Court of Appeals Affirms: Unconsented Settlement with Second Tortfeasor Forfeits SUM Coverage

AUTO – SUM – CONSENT TO SETTLE – EXHAUSTION OF MULTIPLE TORTFEASORS' POLICY LIMITS
Matter of Central Mut. Ins. Co. v. Bemiss
(Ct. Apps., decided 6/25/2009)

Three car accident.  Injured plaintiff in Car 1 sues drivers/owners of Cars 2 and 3.  Plaintiff settles with Car 2 for its full, per person BI liability policy limit after properly notifying her SUM insurer.  Then settles with Car 3 for less than its BI limit without notice to or consent from her SUM insurer.  Has plaintiff breached the consent-to-settle and subrogation-protection conditions of her policy's SUM endorsement, voiding coverage for her SUM claim vis-à-vis Car 2?

Yes, said the Third Department, and yes, now says the Court of Appeals.  By choosing to proceed with and settle her claim against the second tortfeasor without obtaining her SUM insurer's consent, the plaintiff-insured forfeited her SUM coverage.

At issue in this case was "whether consent-to-settle and subrogation-protection provisions in the supplementary uninsured/underinsured (SUM) endorsement in an automobile liability insurance policy fall by the wayside once an insured has exhausted the available policy limits of a single tortfeasor in a multi-tortfeasor accident."  In a unanimous decision holding that these provisions remain in force and govern any settlements that the insured may subsequently make with other tortfeasors, Judge Read reasoned:

As already noted, an insured generally may not settle with a tortfeasor without the SUM insurer's written consent, and may not prejudice the SUM insurer's subrogation rights. As to the latter point, Condition 13 of the SUM endorsement specifically states as follows:

"13. Subrogation: If we make a payment under this SUM coverage, we have the right to recover the amount of this payment from any person legally responsible for the bodily injury or loss of the person to whom, or for whose benefit, such payment was made to the extent of the payment. The insured or any person acting on behalf of the insured must do whatever is necessary to transfer this right of recovery to us. Except as permitted by Condition 10, such person shall do nothing to prejudice this right" (11 NYCRR 60-2.3 [f]) (emphasis added).

The final sentence of Condition 10 — the crux of Bemiss's argument — specifies that the insured "shall not otherwise settle with any negligent party, without [the SUM carrier's] written consent, such that [the SUM carrier's] rights would be impaired" (emphasis added). Looking at both this language and the structure of Condition 10, "otherwise" refers back to the settlement scenario delineated in the first sentence — i.e., an insured's 30 days' written notice to the insurer of a tortfeasor's offer to settle for the maximum available policy limits. And while Bemiss contends that "any negligent party" refers only to the first tortfeasor whose policy is exhausted so as to make SUM benefits payable, this is not readily apparent from the words used or the regulatory history. In the original version of Condition 10 (former Condition 8), "any negligent party" clearly referred to all the tortfeasors in a multiple-tortfeasor accident. When the Department revised the SUM endorsement to make the exhaustion requirement applicable to any single tortfeasor rather than the aggregate limits of the liability coverage of all tortfeasors, it retained in new Condition 10 the stipulation that the insured could not "otherwise settle with any negligent party" (emphasis added). Bemiss, in effect, asks us to read this provision to mean "otherwise settle with the first party to tender the available limit of his/her motor vehicle bodily injury liability coverage." Even if Bemiss's interpretation of "any negligent party" were correct, there is nothing in the SUM endorsement to suggest that the subrogation-protection provisions in Condition 13 become inoperative once an insured has exhausted a single tortfeasor's policy limits in a multiple-tortfeasor accident.

In short, Condition 10 delineates the sole situation in which an insured may settle with any tortfeasor in exchange for a general release, thus prejudicing the insurer's subrogation rights, without the carrier's written consent. Here, Bemiss violated Condition 10 when she settled with Genski for less than the maximum available policy limits without Central's written consent, such that its subrogation rights were impaired. Moreover, this result is not inconsistent with our decision in S'Dao or Condition 9 of the SUM endorsement. In this case, Bemiss settled with Kowalczyk in compliance with Condition 10, thereby also fulfilling the exhaustion requirement in Condition 9. At that point, she was entitled to make a claim for $75,000 under her SUM coverage and, if Central disagreed, to proceed to arbitration. That is, she did not have to pursue a claim against Genski in order to become eligible to collect up to the remaining limits of her SUM policy. But once having chosen to resolve her claim against Genski, she was not free under the SUM endorsement to compromise Central's subrogation rights unilaterally.

Counsel for persons injured in multiple vehicle accidents with multiple tortfeasors take note:  at the risk of forfeiting your client's SUM coverage, do not settle any claims against multiple tortfeasors without complying with the SUM endorsement's consent-to-settle conditon(s) as to each settling tortfeasor.