Uninsured / Underinsured Motorist Claim

Dallas insurance lawyers need to understand how uninsured / underinsured motorist claims work.
A 1994, Texas Supreme Court case discusses this issue. The style of the case is, Ruben and Anita Hernandez v. Gulf Group Lloyds. Here is some relevant information.
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 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. 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 Hernandezes, 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 coverage based upon the Hernandezes’ failure to obtain its consent before settling with McCullough.
After a bench trial, the trial court rendered judgment for the Hernandezes in the amount of $100,000 (the amount of the underinsured motorist policy), plus pre-judgment interest, post-judgment interest, and attorney’s fees. In its conclusions of law, the trial court stated that Gulf had suffered no material prejudice because of the Hernandezes’ failure to comply with the settlement-without-consent exclusion, and that invocation of the exclusion would deprive the Hernandezes of protection required by the Texas Uninsured/Underinsured Motorist Statute. The court of appeals disagreed with the latter conclusion, and thus reversed the trial court’s judgment. The Hernandezes do not dispute the validity of settlement-without-consent exclusions. They argue, however, that such an exclusion is unenforceable absent a showing by the insurer that it has been prejudiced by an 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.
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 In the context of an underinsured 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. 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.
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 underinsured 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 consent before settling with McCullough and releasing him from all liability.” Gulf, therefore, remains in the same position it would have occupied had the Hernandezes complied with the settlement-without-consent clause. Since Gulf has not been prejudiced by the Hernandezes’ breach, the breach is not material, and Gulf therefore is not excused from its obligation to perform under the contract.
Because the stipulated facts establish as a matter of law that Gulf was not prejudiced by the Hernandezes’ settlement with McCullough, Gulf may not escape liability by invoking the settlement-without-consent exclusion. The Court therefore reversed the judgment of the court of appeals and affirmed the trial court’s judgment in favor of the Hernandezes.