James v. State Farm Mutual Auto. Ins. Co., 929 N.W.2d 541 (S.D. 2019).
The origins of auto insurance can be traced all the way back to the ancient Chinese when investors took out insurance policies on cargo ships crossing the high seas. This later became known as marine insurance and is still a system used to protect against losses of ships (hull insurance) and their cargo. These meager beginnings of marine insurance were brought by the Lombards to northern Europe and England in the 13th Century. By the 17th Century, London, with the emergence of the Lloyd’s of London Association, had developed into a leading center for marine insurance. Auto insurance is a spin-off of marine insurance, developed after policymakers decided that operating a motor vehicle on public property was a privilege and motorists were required to purchase car insurance to protect innocent third parties against injury or property damage. The first car insurance policy that offered liability coverage was written by an English company in 1895. The first liability car insurance policy written in the U.S. took place in 1898 and was written for Dr. Truman J. Martin.
You would think that with such a long and storied history, the typical auto insurance policy would have evolved to the point of addressing every potential scenario and eliminating any conceivable ambiguity. Who knew that on May 29, 2019, however, the South Dakota Supreme Court would discover—or more appropriately, concoct—a policy ambiguity with the clear intent to thwart legitimate rights of subrogation.
In James v. State Farm Mutual Auto. Ins. Co., State Farm insured both drivers in a rear-end accident and then sought subrogation of $5,000 in Med Pay benefits paid under the plaintiff’s policy. The plaintiff’s policy stated that “if we make payment under this policy and the person or organization to or for whom we make payment recovers or has recovered from another person or organization”, but the policy defined “person” as “a human being” but “organization” was left without a definition. The insured argued that the term “person” was ambiguous because it could also be interpreted to require reimbursement only when the insured recovers from another person or organization, but not another insured by State Farm. The insured contended that, here, there is no other “person or organization”—there is only State Farm. In what this author believes to be a brazen challenge to subrogation, the Supreme Court held that there were two “equally reasonable” interpretations of the reimbursement provision, and because ambiguity is construed most strongly against the insurer and in favor of the insured, the language “another person or organization” in the reimbursement provision did not include State Farm or any of its insureds.
Ignore for the moment that Dictionary.com provides a very straightforward definition of the term “organization.” It is defined as “an organized body of people with a particular purpose, especially a business, society, association, etc.” This would seemingly include an auto insurance company such as State Farm. The court held that State Farm had no contractual right to reimbursement for the $ 5,000 paid to James for medical expenses under the policy. While this was less of an anti-subrogation case and more of an “ambiguous policy language” case, it does address the insurer being on both sides of a subrogation action. South Dakota is one of the few remaining states which has not weighed in on the ability of a subrogated carrier proceeding against a tortfeasor who they also happen to insure under a different risk and a different policy. Known as the “Anti-Subrogation Rule”, it is an equitable rule that prohibits an insurance company from subrogating against its “own insured.” A chart detailing the law in all 50 states on this subject can be found HERE.
If you have any questions on South Dakota subrogation or Med Pay subrogation or the Anti-Subrogation Rule in general, please feel free to contact Gary Wickert at [email protected].