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October 26, 1993


The opinion of the court was delivered by: CHARLES RONALD NORGLE, SR.


 CHARLES R. NORGLE, SR., District Judge:

 Before the court are cross-motions for summary judgment filed by plaintiff Frank Robert Ness ("Ness") and defendants The Chubb Corporation ("Chubb") and Vigilant Insurance Company ("Vigilant"). For the following reasons, Ness' motion for summary judgment is granted and Chubb and Vigilant's joint motion for summary judgment is denied. *fn1"


 On January 7, 1987, Ness was injured in an automobile accident. *fn2" The injuries Ness sustained during the accident rendered him a quadriplegic. At the time of the accident, Ness was riding as a passenger in an underinsured automobile owned and operated by Donald Moseley ("Moseley"). There were no other vehicles involved in the accident.

 Prior to the January 7, 1987 accident, Chubb and Vigilant had issued an insurance policy to the parents of Ness, which included an underinsured motorist provision that provided underinsurance coverage to Ness. *fn3" On July 14, 1988, Chubb and Vigilant paid Ness the sum of $ 750,000, the full limit of the underinsured motorist coverage under the policy. The underinsurance proceeds of $ 750,000 were paid to Ness in "full settlement and final discharge of all claims under the . . . policy for injuries to [Ness] arising out of the ownership or operation of an underinsured automobile by [Moseley] . . . ." Pltf.'s Mot. for Summary Judgment, Exhibit C at 1.

 On January 26, 1989, Ness filed a two-count complaint against defendant Ford Motor Company ("Ford"). The complaint does not name or join Moseley as a party defendant. Ness asserts two product liability claims against Ford for the enhanced injuries caused by the lack of crashworthiness of the Ford manufactured vehicle (the "Ford Litigation"). The Ford Litigation involves matters that are separate and distinct from the ownership and operation of an underinsured motor vehicle operated by Moseley. *fn4"

 On May 19, 1993, over four years into the Ford Litigation, Chubb and Vigilant notified Ness of a lien and an assertion of a subrogation right in Ness' action against Ford. In response to Chubb and Vigilant's assertion of their subrogation right in the Ford Litigation, Ness filed a second amended complaint on June 1, 1993 adding a count against Chubb and Vigilant for a declaratory judgment. Subsequently, the parties filed the instant cross-motions for summary judgment.


 To grant summary judgment "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, [must] show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The nonmoving party must elucidate specific facts demonstrating that there is a genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). A scintilla of evidence will not be adequate to oppose a motion for summary judgment. Brownell v. Figel, 950 F.2d 1285, 1289 (7th Cir. 1991). A dispute about a material fact is "genuine" only if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 In the instant case, the material facts are not in dispute. The parties are in agreement as to the relevant facts. The only disputed matter is whether Chubb and Vigilant's right to subrogation pursuant to the terms of the insurance policy at issue may be asserted in the Ford Litigation. "The construction of the terms of an insurance policy and the effect of the [related] statutory requirements are questions of law appropriate for summary judgment disposition." Banes v. Western States Ins. Co., 247 Ill. App. 3d 480, 616 N.E.2d 1021, 1023, 186 Ill. Dec. 579 (Ill. Ct. App. 1993). *fn5"

 The difficulty in the enforcement of the subrogation clause in the Ness' policy arises because the accident which caused his injuries was allegedly caused by two tortfeasors with varying abilities to compensate Ness for his injuries: Moseley is underinsured and Ford is sufficiently insured. Chubb and Vigilant argue that the sum paid to Ness under the underinsurance provision of the policy may be recouped from any settlement or judgment amount recovered from Ford. Ness responds that Chubb and Vigilant do possess the right of subrogation to the extent of the amount paid to Ness, but such right of subrogation does not extend to settlement proceeds recovered from Ford whose liability is unrelated to the liability of Moseley.

 The rules of contract construction apply when terms of an insurance policy are at issue. Monsalud v. State Farm Mut. Auto. Ins. Co., 210 Ill. App. 3d 102, 568 N.E.2d 969, 971, 154 Ill. Dec. 748 (Ill. Ct. App. 1991). The relevant terms and corresponding provisions, however, are not to be construed in a vacuum; rather, the terms must be read in conjunction with the policyholder's reasonable expectations, the public policy behind the relevant provision, and the intended coverage of the provision. Hoglund v. State Farm Mut. Auto. Ins. Co., 148 Ill. 2d 272, 592 N.E.2d 1031, 1034, 170 Ill. Dec. 351 (Ill. 1992). *fn6" When the relevant policy terms are viewed in this way and a latent ambiguity in the policy emerges, such ambiguity must be construed in favor of the insured. Gibbs v. Madison Mut. Ins. Co., 242 Ill. App. 3d 147, 610 N.E.2d 143, 148, 182 Ill. Dec. 719 (Ill. Ct. App. 1993).

 The public policy behind underinsurance coverage is to bridge the gap between the underinsured driver's liability policy limit and the injured party's underinsurance coverage limit. Banes, 616 N.E.2d at 1023. Section 143a-2(4) of the Insurance Code of Illinois provides that "the limits of liability for an insurer providing underinsurance . . . coverage shall be the limits of such coverage, less those amounts actually recovered under the applicable bodily injury insurance policies . . . maintained on the underinsured motor vehicle." 215 ILCS 5/143a-2(4) (1993) (emphasis added). Thus, the primary function of the underinsurance coverage is to place the injured party in the same position as if the underinsured driver had been adequately insured. *fn7" Hoglund, 592 N.E.2d at 1035; Banes, 616 N.E.2d at 1025-1026.

 The right of subrogation exists when the insurer pays the insured the full amount of the proceeds the insured is entitled under the policy. Banes, 616 N.E.2d at 1025. The doctrine of subrogation is "founded on principles of justice and equity, and its operation is governed by principles of equity." Remsen v. Midway Liquors, Inc., 30 Ill. App. 2d 132, 174 N.E.2d 7, 12 (Ill. Ct. App. 1961). The right of subrogation must be recognized to prevent injustice and unjust enrichment, but that right will not be enforceable where the execution will result in inequity. Banes, 616 N.E.2d at 1025.

 In the case at bar, inequity will result to Ness if the right of subrogation in the amount of $ 750,000 is extended to the Ford Litigation. Pursuant to the underinsurance coverage provision, Chubb and Vigilant were obligated to pay Ness the policy limit, $ 1 million, less the policy limit collected from the underinsured driver Moseley, $ 250,000. Chubb and Vigilant paid the sum of $ 750,000 to Ness on behalf of Moseley who was the owner and operator of the underinsured motor vehicle. The inequity that will result from permitting Chubb and Vigilant to recoup the $ 750,000 from the settlement or judgment collected from Ford is that Ford and Ness would bear the burden of "filling the gap" between the underinsurance coverage limit and Moseley's liability coverage limit. Further, if Moseley was adequately insured up to $ 1 million, Ness would recover the $ 1 million policy limit of Moseley and also recover compensation from Ford without having to reimburse Moseley the $ 1 million settlement. *fn8" Thus, if Chubb and Vigilant were allowed to exercise their subrogation right as to any sum of money recovered from Ford, it would result in Ness being placed in a worse position than if Moseley carried adequate insurance.

 Chubb and Vigilant support their position by relying on the provision in the insurance policy concerning "Transfer of rights" *fn9" and the subrogation clause in the "Release and Trust Agreement" *fn10" (the "Release") signed by Ness on July 14, 1988 which essentially provides that Chubb and Vigilant have the right to recover $ 750,000 if Ness recovers any sum from any person or entity less prosecution costs and related fees. Chubb and Vigilant also argue that under Remsen and Glidden v. Farmers Auto. Ins. Ass'n, 57 Ill. 2d 330, 312 N.E.2d 247 (Ill. 1974), they are permitted to recover the subrogation amount from the settlement or judgment recovered from any individual or entity legally responsible for the insured's injuries.

 A literal interpretation of the relevant subrogation provisions would nullify the coverage intended by the policy and destroy the expectation of the policyholder. When the "Transfer of rights" is construed in conjunction with Ness' expectation, the public policy behind underinsurance, and the intended coverage, a latent ambiguity surfaces as to the phrase "in connection with that loss." In the context of this case, the phrase may be construed to mean that Chubb and Vigilant have the right to recover the underinsurance proceeds from any money recovered in connection with Ness' bodily injury. In the alternative, however, the "loss" may be limited to the loss caused by Moseley and his being underinsured. The second interpretation is reasonable given the last clause in the provision which reads "to the extent [Chubb and Vigilant] have paid for the loss." Chubb and Vigilant have paid $ 750,000 for the loss caused by Moseley. Chubb and Vigilant have not paid Ness any amount for the loss caused by Ford. Because there are at least two ways of reasonably interpreting the "Transfer of rights," such provision will be construed in favor of Ness and strictly against Chubb and Vigilant. See Gibbs, 610 N.E.2d 148.

 It is a fundamental principle that parties may agree to any terms they choose in entering a contract. Nonetheless, if the contract is contrary to public policy, such agreement will not be enforced. Banes, 616 N.E.2d at 1023. The subrogation provision contained in the Release is contrary to the public policy behind underinsurance coverage. Chubb and Vigilant's exercise of their subrogation right as specified will cause Ness to be in a worse position than if Moseley purchased adequate insurance coverage. The intent of the Illinois General Assembly in enacting underinsurance motorist coverage is "to place the insured in the same position he would have occupied if the tortfeasor had carried adequate insurance." Sulser v. Country Mut. Ins. Co., 147 Ill. 2d 548, 591 N.E.2d 427, 429, 169 Ill. Dec. 254 (Ill. 1992). Thus, the subrogation provision in the Release must be limited to settlement or judgement recovered from Moseley and not Ford.

 Additionally, the language employed in the Release is broader than the language used in the "Transfer of rights" provision. It is well established that parties to a contract may freely modify their agreement. A valid modification to an existing agreement must meet all the criteria necessary for a valid contract: offer, acceptance and consideration. Pankow v. WestAmerica Mortg. Co., 740 F. Supp. 1309, 1313 (N.D. Ill. 1990) (interpreting Illinois law). The subrogation clause in the Release is a modification of the subrogation clause contained in the "Transfer of rights" provision. However, Chubb and Vigilant provided no new and additional consideration to validate the modification. Therefore, the broader subrogation clause in the Release will not expand the rights of Chubb and Vigilant.

 The authorities cited by Chubb and Vigilant in support of their subrogation right, Remsen and Glidden, are not persuasive. The court in Glidden adhered to the holding of Remsen, that the insurer was subrogated to the rights of the insured to any proceeds recovered from one legally responsible for the injury, without discussion of the basis or prevailing public policy reasons for following Remsen. Therefore, the court will analyze the Remsen opinion to explain the inapplicability of these two cases.

 In Remsen, the insurer was able to recover the payment made to the plaintiffs under the uninsurance coverage from the settlement proceeds the plaintiffs recovered from the Dramshop defendants. The liability of the Dramshop defendants was independent from the liability of the uninsured driver. The decision of the Remsen court was consistent with the existing public policy in 1961. The court in applying the subrogation right in Remsen discussed the public policy behind the uninsurance motorist coverage. The court opined that "insurance for protection against bodily injury as a result of the wrongful acts of an uninsured motorist is of relative recent origin. The purpose is to provide some form of compensation for innocent victims of accidents." Remsen, 174 N.E.2d at 11-12 (emphasis added). Thus, the insurer's assertion of its right to reimbursement from the settlement proceeds paid by the Dramshop defendants did not violate the applicable public policy because the plaintiffs remained compensated by the initial fund provided by the insurer.

  The question of law involved in Remsen is strikingly similar to the case at bar. The Remsen holding is not applicable to the instant case, however, because the current public policy behind uninsurance and underinsurance is not merely to compensate the innocent victim, but to place him in a substantially the same position he would occupy if the tortfeasor had carried adequate insurance. Hoglund, 592 N.E.2d at 1035; Banes, 616 N.E.2d at 1025-1026.

 In sum, Chubb and Vigilant do not have a right of recovery or subrogation against the proceeds of any recovery Ness may obtain by settlement or judgment from Ford. Accordingly, any lien or claim of a right of recovery or subrogation by Chubb and Vigilant against such proceeds is void.


 For the foregoing reasons, Ness' motion for summary judgment is granted and Chubb and Vigilant's joint motion for summary judgment is denied.




 United States District Court

 DATED: 10/26/93

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