Arizona Supreme Court Holds That An Insurer May Not Reduce Underinsured Motorist Coverage Based on the Insured’s Receipt of Workers’ Compensation Benefits.

Jean Cundiff, a Pima County Deputy Sheriff, was struck in her patrol car by another vehicle during the course of her employment. Cundiff sued the driver of the other vehicle and settled for the driver’s policy limit, $15,000. Cundiff then made an Underinsured Motorist (“UIM”) claim under her personal motor vehicle liability insurance policy which had a limit of $25,0000. An arbitrator determined Cundiff’s damages totaled $40,000, and neither side appealed.

Meanwhile, the State Compensation Fund provided Ms. Cundiff with approximately $30,000 in workers’ compensation benefits. Based on an offset provision in her policy, State Farm sought to reduce the UIM benefits it paid to Ms. Cundiff by the amount of her worker compensation benefits. Cundiff filed suit claiming, inter alia that the offset provision was unenforceable per se because it violates the Uninsured Motorist Act (“UMA”) as well as the common law collateral source rule. The trial court held that the offset provision was enforceable, and Ms. Cundiff appealed. The Court of Appeals affirmed the trial court, and Ms. Cundiff timely filed a petition for review.

The Supreme Court vacated the Court of Appeals opinion and reversed the trial court’s judgment. Justice McGregor, writing for a unanimous court, held that the language of the UMA is clear and unambiguous in defining the scope of underinsured motorist coverage to be provided by insurers as the difference between one’s total damages for bodily injury or death and the total limits of applicable liability insurance policies. Under the statute, only the “total applicable liability limits” may be deducted from UIM benefits. Worker’s compensation, while a form of casualty insurance is not a form of liability insurance, and thus cannot be considered in determining the amount of UIM coverage available to an insured. Because it held the setoff provision unenforceable per se, the Court declined to reach the issue of the application of the collateral source rule. The Court also declined State Farm’s invitation to apply its decision prospectively only.

Chief Justice McGregor authored the unanimous opinion.