New York Court of Appeals Rules that Co-Occupants of Car May Not Reduce the Liability Limits of Offending Vehicle By Payments to Other Co-Occupants to Trigger SUM Coverage

SUM – TRIGGER – INSURANCE LAW § 3420(F)(2)(A) – REGULATION 35-D
Matter of Allstate Ins. Co. v. Rivera
(Ct. Apps., decided 6/4/2009)

New York Insurance Law § 3420(f)(2)(A) provides:

Any [automobile insurance] policy shall, at the option of the insured, also provide supplementary uninsured/underinsured motorists [SUM] insurance for bodily injury, in an amount up to the bodily injury liability insurance limits of coverage provided under such policy . . . [SUM] insurance shall provide coverage . . . if the limits of liability under all . . . insurance policies of another motor vehicle liable for damages are in a lesser amount than the bodily injury liability insurance limits of coverage provided by such policy. . . . As a condition precedent to the obligation of the insurer to pay under the [SUM] insurance coverage, the limits of liability of all bodily injury liability bonds or insurance policies applicable at the time of the accident shall be exhausted by payment of judgments or settlements.

In this case, the Court of Appeals reviewed appeals regarding two losses and sets of SUM claims:

Mercado (Allstate) with $25,000/$50,000 BI & SUM coverages -- Driver and 5 passengers injured by
Rodriguez (GMAC) with $25,000/$50,000 BI coverage
GMAC paid $25,000 to Mercado and $5,000 to each of 5 passengers.
Five passengers sought SUM coverage from Allstate.
Allstate denied SUM coverage to all passengers based on lack of trigger.

Nunez (Clarendon) with $25,000/$50,000 BI & SUM coverages -- Driver, wife and 2 children injured by
Tortfeasor (Progressive) with $25,000/$50,000 BI coverage
Progressive paid $15,000, $15,000, $15,000 and $5,000 to the four claimants.
Four claimants sought SUM coverage from Clarendon.
Clarendon denied SUM coverage to all claimants based on lack of trigger.

The claimants argued that since each of their recoveries was less than $25,000, SUM coverage was triggered.  In so arguing, they relied on New York Insurance Regulation 35-D, which states that a vehicle is underinsured for purposes of triggering SUM coverage where:

... a motor vehicle ... results in bodily injury to an insured, and for which ....  (3) there is bodily injury liability insurance coverage ... applicable to such motor vehicle at the time of the accident, but ... (ii) the amount of such insurance coverage ... has been reduced, by payments to other persons injured in the accident, to an amount less than the third-party bodily injury liability of this policy (see 11 NYCRR § 60-2.3 [f] [I] [c] [3] [ii]). 

The SUM claimants demanded arbitration, and Allstate and Clarendon each commenced a CPLR article 75 proceeding for a permanent stay of arbitration.  In both cases, the SUM claimants argued that SUM coverage was triggered under Insurance Department regulation 11 NYCRR § 60-2.3 (f) (the prescribed New York supplementary uninsured/underinsured motorists coverage endorsement).  The Appellate Division ruled for petitioner insurers and permanently stayed arbitration in both cases. The Court of Appeals granted the SUM claimants in Matter of Allstate and Matter of Clarendon leave to appeal, and in a 5-2 decision, AFFIRMED in both cases.

In an opinion written by Judge Jones, the majority reasoned that since they were all "insureds" for SUM coverage purposes, co-occupants of a single vehicle were not "other persons" within the meaning of § 60-2.3(f)(I)(c)(3)(ii):

Each co-occupant in the covered vehicles contends that he or she should be allowed to deduct the payments made to other co-occupants, thereby reducing the tortfeasor's bodily injury liability coverage to an amount less than the coverage limits on their vehicle, triggering SUM coverage. The SUM claimants therefore argue that co-occupants constitute "other persons" under the endorsement, even though co-occupants are insureds under the policy. We are unpersuaded. 

The "payments to other persons" that may be deducted from the tortfeasor's coverage limits for purposes of rendering the tortfeasor "uninsured" under a SUM endorsement do not encompass payments made to anyone who is an insured under the endorsement. It is important to note that the phrase "other persons" is used elsewhere in the endorsement to denote persons other than those insured under the policy. The Notice and Proof of Claim condition directs that "the insured or other person making claim" shall give written notice of claim "under this SUM coverage" (11 NYCRR § 60-2.3 [f] [III] [Condition 2]). It is evident that, in the phrase "the insured or other person," the reference to "other person" means someone who is not "the insured." As each claimant here falls within the endorsement's definition of an "insured," which encompasses all passengers in the covered vehicle, claimants are not "other person[s]." Insureds are therefore able to reduce the coverage limits of the tortfeasor's policy only when payments made under the tortfeasor's policy are to individuals — such as occupants of the tortfeasor's vehicle, injured pedestrians or those operating a third vehicle — not covered under the SUM endorsement. This guarantees that those who have purchased SUM coverage will receive the same recovery they have made available to third parties they injure — but no more.

The position of the SUM claimants and the dissent notwithstanding, this is the only construction that is consistent with the plain language of Insurance Law § 3420, the enabling legislation that Regulation 35-D must conform to, and the core principle underlying SUM coverage — that insureds can never use a SUM endorsement to obtain a greater recovery for themselves than is provided under the policy to third parties injured by the insureds (see Raffellini, 9 NY3d at 203-204; Mancuso, 93 NY2d at 492; Szeli, 83 NY2d at 687). To demonstrate this principle, we need only look at what would occur in Matter of Clarendon were we to adopt the claimants' position. The four members of the Nunez family received $50,000 under the tortfeasor's policy and, by each claimant characterizing the other three family members as "other person[s]," the family now seeks to obtain an additional $50,000 under the SUM coverage provided in their own policy, for a total recovery of $100,000. Yet, if the Nunez vehicle was operated negligently, causing an accident that injured four pedestrians, the total recovery those injured parties could obtain under the Clarendon policy would be $50,000, the per accident limit.

Therefore, reading Insurance Law § 3420 (f) (2), our well-settled interpretation of this statute and Regulation 35-D together, we hold that SUM coverage is not available (that is, SUM coverage cannot be triggered) because (1) the bodily injury liability insurance coverage limits provided under the respective tortfeasors' policies were equal to the third-party bodily injury liability limits of the Allstate and Clarendon policies, (2) the payments made to the SUM claimants did not reduce the amount of the bodily injury insurance coverage provided under the tortfeasors' policies to "an amount less than the third-party bodily injury liability limit of [the Allstate and Clarendon policies]" (11 NYCRR § 60-2.3[f][I][c][3][ii]) and (3) allowing such additional coverage would provide an insured/policyholder with more coverage than that provided to an injured third party under his or her policy. 

In her two-judge dissent, Judge Ciparick asserted that Regulation 35-D's plain language, history and the basic purpose of the SUM coverage supported the alternate conclusion that co-occupants could and should be considered "other persons injured in the accident" within the meaning of 60-2.3(f)(I)(c)(3)(ii), entitled to reduce the tortfeasor's bodily injury limits by payments made to another co-occupants in order to trigger SUM coverage.