Title: Downey v. Travelers Property Casualty Insurance Co.

State: alabama

Issuer: Alabama Supreme Court

Document:

REL: 06/30/2011
Notice: This opinion is subject to formal revision before publication in the advance
sheets of Southern Reporter.  Readers are requested to notify the Reporter of Decisions,
Alabama Appellate Courts, 300 Dexter Avenue, Montgomery, Alabama 36104-3741 ((334)
229-0649), of any typographical or other errors, in order that corrections may be made
before the opinion is printed in Southern Reporter.
SUPREME COURT OF ALABAMA
OCTOBER TERM, 2010-2011
_________________________
1100272
_________________________
Lou Ann Downey and Delbert Downey
v.
Travelers Property Casualty Insurance Company
Certified Question from the United States District Court for
the Northern District of Alabama
(CV-09-PT-2539-M)
WOODALL, Justice.
The United States District Court for the Northern
District of Alabama, Middle Division, has certified to this
Court the following question:
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2
"Under Alabama law does the failure of an
insured to give prior notice to his or her insurer
of a proposed settlement and release of an alleged
tortfeasor cause the insured to forfeit underinsured
motorist coverage regardless of the insured's actual
knowledge of said coverage and regardless of
prejudice to the insurer if the insured has
possession 
of 
the 
policy 
which 
provides 
the
coverage?"
We answer this question in the affirmative.
I. Factual Background
The facts are undisputed.  On April 21, 2007, Delbert
Downey was operating a motorcycle on which Lou Ann Downey was
a passenger.  While the Downeys' motorcycle was stopped at an
intersection controlled by a traffic light, an automobile
operated by Wyndell Thompson approached the intersection from
the Downeys' rear.  Mrs. Downey was seriously injured when
Thompson failed to stop. 
At the time of the accident, a number of insurance
policies were in force.  Thompson had a liability policy
issued by First Acceptance Insurance Company, Inc. ("First
Acceptance"), in the amount of $10,000.  The Downeys had,
among others, a Personal Automobile Insurance Policy ("the
policy") issued by Travelers Property Casualty Insurance
Company ("Travelers").  Each of the Downeys was a named
1100272
The motorcycle was insured by yet a third insurer that
1
did not provide uninsured/underinsured-motorist coverage.
3
insured on the policy.  The policy listed three of the
Downeys' vehicles, none of which was the motorcycle.   The
1
policy provided uninsured/underinsured-motorist coverage as
follows:
"COVERAGE D1 UNINSURED MOTORISTS (BODILY INJURY)
"INSURING AGREEMENT
"A.
We will pay damages which an 'insured' is
legally entitled to recover from the owner or
operator 
of 
an 
'uninsured 
motor 
vehicle'
because of 'bodily injury':
"1.
Sustained by an 'insured'; and
"2.
Caused by an 'accident.'
"The owner's or operator's liability for
these damages must arise out of the
ownership, maintenance or use of the
'uninsured motor vehicle.' 
"....
"B.
'Insured' as used in this coverage means:
"1.
You or any 'family member.'
"2.
Any other person 'occupying' 'your
covered auto.'
"....
"C.
'Uninsured motor vehicle' means a land motor
vehicle or trailer of any type:
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4
"1.
To which no bodily injury liability
bond or policy applies at the time of
the accident.
"2.
To which a bodily injury liability
bond or policy applies at the time of
the accident.  In this case its limit
for bodily injury liability must be
less than the minimum limit for bodily
injury liability specified by the
financial 
responsibility 
law 
of
Alabama.
"3.
For which the sum of the limits of
liability under all bodily injury
liability bonds or policies applicable
at the time of the accident is not
enough to pay the full amount the
'insured' 
is 
legally 
entitled 
to
recover as damages.  In this case the
applicable limits for bodily injury
liability must be equal to or greater
than the minimum limit for bodily
injury liability specified by the
financial 
responsibility 
law 
of
Alabama.
"....
"EXCLUSIONS
"A.
We do not provide Uninsured Motorists Coverage
for 'bodily injury' sustained by any 'insured':
"1.
If 
that 
'insured' 
or 
the 
legal
representative settles the 'bodily
injury' claim without our consent."
(Emphasis added.)
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5
On July 8, 2008, the Downeys, in consideration of $10,000
-- while represented by counsel but without having notified
Travelers of the accident and without notifying it that they
were doing so -- executed a general release fully discharging
Thompson and First Acceptance from all liability arising out
of the accident.  On August 19, 2009, the Downeys, represented
by different counsel, notified Travelers for the first time of
the accident and that they were making a claim for
underinsured-motorist ("UIM") benefits  under  the  policy.
Travelers denied the claim pursuant to Exclusion A.1. of the
policy because of the Downeys' failure to obtain its consent
to the settlement.
Subsequently, the Downeys sued Travelers in the Etowah
Circuit Court alleging breach of contract.  Travelers removed
the case to the United States District Court for the Northern
District of Alabama, Middle Division.  Each side moved for a
summary judgment.  In opposition to Traveler's motion, the
Downeys submitted their own affidavits addressing the pre-
settlement-notification 
issue. 
 
Specifically, 
they 
stated 
that
the reason they "did not notify Travelers of the liability
settlement is because [they] did not know [they] had UIM
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6
coverage because [they] had no UIM coverage on the motorcycle
which was involved in the accident."  (Emphasis added.)  The
federal district court certified to this Court the question
regarding the legal effect of the Downeys' alleged ignorance
of the scope of the policy's coverage.
II. Discussion
Central to this case is Lambert v. State Farm Mutual
Automobile Insurance Co., 576 So. 2d 160 (Ala. 1991), which
defines the respective rights and duties of insureds and their
UIM insurers when the tortfeasor's liability insurer offers to
settle for its policy limits.  Lambert was an action brought
by Shelby Lambert and her husband against their own UIM
carrier, State Farm Mutual Automobile Insurance Company
("State Farm"), after Shelby Lambert was injured in an
automobile accident and State Farm refused to consent to an
offer by Alfa Mutual Insurance Company ("Alfa"), the alleged
tortfeasor's liability insurer, to settle with the Lamberts
for $25,000, the limits of the tortfeasor's policy with Alfa.
576 So. 2d at 162.  Indeed, State Farm had "informed the
Lamberts that if they accepted Alfa's settlement offer without
first obtaining State Farm's written consent, as required by
1100272
Lambert thus answers any contention that consent-to-
2
settle clauses violate public policy or the Alabama Motor
Vehicle Safety-Responsibility Act, Ala. Code 1975, § 32-7-23
("the Act").  In other words, operation within the Lambert
framework obviates concern over any alleged conflict with the
Act. 
7
their policy, State Farm would refuse to pay any underinsured
motorist benefits."  Id.  In their complaint, the Lamberts
asserted "that the policy provisions that required them to
obtain State Farm's consent before they could settle with the
tortfeasor were unconscionable, violative of public policy,
and void."  Id.
In lieu of holding that consent-to-settle clauses were
unenforceable,  this Court set forth a framework "that will
2
guarantee that the insured will receive the benefits of the
bargain he has made, but that will, at the same time, protect
the [UIM] insurance carrier's subrogation rights against the
tort-feasor ... and also protect the carrier against the
possibility of collusion between the tort-feasor and his
liability insurer,"  576 So. 2d at 166, stating, in pertinent
part:
"[(1)] If the tort-feasor's liability insurance
carrier and the insured enter into negotiations that
ultimately 
lead 
to 
a 
proposed 
compromise 
or
settlement of the insured's claim against the tort-
feasor, and if the settlement would release the
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8
tort-feasor from all liability, then the insured,
before 
agreeing 
to 
the 
settlement, 
should
immediately 
notify 
the 
underinsured 
motorist
insurance carrier of the proposed settlement and the
terms of any proposed release.
"[(2)] At the time the insured informs the
underinsured motorist insurance carrier of the tort-
feasor's intent to settle, the insured should also
inform the carrier as to whether the insured will
seek underinsured motorist benefits in addition to
the benefits payable under the settlement proposal,
so that the carrier can determine whether it will
refuse to consent to the settlement, will waive its
right of subrogation against the tort-feasor, or
will deny any obligation to pay underinsured
motorist 
benefits. 
If 
the 
insured 
gives 
the
underinsured motorist insurance carrier notice of
the claim for underinsured motorist benefits, as may
be provided for in the policy, the carrier should
immediately begin investigating the claim, should
conclude such investigation within a reasonable
time, and should notify its insured of the action it
proposes with regard to the claim for underinsured
motorist benefits.
"[(3)] The insured should not settle with the
tort-feasor without first allowing the underinsured
motorist insurance carrier a reasonable time within
which to investigate the insured's claim and to
notify its insured of its proposed action.
"[(4)] If the uninsured motorist insurance
carrier refuses to consent to a settlement by its
insured with the tort-feasor, or if the carrier
denies the claim of its insured without a good faith
investigation into its merits, or if the carrier
does not conduct its investigation in a reasonable
time, the carrier would, by any of those actions,
waive any right to subrogation against the tort-
feasor or the tort-feasor's insurer.
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9
"[(5)] If the underinsured motorist insurance
carrier wants to protect its subrogation rights, it
must, within a reasonable time, and, in any event
before the tort-feasor is released by the carrier's
insured, advance to its insured an amount equal to
the tort-feasor's settlement offer."
Lambert, 576 So. 2d at 167 (emphasis added).
Notwithstanding the Lambert framework, the Downeys
contend that "Alabama [case]law recognizes that lack of notice
is excusable under certain circumstances."  The Downeys'
brief, at 3.  This argument is unavailing.
"In the typical case, the insured must, at a minimum, put
on evidence showing the reason for not complying with the
[insurer's] notice requirement.  This prerequisite satisfied,
the insurer may then demonstrate that it was prejudiced by the
insured's failure to give timely notice."  State Farm Mut.
Auto. Ins. Co. v. Burgess, 474 So. 2d 634, 637 (Ala. 1985)
(emphasis added).  If no reason is given, however, a summary
judgment for the insurer denying UIM benefits is appropriate.
See Ex parte Morgan, 13 So. 3d 385 (Ala. 2009) (where insured
gave no reason for affording the insurer only 10 days' notice
of the settlement negotiations, the notice was unreasonable as
a matter of law); Overstreet v. Safeway Ins. Co. of Alabama,
740 So. 2d 1053 (Ala. 1999) (affirming a summary judgment for
1100272
10
the insurer denying UIM benefits when the insured offered no
excuse for its clandestine settlement with the tortfeasor);
Jones v. Allstate Ins. Co., 601 So. 2d 989 (Ala. 1992) (no
reason given); Brantley v. State Farm Mut. Auto. Ins. Co., 586
So. 2d 184 (Ala. 1991) (no reason given).  Similarly, where a
proffered reason is invalid as a matter of law, the
noncompliance stands unexcused.  See Reeves v. State Farm Fire
& Cas. Co., 539 So. 2d 252, 255 (Ala. 1989). 
The only reason proffered by the Downeys for their
noncompliance 
with 
the 
notice 
requirement 
regarding 
settlement
of their claim is that they did not know that the policy
provided UIM coverage for the bodily injuries suffered by Mrs.
Downey while riding the motorcycle.  It is well settled,
however, that "'uninsured motorist coverage inures to a
person, not to a vehicle.'"  State Farm Mut. Auto. Ins. Co. v.
Jackson, 462 So. 2d 346, 353 (Ala. 1984)(quoting and adopting
opinion of United States Court of Appeals for the Eleventh
Circuit).  In other words, "uninsured motorist coverage is not
dependent on the insured person being injured in connection
with a vehicle which is covered by the liability insurer
against whom recovery is sought under the uninsured motorist
1100272
11
provisions."  Id.  Indeed, the Downeys do not contend that
they misunderstood the meaning of the provision.  Thus, it is
implicit that they simply did not read their policy.   
It is clear, however, that where a named insured not only
has possession of the policy but also is represented by
counsel, ignorance of policy terms resulting from a failure to
read the policy does not, as a matter of law, constitute an
acceptable excuse for noncompliance with the notification
requirements of the policy.  See Southern Guar. Ins. Co. v.
Thomas, 334 So. 2d 879, 884 (Ala. 1976) (where the insured is
represented by counsel, excuse of ignorance of policy coverage
"is clearly unreasonable and affords no basis for submitting
the reasonableness of the delay [in notifying insurer of
potential claim] to the jury").  Cf. Watson v. Alabama Farm
Bureau Mut. Cas. Ins. Co., 465 So. 2d 394, 397 (Ala. 1988);
Reeves, 539 So. 2d at 255 (where the insured has "possession
of the policy and ample opportunity to read it," the
ignorance-of-coverage excuse is unreasonable as a matter of
law).  Indeed, the manifest mischief that would ensue from the
adoption of a contrary rule is not difficult to imagine.
III. Conclusion
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12
In this case, the Downeys were at all relevant times in
possession of the policy, which clearly provided UIM coverage
to them for bodily injury caused by the operator of an
"uninsured motor vehicle."  Not only so, but they were
represented by legal counsel when, without prior notice to
Travelers, they settled with Thompson and released him from
all further liability.  The only excuse they offer is that
they were ignorant of the coverage the policy provided.  That
excuse is unreasonable as a matter of law.  Consequently, they
have not met the threshold of showing any alleged "certain
conditions" under which "lack of notice [may be] excusable."
In other words, the Downeys have "forfeit[ed]" UIM coverage.
QUESTION ANSWERED.
Cobb, C.J., and Stuart, Bolin, Parker, Shaw, Main, and
Wise, JJ., concur.
Murdock, J., concurs in the result.
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13
MURDOCK, Justice (concurring in the result).
I concur in the result.
The underinsured-motorist ("UIM") insurance contract at
issue in this case, like most such contracts, contains a
clause that purports to prevent the insured from settling with
an alleged tortfeasor without the consent of the insurance
carrier to the proposed settlement.  In Lambert v. State Farm
Mutual Automobile Insurance Co., 576 So. 2d 160 (Ala. 1991),
in an effort to uphold the purpose of the UIM statute, Ala.
Code 1975, § 32-7-23, while simultaneously protecting UIM
carriers, this Court placed a judicial overlay on such no-
settlement-without-consent provisions.  This overlay appears
to constitute a complete procedural scheme that includes a
recognition that a UIM carrier is entitled to reasonable
notice and an opportunity to investigate and respond to any
proposed settlement with, and release of, an alleged
tortfeasor.  I question whether our law places an additional
overlay on such contractual provisions based upon the holding
in State Farm Mutual Automobile Insurance Co. v. Burgess, 474
So. 2d 634 (Ala. 1985).  
1100272
14
Burgess was decided in 1985, six years before the
adoption in Lambert of the above-referenced procedural scheme.
Moreover, Burgess addressed the possibility of an insured's
being excused from giving notice of his or her accident; it
did not concern the issue whether an insured could ever be
excused from giving notice of a proposed settlement.