An injured plaintiff who settled a personal injury lawsuit against the tortfeasor and received payment from the tortfeasor’s insurer under the liability provision of the insurance policy was not precluded from later separately suing the tortfeasor’s insurer based on the insurer’s alleged breach of direct duties owed to the plaintiff under the medical payment provision of the policy. ( Barnes v. Western Heritage Insurance Co. (2013) 217 Cal.App.4th 249)
Facts
In May 2001, 11-year-old Justin Barnes was injured while participating in an after-school recreational program sponsored by the Shingletown Activities Council (the Activities Council). At the time of the incident, the Activities Council was insured under a commercial general liability policy issued by Western Heritage Insurance Company (Western Heritage). The policy contained a liability provision that obligated Western Heritage to indemnify an insured for damages legally owed to third parties because of bodily injury or property damage not otherwise excluded. The policy also contained a medical payments provision that obligated Western Heritage to pay up to $5,000 for medical expenses incurred by a person injured because of the Activities Council’s operations, regardless of fault, provided the medical expenses were incurred and reported to Western Heritage within one year of the date of the accident.
Within 10 days after the incident, Barnes made a claim against the Activities Council, and the Activities Council turned the claim over to Western Heritage. Western Heritage responded by sending a letter stating that the policy provided $5,000 in medical payment coverage to Barnes for his injury. However, Western Heritage never informed Barnes that in order to qualify for medical payment coverage, he had to incur and report a medical expense to Western Heritage within one year of the date of the accident.
In August 2001, Western Heritage paid $1,478 to Barnes’ medical care providers pursuant to the medical payment provision of the policy for medical services Barnes received up through July 2001.
In May 2002, Barnes through his guardian ad litem filed a personal injury action against the Activities Council and various other parties. Barnes sought to recover for both medical expenses and general damages. Pursuant to the liability provision of the policy, Western Heritage retained defense counsel to represent the Activities Council in the personal injury action.
In December 2002, more than a year after the accident, Barnes through his attorney requested coverage under the medical payment provision of the policy for a consultation with a specialist. Western Heritage denied Barnes’ request for additional medical payment benefits, asserting that the policy required expenses to be incurred and reported to Western Heritage within one year of the date of the accident. This was the first notice that Barnes received regarding the one-year deadline in the policy. In 2003, Barnes settled his personal injury action against the Activities Council, which settlement was funded under the liability section of the Western Heritage policy. The settlement agreement released the Activities Council, but did not release Western Heritage.
In September 2007, Barnes turned 18 years old. In July 2009, he sued Western Heritage for breach of contract and bad faith. In his complaint, Barnes alleged that he was a third-party beneficiary of the medical payment provision of the policy; that Western Heritage breached the policy by failing to pay for all of his medical expenses; and that as a result Western Heritage’s conduct, he was unable to seek further medical services and was forced to settle his personal injury action for a lesser sum. The trial court granted summary judgment in favor of Western Heritage, ruling that the settlement in the personal injury action resolved the issue of payments due to Barnes for medical expenses under the policy, and that Barnes could not seek to recover more than once for the same injury. Barnes appealed.
Holding
The Court of Appeal reversed. According to the appellate court, Barnes’ lawsuit against Western Heritage would not lead to an impermissible double recovery. Rather, an insurer’s obligation to pay for medical expenses incurred by the injured party under the medical payment provision of a policy (i.e., no-fault coverage) is separate and distinct from the insurer’s obligation to indemnify its insured under the liability provision of that same policy (i.e., fault-based coverage).
Here, Barnes was suing Western Heritage based on Western Heritage’s alleged breach of duties owed to Barnes under the medical payment section of the policy. The fact that Western Heritage had discharged its duty to indemnify the Activities Council under the liability section of the policy did not mean that Western Heritage had discharged its obligation to pay for medical expenses incurred by Barnes under the medical payment provision of the same policy. As such, Barnes was entitled to proceed with his lawsuit against Western Heritage.
Comment
Medical payment insurance provides first-party coverage on a no-fault basis with relatively low policy limits (e.g., the medical payment limits in general liability policies usually range from $5,000 to $10,000). The coverage is primarily designed to provide an additional source of funds for medical expenses for injured claimants without the burdens of a fault-based payment system. The purpose is to create a fund for the payment of medical services so that the injured party will not necessarily be contemplating how to impose liability upon the insured.
Presumably, the problem in the above case could have been avoided if the release which the injured party (Barnes) executed in the personal injury action had extended to both the insured (the Activities Council) and the insurer (Western Heritage). However, as the appellate court was careful to point out, the release in this particular case only extinguished the injured party’s rights against the insured, and did not extinguish the injured party’s rights to pursue claims against the insurer under the medical payment provision.