Alabama Supreme Court Holds Insurer is Discharged from Payment of Underinsured Motorist Benefits Where Insured Violates Consent-To-Settle Provision

The Alabama Supreme Court recently issued an opinion affirming a trial court’s decision granting summary judgment and held that an insurer is discharged from its obligation to pay underinsured motorist benefits when it has paid the insured an advance and the insured repudiates the policy by violating a consent-to-settle provision.

In Turner v. State Farm Mutual Insurance Company, David Turner – an on-duty paramedic – collided with defendant Michael Norris while passing through an intersection. Turner suffered several injuries, including a broken leg. Turner sued Norris, alleging negligence and recklessness. Norris filed a notice of bankruptcy with the circuit court, and the matter was dismissed without prejudice. Turner later successfully moved to have the case reinstated and filed an amended complaint, naming his insurer, State Farm, as a defendant. Turner sought to recover damages against State Farm through his underinsured motorist coverage. Norris and his insurance carrier offered to settle Turner’s original claim for the $25,000 policy limits of Norris’s coverage. Upon notice of this offer, State Farm sent Turner a $25,000 check to be held in trust while maintaining its subrogation rights. State Farm then opted out of the proceedings. The plaintiff eventually entered a settlement agreement with Norris for $25,000 without State Farm’s consent. Turner returned the check to State Farm. Norris was released following the settlement, and the plaintiff sought a direct action against State Farm for underinsured motorist benefits. State Farm filed for summary judgment on the grounds that the plaintiff had forfeited his right to the UIM coverage upon entering into the settlement agreement without State Farm’s consent. The circuit court granted State Farm’s motion, and Turner appealed to the Supreme Court.

The Alabama Supreme Court noted Turner’s policy included a consent to settle provision providing in pertinent part: “There is no coverage … for an insured who, without our written consent, settles with any person or organization who may be liable for the bodily injury and thereby impairs our right to recover our payments.” On appeal, Turner did not challenge the validity of the consent to settlement provision of his insurance coverage with State Farm. Instead, Turner asserted that State Farm did not have a legitimate reason in refusing its consent to his settlement with Norris. Turner alternatively asserted that his settlement did not forfeit his UIM benefits because State Farm failed to provide further explanation for withholding its consent. In its analysis, the Court explained that an insurer wanting to protect its subrogation rights under a UIM policy must provide the insured an advancement in an amount equal to the settlement offer from the tortfeasor. State Farm complied with this requirement when it originally sent Turner a $25,000 check prior to the consummation of the settlement. By doing so, State Farm acted in accordance with the guidelines laid out in Lambert v. State Farm Mut. Auto. Ins. Co., 576 So. 2d 160 (Ala. 1991). State Farm also followed the Court’s precedential standards by opting out of the trial court proceedings to protect its rights in present and future litigation. Lowe v. Nationwide Ins. Co., 521 So.2d 1309 (Ala. 1988). Therefore, Turner’s actions were a repudiation of his contract with State Farm, and State Farm, as a matter of public policy, was justified in withholding its consent to the settlement agreement between Turner and Norris.

Before the Supreme Court, Turner essentially argued “he should have been permitted to unilaterally decide that State Farm’s decision to avail itself of the Lambert procedure was unreasonable, to release Norris from liability, and still retain his entitlement to UIM benefits in contravention of the consent to settle provision in his State Farm policy.” The Supreme Court pointed out Turner presented no compelling reason for such a rule. The Court further noted Turner failed to seek the circuit court’s intervention regarding the reasonableness of State Farm’s actions prior to entering into the settlement agreement and releasing Norris. Because Turner failed to take such action, the Court did not consider whether the circuit court could have compelled State Farm to consent to the settlement. The Court therefore affirmed the entry of summary judgment in favor of State Farm because Turner failed to demonstrate that principles of contract law or public policy would necessitate overturning the circuit court’s ruling.

Although this decision might open the possibility for circuit courts under different circumstances to somehow compel an insurer to consent to a settlement agreement, the Supreme Court’s holding makes one thing clear: an insured cannot simply refuse to abide by a consent-to-settle provision in an underinsured motorist policy and expect to reap the benefits when their insurer has followed the procedures laid out in Lambert and Lowe.