IN THE SUPREME COURT OF THE STATE OF MONTANA 

BETH SORENSEN and MARK SORENSEN, 

Plaintiffs and Appellants, 

FARMERS INSURANCE EXCHANGE, 

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Defendant and Respondent. cr,G!;R Gr :&LIPRIME C~US?'S BZ'ATP, 8F LWBill'F"&@ 

APPEAL FROM: District Court of the Eleventh Judicial District, 

In and for the County of Flathead, 

The Honorable Katherine R. Curtis, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Daniel W. Hileman (argued), Murray & Kaufman, 

Kalispell, Montana 

For Respondent: 

Shelton C. Williams (argued) and Susan Moriarity 

Miltko, Williams & Ranney, P.C., Missoula, Montana 

For Amicus Curiae: 

Peter L. Helland, Edmiston Law Firm, Billings, 

Montana (for Montana Trial Lawyers Association) 

Filed: 

Heard and Submitted: September 12, 1996 

Decided: November 20, 1996 
Chief Justice J. A. Turnage delivered the Opinion of the Court. 

Beth Sorensen was injured in a two-vehicle accident. The 

Eleventh Judicial District Court, Flathead County, ruled that 

because she and her husband Mark settled with the liability carrier 

for the driver of the other vehicle, they were precluded from 

seeking, in this action, underinsured motorist coverage from their 

own insurance carrier. We reverse and remand for further proceedings consistent with this Opinion. 

We here determine that the District Court erred in ruling that 

the Sorensens may not recover an underinsured motorist claim after 

releasing the tortfeasor without their insurer's permission. 

On November 21, 1991, Beth Sorensen's vehicle was struck by a 

vehicle driven by Cynthia Lynn Ryan. Sorensen alleges permanent 

disability as a result of injuries sustained in the collision. As 

a result of her injuries, Sorensen has claimed medical expenses of 

at least $52,974.06. Additionally, a vocational rehabilitation 

counselor has estimated her loss of earnings at $803,495.46. 

Ryan held liability insurance with State Farm Mutual Automobile Insurance Company with a limit of $50,000. After investigating Ryan's assets or, more precisely, the lack thereof, Sorensen's 

attorney advised her to accept Ryan's $50,000 policy limit from 

State Farm. Beth and Mark Sorensen executed a written release of 

Cynthia Ryan, her ex-husband Patrick H. Ryan, and State Farm from 

any further liability. 

The Sorensens then brought this action against their own 

insurer, Farmers Insurance Exchange, seeking to recover underin: 
sured motorist coverage under their own motor vehicle insurance. 

In answering the complaint, Farmers alleged that because the 

Sorensens had settled with Ryan's liability carrier, State Farm, 

and executed a release, they were precluded from seeking underinsured motorist coverage from Farmers. 

Farmers moved for summary judgment, which motion was granted. 

The District Court reasoned LhaL when an insured has destroyed. her 

insurer's right of subrogation, the insured is barred from a claim 

against the insurer. The court relied on this Court's opinion in 

Nimmick v. State Farm Mut. Auto. Ins. Co. (1995), 270 Mont. 315, 

891 P.2d 1154. The Sorensens appeal. 

Did the District Court err in ruling that the Sorensens may 

not recover an underinsured motorist claim after releasing the 

tortfeasor without their insurer's permission? 

Our standard of review on summary judgment is the same as that 

used by the district court--whether material issues of fact exist 

and whether the moving party is entitled to judgment as a matter of 

law. McCracken v. City of Chinook (19901, 242 Mont. 21, 24, 788 

P.2d 892, 894; Rule 56(c), M.R.Civ.P. In this case, the material 

facts are undisputed. We therefore limit our review to the 

correctness of the trial court's legal conclusion. 

The Sorensens' Farmers insurance policies provided that: 

In the event of any payment under this policy, we are 

entitled to all the rights of recovery of the person to 

whom payment was made against another. That person must 

sign and deliver to us any legal papers relating to that 

recovery, do whatever else is necessary to help us 
exercise those rights and do nothing after loss to 

prejudice our rights. 

Farmers argues, and the District Court ruled, that Farmers is not 

liable to pay the Sorensens under the underinsured motorist clause 

because they failed to notify Farmers before they released State 

Farm and the Ryans from further liability. Farmers maintains that 

by destroying its subrogation rights, the Sorensens breached the 

insurance contract. 

In making its argument, Farmers relies on this Court's opinion 

in Nimmick. Nimmick was injured as a passenger in a one-vehicle 

accident. She brought suit against her insurer, State Farm, to 

recover damages under the uninsured motorisl. provision of her 

insurance policy. She subsequently entered a settlement agreement 

with Employers Mutual, the insurer for the owner of the vehicle in 

which she was injured. In her suit against State Farm, Nimmick 

alleged that because the unauthorized driver of the vehicle was not 

covered under the Employers Mutual policy, she was entitled to 

uninsured motorist coverage under her own insurance. 

After examining the language of the settlement agreement 

signed by Nimmick and Employers Mutual and its underlying effect as 

a whole, this Court concluded that the settlement was made on 

behalf of the driver of the vehicle, as well as the owner and other 

passengers, as the agreement expressly stated. Therefore, we 

concluded, the driver was no longer an uninsured motorist under the 

State Farm policy. Nimmick, 891 P.2d at 1159. 

The issue in Nimmick concerned uninsured motorist coverage, 

whereas the present case involves underinsured motorist coverage. 

4 
Farmers maintains that this distinction is insignificant and that 

Montana courts generally treat uninsured and underinsured motorist 

coverage similarly, citing Bennett v. State Farm Mut. Auto. Ins. 

Co. (19931, 261 Mont. 386, 862 P.2d 1146. 

Farmers focuses on the subrogation analysis in Nimmick. It 

argues that but for the destruction of the insurer's subrogation 

rights, the tortfeasor in Nimmick would still have been uninsured, 

and coverage would apply. Farmers reasons that here, because 

Sorensen has destroyed its subrogation rights, coverage does not 

apply. 

The dispositive issue in Nimmick was whether an uninsured 

motorist was still involved after the settlement. A settlement 

between an underinsured motorist like Ryan and an injured person 

like Sorensen does not necessarily eliminate the underinsured 

status, as did the insurance settlement for the motorist's 

uninsured status in Nimmick. Here, Ryan's underinsured status 

would be eliminated only if the insurance settlement covered all 

damages. Such is not the case on the record here. We conclude 

that the distinction between uninsured motorist coverage and 

underinsured motorist coverage is significant for purposes of the 

issue here presented. 

Even where a right to subrogation exists, many courts have 

recognized that if the insurer is unable to demonstrate prejudice 

to itself as a result of an unapproved settlement, the insured is 

not barred from collecting on the insurance policy. See, e . g., 

Thompson v. American States Ins. Co. (M.D. Ala. 1988), 687 F.Supp. 
559; Rafferty v. Progressive American Ins. Co. (Fla. Dist. Ct. App. 

19901, 558 So.2d 432; Mulholland v. State Farm Mut. Auto. Ins. Co. 

(Ill. App. Ct. 1988), 527 N.E.2d 29; Kapadia v. Preferred Risk Mut. 

Ins. Co. (Iowa 1988), 418 N.W.2d 848; Lumbermens Mut. Cas. Co. v. 

Mercurio (Mass. App. Ct. 1989), 535 N.E.2d 234; Tegtmeyer v. 

Snellen (Mo. Ct. App. 1990), 791 S.W.2d 737; Branch v. Travelers 

Indem. Co. (N.C. Ct. App. 19881, 367 S.E.2d 369, affld 378 S.E.2d 

74 8 

P.2d 

(E. D 

Co . 

1989); Federated Service Ins. Co. v. Granados (Or. 1995), 889 

1312; Prudential Property & Cas. Ins. Co. v. Nayerahamadi 

Pa. 1984) , 593 F. Supp. 216; Thiringer v. American Motors Ins. 

Wash. 1978), 588 P.2d 191. 

In his concurrence to Nimmick, Justice Leaphart urged that 

Montana adopt such a "no prejudice" rule. He explained that under 

a "no prejudice" rule, a settlement with a tortfeasor would not 

release an insurer if the plaintiff could show that the tortfeasor 

was judgment proof and thus there was no prejudice to the insurer. 

As applied to a case involving underinsured motorist coverage, 

a "no prejudice" rule states that absent some showing of material 

prejudice to the underinsurance carrier, a claim for underinsured 

motorist coverage may not be precluded on a technicality. The "no 

prejudice" rule has been explained as follows: 

The loss of an insurer's subrogation right may not 

be siqnificant. In many instances, pursuit of any 

recovery from an insured tortfeasor beyond the available 

liability insurance would be fruitless. . . . "[A] 

technical and illusory 'loss' of this kind cannot result 

in the forfeiture of insurance coverage." Such decisions 

establish, either implicitly or explicitly, a requirement 

that an insurer must be prejudiced as a result of a 

settlement with a tortfeasor or tortfeasor's insurer that 
is entered into without the consent of the insurer 

providing underinsured motorist insurance. . . . 

There is now a significant body of judicial precedents for the proposition that in order to justify 

foreclosing an insured's right to indemnification from an 

otherwise applicable underinsured motorist insurance 

coverage, an insurer must show that it was prejudiced by 

the settlement of the tort claim. 

3 Alan I. Widiss, Insured and Underinsured Motorist Insurance § 

43.5, at 347 (1995) , yuoLiny SouLheasLern FideliLy Insurance 

Company v. Earnest (Fla. Dist. Ct. App. 1981), 395 So.2d 230, 

We favor this approach as a matter of public policy. The 

purpose of underinsured motorist insurance is to provide a source 

of indemnification for accident victims when the tortfeasor does 

not provide adequate indemnification. State Farm v. Estate of 

Braun (1990), 243 Mont. 125, 130, 793 P.2d 253, 256. Denying 

accident victims indemnification based upon their action which can 

have no effect on the insurer's ability to subrogate will not 

further the purpose of underinsured motorist coverage 

As to the burden of proof: 

Most of the judicial decisions in which courts have 

sustained the view that a failure to secure an insurer's 

consent to a settlement only justifies a loss of underinsured motorist insurance benefits when the insurer was 

prejudiced, seem to require the insurer to show that the 

unauthorized settlement adversely affected its interests. 

There are several rationales for this approach. First, 

the insurer is in the best position both to assess 

whether it has been prejudiced and to then produce 

evidence for the court that is relevant to an adjudication. Second, in effect, it recognizes the difficulty of 

requiring a claimant to attempt to prove the "negative 

fact" that the insurer was prejudiced. Finally, if 

no clear proof is available, such an allocation serves to 

avoid a forfeiture of coverage. 
Widiss, § 43.5 at 349. The "no prejudice" rule places the burden 

on the insurer which has collected premiums, rather than on an 

injured claimant, to show that the insurer's subrogation claim has 

potential value. 

We hold that henceforth in Montana, to justify foreclosing an 

insured's right to indemnification from an otherwise applicable 

underinsured motorist insurance coverage, an insurer must establish 

that it was prejudiced by settlement of the claim by the insured. 

In the present case, the issue of the potential value of 

Farmers' subrogation claim was briefed and argued in relation to 

the summary judgment motion. The Sorensens submitted an affidavit 

by a private investigator who had conducted a social security 

search on Cynthia Ryan. The investigator stated that the search 

indicated that she had lived in six different locations and that 

her current address was unknown. Beth Sorensen filed an affidavit 

in which she stated that her attorney had advised her that Ryan was 

essentially unemployed, had no assets, and was "judgment proof ." 

Farmers refers in its brief to deposition testimony by the 

Sorensens that Cynthia Ryan's ex-husband had a job, a car, and a 

trailer house. Whatever value that testimony may have in establishing that Cynthia Ryan had assets, the depositions to which 

Farmers refers are not in the record. We hold that Farmers failed 

to meet its burden of proving that it was prejudiced by the 

settlement entered by the Sorensens. 
We therefore reverse the decision of the ~istrict Court and 

remand for further proceedings consistent with this Opinion. 

We concur: 

Justices