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03/19/97 JOHN W. TERRY v. STATE FARM MUTUAL

March 19, 1997

JOHN W. TERRY, PLAINTIFF,
v.
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, DEFENDANT-APPELLANT, (THE VILLAGE OF CARPENTERSVILLE, DEFENDANT-APPELLEE).



Appeal from the Circuit Court of Kane County. No. 94--MR--0473. Honorable Melvin E. Dunn, Judge, Presiding.

Released for Publication April 18, 1997.

The Honorable Justice Bowman delivered the opinion of the court. McLAREN and Rathje, JJ., concur.

The opinion of the court was delivered by: Bowman

JUSTICE BOWMAN delivered the opinion of the court:

In this declaratory judgment action, defendant, State Farm Mutual Automobile Insurance Company (State Farm), appeals the trial court's order granting the motion for summary judgment filed by defendant, the Village of Carpentersville (Village), and denying the motion for summary judgment filed by plaintiff, John W. Terry, in which State Farm joined by filing a response. The issues on appeal are: (1) whether an employer may assert a lien pursuant to section 5(b) of the Workers' Compensation Act (Act) (820 ILCS 305/5(b) (West 1994)) against the proceeds of a claim under an employer-paid underinsured motorist insurance policy to recover benefits paid to the employee under a worker's compensation plan; and (2) whether an underinsured motorist insurance carrier may set off from the amount due the injured employee the amount of worker's compensation benefits paid to the employee. We reverse and remand.

On December 27, 1994, plaintiff filed a complaint seeking a declaration of the rights of the parties under a State Farm underinsured motorist policy. In his complaint, plaintiff alleged that, on October 7, 1989, he was employed by the Village as a police officer. He further alleged that, while operating a police car, he was injured in an automobile accident with another motorist. Plaintiff filed a complaint against the other driver, and that case was settled for the $25,000 per person liability limits of the other driver's insurance policy.

Plaintiff filed a worker's compensation claim against the Village. Pursuant to the settlement agreement for that claim, plaintiff received $69,023.90. Moreover, the $25,000 settlement from the other driver's insurance carrier (minus $6,250 in attorney fees and $363 in costs) was paid directly to the Village.

Plaintiff also filed an underinsured motor vehicle claim under a State Farm policy. Although the declarations page is not included in the record on appeal, the parties agree that the declarations page lists the Village as the named insured under the State Farm policy and that the Village paid the premiums for that policy. The Village then notified plaintiff's attorney that it was asserting a lien for the worker's compensation payments on any recovery under the underinsured motorist claim.

State Farm filed an answer which admitted that plaintiff had settled with the other motorist for $25,000 and that the gross amount of the worker's compensation settlement was $69,023.90. The answer also requested a declaration that State Farm was entitled to a setoff or a reduction of any underinsured motorist payments to plaintiff in an amount equal to the gross worker's compensation settlement.

The Village filed an answer which admitted all of the allegations of plaintiff's complaint. The Village also filed a counterclaim which sought a declaration that the Village had a statutory lien for $33,380.93 on the proceeds of any recovery under the underinsured motorist claim. The Village calculated the amount of its lien by (1) reducing the $69,023.90 worker's compensation claim by 25% for attorney fees and (2) subtracting $18,387 previously paid to it from the $25,000 settlement with the other driver's insurance carrier.

State Farm filed an answer to the Village's counterclaim in which it denied the applicability of the statutory lien and sought a declaration that State Farm was entitled to a setoff or reduction of any underinsured motorist benefits paid to plaintiff in an amount equal to the gross worker's compensation settlement.

Plaintiff filed an answer to the Village's counterclaim in which he denied that the Village was entitled to enforce a lien on the underinsured motorist benefits in an amount equal to the worker's compensation benefits the Village paid to plaintiff.

The Village filed a motion for summary judgment. In its motion, the Village alleged that it was entitled to be reimbursed from State Farm in the amount of the worker's compensation benefits the Village paid to plaintiff. The Village further alleged that the setoff provision in the State Farm policy was invalid.

Plaintiff filed a motion for summary judgment in which he argued that State Farm was entitled to a setoff of the entire amount of the worker's compensation claim and that the Village had no right to enforce a lien against the proceeds of any recovery under the underinsured motorist policy. Plaintiff also filed a response to the Village's motion for summary judgment. The Village filed a response to plaintiff's motion for summary judgment.

State Farm filed a response to plaintiff's motion for summary judgment in which it agreed that it had a right to assert its setoff and that the Village had no right to enforce a lien against the underinsured motorist claim. State Farm also filed a response to the Village's motion for summary judgment based on these same arguments. The Village filed a combined reply to both responses.

On January 26, 1996, the trial court conducted a hearing on the motions. On February 9, 1996, the trial court denied plaintiff's motion for summary judgment (in which State Farm joined by its response) ...


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