Opinion ID: 2450555
Heading Depth: 2
Heading Rank: 1

Heading: does settlement of the claim against the tortfeasor preclude a further claim for uim benefits?

Text: We start with the underinsured motorist statute, KRS 304.39-320, which now provides: (1) As used in this section, `underinsured motorist' means a party with motor vehicle liability insurance coverage in an amount less than a judgment recovered against that party for damages on account of injury due to a motor vehicle accident. (2) Every insurer shall make available upon request to its insureds underinsured motorist coverage, whereby subject to the terms and conditions of such coverage not inconsistent with this section the insurance company agrees to pay its own insured for such uncompensated damages as he may recover on account of injury due to a motor vehicle accident because the judgment recovered against the owner of the other vehicle exceeds the liability policy limits thereon, to the extent of the under-insurance policy limits on the vehicle of the party recovering. [Emphasis added.] This statute was originally enacted in 1974 as Subsection 32 of the Motor Vehicle Reparations Act (MVRA) of 1974. It mandates that (1) upon request automobile insurers must include underinsured motorists coverage within their policy. The MVRA elsewhere requires: (2) Unless specifically rejected (KRS 304.39-030), automobile insurers must provide basic reparation benefits (BRB) which shall be paid without regard to fault (KRS 304.39-040(1)); and, (3) For compulsory tort liability insurance (KRS 304.39-110). All three of these coverages are mandatory in the sense that the automobile insurer is required by statute to provide such coverage: the underinsured motorist coverage if the insured requests it, the no-fault coverage unless the insured rejects it, and minimum limits tort liability coverage with no option. The carrier has no option whether it wishes to offer these coverages if it sells policies in Kentucky. All of the coverage provided for in the MVRA is so provided to carry out the policy and purpose of the statute as specified in KRS 304.39-010, which include: in subparagraph (3), [t]o encourage prompt medical treatment and rehabilitation of the motor vehicle accident victim by providing for prompt payment of needed medical care and rehabilitation; and in subparagraph (5), [t]o reduce the need to resort to bargaining and litigation through a system which can pay victims of motor vehicle accidents without the delay, expense, aggravation, inconvenience, inequities and uncertainties of the liability system. Underinsured motorist coverage is a younger sibling to statutory uninsured motorist coverage, which was provided for in KRS 304.20-020, enacted in 1970. UM coverage must be included in every automobile insurance policy unless rejected. From its inception, we have recognized UM coverage is first party coverage, which means that it is a contractual obligation directly to the insured which must be honored even if the tortfeasor cannot be identified. See First Nat'l Ins. Co. v. Harris, Ky., 455 S.W.2d 542 (1970). See also Puckett v. Liberty Mut. Ins. Co., Ky., 477 S.W.2d 811 (1971), holding the carrier may be sued without first obtaining a judgment against the uninsured motorist, or without the uninsured motorist being a party to the suit, albeit the potential liability of the uninsured motorist and the amount of damages he caused must be established in the suit against the insurer in order to measure the insurer's obligation to the insured under the policy. With both UM and UIM coverage there must be a tortfeasor, and in the case of UIM coverage, the damages inflicted must exceed the tortfeasor's liability insurance. But these factors do not make the tortfeasor a party to the insurance contract. UM coverage exists without regard to whether the obligation of the tortfeasor can be reduced to judgment, and there is no logical way to explain UIM coverage differently. UIM coverage serves the same purpose and follows the same pattern as UM coverage. While the wording of the UIM statute is different from that of the UM statute, we can discern no fundamentally different insurance arrangement from that provided for under the UM statute. Puckett speaks to the situation where the accident has occurred elsewhere and the uninsured motorist is a nonresident who is not amenable to process in this state, holding that the insurer's obligation cannot be defeated by this circumstance and a policy provision giving the insurer an absolute right to require joinder [of the tortfeasor]. . . must be held unenforceable. Id. at 814. Speaking to the subrogation right thus destroyed, the court states that although that appears to be an unavoidable consequence in this case: . . . insurance against uninsured motorists owes its existence to the probable and usual worthlessness of a claim against an uninsured tortfeasor. The policy of our statute places the insured party's right to sue in this state above the dubious value of the insurer's right of subrogation. Id. When the UIM statute speaks in terms of measuring the insurer's liability by the judgment recovered against the underinsured motorist, the intent of the language is no different when the UM statute speaks to the amount the insured is legally entitled to recover . . . from owners or operators of uninsured motor vehicles as the measure of the insurer's liability. Indeed, UM coverage and UIM coverage are treated coextensively in many standard insurance policies, and in some cases are offered as a combined coverage. In both, proof the offending motorist is a tortfeasor and proof of the amount of damages caused by the offending motorist are not preconditions to coverage, but only essential facts that must be proved before the insured can recover judgment in a lawsuit against the insurer on the contract of insurance. That the insurance industry, itself, recognizes that judgment against the tortfeasor is not a precondition to the insurance claim is illustrated by the language in the Kitchens' policy, which premises liability upon payment of judgments or settlements. Because of this language the Kitchens argue that they are entitled to settle with the tortfeasor and proceed against their UIM carrier who refused to consent to the settlement under the language of their own policy, regardless of statutory interpretation. But we do not reach this issue because the only rational interpretation of the statute is, while the policy limits specified in the tortfeasor's policy must be exhausted before the UIM carrier has an obligation to pay, the liability of the tortfeasor and the amount of damages sustained are elements that must be established in measuring the UIM carrier's obligation and not a statutory precondition to coverage. This is consonant with our earlier decision in LaFrange v. United Serv. Auto. Ass'n, supra , the only prior UIM coverage case decided by our Court. LaFrange states: KRS 304.39-320, `Underinsured motorist coverage,' is part of the Motor Vehicle Reparations Act (MVRA), and, as such, is remedial legislation which should be generally construed to accomplish its stated purposes. [Emphasis added.] Id. at 413. When viewed in terms of the MVRA's stated purposes, infra, the coverage the statute intended cannot be accommodated if the statute is construed to require the insured to pursue to judgment the underlying tort claim in every instance. The UIM carriers argue the words of the statute should be applied literally and without regard to the resulting absurdity, but our rule of statutory construction does not go that far. Our duty is . . . to accord to words of a statute their literal meaning unless to do so would lead to an absurd or wholly unreasonable conclusion. Bailey v. Reeves, Ky., 662 S.W.2d 832, 834 (1984). As stated in Board of Educ. v. Logan Aluminum, Inc., Ky., 764 S.W.2d 75, 78 (1989): Our mandate does not demand tunnel vision but reasoned analysis of the statutory scheme. Here, as in Board of Educ. v. Logan Aluminum, Inc .: [T]he overall statutory structure is of compelling persuasion in construing the statutes that we are now called upon to apply. . . . We must assume that the legislature intended to create a workable procedure and construe the statutes involved to provide one rather than acceding to a hypertechnical literal interpretation that would lead to a wholly unreasonable conclusion. Id. at 80. More succinctly, as stated by Justice Palmore in Cantrell v. Kentucky Unemployment Ins. Co., Ky., 450 S.W.2d 235, 236-37 (1970): [W]e do not believe the circumstances of this case require any fol do rol about strict or liberal construction in order to arrive at the correct solution. When all else is said and done, common sense must not be a stranger in the house of the law. Widiss, Uninsured and Underinsured Motorist Insurance, 2d Ed. (1992), the most exhaustive treatise on the subject, states: A persuasive case can be made for the proposition that underinsured motorist coverage should be available whenever an insured's damages exceed the amount of indemnification actually provided to an individual claimant by an insured driver's liability insurance. As noted in the discussion of the statutory provisions, this result is expressly mandated in several states [Ohio and Washington cases cited]. However, of at least equal importance is the fact that this approach has also been applied by courts in several states in which the statutes are not expressly framed in this way [Florida and Minnesota cases cited]. Vol. 3, Sec. 35.3, p. 53. In 1988 the UIM statute was amended to address the problem with which we were confronted in LaFrange v. United Serv. Auto. Ass'n, supra , the so-called offset language formerly in the statute. The General Assembly added Subsection (1) defining the term underinsured motorist, and deleted from Subsection (2): to the extent of the policy limits on the vehicle of the party recovering less the amount paid by the liability insurer of the party recovered against. In LaFrange we had held this meant that the UIM coverage was not triggered unless the policy limits of the insured's automobile policy exceeded the policy limits of the tortfeasor's policy. The 1988 change in statutory language eliminated the offset problem. We do not construe the amendments as changing the fundamental characteristics of UIM coverage. Before, as well as after, the statute defined the measure of the amount recoverable under a UIM policy as such uncompensated damages as he [the UIM insured] may recover on account of injury due to a motor vehicle accident because the judgment recovered against the owner of the other vehicle exceeds the liability policy limits thereon. [Emphasis added.] KRS 304.39-320(2). The reference is to judgment, not judgment or settlement, because the latter phrase would destroy the context. There is no magic in the definition of underinsured motorist added by Subsection (1) that transforms underinsured motorist coverage to an umbrella policy for the tortfeasor. We conclude that it does not abrogate UIM coverage to settle with the tortfeasor and his carrier for the policy limits in his liability coverage, so long as the UIM insured notifies his UIM carrier of his intent to do so and provides the carrier an opportunity to protect its subrogation, as we will discuss in the next section of this Opinion. We recognize that the Court of Appeals has held otherwise in Kentucky Cent. Ins. Co. v. Kempf, supra . Kempf attempted a literal interpretation of the word judgment as used in KRS 304.39-320, without regard to whether it made sense in the context of the coverage the statute intended to provide, and held that the insured must obtain a judgment [against the tortfeasor] before claiming underinsurance benefits from its insurer. Id. at 831. Under this construction, even in the most flagrant case where an automobile accident victim has losses far in excess of the tortfeasor's policy limits, the remedial purpose of the MVRA, and the duty to negotiate for payment of the underinsured motorist coverage under the Unfair Claims Settlement Practices Act (KRS 304.12-230) and the Consumer Protection Act (KRS 367.170) would be abrogated. As frankly stated in the Kempf opinion, under its aegis [i]nsurers need not worry about first party bad faith or unfair claims settlement practice charges. . . . We are aware that this is contrary to the usual position of the law, which is to encourage settlements. . . . Id. at 832. The Court of Appeals reached this result because it believed that it was necessary to do so to pay heed to the intent of the legislature. Id. We have reached the opposite result and overrule Kempf .