Arizona Court of Appeals Division Two Holds That Underinsured Motorist Insurance Coverage Can Be Offset By Injured Driver’s Workers’ Compensation Benefits.

Jean Cundiff was injured in a two-car collision while on duty when her patrol car was struck from behind by Elizabeth Kozma. Cundiff sustained injuries and sought payment from her insurer, State Farm, of the full amount of underinsured motorist coverage (UIM coverage). State Farm contended that the payment from the tortfeasor’s insurer had fully compensated Cundiff and refused to pay any UIM benefits under its policy. Cudiff requested arbitration of her claim and was awarded $40,000 as full compensation for her claim against State Farm. Cundiff then filed an action against State Farm for breach of contract and for a declaratory judgment that she and a putative class were entitled to full benefits of their uninsured and underinsured motorist coverage upon their claims without any offset of workers’ compensation benefits.

After cross-motions for summary judgment, the trial court ruled that the offset provision was enforceable by State Farm as long as it did not interfere with Cundiff’s right to receive full compensation for her loss, upheld the arbitration award, and granted summary judgment to State Farm.

On appeal, Cundiff contended that State Farm’s offset clause violated the uninsured and underinsured motorist coverage statutes, A.R.S. § 20-259.01. On de novo review, the Court of Appeals held that is does not and affirmed the grant of summary judgment in favor of State Farm. The Court cited earlier case law holding that a provision in an insurance policy reducing uninsured motorist coverage by workers’ compensation benefits is invalid and against public policy. See State Farm Mut. Auto. Ins. Co. v. Karasek, 22 Ariz. App. 87, 90 (1974); Allied Mut. Ins. Co. v. Larriva, 19 Ariz. App. 385, 388 (1973). However, the case to which Karasek and Larriva had cited, Bacchus v. Farmer’s Ins. Grp. Exch., 106 Ariz. 280 (1970), had been overruled by the Supreme Court in Shultz v. Farmers Ins. Grp. Of Cos., 167 Ariz. 148, 152 (1991). Therefore, given the Supreme Court’s rejection of Bacchus in Shultz, the Court of Appeals found the underlying reasoning of Larriva and Karasek no longer persuasive. Moreover, the Court noted that a more recent case out of Division One was directly on point, Terry v. Auto-Owners Ins. Co., 184 Ariz. 246, 250 (App. 1995), and chose to follow its reasoning. The Court, therefore, held that an insurer may offset UIM coverage by the insured’s worker’s compensation benefits so long as the insured is not deprived of full recovery.

Judge Brammer wrote the opinion; Chief Judge Pelander and Judge Eckerstrom concurred