State Farm Mutual Automobile Insurance v. Nalbone

569 A.2d 71, 1989 Del. LEXIS 472

• Court: Supreme Court of Delaware
• Decided: December 28, 1989
• Status: Published

Opinions

WALSH, Justice,

for the majority.

This appeal arises out of a declaratory judgment action filed in the Superior Court by State Farm Mutual Automobile Insurance Company (“State Farm”) to determine its obligation to pay no-fault benefits to its insured, Brenda Nalbone (“Nalbone”), pursuant to 21 Del.C. § 2118. We have accepted certification of the following question: is an injured person entitled to be compensated for net wages lost while she is unable to be actively employed, even though she has received or is receiving reimbursement for such losses pursuant to a wage continuation or disability plan. We conclude that such recovery is not authorized where it appears that the receipt of such employment benefits creates no detriment or loss of entitlement to reimbursement of future losses.

I

The parties have stipulated to the following facts. Nalbone was injured in an automobile accident on November 15, 1986, at which time she was insured under a State Farm policy that extended personal injury protection (“PIP”) benefits pursuant to 21 Del.C. § 2118. State Farm concedes that, as a result of the accident, Nalbone is entitled to PIP benefits under its policy. Nalbone has asserted a claim for loss of net income pursuant to 21 Del. C. § 2118(a)(2)a.2.¹ Nalbone’s employer has a wage continuation plan that provides for the payment of part or all of her lost wages. State Farm has paid Nalbone the difference between her normal net weekly earnings and the amount paid by her employer under its wage continuation plan. Nalbone is not required to contribute to her employer’s wage continuation plan and her benefits are not accrued; that is, if unused, they cannot be converted into vacation time or cash. Benefits provided to Nalbone are in the form of sick pay. Her employer does not have a right of subrogation.

Nalbone seeks to recover from State Farm, as PIP benefits, the entire amount of her net lost wages without reduction for the wage loss compensation received from her employer. State Farm denies any obligation under 21 Del.C. § 2118 to pay as net lost earnings those amounts that Nalbone has received pursuant to her employer’s wage continuation plan.

II

The question before us is essentially one of statutory interpretation since State Farm, like all insurers operating in this State, is required to issue policies that extend PIP benefits coextensively with the requirements of 21 Del.C. § 2118. A policy provision or coverage interpretation that does not meet the minimum requirements of the statute will not receive judicial recognition. Bass v. Horizon Assurance Co., Del.Supr., 562 A.2d 1194 (1989); Frank v. Horizon Assurance Co., Del.Supr., 553 A.2d 1199 (1989). Unfortunately, recourse to the statute itself provides little insight into the legislative purpose concerning the certified question. While the language of section 2118(a)(2)a.2. mandates compensation for the net amount of lost earnings, no guidance is offered as to when earnings may be deemed “lost”.² We thus approach the question from the standpoint of the primary policy considerations underlying the Delaware No-Fault Statute, i.e., is the goal of section 2118, the protection and compensation of persons injured in automobile accidents, advanced by requiring payment for losses already compensated through other sources?

The parties have argued their respective positions in terms of application of the collateral source rule. Nalbone contends that the collateral source rule should be extended to permit recovery for her lost earnings irrespective of whether those losses have been compensated by a third party, her employer. To the contrary, State Farm argues that the collateral source rule finds application only in claims asserted against tortfeasors and their insurance carriers and is irrelevant to insurance claims in which fault is not a consideration.

The collateral source rule was first recognized in Delaware in Yarrington v. Thornburg, Del.Supr., 205 A.2d 1 (1964). The rule finds classic application in an action brought by an injured party against a tortfeasor. Although in Yarrington this Court ruled that the medical payments received by the plaintiff could be set off against claimed damages because the source of the disputed payments was the tortfeasor’s insurance carrier, the collateral source rule was approved in the following language:

The collateral source doctrine is predicated upon the theory that a tortfeasor has no interest in, and therefore no right to benefit from, monies received by the injured person from sources unconnected with the defendant. The doctrine, however, does permit the tortfeasor to obtain the advantage of payments made by himself or from a fund created by him; in such an instance the payments come, not from a collateral source, but from the defendant himself.

205 A.2d at 2.

The rationale for the collateral source rule appears to emphasize the deterrent and quasi-punitive functions of tort law. It is considered better that the innocent plaintiff receive a windfall than that the wrongdoing defendant bear less than the full cost of his negligent conduct. Some commentators have argued that even this “pure” application of the collateral source rule is inappropriate in an age when the rationale of the tort law is, or should be, focused more on risk-spreading and providing adequate compensation at the lowest cost. See, e.g., Fleming, The Collateral Source Rule and Loss Allocation in Tort Law, 54 Cal.L.Rev. 1478 (1966); Harper, James & Gray, The Law of Torts §§ 25.19-.23 (2d ed. 1986 & Supp.1989); P. Huber, Liability: The Legal Revolution and Its Consequences 193 (1988). Several states have enacted legislation that limits the extent of double recovery or windfall results. For example, New Jersey law does not permit an insured to recover PIP benefits that duplicate certain other disability payments. See Smith v. Allstate Ins. Co., N.J.Super.Ct. Law Div., 203 N.J.Super. 610, 497 A.2d 602, 605 (1985); Puzio v. New Jersey Mfrs. Ins. Co., Passaic County Ct., 165 N.J.Super. 585, 398 A.2d 934 (1977). Similarly, New York, by statute, has precluded double recovery of lost earnings through receipt of social security disability benefits and PIP benefits. See Ardolino v. City of New York, App.Div., 94 A.D.2d 780, 463 N.Y.S.2d 26 (1983). Although State Farm relies upon these decisions as supportive of the policy argument against double recovery, their force is limited because they represent the implementation of clear legislative restrictions against duplication of PIP benefits.

Delaware has not enacted a direct statutory modification of the collateral source rule. The no-fault statute, 21 Del.C. § 2118(g), limits the collateral source rule by precluding an insured from suing a tort-feasor for damages for which compensation is available under the statute. Somewhat cryptically, the statute limits recovery against the tortfeasor “whether or not ... [the no-fault] benefits are actually recoverable.” State Farm contends that this language precludes Nalbone’s claim for PIP benefits. Under State Farm’s argument, Nalbone is entitled to receive lost wage benefits from her employer; therefore, the benefits of her no-fault policy are “available” but not “actually recoverable.” The absence of a legislative history or prior judicial construction renders this argument inconclusive but the reasoning seems at least plausible. One of the policies underlying the no-fault statute is the provision of quick and adequate compensation, but this policy is not compromised by State Farm’s interpretation of the statutory language. It is difficult to imagine a situation in which the insured would be precluded from recovering damages from a collateral source, his no-fault insurer, and the tort-feasor. Therefore, the language suggests that to the extent that payments are received from a collateral source, the insured may not recover from the insurer or the tortfeasor.

State Farm also argues that permitting double recovery of PIP benefits will inevitably result in increased insurance costs as insurance carriers seek to recoup such payments through higher rates. While this argument has theoretical appeal, the empirical proof is lacking in this case. State Farm has pointed to no study or data that demonstrates an adverse premium effect in jurisdictions that have extended the collateral source rule indiscriminately to permit duplicate payment of PIP benefits. On the one hand, it is possible that if no-fault insurers are not required to provide compensation for wages not actually lost, the gross amount of losses that insurance companies may expect to bear will decrease and the premiums required to support such losses will be lower. It could thus be argued that limiting the collateral source rule will further the no-fault policy of minimizing rates. To accept this conclusion one would have to indulge the belief, perhaps naively, that insurance carriers will always pass on reduced underwriting costs to policy holders. In the absence of supporting empirical data, we can make no such judgment on this record and thus do not find this argument persuasive.

Three decisions applying Delaware law have spoken to the interaction between no-fault insurance and the collateral source rule. In Dickerson v. Continental Casualty Co., Del.Super., C.A. No. 82C-MR-8, Poppiti, J. (Sept. 1, 1983), the court held that no-fault benefits should not be reduced by the value of payments received through an independently purchased health insurance policy. In Freeman v. Allstate Insurance Co., Del.Super., C.A. No. 42-1973, Balick, J. (Nov. 19,1973), on the other hand, it was ruled that a no-fault insurer is not required to duplicate lost wages paid through normal sick leave benefits. The rationale for this holding was that preventing such double recoveries will help to keep insurance premiums lower. Finally, in Willis v. Continental Casualty Co., D.Del., 649 F.Supp. 707 (1986), the District Court squarely confronted the issue raised by the certification in this case and attempted to predict what this Court would decide. The Willis court held that the collateral source rule allows an insured to recover “lost” wages from his no-fault insurer, even though his employer had already made him whole. The court reasoned that the no-fault insurer’s subrogation rights would allow it to shift the cost of the excess benefit to the tortfeasor (or the tortfeasor’s insurance company). Thus, the ultimate result would be the same as if the injured party sued the tortfeasor directly and the collateral source rule were applied.

Willis ultimately relied upon one of the several competing policies that we confront here. Willis saw the goal of no-fault insurance, and of tort law in general, as the quick and full compensation of injured parties. In pursuit of this policy, the court in Willis allowed an injured party to seek recovery from as many sources as possible and then relied upon subrogation to allocate the loss fairly among the involved parties. Moreover, since, in the usual case, subrogation will eventually place the loss upon the tortfeasor, the Willis court also sought to serve the policy of deterring negligent conduct by making tortfeasors bear the full cost of their acts.

Extensions of the collateral source rule, as sanctioned by Willis, may produce unusual results. The Willis court justified the prospect of the insured’s double recovery by rationalizing that “[i]n the normal course [no-fault] insurers will pay the insured, and then pursue the subrogated claims against tortfeasors and their insurers.” 649 F.Supp. at 715. There are, however, many situations in which no such recourse exists. For example, if the insured is involved in a one-car accident, or in a multiple vehicle accident for which the insured is solely at fault, there is no tort-feasor against whom subrogated PIP benefits may be asserted. Similarly, if the insured is blameless but the tortfeasor is uninsured, or if the tortfeasor is underin-sured and other claims exhaust the limits of coverage, the insured would recover duplicate lost earnings but there would be no realistic prospect that the no-fault carrier would achieve subrogation.

Apart from the anomalous results that may flow from Willis’ indiscriminate application of the collateral source rule, we find the policy articulation of Willis unpersuasive. The acknowledged no-fault goal of full and speedy recovery of special damages, i.e., medical expenses and lost earnings, is not advanced by permitting double recovery under the collateral source rule. In most instances, an injured insured covered by sick benefits will promptly receive such benefits through his employer. The PIP carrier will then be expected promptly to pay the difference, if any, as State Farm has done here. Since the claim for duplicate earnings losses occurs, of necessity, after the employee-insured has already received reimbursement through her employer, the no-fault policy of reducing delay in compensation is not impaired.

In our view, the policy goals of no-fault insurance can best be served by application of principles of contract rather than tort law. The collateral source rule, with its emphasis on turning a blind eye to the prospect of double recovery so as not to confer a benefit on a wrongdoer, discourages analysis of the critical inquiry in the area of no-fault insurance: what is the actual loss for which compensation should be quickly expected without regard to fault? The answer to that question focuses not only on actual losses sustained but on the reasonable expectations of the insured. Thus, the extent to which the collateral source rule should be applied to permit double recovery should depend upon the contractual expectations that underlie the collateral source payment. Such an approach encourages examination of the source of the collateral payment rather than indifference to it.

There is no reason why a risk-averse insured should not be permitted to contract for a double recovery. If a person pays both auto and health insurance premiums, he has paid the expected value of loss due to injury in an automobile accident twice. Accordingly, if an injury occurs he should be permitted, as a matter of contract law, to receive a double recovery since that is what he has paid for. Thus, the conditions under which double recovery should be allowed may best be determined by examining the consideration that has been paid. If the insured has paid consideration for recovery from a collateral source, then recovery should be allowed. If the collateral payments are received gratis, then their receipt should bar recovery under the no-fault policy. In the latter instance, the insured has lost nothing, neither wages nor consideration paid to a collateral source for wage compensation. Accordingly, the insured has no loss for which his insurer should provide compensation.

Application of a contractual-consideration rule will permit payment of uncompensated losses through payment of PIP benefits without disturbing the receipt of benefits from a collateral source if the collateral benefits are supported by a specific consideration,³ including the detriment of loss of future availability. Thus, where it can be demonstrated that the use of a wage continuation plan as the primary source of compensation for injury will result in a specific loss to the employee, either through the unavailability of such benefits in the future or the loss of any other employment benefit, the employee is entitled to recover PIP benefits. The sequence in this case clearly indicates that Nalbone received benefits under her employer’s wage continuation plan prior to making a claim for PIP benefits. It is also clear that her receipt of employment benefits will not create a detriment in terms of future availability or entitlement to a cash equivalent. Under such circumstances, it cannot be said that Nalbone suffered any out-of-pocket loss for which she has not received full compensation through a combination of employer benefits and PIP payments.

Nalbone argues, in reliance upon Willis, that since the Delaware no-fault statute does not specifically bar the receipt of duplicate PIP benefits through disallowance of collateral source payments, a court should not fill the legislative void by rejecting the collateral source rule. Recently, however, this Court refused to permit application of the collateral source rule to allow an employee to achieve double recovery of medical expenses in a workmen’s compensation claim. In addressing the absence of specific statutory guidance we noted that “[n]o statutory authority is required to deny recovery for losses which did not, in fact, occur or expenses not, in fact, sustained.” Guy J. Johnson Transp. Co. v. Dunkle, Del.Supr., 541 A.2d 551, 553 (1988). Similarly, recognition of the collateral source rule to permit receipt of PIP benefits for wage losses that did not actually occur in the face of legislative silence on the subject sanctions a windfall for insureds by introducing a fault-based doctrine into a no-fault system of insurance.

We recognize that the question of the amount of detriment or consideration needed to permit collateral recovery may, at times, prove troublesome in other fact situations. There is no need to examine this question in detail to determine whether an injured party has paid a consideration equal to the risk of loss assumed by the collateral source. In our view, any consideration will support recovery, but the nature or existence of the consideration should not be based on speculation. Thus, it is speculative to argue that because an employer voluntarily agrees to provide a wage continuation plan or sick benefits, its employees suffer a detriment in the form of lower wages. The search for consideration in such a case would involve conjecture about the degree of competition in the relevant labor market and the effect of collective bargaining, or lack thereof, on the wage-benefit package achieved.

Although it appears under the stipulation of facts that there is no right of subrogation assertable in this case, we also recognize that if the employer has a right of subrogation, that right cannot be barred by the PIP carrier on the ground that the employee would have no right to double recovery in ordinary circumstances. We hold that the right of subrogation is a contractual matter between the employer and the employee and is subject to the normal legal principles that govern subro-gation. Cf. International Underwriters, Inc. v. Blue Cross & Blue Shield of Del., Inc., Del.Supr., 449 A.2d 197 (1982).

In sum, we conclude that an insured is not entitled to recover PIP benefits as compensation for wage losses not actually sustained because of payments received from a collateral source when those payments are unsupported by actual consideration or detriment. Accordingly, Nalbone may not recover PIP benefits from State Farm to the extent that her wage loss has already been satisfied through her employer’s wage continuation plan.

1 . § 2118. Requirement of insurance for all motor vehicles required to be registered in this State; penalty.

(a) No owner of a motor vehicle registered in this State, other than a self-insurer pursuant to § 2904 of this title, shall operate or authorize any other person to operate such vehicle unless the owner has insurance on such motor vehicle providing the following minimum insurance coverage:

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(2)a. Compensation to injured persons for reasonable and necessary expenses incurred within 2 years from the date of the accident for:

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2. Net amount of lost earnings. Lost earnings shall include net lost earnings of a self-employed person.

2 . There is no dispute that the terms “net earnings” refers to so-called “take home” earnings, i.e., the amount received by an employee after authorized deductions from gross earnings.

3 . The receipt of benefits under a separately purchased sickness or accident policy, as occurred in Dickerson v. Continental Casualty Company, Del.Super., C.A. No. 82C-MR-8 (Sept. 1, 1983), would not be barred under the ruling in this case.