Insurance Policy Conditions

For someone in Grand Prairie, Arlington, Dallas, Fort Worth, Irving, Hurst, Euless, Bedford, Garland, Mesquite, Carrollton, Richardson, or anywhere else in Texas, it is sometimes difficult to understand the conditions that are written in a policy and how those conditions apply to a claim the insured person is making to the insurance company.
An insurance contract may impose conditions on the insured. For example, almost all policies are going to require that the insured give notice of the claim as soon as is practicable when a claim arises. The insured also has a duty to to co-operate with the insurance company in its investigation of the claim. Most policies require that the insured file a formal proof of loss, if the insurance company requests it. When the insured commits a material breach of the insurance contract, the insurance company is excused from its obligation under the insurance contract. In this regard, it then becomes important to understand what a “material” breach is.
In trying to understand what a “material” breach is, the case, Rueben and Anita Hernandez v. Gulf Group Lloyds, decided in 1994, by the Texas Supreme Court is a good case to look at for guidance.
This case was tried on agreed upon facts. “On November 21, 1987, Elizabeth Hernandez was killed when the car in which she was a passenger flipped over. The sole proximate cause of the accident was the negligence of the driver of the car, Charles McCullough, Jr. At the time of the accident, McCullough was nineteen years old and his only asset was a $25,000 liability policy with State Farm Mutual Automobile Insurance Company. Elizabeth Hernandez was covered by her parents’ insurance policy with Gulf Group Lloyds (Gulf). That policy included uninsured/underinsured motorist coverage in the amount of $100,000. The damages suffered by Elizabeth Hernandez and her parents exceeded $125,000.
Six weeks after the accident, the Hernandezs, without the consent of Gulf, entered into a settlement with McCullough for the limits of McCullough’s State Farm policy. On March 30, 1990, the Hernandezes sought to recover from Gulf under the underinsured motorist coverage. Gulf denied coverge based upon the Hernandezes’ failure to obtain its consent before settling with McCullough.
At trial, in the trial court, judgment was rendered for the Hernandezes in the amount of $100,000, plus interest and attorney’s fees. The trial court ruled that Gulf had suffered no material harm because of the Hernandezes failure to comply with the settlement without consent exclusion. The first level appeals court disagreed and reversed the trial court.
In arguements, the Hernandezes did not dispute the validity of the settlement without consent exclusion in the policy. They argued, however, that such an exclusion is unenforceable absent a showing by the insurer that it has been prejudiced by the insured’s failure to obtain consent before settling with an uninsured or underinsured motorist.
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.
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. This principle is discussed in the “Restatement (Second) Of Contracts, Section 241”. The less the non-breaching party is deprived of the expected benefit, the less material the breach.
In the context of an uninsured motorist 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.
Applying this materiality principle to the facts of this case, the court concluded that the Hernandezes’ failure to obtain Gulf’s consent before settling with McCullough was not a material breach. Gulf stipulated that it knew of no case in which it has refused its consent to settle a claim when an insured driver has tendered the full limits of his or her policy. 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.
The courts ruling was:
We hold 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.
So, this is an example where a condition in the policy was not complied with, yet this non-compliance did not void the coverage. It is best to consult with an experienced Insurance Law Attorney before thinking that a policy conditon can be ignored. What is important to know is that often times an insurance company will point to a policy condition that was violated by the insured and use that violation as an excuse to void coverage when that excuse is not legally justified.