Opinion ID: 2230281
Heading Depth: 1
Heading Rank: 4

Heading: Refusal to Consent to Insured's Settlement with Tortfeasor.

Text: The jury also predicated its bad faith finding on Farm Bureau's refusal to consent to Bellville's settlement with the underinsured motorist. Farm Bureau argues on appeal that its denial of consent was objectively reasonable because a UIM carrier has no duty to consent to its insured's settlement with the alleged tortfeasor. It contends alternatively that even if it is wrong in this assertion, the existence of a duty to consent was fairly debatable. The plaintiff responds that an insurer does have a duty to consent to settlement, and Farm Bureau should have known it had such a duty. A three-judge panel of the court of appeals held that Farm Bureau had no specific duty to consent to a reasonable settlement, only a general duty of good faith. The court further concluded Bellville had failed as a matter of law to show any underlying breach of an implied duty of good faith relating to Farm Bureau's failure to consent. A. Existence of duty to consent. Farm Bureau's UIM coverage included the following provision: There is no coverage. . . for any insured who, without our consent, settles with any person or organization who may be liable for bodily injury. This clause imposes a duty on the insured to obtain the insurer's consent prior to any settlement with the tortfeasor. Grinnell Mut. Reins. Co. v. Recker, 561 N.W.2d 63, 68 (Iowa 1997). Our court has held that such clauses are permissible under Iowa law as a means to protect the insurer's subrogation rights against the responsible party. Kapadia v. Preferred Risk Mut. Ins. Co., 418 N.W.2d 848, 851 (Iowa 1988). 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. Id. at 852. Furthermore, the insured's entitlement to UIM benefits will be reduced only by the amount of the subrogation recovery lost by the insurance company. Hoth v. Iowa Mut. Ins. Co., 577 N.W.2d 390, 393 (Iowa 1998). 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. Id. Farm Bureau argues it had no implied duty to consent because under Iowa case law an insured can settle prior to obtaining the insurer's consent without necessarily forfeiting all benefits under the policy; recovery of benefits is reduced only by the amount otherwise collectible from the party liable. Thus, it asserts, if an insured is confident that the tortfeasor has no collectible assets, as Bellville was here, then no harm will result from the insured's settlement without consent. In response, the plaintiff contends there is harm to the insured if the UIM carrier has no duty to consent. He claims that realistically no insured would settle with a tortfeasor without the UIM carrier's consent for fear of losing all or some portion of the UIM benefits. [4] We think the plaintiff has the better argument. Although the consent-to-settlement clause places a duty on the insured, the obtaining of consent also bestows a benefit on the insured by facilitating the insured's settlement with the tortfeasor. Recognition of a duty to consent is also more consistent with our case law on the effect of the consent-to-settlement clause and its breach. The practical result of holding that an insurer has no good faith duty to consent is to shift to the insured the responsibility of ascertaining and evaluating the tortfeasor's ability to contribute toward payment of the insured's damages. This result is contrary to current case law under which the insurer bears the burden to establish that its subrogation rights have been harmed by a settlement to which it did not consent. If the insurer has a good faith duty to consent to settlement, it will have to make a determination up-front on the viability of its subrogation claim. If it has a reasonable basis to believe its claim has value, then it may refuse to give consent without being exposed to liability for extracontractual damages. But if the insurer has no reasonable basis to think that it can recover from the tortfeasor personally, then it must give consent to its insured's settlement with and release of the tortfeasor. [5] For these reasons, we hold 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. Cf. Brunet v. Am. Ins. Co., 660 F.Supp. 843, 846 (D.Vt.1987) (holding duty of good faith requires insurer to consent to insured's settlement with tortfeasor if the settlement is within the best interests of both insurer and insured); Pickering v. Am. Employers Ins. Co., 109 R.I. 143, 282 A.2d 584, 591 (1971) (stating consent-to-settlement clause carries with it an implied promise by the insurer that its consent will not be arbitrarily or unreasonably withheld). Of course, the mere fact that Farm Bureau was wrong in concluding it had no duty to consent to settlement does not mean it was in bad faith. See Bad Faith Actions § 5:07, at 5-26; cf. Kohlstedt v. Farm Bureau Mut. Ins. Co., 258 Iowa 337, 347, 139 N.W.2d 184, 190 (1965) (A mere mistake in judgment is not enough to show bad faith.). Nor does the fact that Farm Bureau took a position on this issue that was contrary to its insured necessarily subject it to liability. An insurer's duty of good faith does not require it to take a position favorable to its insured on an unsettled question of law. See Bad Faith Actions § 5:07, at 5-26 to 5-30. The determinative question is whether its position was reasonable, and that matter turns on whether the existence of a good faith duty to consent was fairly debatable. We now address that issue. B. Whether existence of duty to consent was fairly debatable. There are several factors that indicate Farm Bureau had a reasonable basis to assert it had no duty to consent to its insured's settlement. First, whether a UIM insurer has a good faith duty to consent had not been decided by an Iowa appellate court. See Colonial Penn Ins. Co. v. First Ins. Co. of Haw., Ltd., 71 Haw. 42, 780 P.2d 1112, 1114 (1989) (affirming summary judgment for insurer on bad faith claim when coverage issue was an open question of law); CUNA Mut. Ins. Soc'y v. Norman, 237 Va. 33, 375 S.E.2d 724, 727 (1989) (finding no bad faith, in part, based on fact that issue was a matter of first impression in this jurisdiction); 14 Couch on Insurance 3d § 207:4, at 207-17 (stating disputed point of law provides reasonable basis for denial of policy claim where issue is one of first impression); Barker & Glad Article, 30 Tort & Ins. L.J. at 86 (Many courts have found insurer legal positions reasonable, even in the absence of clear supporting authority, because the issue was an open one or one of first impression in the controlling jurisdiction.). Moreover, whether such a duty should be implied is a question upon which reasonable minds could differ, as evidenced by the court of appeals' ruling in this case. See Barker & Glad Article, 30 Tort & Ins. L.J. at 83 (stating the most reliable method of establishing that the insurer's legal position is reasonable is to show that some judge in the relevant jurisdiction has accepted it as correct). Thus, we conclude the question of whether an insurer had a good faith duty to consent was fairly debatable as a matter of law. C. Summary. A UIM insurer has a good faith duty to consent to its insured's settlement with the tortfeasor when there is no reasonable basis to believe the tortfeasor has any assets or other ability to contribute toward satisfaction of the insurer's subrogation rights. For purposes of the present case, however, this duty was not so evident that Farm Bureau could not fairly debate whether such a duty existed. Therefore, Farm Bureau had a reasonable basis to refuse to consent to Bellville's proposed settlement with Schueler. Consequently, the defendant's refusal to consent cannot support the jury's verdict finding the defendant in bad faith.