Special Endorsement in NC Commercial Auto Policy Sinks Employer/Insurer's Subrogation Claim

The North Carolina Supreme Court, in a split decision, reversed an earlier decision by the state's Court of Appeals, and held that because the employer's commercial auto policy contained an endorsement making the policy subject to South Carolina's underinsured motorist (UIM) law — which, unlike the law in North Carolina, bars an employer and/or insurer, without exception, from being reimbursed with UIM proceeds for workers compensation benefits previously paid — an employer's insurer could recover none of the $333,763 it had paid following the death of an employee in a work-related auto accident in South Carolina [Walker v. K&W Cafeterias, 2020 N.C. LEXIS 692 (Aug. 14, 2020)]. That the decedent's widow had filed the workers' compensation death benefits claim in North Carolina was not a controlling factor, held the majority.

Background

On 16 May 2012, Robert Lee Walker (decedent), plaintiff's husband and an employee of defendant K&W Cafeterias (K&W), was involved in a motor vehicle accident with a third-party in Dillon, South Carolina. Decedent died as a result of his injuries. The vehicle that decedent was driving was owned by K&W, a North Carolina corporation headquartered in Winston-Salem, North Carolina.

Prior to the occurrence of the accident in which Mr. Walker died, the vehicle insurance policy applicable here was modified by an endorsement that indicated it would be controlled by South Carolina's UIM law. Decedent's widow filed a workers' compensation claim with the North Carolina Industrial Commission (the Commission) for medical expenses and death benefits resulting from decedent's death. On 7 January 2013, the Commission entered a Consent Opinion and Award ordering the employer and its carrier to pay $333,763 in workers' compensation benefits to the widow.

South Carolina Wrongful Death Action

In 2014, plaintiff, as representative of decedent's estate, filed a new and separate civil action in South Carolina — a wrongful death case seeking damages from the driver of the motor vehicle (the third-party) who was at fault in the accident that resulted in Mr. Walker's death. In 2016, plaintiff and the third-party reached a settlement agreement, according to which plaintiff recovered a total of $962,500 on behalf of decedent's estate. The recovery included: (1) $50,000 in liability benefits from the third-party's insurer; (2) $12,500 in personal UIM proceeds from plaintiff's and decedent's own personal UIM policy; and (3) $900,000 in UIM proceeds from a commercial UIM policy that K&W purchased with its automobile insurance carrier.

Comp Carrier Sought Reimbursement Under Subrogation Law of NC

Liberty Mutual Insurance Co. — the workers' compensation insurance carrier for K&W and co-defendant in this case — filed a request for a hearing with the North Carolina Industrial Commission, seeking repayment of the workers' compensation death benefits it had paid to plaintiff. It claimed a lien under N.C.G.S. § 97-10.2 on the UIM proceeds that the plaintiff had recovered from the South Carolina wrongful death settlement in 2016.

The Deputy Commissioner ultimately concluded that defendants were entitled to subrogation, and ordered that defendants be reimbursed out of the third-party recovery for the $333,763 in workers' compensation benefits that they had paid to Mrs. Walker under the 7 January 2013 Consent Opinion and Award.The Full Commission affirmed, and plaintiff then appealed to the N.C. Court of Appeals, which also affirmed.

Divided Supreme Court Reverses

Initially, the majority of the Supreme Court emphasized that the case at bar was not plaintiff's workers' compensation claim. That claim had been fully resolved in 2013, when death benefits were paid to plaintiff under the North Carolina Act. Instead, the Court was called to review what should happen to more than $900,000 that had been paid to plaintiff in the South Carolina wrongful death settlement with the at-fault driver.

The majority concluded that the South Carolina UIM policy — a contract to which defendants were party and according to which the wrongful death settlement proceeds were paid — controlled the outcome here. That policy required the application of South Carolina law to the payment of UIM proceeds. The majority stressed that under South Carolina UIM law, an insurer is barred, without exception, from seeking to be reimbursed with UIM proceeds for benefits it has previously paid [see S.C. Code § 38-77-160]. Accordingly, the Court, by its split decision, reversed the decision of the Court of Appeals and remanded to the Commission for proceedings not inconsistent with the majority's opinion.

Choice of Law Issue?

The majority stressed that the case was properly analyzed under contract law interpreting a choice-of-law clause. As the majority based its decision on contractual terms rather than legal principles related to choice of law, the majority said it need not — and did not — go beyond the contract as modified by its endorsement. By the explicit terms of that contract, the UIM proceeds were paid and governed by South Carolina law.

The majority acknowledged the defendants argument that the commercial UIM policy purchased by K&W was not a South Carolina UIM policy. Specifically, they pointed out that the parties stipulated before the Commission that the commercial UIM policy was purchased and entered into in North Carolina.

The Endorsement

The majority said the defendants' argument overlooked the effect of the endorsement that was added to the commercial UIM policy on 7 July 2011, titled "South Carolina Underinsured Motorist Coverage." Specifically, the endorsement stated that it changed the policy. The endorsement also states that it was intended to be "in full conformity with the South Carolina Insurance Laws" and that "[I]f any provision of this endorsement [conflicted] with that law, it is changed to comply with the law." Further, the endorsement stated that "[the insurance carrier] will pay in accordance with the South Carolina Underinsured Motorists Law." The majority said, therefore, the clear intent and effect of the endorsement was to provide for the application of South Carolina law to all UIM payments under the policy.

Dissent

Justice Newby dissented, indicating in relevant part that the case asked whether a plaintiff who seeks benefits under the North Carolina Workers' Compensation Act (the Act) subjects herself to North Carolina's accompanying remedial laws, including those concerning subrogation. The justice stressed that under the General Assembly's carefully crafted statutory scheme, when a plaintiff chose to file for benefits under the Act, the plaintiff also accepted the accompanying provisions regarding subrogation. According to the justice, plaintiff had the option to proceed under either North Carolina or South Carolina's workers' compensation acts. She chose the more generous North Carolina Act. Having availed herself of the benefits under the Act, the justice indicated she was also bound by the terms of North Carolina's remedial laws, including those allowing an employer to subrogate recoveries from third-parties which prevent double recoveries.