Settlement Without Knowledge of All Available Insurance is Dangerous
When a person is injured in an automobile accident, even one involving a moped and an auto, it is the obligation of the injured person and the injured person’s lawyer, to determine all insurance available to provide indemnity to the injured person. That means all third party liability insurance and uninsured or underinsured motorist (UM/UIM) insurance. Failure on the part of the injured person or the injured person’s lawyer results in litigation and multiple appeals.
In Auto-Owners Insurance Company v. Sharon Spalding, NO. 2017-CA-001474-MR, Commonwealth of Kentucky Court of Appeals (January 18, 2019) the Kentucky Court of Appeals was faced with a dispute over available insurance coverages where the injured person Sharon Spalding and her lawyer failed to discover all coverage before a settlement was reached with the responsible party.
On April 19, 2011, a vehicle operated by Bashia Robinson struck a moped operated by Spalding. There is no dispute that Robinson was at fault in causing the accident. As a result, Spalding suffered a badly broken arm that required surgery, and she incurred substantial medical bills. According to the record, Spalding suffers from some degree of dementia and memory loss, which pre-existed the accident.
Spalding subsequently retained attorney Dallas George to represent her in any claims arising from the accident. George investigated the matter and determined that Robinson had automobile insurance through Kentucky Farm Bureau with statutory limits of $25,000/$50,000. In addition, George learned that Spalding had motor vehicle insurance that had been purchased through Energy Insurance Agency of Lebanon (“Energy Insurance”). Spalding’s moped was insured under a policy issued by Progressive Insurance Company that did not provide Underinsured Motorist Coverage (“UIM”).
Spalding advised her lawyer’s paralegal that she did not have such coverage. Based upon that information, George secured a $25,000 settlement with Kentucky Farm Bureau on the liability claim against Robinson. Spalding signed a release in favor of Robinson in exchange for Kentucky Farm Bureau’s policy limits.
Six months after the release was signed it was discovered that Spalding had another policy issued by Auto Owners that provided UIM coverage limits of $100,000/$300,000.
Auto Owners concluded after completing an investigation that there would be coverage for a policyholder injured in a motor vehicle accident while occupying the moped because the operator of the moped would be considered a pedestrian. Regardless, Auto Owners denied Spalding coverage on the grounds that upon reaching the settlement with Kentucky Farm Bureau, Spalding failed to give the required notice to Auto Owners as her UIM carrier.
The trial court granted summary judgment in favor of Auto Owners finding that “the notice requirements of the statute are mandatory” and that Appellant did not owe Spalding coverage. In Spalding v. Auto-Owners Insurance Company, 2014-CA-001737, 2016 WL 361653, *2-3 (January 29, 2016) the court of appeal reversed the trial court decision and sent it back to the trial court.
According to her lawyer, George’s deposition, she never informed him that she owned a Ford Focus, and he learned of it only after securing the settlement with Kentucky Farm Bureau on the liability claim against Robinson. The trial court again ruled in favor of the insurer.
Summary judgment is an extraordinary remedy that should be cautiously applied and should not be used as a substitute for trial.
It was clear to the appellate court that a factual issue existed as to whether the conversation between Gloria and Spalding occurred. Gloria testified in her deposition that she called the insurance agency to inquire as to whether Spalding had UIM coverage. It is the agency’s policy to provide insurance information only in response to a written request and that she would not have provided any information over the phone.
The required notice is designed to give the UIM carrier the opportunity to protect its subrogation rights against the tortfeasor and the tortfeasor’s insurer. If an underinsured motorist insurer chooses to preserve its subrogation rights by refusing to consent to settle, the underinsured motorist insurer must, within thirty (30) days after receipt of the notice of the proposed settlement, pay to the injured party the amount of the written offer from the underinsured motorist’s liability insurer. Thereafter, upon final resolution of the underinsured motorist claim, the underinsured motorist insurer is entitled to seek subrogation against the liability insurer to the extent of its limits of liability insurance, and the underinsured motorist for the amounts paid to the injured party.
Although not specifically addressed in Kentucky with respect to UIM coverage, a multitude of jurisdictions have held that an insurer, through action or inaction, can waive or be estopped from asserting a defense to liability under the policy based upon the insured’s unauthorized settlement with a third-party tortfeasor. The Insurer, through the agent, did not make a coverage determination and decline coverage or fail to act. However, the effect of the alleged misstatement of coverage, if indeed such occurred, had the same result as it essentially led George to believe there was no other insurance coverage and that he needed to go ahead and settle Spalding’s claim with Robinson.
Where an insurer has initially denied coverage, whether the denial is based upon an erroneous coverage determination or, as in this case, a misrepresentation that a policy providing coverage even exists, the insurer cannot be allowed to subsequently assert a defense to liability based upon a provision requiring the insured to notify it prior to settlement, regardless of whether that provision is statutory or contractual. To hold otherwise would lead to an untenable result.
There is no question in this case that Spalding had a policy containing uninsured motorist coverage. Regardless of whether the notice requirement was contractual or statutory, we cannot conclude that Spalding should be penalized for the failure to fulfill a requirement that she was unaware was applicable to her. As the trial court noted, Spalding could not have given the required notice where the underlying existence of a UIM policy was denied or misstated.
Under the specific facts presented herein, the court of appeal believed it would be unjust to hold as a matter of law that Spalding is precluded from recovering UIM benefits. That is not to say that a jury could not find that the oversight in informing lawyer George of another policy contributed to the failure to provide the required notice. Indeed, the appellate court believed that is yet another factual issue that should have precluded summary judgment. As a result the case was returned to the trial court to take the case to trial.
Summary judgment often resolves a case quickly. However, if not properly granted, it causes unnecessary delay and expense. In this case summary judgment decisions were reversed twice and the case must go to trial. The problems would have been avoided had the insured, her lawyer and her agent had properly obtained the coverages available and not relied on the plaintiff – who suffered from dementia – to reach a quick settlement. Counsel, plaintiff, the agent and the insurer were abused by a failure to properly advise everyone who insured the risk faced by the injured party.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
His newest book:
Insurance is a contract between a person seeking insurance and an insurer. It is obtained by making contact with the insurer as a prospective insured seeking insurance. The homeowners policy is a specialized policy of insurance that protects the homeowner from certain risks of loss to the real and personal property at the home, the exposure the insured faces for injury to a household employee, and the exposure the insured faces to liability for bodily injury or property damage caused to third parties. The book explains how to buy a homeowners policy and how to collect on any claim made to the homeowners insurer.
Books from Full Court Press
Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.
California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.
Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.