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Insurance Lawyers Weigh Top Court’s Comment on Waiver

By Caryn Tamber, Maryland Daily Record Legal Affairs Writer
April 29, 2007
A few dozen words in a 40-page Court of Appeals opinion could have a major impact on Maryland insurance law.

The case, Erie Insurance Exchange v. Heffernan, primarily addressed choice-of-law issues. But a small part of the opinion addresses the rights of an injured driver’s insurance company after the company has signed off on a settlement between the injured driver and an uninsured/underinsured driver’s insurance company.

The top court appears to say that if the victim’s insurance company approves the settlement and waives subrogation – the right to sue the uninsured driver in the victim’s stead – the insurer cannot then argue about who is liable for the accident.

“It will certainly have a chilling effect on insurance companies’ willing[ness] to waive subrogation,” said Ronald V. Miller Jr., who handles car accident cases on the plaintiff’s side and teaches an insurance class at the University of Baltimore School of Law.

That, in turn, could be bad news for negligent drivers, who might be more frequently exposed to suits filed by the injured person’s insurance company.

“That’s not the way it’s construed today,” said Miller, of Miller & Zois LLC. “Certainly, plaintiffs’ lawyers have not, prior to this case, considered a waiver of subrogation as an admission of liability.”

Underlying tort claim

The potentially far-reaching language comes in a case whose major issue was which state’s law applies in an underinsured motorist claim where the insurance contract was executed in Maryland but the accident occurred in Delaware.

Edmund and Diane Heffernan are suing their car insurance company, Erie, for underinsured motorist benefits connected to their teenage daughter’s death in a Delaware car accident. The underlying suit is pending in U.S. District Court in Baltimore, and the federal judge asked Maryland’s top court to determine which state’s law should apply.

Maryland law would be more favorable for the insurer because Maryland has a statutory cap on non-economic damages as well as a contributory negligence standard for tort recovery. Contributory negligence renders an injured person ineligible to recover money if he or she contributed in any way to the injury.

Erie claims that the Heffernans contributed to the accident by allegedly telling their daughter, Mallory, that she and the sleepy friend driving her home to Maryland from Pennsylvania should continue driving instead of resting for the night. Mallory was killed when the friend fell asleep at the wheel and collided with a tractor-trailer.

Before the Court of Appeals, Erie argued that even if Delaware law controls, the court should apply Maryland law because Maryland’s statutes dealing with contributory negligence and non-economic damages are crucial public policies.

Dicta or controlling?

In dismissing Erie’s argument about contributory negligence, the court held that Erie’s consent to the Heffernans’ settlement with the driver’s insurance company lays to rest the question of the driver’s negligence.

“Because the underlying tort claim against the underinsured tortfeasor settled, there is no longer a valid question as to the underlying tort liability; the only remaining issue for resolution is damages,” Judge Clayton Greene Jr. wrote for the court in an opinion filed April 10.

If the injured party’s insurer approves a settlement and waives subrogation, it means the underinsured negligent driver’s insurance company can pay the victim its policy limits. The victim’s insurer then owes the victim the different between the other party’s policy limits and the injured person’s underinsured motorist policy.

If the victim’s insurance company does not waive subrogation, it puts up the amount of money the victim would have gotten from the underinsured driver’s insurer and reserves the right to sue the underinsured motorist.

The court reasoned that a payment by the underinsured driver to the victim is an admission of liability, so when the victim’s insurer signs off on that settlement, it, too, is admitting that the underinsured driver is liable.

Attorneys who have read the decision are trying to determine what status the court’s reasoning, spelled out primarily in a footnote, will have on insurance cases. The lawyers say it is unclear whether the court’s holding is dicta – reasoning not central to the holding of the case and without the full force of precedent – or controlling precedent.

Insurance defense lawyer Michael J. Budow described the holding as “almost like a hybrid.” The Court of Appeals decided the case only after a U.S. District Court judge certified two questions, he pointed out. The rights of an insurance company after it has waived subrogation was not one of those questions, said Budow, who practices with Budow & Noble PC.

At the same time, the court’s decision on that issue did help determine its final result, he said.

In any event, lawyers who read the opinion said insurance companies would be wise to treat the holding as precedent-setting for the time being.

Tight spot

Attorney Howard Simcox Jr., who does insurance defense work, said the Court of Appeals’ holding is puzzling because settlements between the victim and the negligent party’s insurer contain no language admitting liability.

“I don’t know why the court is now suggesting that a settlement with the underlying tortfeasor extinguishes liability defenses, because it typically doesn’t resolve any liability issues,” said Simcox, of Sussman & Simcox Chartered.

Miller said that besides liability on the part of the underinsured driver, there may be another reason the driver’s insurer would offer to settle: The insurer may not want to risk a trial award that exceeds the policy limits.

Simcox said the decision is at odds with past jurisprudence.

“I don’t know where that holding comes [from], because I think it cuts against earlier decisions that allow the first party carrier to raise any defense that could have been raised by the tortfeasor,” he said.

Richard L. Nilsson of Goodell, Devries, Leech & Dann LLP said the decision is especially negative for insurers when read together with a January Court of Special Appeals decision, Ohio Casualty Insurance Co. v. Chamberlin et al.

In that case, the other driver’s insurance company offered Chamberlin its policy limits of $20,000. Chamberlin’s insurer, Ohio Casualty, blocked the settlement, refusing to waive subrogation, and put up $20,000 of its own. When the case went to trial, a jury decided Chamberlin only deserved $5,445 in compensation.

The Court of Special Appeals decided in a reported opinion that Chamberlin did not need to return the money her insurer had already paid her. The low verdict was a risk Ohio Casualty should have considered when it decided not to waive subrogation, the court held.

Together, the two cases put insurance companies in a tight spot, said Nilsson, who does insurance defense work.

“It really puts the underinsured carrier in somewhat of a predicament, in that they have to make a decision,” he said. “If they want to preserve their defenses, they have to advance to the plaintiff” what the plaintiff would have gotten from the other party’s insurer.

“Yet if they’re successful in their defenses, they don’t have the right to recover the money that they advanced,” Nilsson said.

Spell it out in the policy

One way for insurance companies to deal with the potential fallout from the Heffernan case is to fashion policy language that allows them to waive subrogation while maintaining their right to pursue a liability defense, Budow said.

The language would con
vey that “we will allow you settle the case in this manner. but we do not waive and in fact reserve our rights to raise all issues that we would have in the defense of this case, including liability and damages,” he said.

As of Thursday, Erie had not filed a motion for reconsideration with the Court of Appeals. It has 30 days from April 10 to do so.

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