Title: Benson v. Farmers Ins. Co.
Citation: 227 Kan. 833, 610 P.2d 605
Docket Number: 50,962
State: Kansas
Issuer: Kansas Supreme Court
Date: May 10, 1980

227 Kan. 833 (1980)
610 P.2d 605
THOMAS E. BENSON, Plaintiff-Appellant,
v.
FARMERS INSURANCE COMPANY, INC., A Corporation, Intervenor-Appellee, and KENNY R. BEERS, Defendant.
No. 50,962

Supreme Court of Kansas.
Opinion filed May 10, 1980.
Donald W. Vasos, of Scott, Daily, and Vasos, of Kansas City, argued the cause and was on the briefs for the appellant.
Robert D. Benham, of McAnany, Van Cleave, and Phillips, P.A., of Kansas City, argued the cause and was on the brief for the intervenor-appellee.
The opinion of the court was delivered by
PRAGER, J.:
This appeal involves a controversy between the owner of an insured motor vehicle and his insurance company over the validity of a provision in an insurance policy which excludes uninsured motorist coverage where the insured, without written consent of the company, makes a settlement with any person or organization who may be legally liable for plaintiff's damages. The essential facts in the case are not in dispute and are as follows: On June 13, 1976, the plaintiff-appellant, Thomas E. Benson, was injured in a motor vehicle collision between plaintiff's motorcycle and an automobile operated by the defendant, Kenny R. Beers. At the time of the accident, Benson was insured by Farmers Insurance Company under an automobile liability insurance policy which included an uninsured motorist endorsement. The insurance policy contained the following exclusion applicable to uninsured motorist coverage:
*834 "EXCLUSIONS
"This policy does not apply ...
Following the accident, Benson commenced an action to recover damages from Beers. It appears that Beers had purchased his automobile only the day before the accident occurred and, at the time of the accident, had not yet obtained his own automobile liability insurance coverage. The Beers vehicle had been covered by an insurance policy issued to the previous owner by Casualty Reciprocal Exchange (Casualty). Plaintiff was covered by three separate insurance policies issued by Farmers Insurance Company (Farmers), all of which contained uninsured motorist coverage. Benson filed his petition against Beers to recover damages for his personal injuries on September 28, 1976. Defendant Beers originally retained his own private counsel to represent him in the case. They made a demand upon Casualty to defend Beers in the action. Casualty agreed to defend Beers under a reservation of rights, denying that Beers had any right to liability insurance protection or coverage under the previous owner's policy. When plaintiff Benson discovered that it was questionable whether Beers had insurance coverage, he made demand upon Farmers under the uninsured motorist provisions of his policy. Thereafter, on motion, Farmers was permitted to intervene in the action to protect its interests.
After Farmers intervened in the action, plaintiff began negotiating a settlement with Beers and Casualty. They agreed to a proposal by which Benson was to receive $10,000 in exchange for a covenant not to sue Casualty. The agreement was entered into between Benson, Beers, and Casualty without the written consent of Farmers. The agreement provided in part as follows:
....
It is not clear from the record exactly when this agreement was executed.
Farmers thereafter filed a motion for summary judgment or in the alternative to dismiss on the grounds that the settlement triggered the policy exclusion cited above, since the settlement between Benson, Beers, and Casualty had been entered into without the written consent of Farmers. Farmers maintained that, as a result of the settlement agreement, its subrogation rights had been impaired. The primary issue raised by Farmers' motion was whether the exclusion clause in the insurance contract between Benson and Farmers applied to such a settlement and thus whether the plaintiff's entering into the settlement without Farmers' consent, excluded Farmers' contingent liability under the policy.
The trial court sustained Farmers' motion and granted summary judgment in its favor. The court held that the settlement agreement impaired Farmers' subrogation rights under K.S.A. 40-287 and that the agreement violated the policy terms requiring the insurer's consent to any settlement with someone who might be liable. Hence, the trial court found that the uninsured motorist coverage under Benson's insurance policy had been excluded. Benson brought a timely appeal to this court.
The plaintiff first contends that an exclusionary clause in an uninsured motorist policy which prohibits a settlement by the insured without the consent of the company conflicts with the broad insurance coverage mandated by K.S.A. 40-284 and is therefore invalid and unenforceable. The trial court rejected this contention and upheld the validity of the exclusion clause. In its memorandum opinion, the trial court reasoned as follows:
Other jurisdictions are split on the validity of policy provisions excluding uninsured motorist coverage for unauthorized settlements. Most courts have upheld such exclusions as protecting the insurer's legitimate right to subrogation. See, e.g., Castorena v. Employers Casualty Company, 526 S.W.2d 680 (Tex. Civ. App. 1975); LaBove v. American Employers Insurance Company, 189 So. 2d 315 (La. App. 1966); and the many cases cited in the annotation in 25 A.L.R.3d 1275. In other jurisdictions, the exclusion of coverage for unauthorized settlement has been held invalid when applied to settlement with an insured third-party tortfeasor. See, e.g., Government Employees Ins. Co. v. Shara, 137 N.J. Super. 142, 348 A.2d 212 (1975); Hawaiian Ins. &amp; Guar. v. Mead, 14 Wash. App. 43, 538 P.2d 865 (1975); Dairyland Insurance Company v. Lopez, 22 Ariz. App. 309, 526 P.2d 1264 (1974); Harthcock v. State Farm Mutual Automobile Ins. Co., 248 So. 2d 456 (Miss. 1971); and Michigan Mut. Liab. Co. v. Karsten, 13 Mich. App. 46, 163 N.W.2d 670 (1968).
The rationale of the trial court as to the validity of the consent to settlement exclusion is sound and is approved by this court. Where the insurer's right of subrogation is provided for by statute as in K.S.A. 40-287, the insurer has a legitimate interest to be protected. We have concluded that the exclusion from coverage because of a settlement by the insured without the consent of the insurer is reasonably intended to protect the insurer's right of subrogation, and is valid and enforceable.
We must next consider whether the exclusion contained in plaintiff's insurance policy is applicable under the factual circumstances now before us. We have concluded that it is. The settlement in this case was not with a third-party tortfeasor involved in the accident or a settlement which purports to release the uninsured motorist from liability arising out of the accident. Instead, the settlement agreement releases an insurance company from liability without affecting the liability of the uninsured tortfeasor. This unique situation was specifically addressed in *839 Castorena v. Employers Casualty Company, 526 S.W.2d 680, where a suit was brought by an automobile passenger against his own insurer under his policy's uninsured motorist provision. The passenger had released his driver's insurer in a settlement for $1,000 without his own insurer's consent. The Texas Court of Civil Appeals, in interpreting an exclusion provision identical to the one involved here, held that coverage was voided by the unauthorized settlement. The court noted that the insured sought to avoid the exclusion clause by arguing that he settled with the driver's insurer and not the driver. The court dismissed that argument, observing that although the driver's liability had not been established, if it was, the plaintiff's insurance company would be subrogated to plaintiff's rights against him. Further, the court noted that the driver's insurer was obligated to defend and pay within policy limits any judgment against him. Castorena demonstrates that an impairment of the insurer's effective ability to collect from the tortfeasor not only results from a release of the tortfeasor, but also from the release of a third party who may be liable by a contract with the tortfeasor. In the present case, Benson agreed to release Casualty from possible liability if the defendant Beers was found responsible for the accident. Thus, Farmers is limited in any attempt to recover payments made under its uninsured motorist provision to the defendant Beers alone. This represents a substantial impairment of Farmers' rights to subrogation.
The exclusion of uninsured motorist coverage becomes effective when the insured, without written consent of the company, makes any settlement with any person or organization who may be legally liable therefor. This specific language, in an identical policy provision, was interpreted in LaBove v. American Employers Insurance Company, 189 So. 2d  at 318, 25 A.L.R.3d 1269 (1966), where it was held that the application of the provision was not restricted to a settlement with the uninsured motorist but also included a settlement with any person who possibly, perhaps, or by chance may be liable. The court in LaBove relied in part on the interpretation of the words "may be" found in State v. Howland, 153 Kan. 352, 360, 110 P.2d 801 (1941). In Howland, it was held that the words "may be" are used as equivalent to possibly, perhaps, or by chance. The language contained in the exclusion in this case is clear and unambiguous. It is part of the *840 contract entered into between Farmers and its insured, Benson. As noted above, this provision is valid and enforceable and binding upon the parties. Since the insured, Benson, made a settlement without the written consent of the company with a person or organization who may be legally liable for plaintiff's damages, the uninsured motorist coverage under the Farmers' policy has been excluded, rendering it inapplicable to the injuries suffered by Benson in this case.
Plaintiff next maintains that Farmers, by failing to respond to the plaintiff's request for a consent to the settlement, waived its right to require its consent to the settlement. The plaintiff in his brief cites authorities which hold that the consent requirement before settlement may be waived by the insurer's arbitrary and unreasonable refusal to give the required consent. Courson v. Maryland Casualty Company, 475 F.2d 1030 (8th Cir.1973); Pickering v. American Empl. Ins. Co., 109 R.I. 143, 282 A.2d 584 (1971); Poray v. Royal Globe Ins. Co., 90 N.J. Super. 454, 217 A.2d 916 (1966); and Levy v. American Automobile Ins. Co., 31 Ill. App.2d 157, 175 N.E.2d 607 (1961). In Tuthill v. State Farm Ins. Co., 19 Ill. App.3d 491, 311 N.E.2d 770 (1974), the court acknowledged that the insurer should not be allowed to preclude access to the courts by arbitrarily, and without reason, withholding consent to suit or settlement. Withholding consent arbitrarily or without reason was held to constitute a waiver. In determining whether or not the withholding of consent was arbitrary, the test is whether the insurer had the opportunity to participate in the settlement negotiations. See also Sylvest v. Employers Liability Assurance Corp., 252 So. 2d 693 (La. App. 1971), holding that the insurer's knowledge of the settlement did not alone satisfy the consent requirement. In the case now before us, we have concluded from the record that there is no evidence which required the trial court to find that Farmers acted in any way arbitrary or unreasonably in refusing to give its consent to the settlement agreement reached in this case. We note that on September 27, 1978, counsel for Farmers filed a written request for production of the settlement agreement entered into by Benson and Casualty Insurance Company. Counsel for the plaintiff objected to the request for production of that agreement. These circumstances support the position of Farmers that plaintiff's attorney refused to furnish Farmers with a copy of the agreement. In view of this *841 evidence, it is difficult to see how Farmers acted arbitrarily or unreasonably in refusing to give its consent to the settlement agreement.
The judgment of the district court is affirmed.