Bogan v. Progressive Casualty Insurance

521 N.E.2d 447, 36 Ohio St. 3d 22, 1988 Ohio LEXIS 73

• Court: Ohio Supreme Court
• Decided: March 30, 1988
• Docket: No. 86-1696
• Status: Published

Opinions

Holmes, J.

Upon a review of the policy terms before us, particularly those relied upon by the parties and which are set forth in their letters of correspondence, it becomes apparent that the issues in this case cannot be resolved without determining the effectiveness of those preconditions to underinsured motorist coverage contained in Progressive’s policy. Specifically, we must consider the consent to settlement clause, the extent to which an injured party must exhaust the underinsured’s policy limits and the extent to which the provider of underinsured motorist coverage may require protection of its subrogation rights.

I

R.C. 3937.18(A)(2),¹ which mandates inclusion of underinsured motorist coverage within policies of motor vehicle liability insurance, became effective October 1, 1982. Prior to that time, insurers were required to merely offer underinsured motorist coverage, which requirement was set forth in R.C. 3937.181, effective June 25, 1980, and repealed effective October 1, 1982. This court has had no opportunity to comment on a number of the dilemmas created between the statutory requirements and various insurance policy provisions intended to effectuate the statute. This has allowed a number of activities to become prevalent in this area of legal and insurance practice. We now consider such practices.

As previously mentioned, the Bogans sought Progressive’s consent to settle the case. Progressive impliedly refused to give such consent, setting forth its reasons for doing so by letter dated July 23, 1984. Accordingly, we first consider that portion of Progressive’s policy provisions which excludes underinsured motorist coverage if the insured makes any settlement with those potentially liable without first obtaining the written consent of the insurer.

There are of course a number of considerations which militate in favor of settlement between the underinsured tortfeasor’s insurer and the injured party. Obviously, settlement avoids litigation with its attendant expenses and resultant burden upon the legal system. Where the amount of settlement is less than the policy limits, the unpaid amount may well represent the savings in litigation costs for both sides. More importantly, settlement hastens the payment to the injured party who obviously needs compensation soon after the injuries when the medical expenses begin to amass and when the anxiety level is probably quite high. Additionally, there are many situations where litigation would not be a preferred course of action because, while the injuries are certain, there may remain other problems of proof. Thus, the public policy considerations, apart from the contract of the parties, generally favor settlements.

In the analysis of the issues sub judice, we note that this court has quite recently considered a consent clause, but in the context of an insurer’s refusal to be bound by the outcome of litigation between the injured insured and the tortfeasor. In Motorists Mut. Ins. Co. v. Handlovic (1986), 23 Ohio St. 3d 179, 23 OBR 343, 492 N.E. 2d 417, the policy at issue provided underinsured motorist coverage. The provision relied upon stated, quite similarly to that in the present case, that the injured insured must obtain the insurer’s written consent before he may litigate against the tortfeasor and that without such consent the insurer was not bound to provide underinsured motorist coverage. This court’s judgment was that the avoidance of coverage by requiring such advance written consent was unreasonable under those circumstances and that the underinsured motorist insurance carrier, which had knowledge of the suit, was bound by the final judgment rendered in that case.

The present case presents a substantially similar advance consent requirement in the context of a settlement, rather than a judgment. We note, however, that the requirement of advance consent need not always be construed unfavorably. Although withholding advance consent to a court proceeding might not always be reasonable due to the presumptions accorded a trial and resulting judgment, nevertheless a different result might occur when the advance consent requirement is applied to a settlement between the injured insured and the tortfeasor. Clearly, a settlement is an agreement between such parties, subject to their negotiations, with a wider latitude of potential impact upon the provider of underinsured motorist coverage. Thus, where a provider of underinsured motorist coverage has reasonably refused to give advance consent, particularly in the context of a settlement, then the insured, is bound by the policy’s advance written consent requirement. The issue of whether a provider of underinsured motorist coverage has unreasonably refused to grant advance consent for its insured to settle with the tortfeasor’s insurance carrier and, relatedly, whether the policy requirement of advance consent is enforceable as a bar to underinsured motorist coverage is to be determined from the effects of the settlement, inclusive of the effects upon the rights of both the insured and the insurer. Having determined that an insurer may not avoid coverage by unreasonably refusing to consent to a settlement, we next inquire whether Progressive’s reasons for refusing to consent to the settlement, as stated in its correspondence to the Bogans’ counsel and set forth in its briefs upon the merits, were reasonable under the circumstances.

II

Progressive asserts that it need not have given its consent to any settlement which did not exhaust the Danielses’ policy limits. The basis for this contention is to be found in Progressive’s policy endorsement providing underinsured motorist coverage, which states, in pertinent part, that:

“The company shall not be obligated to make any payment * * * until after the limits of liability under [all other insurance policies] * * * have been exhausted by payment of judgments or settlements.” (Emphasis added.)

Before construing this provision, we should point out that, although the exhaustion clause does not appear in the statutory mandate of underinsured motorist coverage, it seems to have been created in response to the possible implications of the language utilized in R.C. 3937.18(A)(2). Therein, underinsured motorist coverage is mandated in an amount equal to the automobile liability coverage of the policy “less those amounts actually recovered under all applicable * * * insurance policies * * (Emphasis added.) The direct implication of the emphasized language is that the coverage would appear to begin at the amount actually received from the underinsured tortfeasor’s insurer regardless of whether the amount was determined and paid by the 'underinsured tortfeasor’s carrier or voluntarily agreed upon by the injured party. By contractually eliminating this possible impact of the statute, insurers began their underinsured motorist coverage at the upper limits of the underinsured tortfeasor’s policy. This effectively releases such insurers from providing coverage for amounts which the injured party could have received but for his voluntary decision to accept a lesser amount in settlement.

Having considered the necessity of the exhaustion clause to the underinsured motorist insurer, we now consider its implications to the insured who is also the injured party. The requirement of exhaustion appears to affect the injured party in two ways. First, the exhaustion requirement functions as a precondition to application of the underinsured motorist coverage. Progressive is not obligated and the claim is not matured under Progressive’s policy until the exhaustion requirement is satisfied. Second, by its refusal to consent to any settlement which does not exhaust Nationwide’s policy limits, Progressive has converted the exhaustion requirement into a precondition for its consent to settlement. Obviously, a determination of the reasonableness of withholding consent because of the exhaustion clause must turn upon whether the settlement proposed to Progressive satisfied the exhaustion requirement.

As previously mentioned, the term “exhaust” is not found in R.C. 3937.18(A)(2). Nevertheless, the court of appeals below determined that inclusion of this requirement within the underinsured motorist provision did not violate the statutory mandate since the requirement of exhaustion, strictly speaking, was applicable only to the timing of the policy’s application and not the amounts recoverable under the underinsured motorist provision. This reading of both the statute and the provision appears reasonable.

The precise meaning of “exhaust,” although not a legal term per se, would seem rather easily ascertained. Progressive quotes from Webster’s New Third International Dictionary, Unabridged (1986), at 796, which defines “exhaust” as: “to use up the whole supply or store of: expend or consume entirely.” Based upon this definition, Progressive asserts that the exhaustion requirement in its policy requires that the entire “bodily injury liability limits of Nationwide’s policy” must be paid to the Bogans.

While accepting the above definition as accurately describing the term at issue, we are compelled to disagree with so strict an application as that contended for by Progressive. As stated above, the objective of the exhaustion clause in the underinsured motorist insurance policy is quite clearly to absolve the insurer from liability for those uncollected amounts which were below the stated limits of the underinsured tortfeasor’s policy. This goal was fully satisfied by the Bogans’ written assertion that they would seek underinsured motorist coverage from Progressive only for those damages in excess of Nationwide’s policy limits. Therefore, an injured insured satisfies the “exhaustion” requirement in the underinsured motorist provision of his liability insurance policy when he receives from the underinsured tortfeasor’s insurance carrier a commitment to pay an amount in settlement, the injured party retaining the right to proceed against his underinsured motorist insurance carrier only for those amounts in excess of the tortfeasor’s policy' limits., The exhaustion clause must be construed as it was intended, i.e., a threshold requirement and not a barrier to underinsured motorist insurance coverage. From the standpoint of Progressive, Nationwide’s policy limits were exhausted when the Bogans voluntarily decided to treat the proffered settlement as a receipt of the entire- policy limits for all applicable purposes.

We do not mean to suggest by the forégoing that an injured party may, voluntarily or otherwise, abandon his claim against the tortfeasor or his insurer and so proceed directly against the underinsured motorist insurer. The exhaustion clause, as construed herein, is a valid precondition to coverage under such policy.

Having concluded that the settlement proposed to Progressive by the Bogans satisfied the exhaustion clause, it becomes apparent that Progressive could not have reasonably withheld its consent to the settlement on the basis of such exhaustion clause. We therefore hold that a provider of under-insured motorist coverage has unreasonably withheld its consent to a settlement by its injured insured when the refusal to give consent was based upon the exhaustion clause in the policy as we have determined herein to have been fully satisfied. Under such circumstances, the failure to consent to the settlement violates public policy and the intent of the General Assembly as expressed in R.C. 3937.18(A)(2).

III

Progressive also relies upon Part IY of its underinsured motorist insurance provision which is called the “Trust Agreement.” This section, as set forth above, was specifically referred to by Progressive in its letter dated July 23, 1984. In essence, it establishes Progressive’s rights of subrogation and, further, obligates the insured to “do whatever is proper to secure and * * * do nothing after loss to prejudice such rights.” The direction taken by Progressive is therefore twofold, and mirrors the approach taken in considering the exhaustion clause. Progressive contends that it had every right to refuse to consent to a settlement, even supposing that the exhaustion clause was satisfied, if the proposed settlement compromised or destroyed its rights to be subrogated to its insured’s claim as against the Danielses. Also, Progressive asserts that the actual terms of the settlement entered into by the Bogans did, in fact, destroy its subrogation rights against the Danielses, thus constituting a material breach of the Trust Agreement and thereby relieving Progressive of its obligation to provide coverage. Again, the strength of both arguments can only derive from the reasonableness of the insurer in requiring that its rights of subrogation be protected.

The legal doctrine of subrogation has long been recognized as an insurer’s derivative right. In the case of Newcomb v. Cincinnati Ins. Co. (1872), 22 Ohio St. 382, subrogation was defined as follows:

“Where a loss, covered by insurance, is occasioned by a wrong-doer, the underwriter, after reimbursing it in specie, or making compensation in money, is, in a proper case, entitled to be subrogated, quoad hoc, to the right of the assured against the wrong-doer. This is of the highest equity; for whereas the loss is, in the first instance, that of the insured, after reimbursement or compensation, it becomes the loss of the insurer.” Id. at 387, relying upon the opinion of Lord Hardwick in Randal v. Cockran (1748), 1 Ves. Sen. 98, 27 Eng. Rep. 916.

This court has since reaffirmed its adherence to the legal doctrine of subrogation in various circumstances. See, e.g., Federal Union Life Ins. Co. v. Deitsch (1934), 127 Ohio St. 505, 189 N. E. 440 (subrogation to rights of mortgagee); Aetna Cas. & Sur. Co. v. Hensgen (1970), 22 Ohio St. 2d 83, 51 O.O. 2d 106, 258 N.E. 2d 237 (subrogee succeeds to rights of insured); Centennial Ins. Co. v. Liberty Mut. Ins. Co. (1980), 62 Ohio St. 2d 221, 16 O.O. 3d 251, 404 N.E. 2d 759 (excess insurer subrogated to rights against primary insurer); James v. Michigan Mut. Ins. Co. (1985), 18 Ohio St. 3d 386, 18 OBR 440, 481 N.E. 2d 272 (subrogation in case involving underinsured motorist); Shealy v. Campbell (1986), 20 Ohio St. 3d 23, 20 OBR 210, 485 N.E. 2d 701 (subrogation to contribution rights); Theil v. Allstate Ins. Co. (1986), 23 Ohio St. 3d 108, 114, 23 OBR 267, 272, 491 N.E. 2d 1121, 1126 (Holmes, J., dissenting; subrogation claim ordinarily available); Motorists Mut. Ins. Co. v. Handlovic, supra, 23 Ohio St. 3d at 184, 23 OBR at 347, 492 N.E. 2d at 421 (Douglas, J., concurring; full and final release destroys subrogation rights); Federal Bank of Louisville v. Taggart (1987), 31 Ohio St. 3d 8, 12, 31 OBR 6, 10, 508 N.E. 2d 152, 156 (accommodation party may be subrogated to rights of the holder of a promissory note).

Furthermore, in the context of the case before us, the right of subrogation is specifically granted to providers of uninsured/underinsured motorist coverage by the General Assembly. To that end, R.C. 3937.18(E) states, in pertinent part:

“In the event of payment to any person under the coverages required by this section and subject to the terms and conditions of such coverages, the insurer making such payment to the extent thereof is entitled to the proceeds of any settlement or judgment resulting from the exercise of any rights of recovery of such person against any person or organization legally responsible for the bodily injury or death for which such payment is made * * *.” Of course, such right of subrogation would not encompass those amounts payable under the tortfeasor’s insurance policy. See James v. Michigan Mut. Ins. Co., supra, 18 Ohio St. 3d at 388, 18 OBR at 442, 481 N.E. 2d at 274.

Based upon such established common law, and further strengthened by the specific statutory provision, R.C. 3937.18, we can only conclude that a subrogation clause is reasonably includable in contracts providing under-insured motorist insurance. Such clause is therefore both a valid and enforceable precondition to Progressive’s duty to provide underinsured motorist coverage.

It is axiomatic to the doctrine of subrogation that the rights of the insurer are no greater than those of the insured and, further, that a release, such as that granted by the Bogans in the case sub judice, is an effective defense against later actions by an insurer pursuant to its right of subrogation. See, e.g., Automobile Ins. Co. v. Penn RR. Co. (1938), 133 Ohio St. 449, 11 O.O. 148, 14 N.E. 2d 613; Annotation, Collision Insurance: Insured’s Release of Tortfeasor before Settlement by Insurer as Releasing Insurer from Liability (1954), 38 A.L.R. 2d 1095 et seq.; 44 American Jurisprudence 2d (1982) 799, Insurance, Section 1810; 59 Ohio Jurisprudence 3d (1985), Insurance, Section 1223. See, also, Handlovic, supra, at 184, 23 OBR at 347, 492 N.E. 2d at 421, where the above rule is most recently set forth. Consequently, it is beyond dispute that the Bogans’ grant of a full and final release to the Danielses effectively destroyed Progressive’s subrogation right to recover from the Danielses any money paid to the Bogans. This court, in a number of its earlier opinions, has given an insured with uninsured and underinsured motorist coverage some leeway in proceedings to determine the issue of liability and insurance coverage without the specific consent of the insuring company, even where such consent is required by the provisions of the policy. In Motorists Mut. Ins. Co. v. Handlovic, supra, it was determined that an insured could proceed to bring an action against the tortfeasor without obtaining a consent to sue from his own underinsurance carrier, such proceeding not affecting the insurance coverage.² However, there remains a contractual duty of the insured not to settle with the tortfeasor without obtaining the consent of the insurer, where such settlement entails a complete release of the tortfeasor from all liability and, accordingly, destroys the insurer’s right of subrogation. In the case sub judice, not only did the Bogans act without Progressive’s consent, but they acted in the face of Progressive’s flat refusal to contemplate any settlement that violated the terms of the Trust Agreement.

Notwithstanding the obviousness of the above maxims, the court of appeals stated:

“There is no indication of a real and existing subrogation right of defendant against the tort-feasor, that is, that the tort-feasor has assets with which to pay a judgment in excess of the policy limits of his liability insurance.” (Emphasis added.)

Thus, it is argued, no action of the Bogans was prejudicial, as a practical matter, to Progressive’s subrogation right since obtaining the reimbursement from the Danielses appears doubtful. Such view is mistaken both as a matter of law as well as'the factual assumptions underlying the analysis.

Progressive’s subrogation right, as previously demonstrated, is based not only upon the words of its contract, but upon much prior case law and the specific statutory expression of the General Assembly. As such, a right of subrogation, the protection of which is a precondition to underinsured motorist coverage, is a full and present right in and of itself wholly independent of whether a later judgment obtained by use of such right will be reduced to collection from the tortfeasor. Such right constitutes a “real and existing” right at any time the injured insured is in a position to release a liable party from its liability. It is, therefore, both just and reasonable that an insurer require, as a precondition to coverage, not that such subrogation rights will result in reimbursement to the insurer, but that the injured party not compromise with the tortfeasor in such a way as to destroy the insurer’s subrogation right. Such compromise clearly prejudices the present subrogation right of the injured party’s insurer.

Accordingly, under the reasonable terms of the parties’ own contract, the Bogans have failed to meet the crucial precondition of protecting Progressive’s subrogation rights. By executing a release which precluded the insurer from exercising its subrogation rights, the Bogans materially breached the insurance contract. Progressive is therefore discharged from its obligation to provide underinsured motorist coverage.

Accordingly, the judgment of the court of appeals is reversed.

Judgment reversed.

Moyer, C.J., Locher and Wright, JJ., concur. H. Brown, J., concurs in part and dissents in part. Sweeney and Douglas, JJ., dissent.

1 R.C. 3937.18(A)(2):

“(A) No automobile liability or motor vehicle liability policy of insurance insuring against loss resulting from liability imposed by law for bodily injury or death suffered by any person arising out of the ownership, maintenance, or use of a motor vehicle shall be delivered or issued for delivery in this state with respect to any motor vehicle registered or principally garaged in this state unless both of the following are provided: * **

“(2) Underinsured motorist coverage, which shall be in an amount of coverage equivalent to the automobile liability or motor vehicle liability coverage and shall provide protection for an insured against loss for bodily injury, sickness, or disease, including' death, where the limits of coverage available for payment to the insured under all bodily injury liability bonds and insurance policies covering persons liable to the insured are less than the limits for the insured’s uninsured motorist coverage at the time of the accident. The limits of liability for an insurer providing underinsured motorist coverage shall be the limits of such coverage, Jess those amounts actually recovered under all applicable bodily injury liability bonds and insurance policies covering persons liable to the insured.”

2 We also point to the case of Universal Underwriters Ins. Co. v. Shuff (1981), 67 Ohio St. 2d 172, 21 O.O. 3d 108, 423 N.E. 2d 417, wherein the injured insured brought an action in the first instance against the tortfeasor and impleaded his uninsured insurance carrier, seeking a determination of whether the tortfeasor was an uninsured motorist under the policy, The action proceeded with the alleged tortfeasor being determined to be an uninsured motorist. The alleged tortfeasor was, however, determined by a jury not to be negligent. This court held that the matter of liability as determined by the jury was res judicata as to the issue of liability in a later but separate action by the injured party seeking arbitration with his uninsured motorist insurance carrier.