N.Y. court set to rule in key underinsured motorist benefits case

Whether serious injury is required to be demonstrated for an insured to be entitled to supplementary underinsured motorist benefits (SUM) was recently argued before New York’s Court of Appeals.

On October 9, 2007, oral argument regarding Raffellini v. State Farm Mut. Auto. Inc. Co., 36 A.D.3d 92, 823 N.Y.S.2d 440 (2d Dep’t 2006) was heard at the Court of Appeals, New York’s highest court. The Raffellini appeal will impact automobile litigation in New York concerning supplementary underinsured motorist (SUM) benefits.

In Raffellini, the plaintiff settled his action to recover damages for personal injuries against the tortfeasor for $25,000, the limit of the tortfeasor’s automobile liability policy. Plaintiff subsequently commenced a breach of contract action against his own insurer to recover SUM benefits. The plaintiff, however, was attempting to recover those benefits without demonstrating that he sustained a “serious injury” within the meaning of Insurance Law §5102(d); indeed, no finding of serious injury occurred because the plaintiff settled with the underinsured tortfeasor.

In its answer, the plaintiff’s SUM insurer asserted the affirmative defense that the plaintiff did not sustain a “serious injury.” New York’s Appellate Division, Second Department unanimously determined that under Insurance Law §3420(f)(2)(A) the insurer could not assert such a defense and the plaintiff need not demonstrate a “serious injury” to recover SUM benefits. Several months later New York’s Appellate Division, Fourth Department, with Justices Centra and Gorski dissenting, held the complete opposite in Meegan v. Progressive Ins. Co., 43 A.D.3d 182, 838 N.Y.S.2d 748 (4th Dep’t 2007).

The Raffellini and Meegan decisions raise important questions regarding SUM recovery. Does a settlement for the policy limits with the underinsured tortfeasor implicitly equate to an admission of “serious injury”? If so, could that admission be held applicable to the SUM insurer? Should a SUM insurer consent to its insured’s acceptance of the policy limits from the underinsured tortfeasor and risk waiving the argument that the insured did not sustain a “serious injury”? What impact does the New York Superintendent of Insurance’s regulation regarding SUM endorsements have on Insurance Law §3420(f)(2)(A).

As a reminder, Insurance Law §3420(f)(1) addresses uninsured motorist (UM) benefits, i.e., where a hit-and-run accident occurs or where the tortfeasor carries no insurance. Section 3420(f)(1) requires the plaintiff to demonstrate that he or she has sustained a “serious injury,” explicitly stating so in the provision’s body. Section 3420(f)(2)(A) addresses SUM benefits, which applies in situations when a tortfeasor has insurance coverage that is not sufficient to compensate the injured party for the injuries suffered; the SUM coverage then acts as “excess” coverage over that of the tortfeasor. No requirement of demonstrating a “serious injury” is contained in §3420(f)(2)(A), thereby raising the confusion addressed in Raffellini and Meegan. To further complicate the matter, the Superintendent of Insurance enacted a regulation interpreting §3420(f)(2)(A) to require the plaintiff/insured to demonstrate a “serious injury” to receive SUM benefits.

At argument, the New York Court of Appeals bench — which consists of Chief Judge Kaye and Judges Ciparick, Graffeo, Read, Smith, Jones, and Pigott — addressed all the troubling questions that Raffellini raises. Appellant’s counsel began his argument on behalf of State Farm by stating that the statutory framework of Insurance Law §§3420(f)(1) and (2)(A) demonstrate the “serious injury” requirement in both the UM and SUM contexts. Chief Judge Kaye asked counsel to explain his position given §3420(f)(1) explicitly required a “serious injury” showing where §3420(f)(2)(A) did not. Counsel explained that §3420(f)(2)(A) was not written in a vacuum. Counsel also pointed out that section 3420(f)(2)(A) incorporated the language of §3420(f)(1) because §3420(f)(2)(A) language began with the phrase, “[a]ny such policy.” Judge Ciparick seemed to reject that interpretation, observing that such general language is always contained in statutes. Judge Ciparick also seemed to question the fairness aspect of requiring the plaintiff/insured to demonstrate a “serious injury,” commenting that SUM benefits are purchased for an additional premium, the coverage is optional, and the benefits act as excess coverage.

Judge Read asked the insurer’s counsel whether there was any logic for the Court to require a “serious injury” showing for §3420(f)(1) and not for §3420(f)(2)(A). Counsel stated that there was no logic supporting such divergent treatment. Judge Read followed up her question, asking about State Farm’s position regarding the plaintiff/insured’s settlement with the underinsured tortfeasor (State Farm did not respond to its insured’s request for authorization to accept the settlement and, thus, it was deemed that State Farm authorized the settlement), inquiring as to whether an adverse opinion for the insurer would prevent insurers from authorizing underlying settlements. Ultimately, that question remained unaddressed.

With regard to §3420(f)(1) including the “serious injury” requirement but §3420(f)(2)(A) not containing such language, the insured argued that the two sections were completely separate. The crux of the insured’s argument was that a “serious injury” finding was implicit where the underinsured tortfeasor’s carrier paid the plaintiff/insured the policy limits. He reasoned that the plaintiff/insured had to convince the underinsured tortfeasor’s carrier that the plaintiff sustained a “serious injury” to justify the carrier paying the policy limits. As such, a settlement demonstrated a “serious injury” finding and the plaintiff did not have to demonstrate for a second time to the SUM insurer that he or she sustained a “serious injury” to receive SUM benefits. Chief Judge Kaye noted that if the “serious injury” finding was implicit when a settlement with the underinsured tortfeasor’s carrier was reached, what was the harm with just making a “serious injury” showing explicit in a SUM endorsement. Counsel answered that doing so would require two showings of serious injury, and he argued that such a requirement was an unnecessary obstacle to the plaintiff/insured receiving SUM benefits.

The Court struggled with the argument, noting that at some point, a serious injury had to be demonstrated, and in Raffellini, it had not been. Further, the Court also appeared skeptical of counsel’s “implicit showing” argument, asking “Aren’t there many reasons for settlement?” When presented with the question regarding whether the Meegan decision was distinguishable, the insured stated that the Fourth Department was mistaken in its holding, and that the statute had to explicitly state that a “serious injury” showing was necessary to require such a showing.

Perhaps the most telling question came from Judge Graffeo, who asked “In order to find in your [Mr. Raffellini’s] favor, the Court must make a determination about settlement?” The implication of Judge Graffeo’s question is that the Court would have to hold that a settlement with the underinsured tortfeasor’s carrier equated to an finding of “serious injury.” The insured reiterated that a serious injury was implied because of the settlement with underinsured tortfeasor’s carrier.

Given the multitude of questions, it was extremely difficult to predict whether the Court of Appeals will read into Insurance Law §3420(f)(2)(A) a requirement that the insured must demonstrate that he or she sustained a “serious injury” to recover SUM benefits. However, the Judges were clearly concerned with adopting a rule that equated a settlement with an implicit admission that the plaintiff/insured sustained a “serious injury” and that the SUM insurer was bound by another carrier’s settlement.

Based on past practice, the Court of Appeals will likely hand down a decision in this appeal during its November Session. We expect a decision on this appeal on November 15th, 20th or 22nd. We will keep you posted.