3.4 Workers' Compensation Coverage

• Jurisdiction: Arizona

Insurance carriers must provide UM coverage in personal automobile liability policies. However, A.R.S. Sec. 28-4009(C)(4)(a)^[225] (formerly Sec. 28-1170(E)) allows an employer to elect not to provide UM coverage in its business automobile policy if the employer provides workers' compensation insurance benefits to its employees.^[226] Historically, the Arizona courts have suggested that insurance companies may limit UM coverage in commercial policies through the use of policy offsets because, in that context, the coverage is non-mandatory.^[227] Under those circumstances, the courts reasoned, traditional rules of construction apply to determine whether a particular offset clause should be enforced or rejected depending upon the wording of the offset and whether the offset is ambiguous. However, offset clauses that reduced mandatory UM coverage by the amount collected from workers' compensation benefits were found to be against public policy and unenforceable where they appeared in the employee's personal automobile policy.^[228]

The mandatory/non-mandatory coverage distinction was abandoned by the Arizona Supreme Court in Schultz v. Farmers Insurance Group.^[229] In Terry v. Auto-Owners Insurance Co.,^[230] the court applied the holding in Schultz to workers' compensation coverage offsets. Previously, the Arizona courts had held in Allied Mutual Insurance Co. v. Larriva^[231] and State Farm Mutual Automobile Insurance Co. v. Karasek,^[232] that workers' compensation offsets in personal automobile policies were void and unenforceable. The court in Terry rejected Larriva, and Karasek, and followed Schultz. In so doing, the court stated:

Terry asserts that because the offset provision in the policy involved in her case deals with workers' compensation payments rather than medical payments coverage, her situation is controlled by Larriva and Karasek rather than Schultz. We believe, however, that the most important element for our consideration is whether applying the non-duplication provision, whatever its form, denies full recovery for the insured's loss. As to this element, Terry's case is more like the facts in Schultz than in Larriva and Karasek because there is no dispute between the parties that enforcement of the offset provision would not deprive Terry of full recovery for her damages.

Nothing in Schultz limits its holding to non-duplication clauses that apply to payments under coverages in the same policy. Instead, the court used broad language to indicate that the ultimate test of a policy provision that aims to prevent double recovery is whether application of the provision denies the insured full recovery for the loss sustained. If enforcement of the provision does not interfere with full recovery, the provision is enforceable.^[233]

An interesting question arises when the employer fails to provide workers' compensation benefits to its employees, and whether the failure to procure workers' compensation coverage invalidates the offset provisions of the employer's business auto policy. This issue was considered by the court in Scottsdale Insurance Co. v. Monares.^[234] In Monares, the employer, Wilcoxin, hired Monares as an employee. Wilcoxin failed to purchase workers' compensation insurance. He did, however, purchase an automobile business liability policy. The policy contained the following exclusion:

This insurance does not apply to:

* * *

2. Any obligation for which the insured or his or her insurer may be held liable under any Workers Compensation or Disability Benefits Law or under any similar law.

3. Any obligation of the insured to indemnify another for damages resulting from bodily injury to the insured employee.

4. Bodily injury to any fellow employee of the insured arising out of and in the course of his or her employment.

5. Bodily injury to any employee of the insured arising out of and in the course of his or her employment by the insured. However, this exclusion does not apply to bodily injury to domestic employees not entitled to Workers Compensation benefits.^[235]

The issue before the court in Monares was whether the workers' compensation exclusion was voided by the employer's failure to purchase workers' compensation insurance. The insurance carrier argued that the employee was theoretically eligible for workers' compensation coverage under Arizona's "special fund" set forth in A.R.S. Sec. 23-907(B),^[236] and that if such coverage is "available" to the employee, there is no public policy violation. The court found this argument to be misplaced because the employee had filed a civil suit against the employer foreclosing his right to pursue workers' compensation benefits through the special fund.^[237] By the terms of A.R.S. Sec. 23-907(B), once an employee chooses to bring a civil suit against an employer, that employee is precluded from resorting to the "special fund." A.R.S. Sec. 23-1024(B) further emphasizes that "an employee . . . who exercises an option to institute a proceeding in court against his employer waives any right to compensation." Thus, the employee did not have available to him workers' compensation benefits and, therefore, the court held that the exclusion was invalid.^[238] The court reasoned that the special fund statute offers an injured employee whose employer failed to secure workers' compensation insurance a choice of pursuing a remedy under the special fund or a civil suit against the employer.^[239] If the insurance carrier's proposed interpretation of the workers' compensation exclusion was adopted by the court, it would effectively take away the employee's statutory choice.^[240] In order to have his injuries covered by insurance as the Financial Responsibility Act demands, the employee would be forced to resort to A.R.S. Sec. 23-907, the special fund.^[241]

The workers' compensation carrier does not have a lien on the...