Washington Supreme Court extends pro rata attorney fee sharing rule to new PIP reimbursement scenario

In Matsyuk v. State Farm Fire & Cas. Co., 2012 WL 402050, the Washington Supreme Court addressed the pro rata fee sharing rule announced in Mahler v. Szucs, 135 Wn.2d 398 (1998). The Mahler rule provides an “equitable” exception to the American rule on attorney fees (that litigants must bear their own legal expenses) by requiring a personal injury protection (PIP) insurer to share in the legal costs incurred by its injured insured in obtaining a recovery from the responsible tortfeasor or the tortfeasor’s insurer. The underlying theory is that the PIP insurer is benefited by its insured’s recovery because it creates a “common fund” from which the reimbursement of PIP benefits is paid. Mahler has subsequently been applied to a range of PIP reimbursement scenarios, including where the injured insured collected PIP and uninsured/underinsured motorist benefits from the same carrier.

This case adds one additional scenario to which the Mahler rule applies: where the injured party is insured under a PIP policy held by the tortfeasor and also recovers under the tortfeasor’s liability policy. In holding that Mahler applies, the Court expressly “disapproved” of a Court of Appeals case, Young v. Teti, 104 Wn. App. 721 (2001), which had concluded that Mahler rule is inappropriate where an injured, faultless third person recovers only from the insured tortfeasor, rather than also from the injured party's own PIP insurer.

In addition, the majority allowed one of the plaintiffs to recover Olympic Steamship fees for litigating this matter, reasoning that the situation is properly characterized as a coverage dispute. Even though the majority had earlier held that the pro rata fee sharing of legal expenses is based on equitable principles and not on specific policy language, the majority stated that Olympic Steamship fees were appropriate because “[t]he question is a legal one involving interpretation of the insurance policy." Finally, the majority reinstated the plaintiff’s bad faith claim that the insurer refused to effectuate the liability settlement until the plaintiff released her PIP claims against the same insurer.