District Court Finds Disability Policy’s Subrogation and Reimbursement Provision Did Not Encompass Proceeds from Underinsured Motorists Claim

In Gallen v. Liberty Life Assurance Company of Boston & Lincoln National Life Insurance Company, No. 8:22-CV-02031-WLH-JDE, 2024 WL 4751576 (C.D. Cal. Nov. 12, 2024), California Central District Judge Wesley L. Hsu granted judgment for Plaintiff finding that the Long-Term Disability (LTD) Policy terms did not permit Lincoln to assert a lien over proceeds from Plaintiff’s uninsured motorists claim relevant to the accident which caused her disability, and Lincoln could not reduce Plaintiff’s LTD benefits by a correlating amount.

Plaintiff, a former attorney at Ernst & Young US LLP, was involved in a serious automobile accident, leaving her unable to work due to a traumatic brain injury. Plaintiff made a claim for benefits under her employer-offered group LTD policy issued by Defendant Lincoln. Lincoln approved Plaintiff’s claim and began paying LTD benefits.

When Lincoln learned that Plaintiff had been pursuing litigation relevant to the automobile accident, it informed Plaintiff that it intended to assert on a lien on any settlement proceeds, citing the Policy’s “Subrogation and Reimbursement” provision requiring that insureds reimburse Lincoln for benefits they receive “to the extent they are losses for which compensation is paid to the Covered Person by or on behalf of the person at fault[.]” In the alternative, it allows Lincoln to secure a lien on such compensation. Indeed, Lincoln did assert a lien on the proceeds of Plaintiff’s personal injury settlement.

In a subsequent conversation, Plaintiff’s counsel indicated to Lincoln that Plaintiff would also be filing a claim to her own insurer, Progressive, for underinsured motorist (UIM) benefits, as her losses exceeded the settlement with the culpable party. Counsel communicated that Plaintiff did not believe such benefits were subject to reimbursement, nor was Lincoln entitled to a lien on this recovery pursuant to the provision. Lincoln disagreed. Plaintiff’s counsel responded that Lincoln’s position constituted an adverse benefit determination and requested the controlling policy language and interpretation in writing. Lincoln declined, stating that there was no adverse benefit determination and that it had a “fully valid lien.” Considering her appeals exhausted, Plaintiff brought the present action, seeking (1) payment of benefits, unreduced by any amounts Plaintiff has received or will receive as a result of her UIM claims, and (2) an order declaring that any sums she receives as a consequence of her UIM claims are not subject to a lien or recovery by Lincoln.

According to the Court, the determinative question was whether UIM benefits are made “on behalf of” the third party responsible for the accident, such that they would be subject to the Policy’s Subrogation and Reimbursement provision. Lincoln argued that UIM benefits were no different than payments recovered directly from the tortfeasor and should be subject to the provision.

Applying a common sense interpretation of the plain language of the Policy, the Court first looked at the dictionary definition of “on behalf of”, as meaning “in the interest of” or “as a representative of”, and reasoned that insurance companies providing UIM coverage to their insureds are not acting “in the interest of” or “as a representative of” the tortfeasor, nor are insurance companies acting “in the place of” the tortfeasor.” In fact, they have no relationship whatsoever with the underinsured motorist whatsoever. The Court noted, at best, the phrase “on behalf of” was ambiguous, and ambiguity must be construed in favor of the Plaintiff. After factually distinguishing the cases cited by Lincoln, the Court found, absent clearer language, it was unable to conclude that the provision as written encompassed UIM benefits.

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