Opinion ID: 2233244
Heading Depth: 1
Heading Rank: 4

Heading: Is Farm Bureau Bound By the Amended Judgment Entry in Suit I?

Text: In denying the estate's motion for summary judgment, the district court concluded that Farm Bureau would be unfairly prejudiced if bound by a judgment resulting from erroneous jury instructions, given without objection by Carter's attorney [in suit I], which became the law of the case. Under the unusual facts in this record, Farm Bureau should be afforded an opportunity to relitigate the issue of underinsured damages due the plaintiff. This ruling raises the question whether Farm Bureau is bound by the amended judgment entry in suit I. On this issue, we must first look to the language of the UIM provision in the decedent's policy with Farm Bureau. See Am. Family Mut. Ins. Co. v. Petersen, 679 N.W.2d 571, 584 (Iowa 2004). In American Family Mutual Insurance Co. v. Petersen, we were concerned with the binding effect of a default judgment in the context of an uninsured motorist (UM) provision providing that the insurer would pay damages for bodily injury that the insured is legally entitled to recover from the uninsured motorist. Id. Although here we are dealing with a UIM provision, the following language in Petersen applies with equal force to such a provision: In considering the binding effect of the judgment, we are mindful that the issue is presented only in the context of an action to enforce the UM provisions of an insurance policy requiring the insurer to pay the insured damages which the insured is legally entitled to recover from the uninsured motorist. Consequently, the binding effect of the tort judgment at issue in this case is not necessarily governed by the doctrine of res judicata and collateral estoppel; the language of the contract between the parties is the primary source of the parties' respective rights. If an insured establishes legal entitlement to damages against an uninsured motorist, then the insurer is contractually obligated to pay the insured the damages as specified in the insurance policy. An insured generally satisfies the legally entitled to recover condition of UM coverage when a valid judgment has been entered against the uninsured motorist. Id. (emphasis added) (citations omitted). Thus, assuming the other terms and conditions of the policy are satisfied, once the insured obtains a valid judgment against the underinsured motorist, the insurer is obligated pursuant to the terms of the policy to pay the amount of the judgment that exceeds the liability coverage of the underinsured motorist up to the limit of the UIM coverage. An insured establishes the legally entitled to recover requirement by proving the underinsured motorist was liable and the amount of damages. Id. at 584 n. 3. The insured is allowed to meet this burden either in an action against the underinsured motorist or in an action against the insurer. Id.; Handley v. Farm Bureau Mut. Ins. Co., 467 N.W.2d 247, 249 (Iowa 1991). Although securing a valid judgment against an underinsured motorist can establish the insured's right to recover UIM benefits, the UIM coverage provisions here impose other conditions that could require relitigation of the liability and damages issues. See Petersen, 679 N.W.2d at 584-85. In Petersen, we held the default judgment against the uninsured motorist was not binding on the insurer because the insured had not given adequate notice to the insurer of its suit against the uninsured motorist as required by the policy. Id. at 585. Because the notice issue in Petersen was dispositive, we did not consider the effect of a policy provision that provided that the insurer was not bound by any judgment without its `consent' to the suit. Id. In its motion for summary judgment on the contract claim, the estate contended in the district court as it does on appeal that (1) the amended judgment entry in suit I conclusively established what the estate is legally entitled to recover from Farm Bureau and (2) issue preclusion is not an available defense to avoid the binding effect of the amended judgment entry. In response, Farm Bureau contends, as it did in the district court, that (1) the amended judgment entry in suit I did not conclusively establish what the estate is legally entitled to recover under the policy and (2) Farm Bureau could only be bound by the principles of issue preclusion. As to the amended judgment entry, Farm Bureau raised a number of defenses to the estate's motion for summary judgment on its contract claim, all of which Farm Bureau raises here. We address only one of those defenses because we think it is dispositive of the issue. The defense is based on the written consent-to-be-bound provision pertaining to UIM coverage. As mentioned, this provision provides as follows: We are not bound by any judgment against any person or organization obtained without our written consent. This requirement is commonly referred to as a consent-to-sue provision, but it is more accurately described as a consent-to-be-bound provision. Peterman v. State Farm Mut. Auto. Ins. Co., 961 P.2d 487, 491 n. 3 (Colo.1998). The consent-to-be-bound provision has been widely litigated. Some courts have declared such provisions to be void or invalid and hold that tort judgments against the underinsured motorists are generally binding on the insurer. Reasons given by such courts for this holding include the following: (1) [I]t is generally against public policy for the insurer to restrict the insured's right to trial by jury of the action against a negligent motorist, Keel v. MFA Ins. Co., 553 P.2d 153, 157 (Okla.1976); (2) Such provisions are contrary to public policy because they present arbitrary barriers to the recovery of statutorily mandated benefits, Kwong v. Depositors Ins. Co., 627 N.W.2d 52, 56 (Minn.2001); (3) An insurance company could unreasonably and arbitrarily withhold consent, Kremer v. Am. Family Mut. Ins. Co., 501 N.W.2d 765, 768-69 (S.D. 1993); and (4) Declaring consent-to-be-bound provisions void or invalid promotes the policy of avoiding a multiplicity of lawsuits, Nationwide Mut. Ins. Co. v. Webb, 291 Md. 721, 436 A.2d 465, 473 (1981). The district court, relying on Kwong, found the consent-to-be-bound provision in the Farm Bureau policy contrary to public policy and unenforceable. Recognizing that the insurer has some legitimate concerns about protecting its interests, the court in Kwong concluded that [t]hose interests can be adequately safeguarded by requiring that the insurer `receive notice of, and an opportunity to [intervene and] participate in, the insured's personal injury claim.' Kwong, 627 N.W.2d at 57 (citation omitted). Several courts have followed the same approach. See, e.g., Webb, 436 A.2d at 475-78; Heisner v. Jones, 184 Neb. 602, 169 N.W.2d 606, 611-12 (1969); Keel, 553 P.2d at 157-58; Kremer, 501 N.W.2d at 769. Following this approach here would be problematic because of our decision in Handley v. Farm Bureau Mutual Insurance Co., 467 N.W.2d 247 (Iowa 1991). We held in that case that it was an abuse of discretion not to sever the tort claim against the underinsured motorist from the contract claim against the insurer for UIM benefits. Handley, 467 N.W.2d at 250. We reasoned that evidence of insurance would cause the jury to return a larger verdict against the underinsured motorist than it would have if it were unaware that insurance existed. Id. We therefore concluded that potential prejudice could be avoided by severing the claims against the insurer from the claim against the underinsured motorist. Id. Facing a similar problem, the court in Keel simply overruled its prior holding and permitted the joinder of an insurer as a party defendant in an action against an uninsured motorist. See Keel, 553 P.2d at 158. Other courts have upheld the validity of consent-to-be-bound provisions. See, e.g., Gulf Am. Fire & Cas. Co. v. Gowan, 283 Ala. 480, 218 So.2d 688, 693-94 (1969); MFA Mut. Ins. Co. v. Bradshaw, 245 Ark. 95, 431 S.W.2d 252, 256 (1968); Moorcroft v. First Ins. Co. of Haw., 68 Haw. 501, 720 P.2d 178, 179-80 (1986); Baron v. Coronet Ins. Co., 47 Ill.App.3d 95, 5 Ill.Dec. 476, 361 N.E.2d 799, 802 (1977); Allstate Ins. Co. v. Pietrosh, 85 Nev. 310, 454 P.2d 106, 110-11 (1969); Poray v. Royal Globe Ins. Co., 90 N.J.Super. 454, 217 A.2d 916, 920-21 (1966); Criterion Ins. Co. v. Brown, 469 S.W.2d 484, 485 (Tex.Civ.App.1971). However, in upholding consent-to-be-bound provisions, courts have recognized that such provisions have the potential to hinder an insured's ability to recover damages. 9 Steven Plitt, Daniel Maldonado & Joshua D. Rogers, Couch on Insurance § 124:3, at 124-8 (3d ed.2005). Therefore, the validity of consent-to-be-bound provisions is often contingent upon an implied promise on the part of the insurer that it will not arbitrarily or unreasonably withhold or refuse its consent. Id.; see also Levy v. Am. Auto. Ins. Co., 31 Ill.App.2d 157, 175 N.E.2d 607, 611 (1961); Newark Ins. Co. v. Ezell, 520 S.W.2d 318, 321 (Ky.Ct.App.1975). As one court has recognized, one of the purposes of requiring the insurance company's written consent to be bound is to allow the insurance company to protect itself from a default judgment taken against the uninsured/underinsured motorist or an insubstantial defense by the uninsured/underinsured motorist. In re Koehn, 86 S.W.3d 363, 368 (Tex.App.2002); see also Pietrosh, 454 P.2d at 111 (Enforcement of the consent-to-be-bound provision may be appropriate in a case where the insured secures a default judgment against the uninsured motorist, since an adversary determination of liability and damages is absent.). Another reason includes guarding against collusion between the insured and the underinsured motorist. See Ezell, 520 S.W.2d at 321. We hold that a consent-to-be-bound provision, like the one in this case, is valid and enforceable provided the insurer does not withhold or refuse its consent without a reasonable basis to do so. There are several reasons for our holding. The provision does not require a forfeiture of benefits if consent is not obtained, a reason some states have given for holding such provisions valid. See, e.g., Moorcroft, 720 P.2d at 180. Additionally, we see nothing in our statutory provisions regarding UIM coverage that requires such coverage be unqualified. See generally Iowa Code ch. 516A; see also Moorcroft, 720 P.2d at 180. Moreover, the approach we take eliminates the previously discussed joinder problem that might arise were we to declare the consent-to-be-bound provision void or invalid. See, e.g., Handley, 467 N.W.2d at 250; Keel, 553 P.2d at 158. Finally, our holding is consistent with how we have treated a similar provisionthe consent-to-settlement clausein the context of a UIM case. See Bellville v. Farm Bureau Mut. Ins. Co., 702 N.W.2d 468 (Iowa 2005). We held in Bellville v. Farm Bureau Mutual Insurance Co. that the consent-to-settlement clause not only imposes an express duty on the insured to obtain the insurer's consent to settlement but also imposes an implied reciprocal duty on the insurer to consent unless it has a reasonable basis for refusing to do so. Id. at 484. Our holding that a consent-to-be-bound provision is valid and enforceable imposes on the insured and the insurer certain duties. Before the insured can satisfy the legally entitled to recover condition under the UIM coverage, the insured must comply with all of the other conditions of such coverage. For example, here, the UIM policy provision requires the insured to provide the insurer a copy of all suit papers when the insured sues the underinsured motorist. In addition to complying with this condition, the insured must obtain a valid judgment against the underinsured motorist. Implicit in this last requirement is that the suit must be defended. Default judgments, insubstantial defenses, and collusion between the insured and the underinsured motorist will preclude the insured from satisfying the legally entitled to recover condition. In short, the insurer will not be bound by a judgment obtained through any of these means. Once the insured satisfies the legally entitled to recover condition of the UIM coverage, the insurer has an implied reciprocal duty to refrain from withholding or refusing its consent to be bound by the judgment without a reasonable basis to do so. These express duties on the part of the insured protect the insurer against default judgment, insubstantial defenses, and collusion between the insured and the underinsured motorist. The insurer's implied reciprocal duty prevents arbitrary barriers to the recovery of statutorily mandated benefits and promotes the avoidance of multiplicity of lawsuits. With these principles in mind, we turn to the record in this case regarding the amended judgment entry in suit I. Farm Bureau contended in the district court, as it does here, that the amended judgment entry was obtained without Farm Bureau's written consent in violation of its consent-to-be-bound provision. For that reason, Farm Bureau argues, it is not bound by the amended judgment entry. It is undisputed that the estate did not obtain Farm Bureau's written consent to the amended judgment entry in suit I. In addition, the record is uncontroverted, as Farm Bureau argues, that at the time the estate filed its motion to correct judgment entry, suit I was undefended, a fact unknown to Farm Bureau at the time. Thus, there was an insubstantial defense to the motion. See Koehn, 86 S.W.3d at 368. Carter's attorney filed an uncontroverted affidavit that confirms these facts. He stated: 1. I am an attorney licensed to practice law in the state of Iowa. 2. I represented defendant Margie Carter in [suit I] that went to trial in February 2002. 3. I recently learned that [the estate's lawyer] made two telephone calls to [the judge who tried suit I] following the trial of [suit I]. I had no knowledge of these telephone calls [before they were made]. 4. Following the trial, [the estate's lawyer] filed a motion to correct judgment entry [in suit I]. I filed no resistance to that motion because [the estate's lawyer] already accepted my client's offer to settle the case. 5. I never made any analysis, one way or the other, of whether the motion to correct judgment entry should be granted. The circumstances in which the amended judgment entry was granted underscore the very reason for the consent-to-be-bound provision. But our inquiry does not end here. With regard to consent-to-settlement provisions, we said in Bellville: Our court has held that [consent-to-settlement] clauses are permissible under Iowa law as a means to protect the insurer's subrogation rights against the responsible party. In recognition of this limited purpose, we have held that an insured's failure to obtain the insurer's consent to settlement will preclude payment of UIM benefits only if the insurer proves that, absent such a breach, it could have collected from the tort-feasor. Furthermore, the insured's entitlement to UIM benefits will be reduced only by the amount of the subrogation recovery lost by the insurance company. We have placed the burden of proving prejudice on the insurer: The insurer must establish not only that the claim has been released but also that it was collectible and establish within a reasonable approximation the dollar amount that might be collected. Bellville, 702 N.W.2d at 483 (citations omitted). Similarly here, as we now hold, consent-to-be-bound provisions are permissible to protect the insurer's interests, albeit those interests are different from subrogation rights. We are convinced the insurer, as with consent-to-settlement provisions, should bear the burden of proving prejudice when an insured has not secured the insurer's consent to be bound. Farm Bureau has the burden to prove that the amended judgment entry has prejudiced its rights; otherwise it is bound by it. For reasons that follow, we think Farm Bureau has met its burden. If the district court was correct in amending the judgment, Farm Bureau has suffered no prejudice; otherwise it has. The estate relies heavily on our decision in Sullivan v. Wickwire, 476 N.W.2d 69 (Iowa 1991) to support the district court's action in entering the amended judgment. In Sullivan, all defendants except one settled before trial. Sullivan v. Wickwire, 476 N.W.2d 69, 70 (Iowa 1991). During the trial, the district court submitted a jury instruction without objection that failed to advise the jury that if they assigned fault to a settling defendant, that fault would reduce the damages awarded to the plaintiff. Id. at 72. The jury returned a verdict assessing the plaintiff's damages and assigned a percentage of fault to the plaintiff and to all of the defendants except one. Id. Despite the incorrect instruction, the district court reduced the verdict by the settling defendant's fault, thereby reducing the plaintiff's recovery. Id. The non-settling defendant argued on appeal that the district court was correct in reducing the verdict while the plaintiff argued that the district court was powerless to correct the judgment. Id. On this issue, we said: There is considerable merit in plaintiff's claim . . . . In Iowa and elsewhere, an instruction submitted to the jury without objection becomes the law of the case and will not be disturbed on appeal. The [defendant] attempts to discredit the rule in the present case by arguing the jurors' sole task was to find damages and allocate percentages of fault, leaving to the court the job of applying mathematical formulas to achieve the correct judgment. We do not believe, however, that the jury's understanding of the impact of its verdict is irrelevant to its decision-making responsibilities. In keeping with Iowa Code section 668.3(5), our prior decisions make clear that the court must instruct the jury with respect to the effect of answers given to special interrogatories, and the court's failure to do so may constitute reversible error. Id. at 72-73 (citations omitted). Although the facts in Sullivan are similar to the facts here, we need not follow the reasoning expressed in the foregoing discussion because it was dicta. This was made apparent in the passage following that discussion: We need not decide in the present case whether the court's error merits a new trial or merely an amended judgment, because other errors committed by the court demand a new trial. Id. at 73. For reasons that follow, we decide not to follow this dicta. In Reese v. Werts Corp., this court recognized that section 668.3(5) requires the [district] court to instruct the jury not only on the effect of the claimant's contributory fault but also on the effect of the fault of other parties. 379 N.W.2d 1, 3 (Iowa 1985). In that case, the district court instructed the jury that the percentage of negligence it attributed to the plaintiff (the case was tried in part under comparative negligence) would be used by the court to reduce the amount of damages the jury found the plaintiff had sustained. Id. What the court did not tell the jury in that instruction was that a defendant who bears less than fifty percent of the total fault was not jointly and severally liable, as the court was required to do under Iowa Code section 668.3(5). Id. at 3-4. The plaintiff objected to the instruction because the instruction did not take into account the joint and several liability rule. Id. at 3. The district court overruled the objection. Id. The jury found that the plaintiff sustained $100,000 in damages. Id. at 2. The jury attributed five percent of the negligence to the plaintiff, and attributed fifteen percent to the defendant. Id. Following the verdict, the plaintiff moved for a judgment against the defendant in the amount of $95,000. Id. Instead the court entered judgment in favor of the plaintiff in the amount of $15,000. Id. Under the instruction, if it were true, the plaintiff's recovery would have been $95,000 instead of $15,000. Id. at 3. This court held that because the district court undertook to instruct the jury on the effect of its determinations it was required to instruct accurately. Id. We reversed and remanded for a new trial, concluding that the district court had given the jury misleading advice and had failed to instruct the jury on the effect of its answers to the interrogatories as required by section 668.3(5). Id. at 4. Obviously, this court reversed because the verdict was tainted by that error resulting in prejudice to the plaintiff. In Schwennen v. Abell, we also noted that section 668.3(5) requires that the jury be made aware of the effect of its fault apportionment on the claimant's right to recovery. 430 N.W.2d 98, 104 (Iowa 1988). In that case we said: In Reese, we found it to be reversible error for the court to fail to instruct on this matter or to give misleading instructions with respect thereto. Id. (citation omitted). We then pointed out in Schwennen that the instructions given in the case before it were based on the incorrect premise that one of the defendants could be allocated some fault. Id. We rejected the plaintiff's suggestion that such fault should be disregarded and the jury's allocation of fault should be reassigned to the remaining defendants by a process of interpolation. Id. We noted that the plaintiff's suggestion would have a substantially different effect on the [remaining defendants] than the jury would have perceived them to have under the trial court's instructions. Id. Such a result, we held, required that the apportionment of fault among the remaining defendants had to be tried anew. Id. Because the verdict was tainted by the district court's error resulting in prejudice to the remaining defendants, we reversed. Id. Implicit in both Reese and Schwennen was the fact that the erroneous and misleading instructions tainted the jury verdicts resulting in prejudice to the parties challenging the verdicts. See Grefe & Sidney v. Watters, 525 N.W.2d 821, 824 (Iowa 1994) (If instructions are erroneous, they must be prejudicial before we will order reversal.). Here, the estate did not assail the jury's verdict on the grounds of an erroneous and misleading instruction that prejudiced the consortium claimants. Rather, the estate accepted the verdict as the correct measure of damages. Instead of challenging the verdict, the estate is seeking to uphold it on the grounds that the incorrect instruction became the law of the case. Because the consortium claimants were not prejudiced by the instruction and resulting verdict, the estate had no grounds to prevent the district court from reducing the verdict as it did. By reducing the loss of consortium claim by the percentage of fault which the jury attributed to the decedent, the district court did exactly what it was required to do under the law. See Iowa Code § 668.3(1)( b ) (any damages for consortium will be reduced by the percentage of fault attributed to the person who provides the basis for the consortium damages); id. § 668.3(4) (the court shall determine the amount of damages payable to each party in accordance with the findings of the court or jury). It follows therefore that Farm Bureau is prejudiced by the amended judgment entry, which restored the jury's verdict on the loss of consortium claims. For that reason Farm Bureau is not bound by the amended judgment entry. Cf. Carroll v. Martir, 610 N.W.2d 850, 857 (Iowa 2000) (recognizing that district court has the power to correct its own perceived errors); see also Iowa Code §§ 668.3(1)( b ), 668.3(4).