IN THE SUPREME COURT OF THE STATE OF MONTANA
BETH SORENSEN and MARK SORENSEN,
Plaintiffs and Appellants,
FARMERS INSURANCE EXCHANGE,
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APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
The Honorable Katherine R. Curtis, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Daniel W. Hileman (argued), Murray & Kaufman,
Kalispell, Montana
For Respondent:
Shelton C. Williams (argued) and Susan Moriarity
Miltko, Williams & Ranney, P.C., Missoula, Montana
For Amicus Curiae:
Peter L. Helland, Edmiston Law Firm, Billings,
Montana (for Montana Trial Lawyers Association)
Heard and Submitted: September 12, 1996
Decided: November 20, 1996
Filed:
Chief Justice J. A. Turnage delivered the Opinion of the Court.
Beth Sorensen was injured in a two-vehicle accident. The
Eleventh Judicial District Court, Flathead County, ruled that
because she and her husband Mark settled with the liability carrier
for the driver of the other vehicle, they were precluded from
seeking, in this action, underinsured motorist coverage from their
own insurance carrier. We reverse and remand for further proceed-
ings consistent with this Opinion.
We here determine that the District Court erred in ruling that
the Sorensens may not recover an underinsured motorist claim after
releasing the tortfeasor without their insurer's permission.
On November 21, 1991, Beth Sorensen's vehicle was struck by a
vehicle driven by Cynthia Lynn Ryan. Sorensen alleges permanent
disability as a result of injuries sustained in the collision. As
a result of her injuries, Sorensen has claimed medical expenses of
at least $52,974.06. Additionally, a vocational rehabilitation
counselor has estimated her loss of earnings at $803,495.46.
Ryan held liability insurance with State Farm Mutual Automo-
bile Insurance Company with a limit of $50,000. After investigat-
ing Ryan's assets or, more precisely, the lack thereof, Sorensen's
attorney advised her to accept Ryan's $50,000 policy limit from
State Farm. Beth and Mark Sorensen executed a written release of
Cynthia Ryan, her ex-husband Patrick H. Ryan, and State Farm from
any further liability.
The Sorensens then brought this action against their own
insurer, Farmers Insurance Exchange, seeking to recover underin:
sured motorist coverage under their own motor vehicle insurance.
In answering the complaint, Farmers alleged that because the
Sorensens had settled with Ryan's liability carrier, State Farm,
and executed a release, they were precluded from seeking underin-
sured motorist coverage from Farmers.
Farmers moved for summary judgment, which motion was granted.
The District Court reasoned LhaL when an insured has destroyed. her
insurer's right of subrogation, the insured is barred from a claim
against the insurer. The court relied on this Court's opinion in
Nimmick v. State Farm Mut. Auto. Ins. Co. (1995), 270 Mont. 315,
891 P.2d 1154. The Sorensens appeal.
Did the District Court err in ruling that the Sorensens may
not recover an underinsured motorist claim after releasing the
tortfeasor without their insurer's permission?
Our standard of review on summary judgment is the same as that
used by the district court--whether material issues of fact exist
and whether the moving party is entitled to judgment as a matter of
law. McCracken v. City of Chinook (19901, 242 Mont. 21, 24, 788
P.2d 892, 894; Rule 56(c), M.R.Civ.P. In this case, the material
facts are undisputed. We therefore limit our review to the
correctness of the trial court's legal conclusion.
The Sorensens' Farmers insurance policies provided that:
In the event of any payment under this policy, we are
entitled to all the rights of recovery of the person to
whom payment was made against another. That person must
sign and deliver to us any legal papers relating to that
recovery, do whatever else is necessary to help us
exercise those rights and do nothing after loss to
prejudice our rights.
Farmers argues, and the District Court ruled, that Farmers is not
liable to pay the Sorensens under the underinsured motorist clause
because they failed to notify Farmers before they released State
Farm and the Ryans from further liability. Farmers maintains that
by destroying its subrogation rights, the Sorensens breached the
insurance contract.
In making its argument, Farmers relies on this Court's opinion
in Nimmick. Nimmick was injured as a passenger in a one-vehicle
accident. She brought suit against her insurer, State Farm, to
recover damages under the uninsured motorisl. provision of her
insurance policy. She subsequently entered a settlement agreement
with Employers Mutual, the insurer for the owner of the vehicle in
which she was injured. In her suit against State Farm, Nimmick
alleged that because the unauthorized driver of the vehicle was not
covered under the Employers Mutual policy, she was entitled to
uninsured motorist coverage under her own insurance.
After examining the language of the settlement agreement
signed by Nimmick and Employers Mutual and its underlying effect as
a whole, this Court concluded that the settlement was made on
behalf of the driver of the vehicle, as well as the owner and other
passengers, as the agreement expressly stated. Therefore, we
concluded, the driver was no longer an uninsured motorist under the
State Farm policy. Nimmick, 891 P.2d at 1159.
The issue in Nimmick concerned uninsured motorist coverage,
whereas the present case involves underinsured motorist coverage.
4
Farmers maintains that this distinction is insignificant and that
Montana courts generally treat uninsured and underinsured motorist
coverage similarly, citing Bennett v. State Farm Mut. Auto. Ins.
Co. (19931, 261 Mont. 386, 862 P.2d 1146.
Farmers focuses on the subrogation analysis in Nimmick. It
argues that but for the destruction of the insurer's subrogation
rights, the tortfeasor in Nimmick would still have been uninsured,
and coverage would apply. Farmers reasons that here, because
Sorensen has destroyed its subrogation rights, coverage does not
apply.
The dispositive issue in Nimmick was whether an uninsured
motorist was still involved after the settlement. A settlement
between an underinsured motorist like Ryan and an injured person
like Sorensen does not necessarily eliminate the underinsured
status, as did the insurance settlement for the motorist's
uninsured status in Nimmick. Here, Ryan's underinsured status
would be eliminated only if the insurance settlement covered all
damages. Such is not the case on the record here. We conclude
that the distinction between uninsured motorist coverage and
underinsured motorist coverage is significant for purposes of the
issue here presented.
Even where a right to subrogation exists, many courts have
recognized that if the insurer is unable to demonstrate prejudice
to itself as a result of an unapproved settlement, the insured is
not barred from collecting on the insurance policy. See, e . g.,
Thompson v. American States Ins. Co. (M.D.Ala. 1988), 687 F.Supp.
559; Rafferty v. Progressive American Ins. Co. (Fla. Dist. Ct. App.
19901, 558 So.2d 432; Mulholland v. State Farm Mut. Auto. Ins. Co.
(Ill. App. Ct. 1988), 527 N.E.2d 29; Kapadia v . Preferred Risk Mut.
Ins. Co. (Iowa 1988), 418 N.W.2d 848; Lumbermens Mut. Cas. Co. v.
Mercurio (Mass. App. Ct. 1989), 535 N.E.2d 234; Tegtmeyer v.
Snellen (Mo. Ct. App. 1990), 791 S.W.2d 737; Branch v. Travelers
Indem. Co. (N.C. Ct. App. 19881, 367 S.E.2d 369, a f f l d 378 S.E.2d
748 1989); Federated Service Ins. Co. v. Granados (Or. 1995), 889
P.2d 1312; Prudential Property & Cas. Ins. Co. v. Nayerahamadi
(E.
D Pa. 1984) , 593 F.Supp. 216; Thiringer v. American Motors Ins.
Co . Wash. 1978), 588 P.2d 191.
In his concurrence to Nimmick, Justice Leaphart urged that
Montana adopt such a "no prejudice" rule. He explained that under
a "no prejudice" rule, a settlement with a tortfeasor would not
release an insurer if the plaintiff could show that the tortfeasor
was judgment proof and thus there was no prejudice to the insurer.
As applied to a case involving underinsured motorist coverage,
a "no prejudice" rule states that absent some showing of material
prejudice to the underinsurance carrier, a claim for underinsured
motorist coverage may not be precluded on a technicality. The "no
prejudice" rule has been explained as follows:
The loss of an insurer's subrogation right may not
be siqnificant. In many instances, pursuit of any
recovery from an insured tortfeasor beyond the available
liability insurance would be fruitless. . . . "[A]
technical and illusory 'loss' of this kind cannot result
in the forfeiture of insurance coverage." Such decisions
establish, either implicitly or explicitly, a requirement
that an insurer must be prejudiced as a result of a
settlement with a tortfeasor or tortfeasor's insurer that
is entered into without the consent of the insurer
providing underinsured motorist insurance. . . .
There is now a significant body of judicial prece-
dents for the proposition that in order to justify
foreclosing an insured's right to indemnification from an
otherwise applicable underinsured motorist insurance
coverage, an insurer must show that it was prejudiced by
the settlement of the tort claim.
3 Alan I. Widiss, Insured and Underinsured Motorist Insurance §
43.5, at 347 (1995), yuoLiny SouLheasLern FideliLy Insurance
Company v. Earnest (Fla. Dist. Ct. App. 1981), 395 So.2d 230,
We favor this approach as a matter of public policy. The
purpose of underinsured motorist insurance is to provide a source
of indemnification for accident victims when the tortfeasor does
not provide adequate indemnification. State Farm v. Estate of
Braun (1990), 243 Mont. 125, 130, 793 P.2d 253, 256. Denying
accident victims indemnification based upon their action which can
have no effect on the insurer's ability to subrogate will not
further the purpose of underinsured motorist coverage
As to the burden of proof:
Most of the judicial decisions in which courts have
sustained the view that a failure to secure an insurer's
consent to a settlement only justifies a loss of underin-
sured motorist insurance benefits when the insurer was
prejudiced, seem to require the insurer to show that the
unauthorized settlement adversely affected its interests.
There are several rationales for this approach. First,
the insurer is in the best position both to assess
whether it has been prejudiced and to then produce
evidence for the court that is relevant to an adjudica-
tion. Second, in effect, it recognizes the difficulty of
requiring a claimant to attempt to prove the "negative
fact" that the insurer was prejudiced. Finally, if
no clear proof is available, such an allocation serves to
avoid a forfeiture of coverage.
Widiss, § 43.5 at 349. The "no prejudice" rule places the burden
on the insurer which has collected premiums, rather than on an
injured claimant, to show that the insurer's subrogation claim has
potential value.
We hold that henceforth in Montana, to justify foreclosing an
insured's right to indemnification from an otherwise applicable
underinsured motorist insurance coverage, an insurer must establish
that it was prejudiced by settlement of the claim by the insured.
In the present case, the issue of the potential value of
Farmers' subrogation claim was briefed and argued in relation to
the summary judgment motion. The Sorensens submitted an affidavit
by a private investigator who had conducted a social security
search on Cynthia Ryan. The investigator stated that the search
indicated that she had lived in six different locations and that
her current address was unknown. Beth Sorensen filed an affidavit
in which she stated that her attorney had advised her that Ryan was
essentially unemployed, had no assets, and was "judgment proof . "
Farmers refers in its brief to deposition testimony by the
Sorensens that Cynthia Ryan's ex-husband had a job, a car, and a
trailer house. Whatever value that testimony may have in estab-
lishing that Cynthia Ryan had assets, the depositions to which
Farmers refers are not in the record. We hold that Farmers failed
to meet its burden of proving that it was prejudiced by the
settlement entered by the Sorensens.
We therefore reverse t h e decision of t h e ~istrictC o u r t a n d
remand for further proceedings consistent with this Opinion.
We c o n c u r :
Justices