Opinion ID: 1115271
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Heading: deprivation of subrogation as a defense

Text: In Porter v. MFA Mutual Insurance Company, 643 P.2d 302 (Okla. 1982), we said as a general rule an insured who deprives insurer, by settlement and release, of its right of subrogation against the wrongdoer thereby provides insurer with a complete defense to an action on the policy. Id. 643 P.2d at 305. Today we conclude that this rule does not apply when an insurer denies coverage prior to the settlement and release. A short review of this area of the law will explain our reasoning. An act of an insurer may cause it to waive its subrogation rights or estop the insurer from asserting those rights. Ford Motor Credit Company v. State Farm Mutual Automobile Insurance Company, 309 So.2d 914, 917 (La. App. 3rd Cir.1975). See also National Mutual Insurance Company v. Fincher, 428 N.E.2d 1386, 1389-1390 (Ind. App. 1981). As explained in Allstate Insurance Company v. Austin, 120 Ga. App. 430, 170 S.E.2d 840 (1969), certiorari dismissed as improvidently granted, 226 Ga. 93, 172 S.E.2d 602 (1970): Whether the destruction of the right to subrogation constitutes a complete defense to an action on the policy, therefore, depends upon whether there is a prior breach of contract or waiver or estoppel on the part of the insurer which of itself cancels out its right to demand subrogation as a condition of payment. Id. 170 S.E.2d at 843. Insurers often protect their subrogation rights by including in a policy a consent to settle provision requiring the insurer's consent to any settlement between the insured and a third party. [2] Several jurisdictions enforce this provision and require an insured to obtain consent from its insurer prior to settling with an uninsured tortfeasor. For example, in Nationwide Mut. Ins. Co. v. Webb, 291 Md. 721, 436 A.2d 465 (1981), the Maryland court observed: The standard uninsured motorist endorsement, and the endorsement in the instant case, requires the insurer's consent to any settlement with the uninsured motorist. Unlike consent to sue clauses, consent to settle clauses are generally upheld, at least to the extent that settlements, consent judgments, releases, covenants not to sue, etc. between insureds and the uninsured motorists are not binding upon insurers unless the insurers have given their consent. Id. 436 A.2d at 476. The Maryland court cited opinions from several jurisdictions in support of this statement. [3] Requiring consent is consistent with the general principle that [a]n insurer's undertaking cannot be altered or modified by an insured's agreement with a third party in the absence of the insurer's consent. Travelers Ins. Companies v. Dickey, 799 P.2d 625, 628 (Okla. 1990). However, when an insurer arbitrarily withholds consent such action constitutes a waiver. Benson v. Farmers Ins. Co., 227 Kan. 833, 610 P.2d 605, 611 (1980). See also National Mutual Insurance Company v. Fincher, 428 N.E.2d at 1390. In Benson the Kansas court said: [i]n 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. Id. Insurers have been held to have consented to settlement and the loss of their subrogation rights by suggesting settlement or advising an insured to settle. For example, in National Mutual Insurance Company, supra, the Indiana court explained that an insurer's direct suggestion of settlement to its insured would amount to a waiver of, or estoppel with regard to, its loss of subrogation rights. Id. 428 N.E.2d at 1390. See also Ford Motor Credit Company v. State Farm Mutual Automobile Insurance Company, 309 So.2d at 917, wherein the court explained that the insurer could not complain of loss of subrogation rights since its advice led the insured into believing that the release was proper under the policy. An insurer may not complain of its lack of consent to settlement and the attendant loss of subrogation rights when the settlement comes after the insurer denied coverage under the policy. For example, in Roberts v. Fireman's Insurance Co. of Newark, N.J., 376 Pa. 99, 101 A.2d 747 (1954), the court stated: It is well settled that as a prerequisite to the enforcement of a right of subrogation, the subrogee must have paid or, at least, have offered to pay in discharge of the subrogor's claim... . Here, the insurance company not only did not offer to pay the insureds' claim under the policy or any part of it but, as expressed by its own designated adjuster, persisted in denying liability on the ground that the loss was not covered by the insurance contract. If anyone can be said to have repudiated the policy, it was the insurer rather than the insured. Yet, the company now seeks to avoid liability under the policy by claiming that the insured violated the contract and, in so doing, extinguished the insurer's right of subrogation. The contention is manifestly without merit. Id. 101 A.2d at 749-750. (Citations omitted). Other courts echo this principle. See Powers v. Calvert Fire Insurance Co., 216 S.C. 309, 57 S.E.2d 638, 642 (1950); Simmons v. South Carolina Farm Bureau Mutual Insurance Company, 301 S.C. 267, 391 S.E.2d 560, 562 (1990); Liberty Mutual Insurance Company v. Flitman, 234 So.2d 390, 392-393 (Fla.App. 1970); Dinn Oil Company v. Hanover Insurance Company, 87 Ill. App.2d 206, 230 N.E.2d 702, 705 (1967); Alderman v. Hanover Insurance Company, 169 Conn. 603, 363 A.2d 1102, 1107 (1975). See also Couch on Insurance 2d at §§ 61:192 and 61:193. In Uptegraft v. Home Ins. Co., supra , we explained that an insurer's loss of subrogation rights due to the running of the statute of limitations on a claim against the tortfeasor could not bar a UM claim by the insured. Id. 662 P.2d at 686. We cited therein Selected Risks Ins. Co. v. Dierolf, 138 N.J. Super. 287, 350 A.2d 526, 529 (1975). Id. 662 P.2d at 684-685 n. 4 and 686 n. 11. In noting this case we said the following. In Selected Risks, the court said that by virtue of this cooperation agreement, the initial responsibility to act to protect subrogated rights rests upon the insurer. It held that when an insurer sits on these rights, it cannot be heard to complain when the statute of limitations has run. Id. 662 P.2d at 686-687 n. 11. Similarly, in McDonald v. Republic-Franklin Ins. Co., 45 Ohio St.3d 27, 543 N.E.2d 456 (1989), the court said that: [a]n insurer must aid its insured in the preservation of its subrogation rights. Id. 543 N.E.2d at 460. Subrogation is a doctrine the law has devised for the benefit of one secondarily liable who has paid the debt of another. This Court has recognized that subrogation may be either of two kinds: (1) legal or equitable, or (2) conventional subrogation. Lawyer's Title Guaranty Fund v. Sanders, 571 P.2d 454 (Okla. 1977). Legal or equitable subrogation is a creature of equity and does not depend upon a contract. Republic Underwriters v. Fire Ins. Exchange, 655 P.2d 544, 546 (Okla. 1982). Conventional subrogation comes from a contract or agreement, expressed or implied. Lawyer's Title Guaranty Fund v. Sanders, supra at 456. The subrogation involved in this case is clearly of the conventional sort; it arises, if at all, from the contractual obligation of Continental. Continental chose to repudiate its alleged contractual obligation when it denied coverage to the Sextons. The Sextons, relying on Continental's representation that it had no liability, settled with the tortfeasor and her insurer, and gave the required releases. Such representation by Continental, accompanied by the detrimental reliance of the Sextons, created an estoppel [4] when the Sextons later brought suit against Continental. In Old Surety Life Insurance Co. v. Miller, 333 P.2d 504 (Okla. 1958), the Syllabus by our Court states in part: Any course of action or conduct on the part of the insurance company which leads a party insured honestly to believe by that conforming thereto a forfeiture of his policy will not be incurred, followed by due conformity on the part of insured will estop the company from insisting upon the forfeiture, although it might be claimed under the express letter of the insurance contract. Id. Continental, having earlier denied any contractual relationship with the Sextons for UM coverage, would like now to resurrect the insurance contract to claim loss of the subrogation rights it was given thereunder. The law does not accommodate such a change of position. It is also worth noting that Avis, acting on behalf of the insurer, and after the insured had unsuccessfully presented a UM claim to both Avis and Continental, prepared the release which it now claims destroyed its subrogation rights. Here the insurer didn't sleep on its rights as in Selected Risks, supra, but rather, effectively destroyed its own subrogation rights by the release its attorney prepared. An insured does not have the duty to protect an insurer from itself. The fact, however, that the UM carrier and the liability carrier were one and the same company here is not dispositive. Neither is the fact that the UM carrier's attorney prepared the release. The certified question is broader, and in our opinion, is deserving of an answer. The answer is this. When an insurer denies uninsured motorist coverage under a policy to its insured and the insured then settles with a third party the insurer may not thereafter complain of its loss of subrogation rights. Roberts v. Fireman's Insurance Co. of Newark, N.J., supra . It is estopped to do so. We conclude and hold that an insurer's complete denial of UM coverage to its insured estops that insurer from thereafter invoking the Porter defense of loss of subrogation rights arising from the settlement. Certified Question Answered. HODGES, V.C.J., and LAVENDER, DOOLIN, HARGRAVE, ALMA WILSON and KAUGER, JJ., concur. OPALA, C.J., and SIMMS, J., concur in result.