3.3.4 Offsets

• Jurisdiction: Arizona

The primary goal of insurance policy offset provisions is to prevent a double recovery to the insured.^[192] Attempts to reduce statutorily prescribed coverages under the pretext of preventing a double recovery have not been regarded sympathetically by Arizona courts. The skeptical attitude that the courts have taken toward offset clauses is demonstrated by the supreme court in Bacchus v. Farmers Insurance Group Exchange,^[193] where the court observed: "Permitting offsets of any type would allow insurers, by contract, to alter the provisions of the statute [Arizona's Financial Responsibility Act] and to escape all or part of the liability which the Legislature intended they should provide."^[194] Historically, the Arizona courts permitted offset provisions directed toward non-mandatory coverages. For example, the courts held that offset clauses that reduce mandatory uninsured motorist coverage by the amount collected from workers' compensation benefits are valid and enforceable where the offset clause appeared in the employer's business automobile insurance policy.^[195] A.R.S. Sec. 28-4009(C)(4)(a) and (b) (formerly Sec. 28-1170(E)) appear to make uninsured motorist insurance optional coverage in the commercial context. However, the courts found that such offset provisions are void and unenforceable where they appeared in the employee's personal automobile policy.^[196] These statutory provisions are inapplicable to personal automobile insurance and, therefore, any offset that directly or indirectly reduces mandatory UM coverage violates Arizona's Financial Responsibility Act.

However, the mandatory/non-mandatory distinction was abandoned by the Arizona Supreme Court in Schultz v. Farmers Insurance Group.^[197] The current test for enforceability of offset clauses is "whether applying the [offset] denies full recovery for the insured's loss. To the extent applying such an [offset] deprives an insured of full recovery, it is unenforceable."^[198] Both the mandatory/non-mandatory analysis and the Schultz court's abandonment of that analysis are discussed in greater depth at Sec. 3.3.5, infra.

In Caballero v. Farmers Insurance Group,^[199] the court considered an offset-advancement of benefits provision that reduced non-mandatory medical payments coverage by the benefits received from the liability provisions of the policy.^[200] The court held that the offset-advancement of benefits clause was valid and enforceable. The court stated:

No Arizona statute requires the issuance of separate medical expenses insurance, in any amount. The coverage is voluntary, and customarily, as here, provides for the payment of benefits without regard to whose negligence caused the injuries. While offsets attempting to reduce mandatory coverages will not be permitted, there is nothing to prevent the insurer and a person desiring to have medical expenses insurance from employing any provisions with respect to the payment or nonpayment of these benefits which they choose.^[201]

The court refused to "judicially twist the clear meaning"^[202] of the offset-advancement of benefits clause to extend voluntary medical benefits coverage. Such a judicial extension, reasoned the court, "would be to discourage the issuance of this type of insurance" against the public interest.^[203]

The Caballero decision must be read in conjunction with Bacchus. In Bacchus, the court considered a policy offset provision that allowed the carrier to deduct the payments it had made to its insured under the medical payments provisions of the policy from the payments it was obligated to make under the policy's UM...