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Arizona Court of Appeals Enforces Workers’ Comp Exclusion to MedPay Coverage

The Holding

In Doneson v. Farmers Ins. Exch., 2018 WL 4781382 (Ariz.App. Oct. 3, 2018), an insurance bad faith case, the Arizona Court of Appeals upheld an exclusion precluding MedPay benefits “if workers’ compensation benefits are required,” despite the Insured’s reimbursement of the workers’ compensation insurer.

The Takeaways

  • Arizona is more likely to enforce a MedPay exclusion regarding workers’ compensation benefits, if the exclusion applies when workers’ compensation benefits are “required” rather than “payable.”
  • A proponent of parole evidence must first persuade a court that a contract is reasonably susceptible to the interpretation asserted by the proponent before a court will consider the proffered parole evidence.

The Facts

The Insured was injured in an accident and incurred $22,000 in medical expenses. A workers’ compensation insurer paid some of those medical expenses. The Insured recovered $15,000 from the tortfeasor’s liability insurer. Pursuant to ARS 23-1023(D), the Insured reimbursed the workers compensation insurer $8,750.

The Insured’s policy included $5,000 of MedPay coverage for injuries sustained in an auto accident. The MedPay coverage, however, included an exclusion for “bodily injury” that “[o]ccurred…if workers’ compensation benefits are required.” The Insured submitted a claim for the $5,000 MedPay limits. The Insurer denied the claim pursuant to the exclusion.

The Insured filed suit against the Insurer and asserted claims for breach of contract, declaratory relief, bad faith, and tortious interference with contract. The Insurer filed a motion to dismiss, and the trial court granted the motion to dismiss.

The Rationale

In upholding the Workers’ Compensation Exclusion, the Court of Appeals reasoned as follows:

  • It rejected the Insured’s argument that workers’ compensation benefits are not “required” when an insured reimburses a workers’ compensation insurer.
  • The cases relied upon by the Insured were not persuasive because they considered workers compensation exclusions that applied if workers’ compensation benefits were “payable”—a term other courts found ambiguous.
  • The Workers’ Compensation Exclusion’s use of the word “required” creates an exclusion susceptible to only one reasonable and logical interpretation.
  • The trial court correctly refused to consider the Insured’s parole evidence.
  • “In determining whether to consider parole evidence to interpret a contract, a judge first considers the offered evidence and, if he or she finds that the contract language is reasonably susceptible to the interpretation asserted by its proponent, the evidence is admissible to determine the meaning intended by the parties.” Taylor v. State Farm Mt. Auto. Ins. Co., 175 Ariz. 148, 154 (1993).
  • In Doneson, “the Insured did not prove the Workers Compensation Exclusion was “reasonably susceptible” to the Insured’s interpretation—that worker’s compensation benefits are not “required” when an insurer recovers from a tortfeasor and reimburses a workers compensation insurer.

Read the entire Doneson opinion here.  

This and other posts can be found at our blawg: Arizona Bad Faith Blawg.

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