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Walsh v. State Farm Ins. Co.

February 24, 1997


D'italia, A.j.s.c.

The opinion of the court was delivered by: D'italia


This case raises a series of novel questions related to underinsured motorist coverage (hereinafter "UIM"). On December 2, 1996, counsel agreed to submit this matter for decision based upon a Stipulation of Facts and Joint Exhibits. The court has reviewed the stipulation of facts and joint exhibits and makes the following findings.

On September 14, 1989, plaintiff Mercedes D. Walsh was a passenger in a motor vehicle owned and operated by her husband, Charles Walsh, Sr. According to the stipulation, plaintiff's host vehicle swerved into a concrete median on the New Jersey Turnpike, bounced back across two traffic lanes and collided with a bus. As a result of the accident, plaintiff sustained multiple injuries. She filed suit against her husband, the bus company, and its driver.

Charles Walsh, Sr. was insured by State Farm. His liability insurance policy limit of $15,000 was offered to plaintiff and was paid into court. Following mandatory, non-binding arbitration, plaintiff and the attorney for Charles Walsh, Sr. filed for trial de novo. Thereafter, plaintiff accepted the $15,000 policy of Charles Walsh, Sr. and an offer of $17,500 from the co-defendant bus owner and operator. Plaintiff executed releases on March 31, 1992.

Plaintiff's son, Kevin K. Walsh, resided with plaintiff at the time of the accident. Kevin Walsh also had a policy with State Farm. His policy provided UIM coverage with a limit of $100,000 per person. By letter dated June 11, 1992, more than two months after the releases in favor of all tortfeasors had been signed, plaintiff's attorney wrote to State Farm asserting a UIM claim under the policy issued to Kevin Walsh. State Farm denied coverage and this action ensued.

Plaintiff concedes that she failed to comply with certain claim requirements of the Kevin Walsh policy. The UM/UIM endorsement provides that there is no coverage for any insured who "without our written consent settles with the owner or operator of an *** underinsured motor vehicle who may be liable for the bodily injury *** and hurts our right to recover from such person or organization." The same endorsement provides that there is no coverage for any insured who "without prior written notice to us, settles with any other person or organization who may be liable for the bodily injury". Plaintiff did not obtain State Farm's written consent to settle her claim against Charles Walsh, an underinsured motorist. Nor did plaintiff give State Farm written notice of her intention to settle with the bus company and its operator.

Plaintiff asserts that State Farm had actual knowledge of all salient facts and consented orally to the settlements which resulted in plaintiff tendering releases to all tortfeasors. In that regard, plaintiff relies upon the certification of her attorney, one of the joint exhibits, in which counsel states that on October 15, 1990, plaintiff was awarded $50,000 by the arbitrator, who assessed 25% of the liability against the bus company and its driver. The certification further provides:

This result was also discussed with the bodily injury adjusters and it was agreed that a Trial De Novo application would be filed in order to be able to obtain additional funds from the co-defendant, with the understanding, of course, that any amounts received from said co-defendant would be credited to State Farm in connection with the underinsured claim that was to be made under the Kevin Walsh policy. Kevin Walsh is the son of Mercedes and Charles Walsh and resided with his parents in Bayonne, New Jersey at the time of the accident and was also insured by State Farm, all of which information was made known to the various adjusters.

Counsel also certifies that he was "requested" to submit a claim under the UIM provisions of the Kevin Walsh policy subsequent to execution of the releases on March 31, 1992.

State Farm cannot directly refute the assertion that it was on actual notice of an impending UIM claim against the Kevin Walsh policy at the time the actions against the tortfeasors were settled. State Farm's bodily injury file cannot be located and the adjusters on that file have no independent recollection of any of the matters in issue. State Farm did not open a UIM claim file until its receipt of plaintiff's June 11, 1992 letter.

Defendant argues that plaintiff's complaint must be dismissed for failure to comply with the procedures set forth in Longworth v. VanHouten, 223 N.J. Super. 174, 538 A.2d 414 (App. Div. 1988), approved by the Supreme Court in Rutgers Cas. Ins. Co. v. Vassas, 139 N.J. 163, 652 A.2d 162 (1995). Plaintiff contends that oral notice to the State Farm bodily injury adjusters handling the claim against Charles Walsh, Sr. constitutes substantial compliance with the Longworth procedures. This court holds that, where an insurer offers the liability policy limits of its insured in exchange for a complete release from the injured party, the injured party need not first obtain written consent to accept the settlement offer from another department of the same insurer in order to preserve a UIM claim under another policy issued by that insurer.

Longworth established procedures governing an insured's claim for UIM benefits where the insured also files suit against the tortfeasor. In such cases, the insured must notify the UIM carrier of the fact that an action against the tortfeasor has been instituted. If, during the pendency of the action, the tortfeasor's insurance proves insufficient to satisfy the insured's damages, then the insured should again notify the UIM insurer of that fact. If the insured receives a settlement offer or arbitration award that does not completely satisfy the claim because the tortfeasor is underinsured, the UIM insurer has the option of paying the insured the amount of the tortfeasor's settlement offer or thearbitration award in exchange for subrogation of the insured's rights against the tortfeasor. In the alternative, the UIM insurer may allow the insured to settle.

The requirement that the UIM carrier be given the option of exercising its subrogation rights against the tortfeasor is anomalous where the UIM carrier and the liability carrier are the same. The offer to settle the tort claim for the full amount of a liability policy is an exercise by the insurer of its good faith obligation to make an effort to protect the insured from the prospect of an excess judgment. In Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474, 496, 323 A.2d 495 (1974), the Supreme Court held that an insurer, "having contractually restricted the independent negotiating power of its insured, has a positive fiduciary duty to take the initiative and attempt to negotiate a settlement within the policy coverage." The State Farm policy issued to Charles Walsh provides that only the insurer has "the right to investigate, negotiate and settle any claim or suit." The policy also provides that the insured shall not make any payment or assume any obligation to others, except at his or her own cost. Thus, State Farm was under a Rova Farms burden to attempt to negotiate a settlement within the policy coverage or risk being liable for the difference between its policy limit and the amount of an excess judgment. See Lang v. Baker, 101 N.J. 147, 157, 501 A.2d 153 (1985). Having determined that its fiduciary obligation to Charles Walsh required settlement within the ...

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