Unconsented Settlement with Second Tortfeasor for Less Than Full Policy Voids SUM Coverage

AUTO – SUM – CONSENT TO SETTLE – EXHAUSTION OF MULTIPLE TORTFEASORS' POLICY LIMITS
Matter of Central Mut. Ins. Co. v. Bemiss
(3rd Dept., decided 8/14/2008)

After Bemiss was injured in a multicar accident, she negotiated a settlement with one of the tortfeasors for the full amount of that tortfeasor's liability insurance policy. She then gave written notice of her intent to enter into this settlement to Central Mutual, which had issued her an insurance policy with supplementary uninsured/underinsured motorist (SUM) coverage, but Central Mutual did not respond. Later, she agreed to settle with a second tortfeasor for less than that tortfeasor's policy limits without first giving any notice to, or obtaining written consent from, Central Mutual. Bemiss ultimately signed releases for both tortfeasors that made no provision for preserving Central Mutual's subrogation rights. When she then made a claim for SUM benefits, Central Mutual disclaimed coverage based upon her failure to either obtain its consent to the settlements or take steps to preserve its subrogation rights. Bemiss then demanded arbitration of her SUM claim, and Central Mutual commenced this CPLR article 75 proceeding to permanently stay arbitration. Supreme Court granted Central Mutual's application and Bemiss appealed.

In a 4-1 decision, the Third Department, Appellate Division, AFFIRMED the motion court's order granting a permanent stay of SUM arbitration. With respect to Bemiss' settlement with the first tortfeasor, the majority ruled that since Bemiss gave timely notice of her intention to settle with that tortfeasor and Central Mutual did not advance the settlement amount, the policy permitted Bemiss to settle with that tortfeasor without Central Mutual's consent (the "30-day okay or pay rule").

With respect to the Bemiss' settlement with the second tortfeasor, however, the majority found that Bemiss did not comply with policy conditions, thereby voiding her entire claim for SUM benefits:

We reach a different conclusion as to respondent's argument that her settlement with the first tortfeasor for that party's policy limits relieved her of the obligation to either obtain petitioner's written consent to her settlement with the second tortfeasor or preserve petitioner's subrogation rights in the release given to that tortfeasor. While paragraph 9 of the policy makes clear that respondent was obligated to fully exhaust the policy of only one of the tortfeasors involved in her accident (see S'Dao v National Grange Mut. Ins. Co., 87 NY2d 853, 854-855 [1995]), that same provision does not excuse a failure to comply with paragraph 10 upon settling with another tortfeasor. Unlike the settlement with the first tortfeasor, paragraph 10's first sentence is not applicable to respondent's settlement with the second tortfeasor because the latter was not for the full policy amount. As a result, only the last sentence of paragraph 10 applies here. That sentence provides: "An insured shall not otherwise settle with any negligent party, without our written consent, such that our [subrogation] rights would be impaired." We do not view this sentence to be limited to where a party seeks in the first instance to settle for the full available policy limits of one tortfeasor. Rather, its function is to make clear that the method described in the first sentence of paragraph 10 is the one and only way to enter a settlement with "any negligent party" which impairs petitioner's rights without its consent. There is no dispute that respondent failed to obtain petitioner's consent or reserve petitioner's subrogation rights against the second tortfeasor here.

Our reading of paragraph 10 will not have the effect of discouraging settlements by, as respondent contends, holding her hostage to petitioner's subrogation rights and forcing her to fully litigate any claims that she might have against any and all tortfeasors. That effect would occur only if the insured were required to exhaust the policies of all tortfeasors either before or after receiving SUM benefits. However, since the amendment of the applicable regulation (see 11 NYCRR 60-2.3 [f]) in 1993 and the Court of Appeals holding in S'Dao v National Grange Mut. Ins. Co. (supra) in 1995, it has become clear that insureds need only exhaust the policy or policies of a single tortfeasor (see Dachs and Dachs, Insurance Law, NYLJ, Sept. 13, 2005, at 3, col 1). Thus, there is no longer any requirement in the regulations or the policy language that the insured pursue litigation or settle the claims that it might have against additional tortfeasors in order to qualify for or retain SUM benefits. While it is true that our reading of paragraph 10 precludes the insured from entering a second settlement that impairs subrogation rights without the insurer's consent, it nonetheless encourages an initial settlement with one tortfeasor and expedites the receipt of SUM benefits while protecting the insurer's subrogation rights to recoup the benefits paid from other tortfeasors. There can be little doubt that such was the intent of the applicable regulations (see Dachs and Dachs, Insurance Law, NYLJ, Sept. 13, 2005).

The dissenting justice asserted that the effect of the majority's ruling "is to discourage settlements in this type of litigation and to invite indeed command a plaintiff's counsel to fully litigate any and all personal injury claims that it might have against any and all tortfeasors. Clearly, this is not the result that was intended by the Legislature when it enacted these provisions and, in my view, it constitutes a waste of precious judicial resources. * * * Finally, respondent should not, in my view, be penalized because she had the misfortune to be involved in an accident that involved more than one wrongdoer. Had she only brought suit against the primary tortfeasor and settled against him under precisely the same circumstances while forgoing her right to sue others that were involved in this accident, respondent would clearly have been entitled to make this claim under her SUM policy. As a result, I would reverse and deny petitioner's application to stay arbitration. "

Post Script (July 7, 2009) ~~ The Court of Appeals AFFIRMED this decision on June 25, 2009. Read about it here.