1ST DISTRICT REPUDIATES PRECEDENT ON INSURANCE SETOFFS, CITY WORKERS

August 10, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

Emphatically repudiating a 1994 ruling, the 1st District of the Illinois Appellate Court declared that an insurance company paying uninsured motorist benefits to a municipal employee is not entitled to a setoff for benefits paid to the claimant by a government pension plan. Gillen v. State Farm Mutual Automobile Insurance Co., 2004 WL 1433158 (1st Dist., June 25).

Both opinions involved 1st District cases where an auto insurance policy limited the carrier's liability for uninsured motorist claims by providing: "Any amount payable under this coverage shall be reduced by any amount paid or payable to or for the insured under any workers' compensation, disability benefits or similar law."
The question was whether benefits paid under a government pension plan qualified as benefits paid under "similar law."

In a tragic eve of Christmas Eve accident, Scott Gillen, a Chicago firefighter and paramedic, was killed by an uninsured motorist while responding to a highway accident. His medical bills, totaling $76,612, were paid by a municipal pension plan.

Scott's widow, Teresa Gillen, asked State Farm for uninsured motorist benefits of $100,000 under the policy they purchased from the auto insurer. Claiming a right to a setoff for the benefits paid by the pension plan, State Farm offered to pay only $23,388.
Gillen fired back with a complaint for declaratory judgment. Based on the 1994 opinion, the Cook County Circuit Court granted State Farm's motion for judgment on the pleadings. Ruling on Theresa's appeal, the 1st District reversed, with a strong opinion extirpating the 1994 precedent.

Here are some highlights of Justice James Fitzgerald Smith's opinion (with various omissions not noted in the quoted text):

"State Farm relies principally on the case of State Farm Mutual Automobile Insurance Co. v. Murphy, 263 Ill.App.3d 100 (1994), and its citations to Ullman v. Wolverine Insurance Co., 48 Ill.2d 1 (1970), for the proposition that our court (as well as our state Supreme Court) has already addressed and rejected the arguments Teresa [Gillen] now brings, and accordingly, we are bound to hold the same.

"It is our view that Teresa's arguments prevail, and to the extent Murphy presses to the contrary, it must be abrogated.

"We find no better place to begin than a direct disagreement with Murphy and State Farm's reliance upon it. It is true that the facts of Murphy are very similar to those of the instant case.

"There, while on duty, Chicago fire department employee Jessie Stewart was struck by a car driven by an uninsured motorist and sustained severe permanent bodily injuries. At the time of the accident, Stewart was covered by an automobile liability policy he had purchased from State Farm and upon which he had personally paid premiums.

"The policy contained an uninsured motorist clause with a coverage limit of $100,000, as well as the exact same language effecting a 'setoff provision' found in paragraph 2 of the policy at issue in this case, namely, that any amount payable under the coverage 'shall be reduced by any amount paid or payable to or for the insured ... under any workers' compensation, disability benefits or other similar law.'

"As in the instant case, the City of Chicago provided medical payments pursuant to Stewart's pension under the Illinois Pension Code for his health-care expenses, amounting to a total in excess of the $100,000 policy limit. Stewart then submitted a claim to State Farm for uninsured motorist coverage, and State Farm moved for summary judgment.

"State Farm relied on the setoff provision in the policy and declared that it was not required to provide any amount because the payments made by the city under Stewart's pension offset the coverage limits, thereby leaving no uninsured motorist coverage available to Stewart since he had received the full policy limit. The trial court agreed with State Farm and Stewart appealed.

"Upon review, the Murphy court immediately turned to a discussion of the Illinois Supreme Court case of Ullman v. Wolverine Insurance Co., 48 Ill.2d 1 (1970) (Ward and Schaefer, JJ., dissenting). In Ullman, the issue was a narrow one: whether an insurer could properly deduct workers' compensation payments made to an insured by his employer in determining its liability to the insured under a policy providing for uninsured motorist coverage.

"There, the plaintiff's decedent was killed by an uninsured motorist, and the decedent's employer paid $14,000 in workers' compensation benefits. The decedent also had an automobile insurance policy containing an uninsured motorist clause with coverage in the amount of $10,000, as well as the same setoff provision found in Murphy and the instant case allowing the insurer to offset any amount paid to the insured from 'any workmen's compensation law, disability benefits law or any similar law.'
"The plaintiff sought to recover the full policy amount, but the insurer maintained that it was entitled to offset the workers' compensation benefits against its liability and, because that amount exceeded the policy, it owed nothing.

"A divided Supreme Court held for the insurer, basing its decision exclusively on the specific characteristics accompanying workers' compensation. It noted that the setoff provision in the policy expressly mentioned that any amount paid to the injured person as workers' compensation could be set off by the insurer.

"The Ullman court also highlighted the fact that the Workers' Compensation Act requires an employee who receives compensation under that act to reimburse the employer for any recovery he receives from a third party. In the unique situation when workers' compensation is paid to an injured employee, a lien in favor of the employer for the amount of the benefits is created, and thus, the employee cannot retain both compensation from his employer and identical damages from the tortfeasor.

"If the tortfeasor is insured, the employee must reimburse his employer from any recovery obtained; if the tortfeasor is uninsured, the benefits paid to the employee by the employer are deducted from the recovery. In neither instance does the employee retain a double compensation. Instead, to the extent that he receives workers' compensation, the obligation of reimbursement by the employee to the employer in full exists regardless of the final amount recovered.

"Broadly construing the fact-intensive discussion of our Supreme Court in Ullman, the Murphy court found that case to be 'analogous' to the situation it was analyzing, even though the sum paid at issue in Murphy did not arise from workers' compensation as in Ullman but, instead, from Stewart's pension as an employee of the City of Chicago.

"Clearly admitting that such payments under the Illinois Pension Code differ from those made to employees pursuant to the Workers' Compensation Act because no similar lien is created in favor of the employer with the payment of pension benefits, the Murphy court nevertheless concluded that this was 'a distinction without a difference.'

"The Murphy court declared that the medical payments Stewart had received from the city pursuant to his pension qualified as '[an amount paid under] workers' compensation, disability benefits or other similar law' found in the setoff provision of the uninsured motorist clause. Thus, the Murphy court stretched the reasoning of Ullman to hold that State Farm's setoff of Stewart's pension benefits from the $100,000 uninsured motorist policy limit was proper.

"The Murphy court's reliance on and extension of Ullman, and particularly its ultimate conclusion that payments made pursuant to the Illinois Pension Code and the Workers' Compensation Act are 'a distinction without a difference,' were erroneous," Smith declared.

"We make clear that we find no problem with the reasoning applied by our Supreme Court in Ullman, nor with its holding. Instead, we agree that Ullman undoubtedly stands on solid ground. The unique characteristic of workers' compensation payments is that an employee is obligated to reimburse his employer for any recovery he receives for his injury from a third party.

"Ullman presented the court with a fact-sensitive situation in which an on-duty employee, struck and killed by an uninsured driver, received workers' compensation but was also insured with a personal policy containing uninsured motorist coverage. However, the clause in the policy specifically stated that the coverage would be reduced by any amount paid or payable 'under any workmen's compensation law,' which is exactly what occurred there.

"Moreover, precisely because the employee in Ullman received workers' compensation, a lien was created in favor of the employer and an obligation was created upon the employee to reimburse for any benefit received. For both these reasons, that the insurer set off this payment received by the employee was indeed proper.

"The problem arises, however, with the Murphy court's misapplication of the Ullman holding. Murphy dealt not with workers' compensation, but rather payment of medical benefits under the injured employee's pension. Yet, relying solely on Ullman, the Murphy court declared that there was no difference between these two situations and, thus, that the phrase 'or other similar law' as found in the setoff provision of the insurance policy encompassed the medical payments made pursuant to the injured employee's pension.

"As will be demonstrated below, the same unique characteristic of obligatory reimbursement which accompanies a payment made pursuant to workers' compensation is simply not present when dealing with a payment made pursuant to an employee's pension; contrary to Murphy's reasoning, these payments are inherently distinguishable.

"Based on a thorough review of our statutes and case law discussing workers' compensation and pension payments, we hold that the important distinction between these concepts is one that we can no longer ignore as the Murphy court did.

"While our Supreme and Appellate courts have enforced an employer's lien upon an employee's receipt of workers' compensation, these courts have simultaneously and consistently rendered special protection for employees receiving (or scheduled to receive) payments pursuant to their pensions.

"In fact, in reviewing the debates which surrounded the creation of the Illinois Pension Code, our Supreme Court declared that it believes a 'general intent' exists to protect the pension benefits of public employees. From this, our courts have time and again made clear that any reduction, diminution or impairment of pension benefits violates an enforceable contractual relationship between an employee and his employer, impinges upon the employee's constitutional protections, and will not be tolerated.

"This is in stark contrast to our courts' treatment of workers' compensation, which consistently imposes the inherent nature of obligatory reimbursement upon the employee.

"It is only proper that the difference between workers' compensation and pension payments be here and now labeled a distinction with import, and that we conclude once and for all that pension payments are incapable of being classified within an uninsured motorist setoff provision calling for a reduction in coverage of sums paid or payable to the injured under workers' compensation, disability benefits or other similar law.
"Jurisdictions across the country have already arrived at this conclusion without hesitation.

"In addition to this, we find further support for our decision among several strong public policy arguments relevant to the facts of the instant case.

"In sum, we find that State Farm cannot set off from its policy liability the medical payments made by the City of Chicago as part of Scott's pension upon his death.

"Because State Farm did not explicitly include mention of such payments in the setoff provision of paragraph 2 of the uninsured motorist clause, and because we find the phrase 'workers' compensation, disability benefits, or similar law' contained therein does not encompass these payments, we hold that State Farm was not entitled to judgment on the pleadings and is instead liable to Teresa for the full amount of the uninsured motorist coverage as stated in the automobile policy."

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