Making an Underinsured Motorist Claim

People in Grand Prairie, Fort Worth, Arlington, Irving, Dallas, and other places in Texas, who have underinsured motorist (UIM) coverage will hope they never have to use that coverage. But what if they do have to use it? What are the rules?
One rule focused on here, is that in order to make the UIM claim, the claimant must first get written permission from their UIM insurance carrier to settle the case with the underinsured driver who caused injuries. If there is a settlement with the underinsured driver without getting written permission from the UIM carrier, the UIM carrier can refuse benefits. Here is a case where this played out.
The case is a Texas Supreme Court case decided in 1994. The style of the case is Ruben and Anita Hernandez v. Gulf Group Lloyd’s.
In this case, the court had to consider whether an insurer may deny a UIM claim on the basis of a “settlement without consent” exclusion clause absent any showing that the settlement prejudiced the insurer. The court held that an insurer may escape liability on the basis of a settlement-without-consent exclusion only when the insurer is actually prejudiced by the insured’s settlement with the tortfeasor.
This case was tried on the following stipulated facts. On November 21, 1987, Elizabeth Hernandez was killed when the car in which she was a passenger flipped over. The driver of the car, Charles McCullough, Jr., was the sole cause of the accident. McCullough was nineteen years old and his only asset was a $25,000 liability policy with State Farm. Elizabeth was covered by her parents’ insurance policy with Gulf Group and that policy provided UIM benefits of $100,000. The damages suffered by Elizabeth and her parents exceeded $125,000.
Six weeks after the accident, the Hernandezes, without the consent of Gulf, entered into a settlement with McCullough for the limits of the State Farm policy. The Hernandezes then sought UIM coverage from Gulf. Gulf denied the claim based on the Hernandezes’ failure to obtain its consent in writing before settling with McCullough.
In its appeal of the Gulf decision, the Hernandezes did not dispute the validity of the settlement-without-consent exclusion in the Gulf policy. They argued, however, that such an exclusion is unenforceable absent a showing by Gulf that it has been prejudiced by Hernandezes’ failure to obtain consent before settling with an underinsured motorist.
In discussing this case, the court said, “Insurance policies are contracts, and as such are subject to rules applicable to contracts generally.” “A fundamental principle of contract law is that when one party to a contract commits a material breach of that contract, the other party is discharged or excused from any obligation to perform.” Citing from the RESTATEMENT (SECOND) OF CONTRACTS, Section 241(a), the court said, “In determining the materiality of a breach, courts will consider, among other things, the extent to which the nonbreaching party will be deprived of the benefit that it could have reasonably anticipated from full performance.” The less the non-breaching party is deprived of the expected benefit, the less the material the breach.
In the context of an UIM claim, there may be instances when an insured’s settlement without the insurer’s consent prevents the insurer from receiving the anticipated benefit from the insurance contract; specifically, the settlement may extinguish a valuable subrogation right. In other instances, however, the insurer may not be deprived of the contract’s expected benefit, because any extinguished subrogation right has no value. In the latter situation — where the insurer is not prejudiced by the settlement — the insured’s breach is not material. The court concluded, therefore, “that an insurer who is not prejudiced by an insured’s settlement may not deny coverage under an uninsured/underinsured motorist policy that contains a settlement-without-consent clause.
In the case, the parties stipulated that McCullough had no assets other than the $25,000 State Farm policy, and that he did not believe his financial situation would change in the foreseeable future; and Gulf further stipulated that it “has not incurred any financial losses … with regard to its subrogation rights by the failure of the [Hernandezes] to obtain [its] consent before settling with McCullough and releasing him from all liability.” Gulf, therefore, remained in the same position it would have occupied had the Hernandezes complied with the settlement-without-consent clause. Since Gulf had not been prejudiced by the Hernandezes’ breach, the breach was not material, and Gulf therefore is not excused from its obligation to perform under the contract.

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