Is Self-Insurance Really Insurance? Uninsured Motorist Insurance And Personal Injury Protection Coverage Obligations For Self-Insurers - Part I

Monday, May 4, 2009 - 01:00

This is the first of a two-part article.Part II of this article is scheduled to appear in the June issue of The Metropolitan Corporate Counsel.

In these tough economic times, many businesses are looking for ways to cut expenses. For many, self-insurance is one solution. Before switching to a system of self-insurance, it is important for businesses to understand the various obligations of self-insurers. For instance, is a self-insurer required to provide personal injury protection ("PIP") or uninsured/underinsured motorist ("UM") coverage? This article reviews Washington, Oregon, and California law as it relates to UM and PIP coverage and discusses the corresponding obligations of self-insurers in those states.1

What Is Self-Insurance?

The term "self-insurance" can be a bit of a misnomer because many view self-insurance as simply no insurance - i.e., all risks not otherwise insured are self-insured.2Self-insurance, however, should be distinguished from what is known as "going bare."3Some commentators have noted that a true self-insurance plan includes a fund based on projections of future losses.4The plan identifies possible and actual claims so that money from the fund may be set aside to pay those claims if and when they come due.5

Choosing to self-insure may be a smart move, especially if a company has a large number of similar risks that are small in relation to the size of the business.6Some of the benefits of self-insurance include greater control over funds and claims, the opportunity to earn interest on reserve funds, the possibility of administering the plan at a lower cost than a commercial insurer, and the ability to keep all monies saved where the loss experienced is less than the loss expected.7In addition, a company can always cap its exposure by purchasing excess insurance or reinsurance to cover claims over a certain amount.

PIP And UM Obligations For Self-Insurers

An issue can arise for a self-insurer when a self-insured vehicle is involved in an accident with an uninsured or underinsured vehicle. Is the self-insurer obligated to provide PIP and/or UM coverage?

Generally, every motor vehicle liability insurance policy must include PIP and UM coverage unless the named insured rejects the coverage in writing.8For example, Washington law requires the following levels of PIP coverage: medical and hospital benefits of $10,000; funeral expense benefits of $2,000; income continuation benefits of $10,000, subject to a limit of $200 per week, and loss of services benefits of $5,000, subject to a limit of $200 per week.9Typical coverage under a UM statute includes $25,000 for bodily injury or death of a person, $50,000 for bodily injury or death of two or more persons, and $10,000 for property damage.10

Courts in most states have held that self-insurance is not a "motor vehicle liability insurance policy."11As a result, additional insureds and third parties cannot make a claim against a self-insurer on the basis that, by virtue of the self-insured retention, it issued insurance in the amount of the retention.12The majority of decisions hold that UM requirements apply only to insurance policies that have been "issued" as such.13Because a certificate of self-insurance is not a liability policy and has not been issued, a self-insurer is not required to furnish UM coverage.14

For example, in Cann v. King County , a passenger injured on a King County, Washington, bus brought an action against the self-insured county to recover UM benefits.15In response to the plaintiff's argument that as a self-insurer, King County had a liability policy and was therefore required to provide UM coverage for its passengers, the court observed that the Washington State Supreme Court has held that self-insurance is not a liability policy under the UM statute.16Self-insurance does not involve the type of third-party relationship that insurance policies contemplate.17Therefore, the county, as a self-insurer, had no liability policy and no duty to provide UM coverage.18

The Washington Supreme Court, in Kyrkos v. State Farm Mut. Auto Ins. Co ., discussed why self-insurers have no duty to provide UM coverage. Wash. Rev. Code § 48.01.040 defines "insurance" as "a contract whereby one undertakes to indemnify another or pay a specified amount upon determinable contingencies."19Self-insurance does not involve this type of third-party arrangement:

Self-insurance is a misnomer. It is not insurance, but instead is one of four methods by which a person can satisfy the financial responsibility statute. Consequently, the certificate of self-insurance cannot be considered a "policy" for the purposes of underinsured motorist coverage requirements under the statute.20

The Kyrkos court held that an exclusion contained in the policy - purporting to exclude vehicles owned or operated by a self-insurer up to the extent that bodily injury UM limits were payable - was void.21The court emphasized that the exclusion impermissibly denied coverage "when the [UM] statute, by its terms, requires coverage."22The court also noted that "the Legislature has not authorized these exclusions in defining underinsured motorists even though it has amended the statute a number of times, including authorization of specific exclusions."23

Likewise, requiring self-insurers to provide UM coverage in California would require courts in that state to exceed the limits of statutory interpretation and legislate in the area of financial responsibility.24For example, Glens Falls Ins. Co. v. Consol. Freightways involved a self-insured common carrier engaged in the trucking business.25There, the court noted that defendant Consolidated was not an insurance carrier.26

Consolidated is merely an authorized self-insurer or, to put it more exactly, a company to which the motor vehicle department has issued a certificate of self-insurance. Neither the Vehicle Code sections referring to self-insurance (§§ 16055, 16056) nor any other sections of said code contain any provisions that such certificate is or constitutes a policy of motor vehicle liability insurance or that said certificate shall be deemed to incorporate or embrance [sic] provisions required in such policies (§ 16451). Indeed the Vehicle Code nowhere intimates any connection between section 16451 and sections 16055, 16056. A certificate of self-insurance is not a motor vehicle liability policy of insurance.27

"While an extension of the uninsured motorist concept to self-insurers may [ ] have persuasive social virtues, to date the Legislature in its wisdom has not seen fit to require that of self-insurers."28

Oregon courts also hold that self-insurance is not a "motor vehicle liability insurance policy."29The Oregon financial responsibility statute, however, provides specific coverage obligations for self-insurers. For example, in Thompson v. Estate of Pannell, 30the court construed the following statutes:

Or. Rev. Stat. § 806.010 provides for the offense of "driving uninsured," that is, driving while not in compliance with the motor vehicle-related "financial responsibility" requirements. Or. Rev. Stat. § 806.060 sets out methods by which the financial responsibility requirements can be satisfied. It provides, in part:

(1) To meet the financial responsibility requirements, a person must be able to respond in damages in amounts not less than those established under the payment schedule under ORS 806.070.

(2) A person may only comply with the financial responsibility requirements of this state by establishing the required ability to respond in damages in one of the following ways:

(a) Obtaining a motor vehicle liability policy meeting the requirements under ORS 806.080 that will provide at least minimum limits necessary to pay amounts established under the payment schedule under ORS 806.070. . . .

(d) Becoming self-insured as provided under ORS 806.130.

Or. Rev. Stat. § 806.070 provides that an insurance policy described under Or. Rev. Stat. § 806.080 must provide for payment of at least $25,000 because of bodily injury to or death of any one person in any one accident.

Or. Rev. Stat. § 806.130 sets out requirements for self-insurers. A self-insurer must obtain a "certificate of self-insurance" from the Department of Transportation and must "[a]gree to pay the same amounts with respect to an accident occurring while the certificate [of self-insurance] is in force that an insurer would be obligated to pay under a motor vehicle liability insurance policy, including uninsured motorist coverage and liability coverage to at least the limits specified in ORS 806.070."

The Thompson court held that based on a reading of the above statutes, the requirements for a "motor vehicle liability insurance policy" apply to self-insurers only to the extent that those requirements are made applicable to self-insurance by operation of Or. Rev. Stat. § 806.130 or other statutes setting out requirements for self-insurance.31Or. Rev. Stat. § 806.130(3) requires that self-insurers provide UM and PIP coverage to at least the limits set out in Or. Rev. Stat. § 806.070.32

1There are several other regulatory issues that a business should consider before switching to a system of self-insurance. This article discusses the issue of a self-insurer's UM and PIP obligations only. In addition, this article does not address the legal implications of using a system of "captive insurance," where a business forms a wholly owned insurance company subsidiary to insure the parent company's risks. Ultimately, a business should seek the advice of experienced counsel before switching to an alternate system of insurance.

2 See 1A Steven Plitt et. al., Couch on Insurance § 10:1 (3d ed. 2007).

3Alan D. Windt, Insurance Claims and Disputes § 11:31 (5th ed. 2007).

4 See, e.g., id.

5 Id.

6Eric Mills Holmes et al., Appleman on Insurance §2.18 (2d ed. 1996).

71A Steven Plitt et. al., Couch on Insurance § 10:1 (3d ed. 2007). A variety of income and tax implications arise when a business decides to self-insure. Those considerations are not dealt with in this article.

8 See Wash. Rev. Code §§ 48.22.030, .085; Cal. Ins. Code §§ 11580, 11580.2. Oregon law allows the insured to elect, in writing, lower limits, so long as the election does not go below the prescribed amount to meet the requirements of Or. Rev. Stat. § 806.070 for bodily injury or death. See Or. Rev. Stat. § 742.502(2)(a).

9Wash. Rev. Code § 48.22.095.

10 See, e.g., Or. Rev. Stat. § 806.070.

11 See Cann v. King County, 86 Wash. App. 162, 937 P.2d 610 (1997); Thompson v. Estate of Pannell, 176 Or. App. 90, 29 P.3d 1184 (2001); O'Sullivan v. Salvation Army, 85 Cal. App. 3d 58, 147 Cal. Rptr. 729 (1978).

12Alan D. Windt, Insurance Claims and Disputes § 11:31 (5th ed. 2007).

13 Automobile Liability Insurance § 19:26 (4th ed. 2008).

14 Id.

15Cann v. King County, 86 Wash. App. 162, 937 P.2d 610 (1997).

16 Id. (citing Kyrkos v. State Farm Mut. Auto Ins. Co., 121 Wash. 2d 669, 674, 852 P.2d 1078 (1993)); Wash. Rev. Code § 48.22.030(1).

17 Id. at 164.

18 Id. at 163.

19 Kyrkos v. State Farm Mut. Auto Ins. Co., 121 Wash. 2d 669, 674, 852 P.2d 1078 (1993).

20 Id. at 674-75.

21Id. at 672.

22 Id.

23Id. at 673. Interestingly, the Court did not address the fact that the Washington State Office of the Insurance Commissioner had presumably approved the policy at issue in Kyrkos .

24O'Sullivan, 85 Cal. App. 3d at 62.

25 Glens Falls Ins. Co. v. Consol. Freightways, 242 Cal. App. 2d 774, 785, 51 Cal. Rptr. 789 (1966).

26 Id. at 785.

27 Id.

28 O'Sullivan , 85 Cal. App. 3d at 62.

29 See Thompson, 176 Or. App. at 97.

30176 Or. App. 90, 29 P.3d 1184 (2001).

31 Thompson, 176 Or. App. at 98.

32 Id.

Teena M. Killian is Of Counsel in the Seattle office of Williams Kastner PLLC. Her practice concentrates on complex commercial litigation including insurance coverage disputes, on behalf of both policyholders and insurers, and professional liability litigation. John T. Fetters is an Associate in the Seattle office of Williams Kastner PLLC whose practice focuses on business litigation.

Please email the authors at tkillian@williamskastner.com or jfetters@williamskastner.com with questions about this article.