Opinion ID: 1169781
Heading Depth: 3
Heading Rank: 2

Heading: Effect of Hartford's Settlement with Insured

Text: Hartford next contends that even if Aetna had a right to contribution for the defense costs it expended, Hartford's settlement with the insured extinguished Aetna's right. Hartford initially argues that under Utah law, any defenses that are valid against the insured are also valid against the [subrogated] insurer. Fashion Place Invest., Ltd. v. Salt Lake County/Salt Lake County Mental Health, 776 P.2d 941, 945 (Utah.Ct.App.1989). Therefore, since the insured settled and released all claims against Hartford, Hartford argues that that release acts as a complete defense against Aetna's subrogation claims. We disagree. In third-party insurance contexts, this court has held that where the insured settles with a tortfeasor, and the tortfeasor and/or its insurer was on notice of the other insurer's subrogation right, then the settlement and release will not affect the insurer's right of subrogation. Educators Mut. Ins. Ass'n v. Allied Property & Cas. Ins. Co., 890 P.2d 1029, 1031 (Utah 1995) ([A] settlement between an injured party and a tort-feasor who has knowledge of the subrogation rights of the injured party's insurer does not destroy the subrogation claim of the injured party's insurer.); see also Transamerica Ins. Co. v. Barnes, 29 Utah 2d 101, 106, 505 P.2d 783, 787 (1972). [14] This approach is also supported by a majority of other jurisdictions. See Farmers Ins. Group v. Martinez, 107 N.M. 82, 752 P.2d 797, 799 (Ct.App.1988); Leader Nat'l Ins. Co. v. Torres, 113 Wash.2d 366, 779 P.2d 722, 724 (1989) ( Torres II ) (The overwhelming majority of states allows a subsequent equitable subrogation action by an insurer if the insurer did not consent to the release and the tortfeasor knew of the insurer's interest prior to the release.); 16 Mark S. Rhodes, Couch on Insurance 2d § 61:201 (Rev. ed.1983). These authorities reason that allowing a general release between the tortfeasor and the insured `constitutes a trap for the unwary insured plaintiff' and `encourages fraud or, at the very least, sharp practice on the part of the tortfeasor or his insurance carrier.' Leader Nat'l Ins. Co. v. Torres, 51 Wash.App. 136, 751 P.2d 1252, 1254 (1988) ( Torres I ) (quoting Home Ins. Co. v. Hertz Corp., 71 Ill.2d 210, 16 Ill.Dec. 484, 486-87, 375 N.E.2d 115, 117-18 (1978)). Ultimately, these courts find that: To require [the unsophisticated insured] to execute a release of all claims, even though the tortfeasor has knowledge of the insurer's interest and the probable existence of a standard insurance policy provision obligating the insured to protect the insurer's subrogation rights, is simply not consistent with fair dealing and ought not to be encouraged. Id. This rationale was affirmed in Torres II, 779 P.2d at 725, where the Washington Supreme Court stated that although equities were also in favor of encouraging settlements and avoiding litigation, such a speculative result is not equitably purchased at the price of either abandoning the subrogation rights of the insurer or limiting recovery to reimbursement from the injured insured. We believe this same reasoning is equally applicable to co-insurers where one insurer is on notice that another has paid all, or more than its share, of the defense costs. Indeed, there is probably even more of an incentive for an insurer to engage in sharp practices to settle for a limited amount with the possibly unsophisticated insured to avoid the subrogation rights of another insurer who has paid substantial defense costs. We therefore conclude that it is more equitable to hold that an insurer who is on notice that another insurer has been paying significant defense costs should not be allowed to settle for a minimal sum to avoid having to contribute its fair share. [15]