UIM carrier not able to recover advance from liabilit insurer when tortfeasor goes bankrupt: AUTO OWNERS INS. CO. V. OMNI INDEMNITY CO. (COA 8/1/2008)

AUTO OWNERS INS. CO. V. OMNI INDEMNITY CO.
INSURANCE:  Underinsured (UIM) motorist benefits and "Coots" advance
2007-CA-001165
PUBLISHED: AFFIRMING
PANEL: HENRY PRESIDING; COMBS, KELLER CONCUR
JEFFERSON COUNTY
DATE RENDERED: 8/1/2008

The tort victim’s underinsured motorist carrier, Auto Owners Insurance Co., appeals from an order of the Jefferson Circuit Court determining that Auto Owners is not entitled to restitution from the tortfeasor’s insurer, Omni Indemnity Company, for funds advanced to the tort victim pursuant to Coots v. Allstate Insurance Company, 853 S.W.2d 895 (Ky. 1993).

In this motor vehicle accident case, Omni tendered it's liability limits and Auto Owners advanced to preserve its subrogation claim against the tortfeasor for any UIM benefits it might pay.  Subsequent to the advancement, the tortfeasor filed bankruptcy and Auto Owners failed to file proof of its claim with the bankruptcy court, resulting in the tortfeasor’s dismissal from the lawsuit with no finding of liability against him. The tortfeasor was dismissed from the tort lawsuit which did not bar the claimant's claim for UIM benefits against Auto Owners who also sought to recover its advance from the tort feasor's liability insurer Omni. 

The trial court entered an opinion and order determining, based upon Nationwide Mutual Insurance Co. v. State Farm Automobile Insurance Co., 973 S.W.2d 56 (Ky. 1998), and USAA Casualty Insurance Company v. Kramer, 987 S.W.2d 779 (Ky. 1999), that Auto Owners was not entitled to recover the $25,000.00 it had advanced pursuant to Coots from Omni Indemnity. This appeal followed.

Auto Owners contends that the trial court erred in determining that it was not entitled to recover its Coots advance money from Omni Indemnity. More specifically, it alleges (1) that its substituted payment was not an “overpayment,” and (2) that a tortfeasor’s bankruptcy does not affect a UIM carrier’s right to recover a substituted payment. The COA then began a summary of UIM law, advances, and Coots.

In Coots, the Supreme Court established a procedure whereby an injured party with UIM coverage could settle with a tortfeasor and the tortfeasor's liability carrier and still retain a claim against his or her UIM insurer.

Under the Coots procedure, when the injured party, the tortfeasor and the tortfeasor's liability carrier tentatively agree to settle the injured party's claim against the tortfeasor for the policy limits, the injured party may preserve his or her UIM claim by giving notice to its UIM insurer of the parties' intent to settle and affording the UIM insurer the opportunity to preserve its subrogation rights against the tortfeasor by paying the injured party the policy limit amount.

If the UIM insurer elects not to substitute its own funds by paying the liability insurer's policy limits to the injured party: (1) the UIM insurer forfeits its subrogation rights against the tortfeasor for any amount that it is later required to pay the injured party under its UIM coverage; (2) the tortfeasor's liability carrier pays the injured party the settlement amount; (3) the tortfeasor is released from all further liability to either the injured party or the injured party’s UIM insurer; and (4) the injured party may proceed against his or her UIM insurer for any damages in excess of the liability insurer's policy limits.

However, if the UIM insurer elects to preserve its subrogation rights against the tortfeasor and substitutes its own funds for the settlement amount by paying the policy limit to the injured party, the UIM carrier: (1) has subrogation rights against the tortfeasor's liability carrier for the substituted amount paid to the injured party; and  (2) retains its subrogation rights against the tortfeasor for any amount that it is required thereafter to pay the injured party under its UIM coverage.True v. Raines, 99 S.W.3d 439, 445 (Ky. 2003).

It necessarily follows from the two cases (Nationwide and Kramer) that if by some other foreseeable and usual route (such as judgment on the pleadings, summary judgment, or directed verdict) the trial proceedings terminate in a judgment against the alleged tortfeasor for less than the substituted amount, the UIM carrier’s entitlement to reimbursement will likewise be limited by the judgment amount.

“The bottom line is that the UIM [carrier] bears the risk when it chooses to thwart a proposed settlement between the plaintiff and the alleged tortfeasor by substituting payment of the settlement amount.” USAA Cas. Ins. Co. v. Kramer, 987 S.W.2d 779, 783 (Ky. 1999).

The COA then stated it construed the foregoing pronouncements of the Supreme Court as squarely placing the risk of unsuccessful litigation against the tortfeasor on the UIM carrier at trial and believed the rule is also applicable to a claim which has become barred by the bankruptcy of the alleged tortfeasor where the UIM carrier has failed to preserve its subrogation rights through lack of diligence.

Little is to be gained by substituting Coots money to preserve subrogation against a tortfeasor on the brink of bankruptcy. Auto Owners failed to protect its subrogation rights against Edlin in the Chapter 13 filing with the attendant result that its claim became barred which, in turn, resulted in Edlin’s dismissal from the action without there having been an adjudication of his liability (both as to fault and damages) in the case.

It must be borne in mind that Omni Indemnity is the liability carrier for Edlin (the tortfeasor), and Omni's obligation under the liability policy is a function of Edlin’s liability. At the risk of repetition, the proceedings against Edlin terminated without a determination of liability against him. As such, “the insurer’s obligation under its policy” was, in this sense, zero.

Digested by Michael Stevens