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September 29, 2008

Failure To Secure Settlement Permission From SUM Carrier Breaches Policy

There is no longer any question that in a multi-car accident an insured seeking SUM benefits from their carrier must only exhaust the liability policy of one of the tortfeasor. In such a fact pattern the approved language of the Regulation 35-D SUM endorsement sets forth what the claimant must do to comply and properly settle with the tortfeasor.

This would include allowing a claimant to sign a general release with the initial tortfeasor as long as she provides the SUM insurer with written notice of intent to settle for the full available limit of the first tortfeasor's policy and if, after 30 days, the SUM insurer chooses not to advance the settlement amount to claimant and proceed against the first tortfeasor. Moreover the 35-D SUM endorsement does not require the exhaustion of a second tortfeasors' policy in order to make a SUM claim.

The Appellate Division Third Department in a recent decision which engendered a vigorous dissent held that if a claimant does settle with a second tortfeasor he or she must procure the permission of the SUM carrier. Failure to do so would be a breach of the SUM insurer's right to subrogation and preclude claimant from recovering any SUM benefits. Matter of Central Mutual Insurance Company v. Bemis, 2008 NY Slip Op 6618; AD3d (3rd Dept. 2008).

In Central Mutual Insurance Company v. Bemis, the claimant, as required, procured the agreement of a tortfeasors insurer to pay the complete limits of its liability insurance policy. Claimant provided the required notice to her SUM carrier of the proposed settlement. The SUM carrier thereafter failed to respond within the required 30 days. Claimant then reached a settlement agreement with the insurer for a second tortfeasor for less than its policy limits without either giving notice or receiving permission from her SUM carrier. General Releases to both tortfeasors were then executed and delivered by claimant.

When she made a claim for SUM benefits, her SUM carrier disclaimed coverage based upon her failure to either obtain its consent to the settlements or take steps to preserve its subrogation rights. On appeal from the grant of a permanent stay of arbitration, the Appellate Division Third Department held that although claimant was within her right to settle with the first tortfeasor after expiration of the 30 days, she violated the terms of the SUM endorsement by her settlement with the second tortfeasor without providing notice to or seeking permission from her SUM carrier. In finding a breach of the policy precluding recovery of any SUM benefits the Court held:

We reach a different conclusion as to respondent's argument that her settlement with the first tortfeasor for that party's policy limits relieved her of the obligation to either obtain petitioner's written consent to her settlement with the second tortfeasor or preserve petitioner's subrogation rights in the release given to that tortfeasor. While paragraph 9 of the policy makes clear that respondent was obligated to fully exhaust the policy of only one of the tortfeasors involved in her accident (see S'Dao v National Grange Mut. Ins. Co., 87 NY2d 853, 854-855, 661 N.E.2d 1378, 638 N.Y.S.2d 597 [1995]), that same provision does not excuse a failure to comply with paragraph 10 upon settling with another tortfeasor. Unlike the settlement with the first tortfeasor, paragraph 10's first sentence is not applicable to respondent's settlement with the second tortfeasor because the latter was not for the full policy amount. As a result, only the last sentence of paragraph 10 applies here. That sentence provides: "An insured shall not otherwise settle with any negligent party, without our written consent, such that our [subrogation] rights would be impaired."

In his dissent, Justice Kavanagh found the majority's reasoning and interpretation of the language of the SUM endorsement too restrictive. Instead Justice Kavanagh would have found that once a claimant has properly exhausted and settled with one tortfeasor there is no requirement that notice be provided or permission granted by a SUM carrier before settlement with any other tortfeasor. To hold otherwise, Justice Kavanagh reasoned, would be against the stated purpose of Regulation 35-D which promulgated the standard SUM endorsement and would:

discourage settlements in this type of litigation and to invite indeed command a plaintiff's counsel to fully litigate any and all personal injury claims that it might have against any and all tortfeasors. Clearly, this is not the result that was intended by the Legislature when it enacted these provisions and, in my view, it constitutes a waste of precious judicial resources.

Many years after the implementation of the standard Regulation 35-D SUM endorsement Appellate Courts continue to address fundamental issue's of interpretation of the policy language. It would, therefore, not be surprising to see Central Mutual Insurance Company v. Bemis addressed and decided by the New York Court of Appeals.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.


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