyholder subject to the holding we
  announce today could be paying a premium for which the policyholder
  receives no benefit.  If, for example, a policyholder is involved in an
  accident with a tortfeasor who is not adequately insured, partial recovery
  from the tortfeasor's insurer results in only partial UM/UIM payment. 
  Similarly, if the policyholder receives payment from a compensation insurer
  and a portion of UM/UIM payments is assigned to the workers' compensation
  carrier as reimbursement for compensation payments already received, the
  policyholder receives only partial UM/UIM payment.  In either case, the
  benefit that the policyholder receives from UM/UIM coverage is protection
  against the probability of deficient recovery from the tortfeasor, not
  guaranteed receipt of payment equal to the UM/UIM coverage.

       Finally, Cole argues that 21 V.S.A. Sec. 699 voids any agreement
  requiring an employee to pay "any portion of the cost of insurance of any
  kind maintained . . . by an employer for the purpose of securing
  compensation."  This provision must be read in pari materia with 21 V.S.A.
  Sec. 624.  See Robes v. Town of Hartford, 161 Vt. 187, 192, 636 A.2d 342, 346
  (1993) ("[T]his Court must read provisions that are part of the same
  statutory scheme in pari materia.").  Given Cole's broad reading of "any
  portion of the cost of insurance," assignment to a workers' compensation
  carrier of any insurance proceeds the employee would have received, but for
  the assignment, could be said to violate Sec. 699.  Such a reading of Sec. 699 is
  inconsistent with the language and intent of Sec. 624.  But if their
  provisions are interpreted harmoniously, Sec. 624 presents a complete and
  logical apportionment of risks, costs, and benefits, under various 


  accident scenarios, among the employee injured in an accident, the
  workers' compensation carrier, and the employer's private liability
  insurer.  Such interpretation comes as close as possible to the ideal we
  described in LaBombard v. Peck Lumber Co., 141 Vt. 619, 624, 451 A.2d 1093, 1096 (1982):
         [T]he insurance carrier, representing the
         employer, comes out even, being without fault
         or injury; the third party wrongdoer pays
         exactly the damages he would have paid without
         any workers' compensation law; the attorney is
         reimbursed for services rendered, and the
         employee -- in addition to what he has already
         received in compensation benefits -- is
         entitled to the remainder.

       In sum, our construction of Sec. 624 does not conflict with Sec. 699, the
  purpose of which is directed at other ills.

                               FOR THE COURT:

                               Chief Justice