Mahler v. Szucs: an Impediment to Interinsurer Arbitration and Affordable Personal Injury Protection Coverage

• Publication year: 1999
• Citation: Vol. 23 No. 04

SEATTLE UNIVERSITY LAW REVIEWVolume 23, No. 1SUMMER 1999

NOTE

Mahler v. Szucs: An Impediment to Interinsurer Arbitration and Affordable Personal Injury Protection Coverage

John R. Nicholson(fn*)

I. Introduction

Insured drivers who are never in accidents frequently complain that they will see little, if any, of the money they pay in premiums. Truly, most people who are insured under all types of policies will pay a substantially greater amount than they will ever recover. In light of the common idea that insurance companies are bottomless money pits, into which insureds eternally pay their hard-earned dollars with no pay-off, premium-payers find it easy to rationalize abuses of the institution of insurance. Indeed, little sympathy is felt for the faceless insurance company when an individual succeeds in getting a piece of the pie. This mindset, however, is nothing but pervasive self-deception. On an aggregate level, tolerating such abuses only cheats the ultimate foundation of the insurance industry: its premium-paying insureds.

Insurance is our way of dealing with risk, uncertainty, and factors that are beyond our control.(fn1) This observation is especially evident in the realm of auto accident insurance. A driver can exercise extreme caution and care in driving on the roadways and still find herself the victim of a serious accident for reasons beyond her control, such as the negligence of other drivers or unforeseeable weather conditions. Hence, because drivers and other insureds cannot effectively eliminate the probability of loss, they limit the possible economic effects of loss at a cost to everyone through insurance, simultaneously gaining the contentment of peace of mind.

A. The Transactional Costs of Loss Recovery from Insurers

While it is true that most policyholders pay more in insurance premiums than they will ever recover from an insurer, those who do recover often recover much more than they will ever pay. Thus, in this system of risk management, the majority of policyholders subsidizes both the cost of the actual loss incurred by the minority of policyholders and the transactional costs associated with the minority recovering that loss. To the extent that either of these costs can be reduced, the majority will benefit by having to subsidize a reduced amount of other people's losses, resulting in lower average premiums. Again, the cost of the actual loss is beyond anyone's control. The transactional costs, however, such as the cost of recovering subrogated interests(fn2) amongst insurance companies themselves, are within the control of insurance companies to some extent, and their efforts to reduce those transactional costs are worthwhile.

B. A Factual Scenario

As an illustration of the desirability of reducing transactional costs in insurance, consider the hypothetical case of Ms. Hurt, who is injured in an automobile collision by Mr. Liable, a tortfeasor insured under an auto liability policy.(fn3) As a result of the accident, Ms. Hurt incurs significant medical expenses that require immediate payment, and she is able to pay for those expenses through her own Personal Injury Protection (PIP) insurance policy(fn4) with ABC Insurance Company. A portion of Ms. Hurt's PIP policy reads as follows:d. If the insured recovers from the party at fault and we share in the recovery, we will pay our share of the legal expenses. Our share is that percent of the legal expenses that the amount we recover bears to the total recovery.

This does not apply to any amounts recovered or recoverable by us from any other insurer under any interinsurer arbitration agreement.(fn5)

The PIP policy will cover Ms. Hurt's medical expenses and temporarily compensate her for any loss in wages if she is forced to stop working, but it will not compensate her for any pain and suffering she experiences. Therefore, Ms. Hurt hires her own attorney, who will be compensated by way of a contingent fee agreement under which he is paid one third of the entire recovery. Ms. Hurt hopes to recover general damages(fn6) from Mr. Liable under his liability insurance policy with XYZ Insurance Company, which is a signatory to an interinsurer arbitration agreement with ABC.

Ms. Hurt's attorney notifies ABC Insurance that he is representing Ms. Hurt and acknowledges that ABC has a right to be reimbursed for the PIP payments it has made. However, ABC responds that it intends to recover those payments through the interinsurer arbitration agreement between it and XYZ, which is referenced in the policy above. ABC thus advises Ms. Hurt's attorney to do nothing to recover its PIP payment interest. Ms. Hurt's attorney litigates with XYZ and reaches a settlement. However, because Ms. Hurt's attorney has had to document Ms. Hurt's medical expenses in order to prove the existence of her pain and suffering, the settlement he arranges consists of both the medical expenses that have already been paid for by ABC and Ms. Hurt's general damages for pain and suffering. Given the clause noted in the PIP policy held by Ms. Hurt with ABC, should ABC Insurance Company have to pay part of Ms. Hurt's attorney fees in this situation? In Mahler v. Szuchs, the Washington Supreme Court recently decided that it must.(fn7)

This Note will demonstrate that the Mahler court's decision will lead to inefficient results, because it has essentially compelled PIP insurers to accept representation by attorneys who have a conflict of interests, precluding such insurers from selecting the best means of recovering their PIP interests. As a result, the price of insurance premiums inevitably will escalate, while providing plaintiffs' attorneys with a windfall of increased fees for performing no additional work for their clients. The following discussion will show not only that the Mahler court holding is inefficient as a matter of public policy, but also that its analysis ignores a body of Washington case law that suggests the opposite conclusion should have been reached as a matter of legal precedent.

The remainder of this section discusses the specific facts of the two cases that comprise Mahler in its consolidated form. Section II discusses fundamental principles of insurance law and economic efficiency and the manner in which the Washington courts have adopted these principles. Finally, Section III contrasts the implications of Mahler with these principles and with Washington precedent to show that the decision is both inefficient and contrary to the rationales of prior case law.

C. The Facts of the Consolidated Cases of Mahler v. Szuchs and Fisher v. Aldi Tire, Inc.

The Washington Supreme Court recently decided that an insurer must pay reasonable attorney's fees when an insured recovers its PIP interest in a situation like Ms. Hurt's.(fn8) In essence, the court created an entitlement in plaintiffs' attorneys to collect a portion of a PIP insurer's payment interest when they recover such an interest pursuant to a settlement with the liability insurer. The respective plaintiffs, Mahler and Fisher, similar to Ms. Hurt in the above scenario, recovered amounts from liability insurers that they had to hand over to their PIP insurer, which happened to be State Farm Insurance Company in both cases. The language in the State Farm PIP insurance policies held by both Ms. Mahler and Ms. Fisher was identical to that in the scenario above,(fn9) clearly indicating that in the event that it could recover such interests via inter insurer arbitration, it would not have to pay attorney's fees for recovering those interests.

In the first of Mahler's two consolidated cases, Dr. George Szucs injured Elaine Mahler in an automobile collision.(fn10) Ms. Mahler hired her own attorney to seek general damages, similar to Ms. Hurt in the example above.(fn11) After her attorney notified State Farm that he was representing her, State Farm responded that he should "take no action whatsoever in connection with the recovery of State Farm's claim against the adverse party or insurance company."(fn12) However, Mahler's attorney ignored this instruction, electing to collect State Farm's PIP interest along with general damages. Nevertheless, he demanded that State Farm owed him for recovering that interest.(fn13) In response, State Farm declared that it would "not accept having [the attorney's] services unilaterally forced upon [it] for a fee that [it had] not agreed to."(fn14)

Mahler's attorney retained the recovered PIP payments in his trust account and filed a series of motions seeking a declaration that State Farm owed him an attorney's fee credit against that amount.(fn15) Finally, after a mandatory hearing, an arbitrator awarded Mahler's attorney the credit against the PIP payment funds in his trust account.(fn16) State Farm was then granted a trial de novo, and on cross-motions for summary judgment in superior court, Mahler's attorney was awarded a similar offset for recovering State Farm's PIP payment interest.(fn17) The court entered no findings of fact or conclusions of law to support the award.(fn18) Mahler and State Farm then sought direct review to the Washington Supreme Court, and the case was consolidated with Fisher's.(fn19)

Fisher's case involved a truck insured under a liability policy held by Aldi Tire, Inc., which injured Monica Fisher in an automobile collision.(fn20) Fisher likewise hired her...