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An Insurance Contract is Still a Contract

And How That Impacts Voluntary PIP Coverage

November 28, 2017

In two recent opinions, the SC Court of Appeals reminded readers that parties are free to contract as they see fit, as long as the contract provisions at issue are not contrary to public policy or a statutory prohibition. It is sometimes easy to forget those basic rules apply to policies of insurance as well as other contracts, and include an insurer’s right to limit liability and impose restrictions on their responsibilities.

In Erie Insurance Exchange v. Government Employees Insurance Company, et al 2017 WL 5625960 (Filed November 22, 2017)[1] the court provided a series of string citations in resolution of myriad issues addressed in the declaratory judgment action. The case was before the court on GEICO’s appeal from an order finding its policy provided excess liability coverage in an underlying accident. The court took the opportunity to remind that an insurance policy is a contract between the insured and insurer, to be construed according to contract law. Consistent therewith, the court revisited the well-established law that insurers have the right to limit their liability and impose conditions on their obligations as long as they are not in contravention of public policy or a statutory prohibition.

The court had a second opportunity to address the right of parties to freely contract absent a violation of public policy or statutory requirements, specifically as to PIP coverage. Cothran v. State Farm Mutual Automobile Insurance Company, et al 2017 WL 5617124 (Filed November 22, 2017). State Farm issued a policy to Cothran that read, “Any [PIP] Coverage provided by [the Policy] applies as excess over any benefits recovered under any workers’ compensation law or any other similar law.” (Excess Provision). Cothran was involved in an auto accident following which her workers’ compensation carrier paid her medical expenses in full. State Farm paid a portion of the PIP coverage toward Cothran’s lost wages, but denied payment of the remainder of the PIP benefits toward medicals pursuant to the Excess Provision. The circuit court granted Cothrans’ motion for summary judgment and State Farm appealed. The sole issue before the court was whether the Excess Provision violated S. C. Code Ann. §38-77-144.

Based upon a previous opinion of our supreme court, supported by legislative history, State Farm argued and the court agreed that the setoff prohibition in 38-77-144 applies only to prevent tortfeasors from profiting by the amount of PIP benefits paid to a claimant. Because the Excess Provision allowed a setoff only for what was paid under workers’ compensation and did not involve any setoff for tortfeasor liability, it was not prohibited by the subject code section.

Turning to public policy arguments, Cothran argued the public policy at issue was the right of the workers’ compensation carrier to reimbursement of its payments for work-related injuries. Specifically, Cothran argued the workers’ compensation carrier may have an equitable interest in PIP benefits, thus public policy prohibited a setoff of PIP payments that would deprive the workers’ compensation carrier of its lien. The court disagreed. Rather, while acknowledging the freedom to contract is subordinate to public policy, the court reiterated it cannot read provisions into an insurance policy that are not required by law and not included by the parties. Because SC does not require PIP coverage in an automobile policy, it has no public policy concerning such coverage. Our legislature does not require PIP coverage for the public good; therefore, there is no prohibition on the parties’ ability to contractually limit the recovery of PIP benefits to specific situations.

These opinions remind of us of basic legal axioms, while also providing statutory interpretation:

1)  Parties are free to contract and the court cannot read language into an insurance policy to extend coverage not intended by the parties;

2)  Insurers have the right to limit their liability and impose conditions on their obligations if they are not in contravention of public policy of a statutory inhibition;

3)  Despite language included in S.C. Code Ann. §38-77-144 that may appear to prohibit the setoff of PIP benefits, our supreme court determined the legislative intent of the section was to prohibit tortfeasors from reducing their liability by the amount of the PIP benefits; and

 4)  Because S.C. Code § 38-77-144 does not prohibit a setoff for PIP benefits and because PIP coverage is not mandated under an automobile policy, there is no public policy prohibiting parties from contracting for a reduction in PIP benefits when the insured received benefits from another source, such as workers’ compensation coverage.

[1] This is an unpublished opinion. It should not be relied on as precedent except as provided by Rule 268(d)(2), SCACR.

Cheryl D. Shoun is a trial attorney and certified mediator whose experience includes construction law, insurance defense, personal injury defense, employment litigation and medical malpractice. As a frequent writer, she serves as editor for Nexsen Pruet's TIPS: Torts, Insurance and Products Blog.