Kral v. American Hardware Mut. Ins. Co.

• Decision Date: 18 December 1989
• Citation: 784 P.2d 759
• Docket Number: 88SC9
• Parties: Elizabeth A. KRAL, formerly known as Elizabeth A. Teller, Petitioner, v. AMERICAN HARDWARE MUTUAL INSURANCE COMPANY, Respondent.
• Court: Colorado Supreme Court

Page 759

784 P.2d 759

Elizabeth A. KRAL, formerly known as Elizabeth A. Teller, Petitioner, v.AMERICAN HARDWARE MUTUAL INSURANCE COMPANY, Respondent.

No. 88SC9.

Supreme Court of Colorado En Banc.

Dec. 18, 1989.

Cleveland, Wengler & Robbins, P.C., Daniel B. Stageman, Colorado Springs, for petitioner.

White & Steele, P.C., R. Eric Peterson, Michael W. Anderson and Sandra Spencer Coleman, Denver, for respondent.

Justice KIRSHBAUMdelivered the Opinion of the Court.

In Kral v. American Hardware, 754 P.2d 411(Colo.App.1987), the Court of Appeals affirmed a summary judgment entered by the El Paso County District Court in favor of respondentAmerican Hardware Mutual Insurance Company(American Hardware) against Elizabeth A. Kral(Kral).The trial court held that, pursuant to the subrogation clause of an insurance contract and the terms of a release-trust agreement executed by Kral, American Hardware was entitled to recover monies paid by it to Kral under an uninsured motorist clause of the insurance contract.The Court of Appeals held that in the circumstances of this case the subrogation clause and release-trust agreement did not violate public policy.Having granted certiorari to review this conclusion, we reverse the judgment of the Court of Appeals and remand the case to that court with directions.

I

On August 17, 1980, Kral's husband, Joseph W. Teller, was killed when a vehicle he was driving was struck by a car operated by Norman Englebaugh.The vehicle Teller drove was owned by his employer and was insured under a contract of insurance issued by American Hardware.The insurance contract provided uninsured motorist benefits in the maximum amount of $30,000 and contained the following provisions concerning such coverage:

We will pay all sums the insured is legally entitled to recover as damages from the owner or driver of an uninsured motor vehicle.The damages must result from bodily injury sustained by the insured caused by an accident.The owner's or driver's liability for these damages must result from the ownership, maintenance or use of the uninsured motor vehicle.

The policy also contained the following pertinent language:

E.OUR LIMIT OF LIABILITY

....

2.Any amount payable under this insurance shall be reduced by:

....

b. All sums paid by or for anyone who is legally responsible, including all sums paid under the policy's LIABILITY INSURANCE.

....

F.CHANGES IN CONDITIONS

....

3.OUR RIGHT TO RECOVER FROM OTHERS is changed by adding the following:

If we make any payment and the insured recovers from another party, the insured shall hold the proceeds in trust for us and pay us back the amount we have paid.

Kral filed a civil action against Englebaugh on December 1, 1980, and determined through discovery that Englebaugh was uninsured.Kral then filed a claim against American Hardware under the uninsured motorist provision of the insurance contract.On December 18, 1980, American Hardware paid Kral $30,000 and Kral executed a release-trust agreement containing the following pertinent language:

Further, I state that I have instituted an action against Norman A. Englebaugh(the operator of the uninsured automobile) ... and I agree to withhold 15% of any monies received in such action as the result of settlement or judgment in trust for American Hardware Mutual, to be paid to said company immediately upon the same coming into my hands.I agree to be solely responsible for costs incurred in said action.In the event that an offer of settlement is received from the adverse party, I agree to advise American Hardware Mutual before accepting the same.¹

On May 5, 1981, Kral filed an amended complaint in her pending civil action.The amended complaint added Adams Apple Lounge, Inc., a lounge Englebaugh allegedly visited the night of the accident, as a defendant.In July of 1983, Kral again amended her complaint to include as additional defendantsGary Windom and Don Bates, d/b/a Bates and Windom Insurance Agency.²As amended, Kral's complaint alleged that Adams Apple negligently sold alcoholic beverages to Englebaugh and that Windom and Bates negligently misrepresented the status of the liability insurance coverage for Adams Apple's operations.

On July 15, 1985, Kral settled her claims against Adams Apple, Windom and Bates for the sum of $177,500.She notified American Hardware of the settlement and advised American Hardware that she intended to dismiss her claims against Englebaugh.American Hardware consented to the dismissal of the claims against Englebaugh but demanded payment from Kral of $26,635, representing fifteen percent of the settlement she had obtained from Adams Apple, Windom and Bates.

Kral then filed this civil action in the El Paso County District Court seeking a declaration that the subrogation clause of the insurance contract and the release-trust agreement were unenforceable because they were contrary to public policy.Kral moved for summary judgment on her claim, and American Hardware filed a motion for summary judgment alleging that it was entitled to payment of the $26,635 pursuant to the release-trust agreement.On March 11, 1986, the trial court granted American Hardware's motion and denied Kral's motion.The trial court concluded that although Kral's retention of the settlement proceeds and the $30,000 she had received from American Hardware would not constitute double recovery, the release-trust agreement did not violate public policy and was enforceable.

On appeal, the Court of Appeals affirmed the trial court's judgment.Relying on Granite State Insurance Co. v. Dundas, 34 Colo.App. 382, 528 P.2d 961(1974), it held that the subrogation clause and the release-trust agreement did not violate the public policy of this state because uninsured motorist protection was optional rather than mandatory and because section 10-4-609, 4 C.R.S. (1979 Supp.), ³ does not expressly prohibit subrogation.

II

The provisions regulating the availability of insurance protection against uninsured motorists are set forth in section 10-4-609, 4 C.R.S. (1979 Supp.).The statute is designed to protect persons from the often devastating consequences of motor vehicle accidents.Marquez v. Prudential Property & Casualty Ins. Co., 620 P.2d 29(Colo.1980);Newton v. Nationwide Mut. Fire Ins. Co., 197 Colo. 462, 594 P.2d 1042(1979).

At the time of the accident, section 10-4-609 provided in pertinent part as follows:

No automobile liability or motor vehicle liability policy insuring against loss resulting from liability imposed by law for ... death suffered by any person arising out of the ownership, maintenance, or use of a motor vehicle shall be delivered or issued for delivery in this state ... unless coverage is provided therein ... in limits for bodily injury or death set forth in section 42-7-103(2), C.R.S., [of the Motor Vehicle Insurance Responsibility Act] under provisions approved by the commissioner, for the protection of persons insured thereunder who are legally entitled to recover damages from owners or operators of uninsured motor vehicles because of ... death resulting therefrom; except that the coverage required under this section shall not be applicable where any insured named in the policy rejects the coverage and except that, unless the named insured requests such coverage in writing, such coverage need not be provided in or supplemental to a renewal policy where the named insured had rejected the coverage in connection with a policy previously issued to him by the same insurer.

§ 10-4-609, 4 C.R.S. (1979 Supp.).The statute requires insurers to offer their customers the opportunity to protect themselves from loss caused by negligent conduct of drivers who have not obtained insurance to pay for such loss.The coverage enables the insured to gain compensation for loss due to the negligent conduct of non-insured motorists in the same manner as the insured would be compensated for loss due to the negligent conduct of insured motorists.

In many jurisdictions statutes expressly authorize insurers to limit their liability for uninsured motorist benefits.⁴These statutes vary greatly with respect to the amount and kind of limitations on liability that may be imposed.See, e.g., Minn.Stat. 65B.53(2)(1988)(allowing subrogation only to avoid non-duplication of coverage);Mich.Stat.Ann. § 24.13177(1987)[M.C.L. § 500.3177](subrogation limited to owner of uninsured vehicle);Va.Code § 38.2-2206(1986)(subrogation to all rights of the insured).Section 10-4-609 contains no such provision.Kral argues that because the General Assembly has not expressly authorized insurers to limit liability for uninsured motorist benefits an insurer may in no circumstances reduce the amount of sums otherwise payable to an insured pursuant to an uninsured motorist provision of an insurance contract by means of a subrogation clause or a release-trust agreement.Alternatively, she argues that agreements limiting insurers' liability for uninsured motorist benefits should be deemed enforceable only to the extent such reduction in benefits would not impair the ability of the insured to achieve full compensation for any loss caused by the conduct of an uninsured motorist.We agree with Kral's alternative argument.

A

The General Assembly first enacted legislation to protect persons injured by uninsured motorists in 1965, as part of the comprehensive Motor Vehicle Financial Responsibility Act.Ch. 91, sec. 1,1965 Colo.Sess. Laws 333.The declaration of purpose prefacing this legislation contained the following pertinent language:

Declaration of purpose.--The general assembly is acutely aware of the toll in human suffering and loss of life, limb, and property caused by negligence in the operation of motor vehicles in our state.Although it recognizes that this basic problem can and is being dealt with by direct measures designed to protect our people from the ravages of irresponsible drivers, the...