NC Supreme Court: Hairston v. Harward

By Dan Morton

Hairston v. Harward, N.C. Supreme Court, No. 416A17 Dec. 7, 2018

In Hairston v. Harward, 821 S.E.2d 384 (N.C. 2018), the Court held that an underinsured motorist was not entitled to a credit against a judgment for payments made by the plaintiff’s underinsured motorists carrier.  The case is interesting on many levels, including its discussion of the collateral source rule, what the reasoning in this opinion portends regarding the current Court’s proclivities in coverage disputes and what was not addressed concerning the “500-pound gorilla in the room.”

Hairston was in injured in a collision with a vehicle operated by Harward.  Hairston sued Harward.  Harward was insured by an auto liability policy issued by State Farm with a limit of $100,000 per a person.  Hairston was insured by a policy issued by Erie that provided a UIM limit of $250,000 per a person. Erie agreed with Harward before trial that it would not subrogate against Harward.  The jury returned a verdict awarding Hairston $263,000 in compensation for personal injury.  Harward’s liability carrier had previously advanced $3,000.  Hairston had also received $30,000 from his treating physician in settlement of a medical negligence claim associated with his injuries from the auto accident.  The trial judge applied credits totaling $33,000. State Farm paid its remaining coverage, $97,000, to plaintiff.  Erie paid $145,000 to plaintiff in exchange for a complete release. At issue, whether to credit the defendant for the $145,000 paid by Erie. The trial court held this issue open, pending the Supreme Court’s decision in Wood v. Nunnerly.  In Wood v. Nunnerly, 222 N.C.App. 303, 730 S.E.2d 222 (2012) and 232 N.C.App. 523, 757 S.E.2d 526 (2014), review allowed 367 N.C. 506, 758 S.E.2d 868; disc. review improvidently granted 368 N.C. 30, 771 S.E.2d 762 (2015), the Court of Appeals held that the tort feasor was not entitled to a credit from a judgment against him for amounts paid by the plaintiff’s UIM carrier. The Supreme Court granted discretionary review but on April 10, 2015 determined that discretionary review had been improvidently granted.    Thereafter, the trial  court in the Hairston case determined that Harward was not entitled to a credit for amounts paid by Hairston’s UIM carrier.  The Court of Appeals reversed, finding that the facts in Wood v. Nunnerly were distinguishable because the UIM carrier had not waived subrogation in Wood but the UIM carrier had waived subrogation in connection with Hairston’s claim.  Hairston v. Harwood, 808 S.E.2d 286 (N.C.App.)

Due to a dissenting opinion in the Court of Appeals, the case went to the Supreme Court as a matter of right.  The Court held that Harwood was not entitled to a credit for the money paid by Hairston’s UIM carrier.  Justice Irving, writing for a unanimous panel, explained that a balancing of two competing principles supported the Court’s conclusion.  On the one hand, opinions of the North Carolina appellate courts discourage double recoveries.  On the other hand, the collateral source rule prevents defendants from benefiting from plaintiffs’ decisions to purchase other insurance that protects those plaintiffs.  Allowing a defendant to benefit was more abhorrent to the Court’s calculation of justice than was allowing a plaintiff to receive a windfall.  If someone was going to receive a windfall, better that it be the party that paid for the insurance.  The Court’s discussion of the collateral source rule was notable for the Court’s reiteration that the collateral source rule is substantive as well as evidentiary law.

Is Hairston the final word on the possibility of UIM carriers providing assurances to tort feasors that encourage tort feasors to defend cases that appear to fall within the limits of the liability insurance but carry risk of an excess verdict?  The UIM carrier in Hairston waived any rights of subrogation before verdict was entered and confirmed that waiver in its settlement with Hairston.  Would the outcome have been different if, rather than relinquishing its claim altogether, the UIM carrier agreed with the tort feasor that it would direct that any judgment entered against the tort feasor be marked satisfied (to the extent of the UIM carrier’s interest in that judgment)?    N.C.G.S. §20-279.21(b)(4) provides:  “In the event of payment, the underinsured motorist insurer shall be either (a) entitled to receive by assignment from the claimant any right or (b) subrogated to the claimant’s right regarding any claim the claimant has or had against the owner, operator, or maintainer of the underinsured highway vehicle.”  The standard  North Carolina personal auto policy contains provisions reinforcing this statutory right, as do as to most commercial auto policies.  If the claimant transfers a right of recovery to the UIM carrier, arguably the UIM carrier owns that much of the claim and can direct that  claim, including handling of judgments (to the extent of its interest).  Accepting this argument, if Erie had taken an assignment of claim upon its payment to Hairston, it could have directed  that a satisfaction or partial satisfaction of judgment be noted and no double recovery would have occurred.  In this scenario, one can expect plaintiffs and their attorneys to resist giving an assignment of claim and to argue that the UIM carrier has a claim to proceeds from the judgment but that only the plaintiff owns the judgment and only the plaintiff can direct that it be marked satisfied.  If the UIM carrier discounts its claim, the discount inures solely to the benefit of the plaintiff/claimant.  This argument would deprive UIM carriers of the ability to accept partial payments in satisfaction of their claims, as a satisfaction of judgment would frequently be the quid pro quo for such payments, an outcome that does not seem reasonable.

If the UIM carrier can exert control in such a manner as to direct that the judgment be marked satisfied, or partially satisfied, this does not remove the 500-pound gorilla from the room – under what, if any, circumstances could a UIM carrier enter an arrangement with the tort feasor without violating its duties to its insured?  The plaintiffs in Wood and Hairston contended that agreements or understandings between the UIM carrier and the tort feasor that promote a jury trial, as opposed to capitulation by the liability carrier and subsequent arbitration, violate the UIM carrier’s duties to the insured.  Claimants may argue that UIM carriers that assure tort feasors that the UIM carriers will not pursue the tort feasors put their own interests above those of the insured.  UIM carriers may question to what extent they can reasonably be expected to ignore their own interests and preferences in adversarial proceedings.

A hypothetical:  Defense lawyer evaluates a case as likely to result in a verdict of no negligence or a damages verdict within the policy limits.  However, defense counsel recognizes the possibility that a verdict could exceed the policy limits.  To protect the insured, defense counsel reaches out to counsel for the UIM carrier.  Defense counsel explains that she would like to defend the case but is concerned about the prospect of an excess verdict. The defendant is judgment proof, but an unsatisfied judgment would be problematic.  Counsel for the UIM carrier agrees with defense counsel’s evaluation that the case will likely return a verdict below the limits of the liability coverage.  The UIM carrier does not intend to pursue the judgment proof defendant if an excess verdict is returned.  The UIM carrier would like to provide assurances to defense counsel to avoid a situation where the liability carrier sets a floor on negotiations by tendering limits.  Moreover, the UIM carrier prefers resolution in the North Carolina General Court of Justice to arbitration.  If the UIM carrier, directly or through counsel, provides assurances to the attorney for the tort feasor that the UIM carrier will not pursue subrogation, has the UIM carrier violated a duty of good faith to the insured?  Would it matter whether there was an express agreement or a tacit understanding?  (If the UIM carrier could take an assignment of claim following judgement and mark the judgement satisfied, it seems likely that an express agreement would be required to achieve that end.)  Would it make a difference if the tortfeasor or his liability carrier gave monetary consideration to the UIM carrier for its pledge to mark its share of a potential judgment satisfied? Would it matter whether the arrangement was in a writing shared with the claimant?  There are numerous potential variations to this hypothetical.  There are many arguments pro and con.  With so many lingering questions and the threat of extra contractual claims, it would not be surprising if carriers shy away from potential controversy and leave Hairston as the final word on the legal strategies that likely precipitated Wood and Hairston.