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Consent of Carrier Not Required for UIM Coverage

Special provisions apply to underinsured motorist coverage that do not apply to uninsured motorist coverage.

Crackhead Craig had finally been released from county jail after starting a fight with several members of a local motorcycle gang known as Sons of Mary Kay. Crackhead had teased them about the Mary Kay products they were selling from their pink motor scooters, which upset several of the gang members.

After his release from jail, Crackhead decided to drive over to visit his friend, Jimmy “The Bud” Weedman. Bud Weedman owned the largest chain of medical marijuana supply dispensaries in Southern California. Bud had invented and patented a technique for trimming his plants to make his marijuana a more potent pain killer. His company slogan is “It will kill your pain and anything else that ails you!” On the drive to Bud Weedman’s house, Crackhead drove his monster truck through a red light and collided with a Honda Civic owned by Eggshell Eddie. Eggshell and his two children passengers, Robin and Wren, were injured.

Eggshell retained Attorney Seickem Bulldog to represent his family. Attorney Bulldog has a reputation as an aggressive, no-nonsense personal injury attorney. Attorney Bulldog notified Crackhead that he represented Eggshell, Robin and Wren, and that they were pursuing claims against him for their bodily injuries. Crackhead notified his insurance carrier, Saturn Insurance Company, of the claims. Saturn informed Seickem Bulldog that Crackhead had liability limits of $15,000 per person and $30,000 per accident.

Attorney Bulldog evaluated Eggshell Eddie’s claim to be worth $50,000 and the claims of Robin and Wren to be worth $200,000 each. Attorney Bulldog notified Eggshell’s auto insurance carrier, Allsnake Insurance Company, that his clients had been injured in an accident with Crackhead Craig and that they were about to enter into settlement negotiations for the policy limits of Crackhead’s policy and would be pursuing claims for underinsured coverage benefits. Attorney Bulldog provided Allsnake Insurance Company with a copy of the declaration page that Saturn Insurance Company had produced earlier in the claim.

Allsnake sent out its standard letter informing Attorney Bulldog that he should not settle the third-party claims against Crackhead Craig without its prior written consent. Attorney Bulldog negotiated a settlement for the policy limits with Saturn Insurance Company. Saturn paid $10,000 to Eggshell Eddie, $10,000 to Robin Eddie and $10,000 to Wren Eddie. Thereafter, Attorney Bulldog submitted a settlement package to Allsnake Insurance Company that included the signed release agreements that released their claims against Crackhead Craig and Saturn Insurance Company and copies of the settlement checks. Adjustor Sean McScrewem was handling the UIM claims on behalf of Allsnake Insurance Company. Adjustor McScrewem denied coverage for the UIM claims on the basis that Attorney Bulldog had settled the third-party claims against Crackhead Craig without Allsnake’s written consent. Adjustor McScrewem contended that Insurance Code Section 11580.2(c)(3) and the language of the policy required Eggshell Eddie, Robin Eddie and Wren Eddie to obtain Allsnake’s written consent before they settled their claims against Crackhead Craig.

The uninsured motorist coverage portion of Allsnake’s policy stated, in pertinent part:

We will pay damages for which an insured is legally entitled to recover from the owner or operator of an uninsured motor vehicle, we will pay only after the limits of liability under any applicable liability bonds or policies have been exhausted by payment of judgments or settlements. [¶] Any judgment for damages arising out of a suit brought without our written consent is not binding on us.

Thereafter, “uninsured motor vehicle” is defined in four separate definitions. The second definition equates uninsured motor vehicle with an underinsured motor vehicle “with respect to damages for bodily injury only. An underinsured motor vehicle is one to which a liability bond or policy applies at the time of the accident but its limit for liability is less than the limit of liability for this coverage.

Exclusions appeared on the next page of the policy. That section states, in part, “A. We do not provide Uninsured Motorists Coverage for property damage or bodily injury sustained by any person: ... [¶] 2. If that person or the legal representative settles the bodily injury or property damage claim without our consent.” (Emphasis added.)

Adjustor McScrewem, on behalf of Allsnake, denied coverage for the UIM claims of Eggshell Eddie, Robin Eddie and Wren Eddie on the basis that they had failed to obtain Allsnake’s consent before settling their third-party claims against Crackhead Craig. Attorney Bulldog immediately filed suit for breach of contract, declaratory relief, breach of the implied covenant of good faith and fair dealing and punitive damages on behalf of his clients.

Allsnake and Attorney Bulldog filed cross-motions for summary adjudication on the declaratory relief action. Allsnake contended that there was no coverage because of the lack of consent before settling the thirdparty claims. Attorney Bulldog contended that there was coverage.

The matter was assigned to Judge I. B. Solomon. Judge Solomon reviewed the two motions. Judge Solomon ultimately held that the analysis by Attorney Bulldog on the consent issue was the proper analysis for underinsured motorist claims and rejected Allsnake’s contention that its consent was required before the third party claims could be settled.

Insurance Code Section 11580.2(b) defines an “uninsured motor vehicle” as “a motor vehicle with respect to the ownership, maintenance or use of which there is no bodily injury liability insurance . . . or an “underinsured motor vehicle” as defined in subdivision (p). . . .” (Emphasis added.) [All references hereafter to Section 11580.2 shall be referring to Insurance Code Section 11580.2.]

Section 11580.2(p) governs actions brought by insureds that are injured by underinsured tortfeasors. An underinsured tortfeasor is generally someone who purchased the minimum amount of accident insurance that is adequate to meet legal requirements of insurance, but less than the underinsured motorist limits carried by the injured person. (§11580.2(p)(2); State Farm Mut. Auto Ins. Co. v. Messinger (1991) 232 Cal. App.3d 508, 513.)

Judge Solomon pointed out that the provisions governing uninsured versus underinsured motorist coverages differ substantially in the area of the settlement of claims, setoff, reimbursement and the procedures to be followed before settlement. As an example, the carrier has subrogation rights with regard to uninsured motorist coverages. However, there are no subrogation rights under the underinsured motorist provisions. (Hartford Fire Ins. Co. v. Macri (1992) 4 Cal.4th 318, 324-325.) That is significant because Insurance Code section 11580.2(c)(3) provides that an insured who settles or obtains a judgment against an uninsured motorist responsible for the insured’s injuries and does so without the consent of his insurer will lose the uninsured motorist coverage for the accident. (Id. at *325.) The court held that strict adherence to the rule of consent in the uninsured motorist context has been followed, and the insurer is not required to show prejudice before it may claim the benefits of the exclusion. (Id.) The consent provision in part protects the insurer’s right of subrogation that is found in the uninsured motorist provision of Section 115802(g).

Judge Solomon agreed with Attorney Bulldog’s assertion that the consent requirement of Section 11580.2(c)(3) protects the insurer’s subrogation rights in the uninsured context and that such protection is not afforded the first party insurer in the underinsured motorist provisions of the statute. Attorney Bulldog pointed out that Section 11580.2(p)(3) provides that uninsured motorist coverage does not apply until the limits of the bodily injury liability policies applicable to all insured motor vehicles causing the injury have been exhausted and proof of the payment is submitted to the injured party’s insurer. Attorney Bulldog contended that that provision defeats any statutory right to subrogation that the insurer may assert because “if the tortfeasor’s policy limits are exhausted by a settlement, the tortfeasor’s insurance company will insist upon a release of its insured which would, of course, extinguish any subrogation rights.”

Allsnake attempted to argue that because the uninsured and underinsured motorist coverage is sold as a single policy, and treated as one coverage under the statute, the Legislature intended the consent provision of Section 11580.2(c)(3) to apply equally to uninsured and underinsured motorist coverage.

Judge Solomon looked to the legislative history of Insurance Code Section 11580.2 and found that the statute was amended to address the procedures to be followed in settlements and the rights to setoffs and credits. As noted above, Section 11580.2(p)(3) provides that the underinsured coverage does not apply until the limits of the bodily injury of the third-party tortfeasors have been exhausted and proof of payment is submitted to the insurer providing the underinsured motorist coverage. The effect of Section 11580.2(p)(3) “is to require (and therefore by implication to authorize) the insured to prosecute actions against the underinsured, to obtain a settlement and/or judgment, and to submit proof of payment to the insurer.” (Hartford Fire Ins. Co. v. Macri, supra at *327.)

In contrast, in the uninsured motorist context, an insured is not required to pursue any legal action to secure coverage. On the contrary, the insured must obtain consent to settle or even to prosecute to judgment any such action against the uninsured motorist. Thus, although the consent requirements of Section 11580.2(c)(3) creates a logical progression of events in the uninsured motorist context, it would frustrate the statutory scheme if required in the underinsured context. (Id. at *328.)

In addition, Insurance Code Section 11580.2(p)(5) provides an insurer with reimbursement or credit rights in the amount received by the insured from the underinsured tortfeasor or his or her insurer. The right of reimbursement is automatically protected without the application of subrogation rights as set forth in Section 11580.2(c)(3) and is specifically limited to the underinsured tortfeasor’s policy limits and precludes the insurer from asserting additional subrogation rights. (Id.) However, the right of reimbursement under Section 11580.2(p)(5) does not mature until after the insured has received the policy limits from the underinsured’s carrier by “judgments or settlements, and proof of the payment is submitted to the insurer providing the underinsured motorist coverage.” (§11580.2(p)(3).)

Therefore, Judge Solomon held:

Accordingly, although the Legislature generally intended section 11580.2 to regulate both uninsured and underinsured motorist coverages as a single coverage (see § 11580.2, subd. (n)), in doing so it created separate settlement requirements for the different types of coverages in order to accommodate both the needs of the insureds and the requirements of the insurer. By specifically adding section 11580.2(p)(3) and section 11580.2(p)(5), and by specifying separate substantive and procedural requirements and limitations applicable in the underinsurance context only, it appears the Legislature intended to exclude the consent requirement of section 11580.2(c)(3) from the underinsured motorist provisions.

(Id. at *329.)

Judge Solomon noted that the right to subrogation in the underinsured motorist context is not consistent with the plain meaning of the statute, and, if allowed, would lead to anomalous results. In an uninsured motorist situation, the carrier must be notified of the claim and must be given the right to consent to any potential judgment or settlement in order to protect its subrogation rights and prevent double recovery by its insured. (Id.) In contrast, there is no need for such protection in the underinsured motorist context because the underinsured carrier is not required to indemnify its insured until the insured has exhausted the limits of the tortfeasor’s liability policies by either settling the claim or obtaining a judgment against the tortfeasor and submits proof of payment to the insurer. (Section 11580.2(p)(3).) Under those circumstances, there is no danger of double recovery. Therefore, Judge Solomon ruled that the defense of lack of consent raised by Allsnake was without merit and granted Attorney Bulldog’s Motion for Summary Adjudication and held that there was coverage for underinsured motorist benefits and that Eggshell and his children were not required to obtain Allsnake’s consent before settling their third-party claims against Crackhead Craig and his insurer. Bulldog proceeded to trial and received a judgment against Allsnake for $10 million in compensatory and $30 million in punitive damages.

Conclusion

The facts of this Crackhead Craig chronicle come primarily from the case of Hartford Fire Ins. Co. v. Macri (1992) 4 Cal.4th 318. Despite the fact that this has been the law for almost 25 years, automobile insurance carriers frequently send out form letters in the underinsured motorist context and notify attorneys that they are not permitted to settle their clients’ third-party claims without the prior written consent of the insurance carrier. That is not, nor has it ever been, the law in California. The duty to obtain the carrier’s consent by a carrier applies only in the uninsured context and not to the underinsured motorist context. It would appear that many carriers use the consent provision in an effort to obtain pre- UIM claim or UIM arbitration discovery. The UIM claim does not even exist until after you have settled the third-party claims for policy limits. By asserting the consent argument, many carriers are able to bluff inexperienced attorneys into sharing a great deal of medical records or other information about the claim in order to obtain its consent to the third party settlement. The carrier uses the information and documents to begin their investigation to try to defeat the UIM claim that is likely to follow the third-party settlement.

Although the uninsured and underinsured motorist coverage provisions are all contained in Insurance Code Section 11580.2, special provisions apply to underinsured motorist coverage that do not apply to uninsured motorist coverage. Likewise, special provisions apply to uninsured motorist coverage that do not apply to underinsured motorist coverage. An attorney would be well-advised to study the claim requirements for each type of claim before they begin any negotiations on settling third-party claims. There are guide books that can provide checklists for attorneys to make sure that nothing is overlooked. (See California Uninsured Motorist Practice (2d ed Cal CEB).)


This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2016). Consent of carrier not required for UIM coverage. Trial Bar News, 39(10), 11-12, 28-29.

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