On an Issue of First Impression, Third Department Holds that an Underinsurance Claim is Ripe Only if the Exhaustion of Limits Is of the Adverse Driver's Bodily Injury Insurance

SUM – TRIGGER – EXHAUSTION OF OTHER DRIVER'S POLICY LIMITS
Matter of Kemper Mut. Ins. Co. v. Russell
(3rd Dept., decided 7/1/2010)

If instead of collecting the other driver's full $50,000 in auto liability insurance coverage limits, you collect that amount from the legal malpractice insurer of the law firm that failed to sue your personal injury claim in a timely manner, do you have a supplementary uninsured motorists (SUM) coverage or underinsured claim against your own auto insurer?  In a 4-1 decision, the Third Department, Appellate Division, says no, you do not.

Patricia Russell was injured in a 2000 accident in which the automobile she was driving was rear-ended by another car.  She retained a law firm to bring a personal injury suit and, when the firm failed to timely do so, her ensuing legal malpractice action against the firm settled for $50,000, an amount equal to the full limit of the other driver's automotive liability insurance.  Russell then advised Kemper, her personal auto insurer, that she intended to file a supplementary uninsured/underinsured motorist (SUM) insurance coverage claim.  After she demanded arbitration of that claim, Kemper commenced this proceeding seeking a stay of arbitration.  Supreme Court granted the petition to the extent of temporarily staying arbitration pending a hearing on various issues, and Kemper appealed.

In REVERSING the order appealed from and granting Kemper's petition for a permanent stay of the SUM arbitration, the four-justice majority held:

An insurer is obligated to pay under SUM coverage if the bodily injury liability insurance limits of its insured's policy exceed those of the other policy, subject to the condition that "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" (Insurance Law § 3420 [f] [2] [A]; see Matter of Federal Ins. Co. v Watnick, 80 NY2d 539, 546 [1992]).  The statute, in short, "requires primary insurers to pay every last dollar, and requires [respondent] to accept no less, prior to the initiation of an underinsurance claim" (Matter of Federal Ins. Co. v Watnick, 80 NY2d at 546).  The primary insurer here, however, has paid nothing, as respondent was forced to recover damages in a separate legal malpractice claim.  As the other driver's policy limit was not exhausted by payment, respondent's own SUM coverage does not come into play, and Supreme Court should have granted petitioners' application for a permanent stay. 

In her lone dissent, Justice Garry opined that the majority had misread and misinterpreted this language of New York Insurance Law § 3420(f)(2)(A):

As a condition precedent to the obligation of the insurer to pay under the supplementary uninsured/underinsured motorists 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.  (Emphasis added.)

Justice Garry thought the majority had placed undue emphasis on the modifying phrase "all bodily injury . . . insurance policies" in holding that Russell must obtain the pertinent funds directly from the automobile carrier as a condition precedent to enforcing her contract with her own carrier:

Had the Legislature intended to require exhaustion of the applicable policies as opposed to exhaustion of the limits, this purpose would be met by simply stating that "all bodily injury insurance policies . . . shall be exhausted." This is not what the statute requires; the modifying phrase instead defines the measure of benefits, nothing more, and neither precedent nor public policy supports construing the statutory language as the majority suggests.

* * * * *

Upon this appeal, it is undisputed that respondent obtained the full amount of the "limits of liability" of the tortfeasor's bodily injury policy applicable at the time of the accident, albeit from another carrier. This unusual circumstance apparently presents a matter of first impression and, as Supreme Court correctly noted, no legal precedent establishes that the source of payment, as opposed to the amount of the payment, is a critical factor in the analysis. Instead, as respondent has obtained the full amount of the "limits of liability" of the applicable underlying bodily injury policy, the requisite statutory condition has been met, and the insurer's interests have been fully protected ^[FN2]. Accordingly, I would affirm the determination in full and allow the parties to proceed for determination of the remaining issues.

Although this was a reversal of the Supreme Court's order, with only one rather than two dissents, Russell will need leave of either the Third Department or the Court of Appeals to place what appears to be this issue of first impression before the Court of Appeals for determination.