Silvers v. Horace Mann Ins. Co., 261PA88

Decision Date05 April 1989
Docket NumberNo. 261PA88,261PA88
CourtNorth Carolina Supreme Court
PartiesNancy SILVERS, Administratrix of the Estate of Stuart Martin Williams, Deceased v. HORACE MANN INSURANCE COMPANY, Roger Matthews, as Agent, and Individually, James Richard Bell, and Robert Earl Bell.

Anderson, Cox, Collier & Ennis by Henry L. Anderson, Jr. and Clay A. Collier, Wrightsville Beach, for plaintiff-appellant.

Patterson, Dilthey, Clay, Cranfill, Sumner & Hartzog by Grady S. Patterson, Jr. and Theodore B. Smyth, Raleigh, for defendant-appellees Horace Mann Ins. Co. and Roger Matthews.

WHICHARD, Justice.

Defendants Horace Mann Insurance Company (Horace Mann) and Roger Matthews (Matthews) seek reversal of a decision of the Court of Appeals reversing the trial court's entry of summary judgment in their favor. The issue is whether an insured plaintiff who has entered into a consent judgment with a tortfeasor and the tortfeasor's liability insurance carrier, without notice to 1 or the consent of the insured's underinsured motorist (UIM) coverage carrier, in violation of the terms of the UIM policy, may nevertheless recover UIM benefits under that policy. We answer in the affirmative, and we thus affirm the Court of Appeals except as its opinion is modified herein.

On 14 March 1984 plaintiff's son was riding in a car driven by James Bell and owned by Robert Bell when the car was involved in a single-vehicle accident. Plaintiff's son died approximately a week later from injuries sustained in the accident. At the time of the accident plaintiff was covered by a Horace Mann insurance policy providing UIM coverage of at least $25,000 per person and $50,000 per accident. 2 On 4 May 1984 plaintiff filed a wrongful death action against James and Robert Bell. On 16 May 1984 the following consent judgment was entered in that action:

THIS CAUSE, coming on to be heard and being heard before the undersigned Judge upon statement of counsel for Plaintiff and Defendants that this cause has been settled and adjusted between the parties by agreement under the terms of which the Plaintiff shall have and recover judgment in the amount of Twenty-Five Thousand Dollars ($25,000); AND IT FURTHER APPEARING TO THE COURT from the face of the Complaint that this is an action for recovery for wrongful death of Plaintiff's intestate for which damages far exceed the liability coverage of the Defendants' insurance carrier, Indiana Lumbermans Mutual Insurance Co.; AND IT FURTHER APPEARING TO THE COURT, upon statement of counsel, that the liability of Indiana Lumbermans Mutual Insurance Company, which is the insurance carrier for the Defendant, is limited to Twenty-Five Thousand Dollars ($25,000) per person for bodily injury; AND IT FURTHER APPEARING TO THE COURT that the primary carrier, Indiana Lumbermans Mutual Insurance Co., wishes to pay the policy limits in order to avoid unnecessary litigation costs as liability on the part of the Defendants is clear and the damages of the Plaintiff's intestate far exceed the policy limits covered by the primary liability carrier, Indiana Lumbermans Mutual;

AND IT FURTHER APPEARING TO THE COURT that the Plaintiff's intestate was covered by underinsured motorist coverage through The Horace Mann Company and that this consent judgment is not to be construed in any way to adversely affect the rights of Plaintiff or her intestate concerning any such underinsured coverage;

NOW, THEREFORE, IT IS BY CONSENT ORDERED AND ADJUDGED that the Plaintiff's intestate have and recover of and from the Defendants, by and through their primary liability insurance carrier, Indiana Lumbermans Mutual Insurance Company, the sum of Twenty-Five Thousand Dollars ($25,000) and that the same shall be a full and final release of Indiana Lumbermans Mutual Insurance Company and the Defendants. It is hereby further ordered that this consent judgment shall not release nor relinquish any rights that the Plaintiff's intestate has or might have against Horace Mann Company under any underinsured liability coverage.

On 27 March 1985 plaintiff instituted this action against the Bells, Matthews, and Horace Mann to establish the total damages suffered due to the wrongful death of her son and to recover from Horace Mann under her UIM coverage. Plaintiff's complaint also included claims against Horace Mann and Matthews for breach of contract, negligence, bad faith, fraud, and unfair trade practices. All defendants moved to dismiss, relying on the consent judgment in the wrongful death action against the Bells as a bar to further liability. In addition, Matthews and Horace Mann alleged that plaintiff's violations of various policy provisions released them from further liability. The trial court considered matters outside the pleadings and thus treated the motions to dismiss as motions for summary judgment. It entered orders granting summary judgment for all defendants.

On appeal, the Court of Appeals affirmed the summary judgment entered in favor of the Bell defendants. Plaintiff did not seek discretionary review; thus, the propriety of the summary judgment entered in favor of the Bell defendants is not before us. The Court of Appeals reversed the summary judgment in favor of defendants Horace Mann and Matthews (hereinafter defendants) and remanded the cause to the trial court for further proceedings on the claims against those defendants. Those defendants petitioned for discretionary review, and on 7 September 1988 we allowed their petition.

Defendants first argue that defendant-insurer's liability under the UIM coverage derives from the tortfeasors' liability. Because plaintiff has released the tortfeasors--the Bells--from any further liability, defendants argue that plaintiff is no longer legally entitled to recover from the tortfeasors and thus no longer entitled to recover from defendants.

Both the insurance policy and the relevant statute 3 predicate UIM coverage on the insured's entitlement to recover from the tortfeasor. The policy states under Part C--Uninsured Motorist Coverage: "We will pay damages which a covered person is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of:

1. Bodily injury sustained by a covered person and caused by an accident; and

2. Property damage caused by an accident."

(Emphasis added.) The policy includes underinsured motor vehicles within the definition of uninsured motorist (UM) coverage; therefore, Part C and its terms apply to UIM coverage. The phrase "legally entitled to recover" tracks the language of N.C.G.S. § 20-279.21(b)(3), which mandates that motor vehicle liability insurance be available "for the protection of persons insured thereunder who are legally entitled to recover damages from owners or operators of uninsured motor vehicles...."

In Brown v. Casualty Co., 285 N.C. 313, 204 S.E.2d 829 (1974), this Court construed the phrase "legally entitled to recover" in the context of an insured seeking recovery under his UM coverage when his claim against the tortfeasor was barred by the statute of limitations. Justice (later Chief Justice) Sharp wrote for the Court:

In our view it would indeed constitute "antics with semantics" to say that a litigant with a stale tort claim, one against which the applicable statute of limitations has been specifically pleaded, remains "legally entitled to recover" when his remedy has been taken away! To be "legally entitled to recover damages" a plaintiff must not only have a cause of action but a remedy by which he can reduce his right to damage to judgment.

Id. at 319, 204 S.E.2d at 833. See also Buchanan v. Buchanan, 83 N.C.App. 428, 350 S.E.2d 175 (1986), disc. rev. denied, 319 N.C. 224, 353 S.E.2d 406 (1987) (release of tortfeasor without consent of UIM insurer also discharged UIM insurer as a matter of law because of derivative nature of insurer's liability).

The words "legally entitled to recover" are subject to other interpretations. For example, in Karlson v. City of Oklahoma City, 711 P.2d 72 (Okla.1985), the Oklahoma Supreme Court interpreted the phrase as follows: "The words, 'legally entitled to recover[,]' simply mean that the insured must be able to establish fault on the part of the uninsured motorist which gives rise to damages and prove the extent of those damages." Id. at 74-75 (quoting Uptegraft v. Home Ins. Co., 662 P.2d 681, 685 (Okla.1983)). Given our interpretation of the phrase in Brown, however, we agree with defendants that "legally entitled to recover" should be construed to mean that the carrier's UIM liability is derivative in nature.

The analysis does not end here, however. As the Court of Appeals noted, both the policy and the statute contain an exhaustion clause. The policy contains a section entitled "Underinsured Motorists Coverage--North Carolina" which amended Part C, the UM section, to include the following paragraph:

We will pay under this coverage only after the limits of liability under any applicable liability bonds or policies have been exhausted by payment of judgments or settlements.

Similarly, the 1983 version of the statute provided:

The insurer shall not be obligated to make any payment ... to which underinsured motorist insurance coverage applies ... until after the limits of liability under all bodily injury liability bonds or insurance policies applicable at the time of the accident have been exhausted by payment of judgments or settlements....

1983 N.C.Sess. Laws ch. 777, § 1. Thus, both the policy and the statute contain internally conflicting provisions. While a release of the tortfeasor acts to release the UIM insurance carrier of its derivative liability, the statute and the policy terms regarding UIM coverage appear to require the insured to exhaust all liability policies by judgment or settlement before the insurer is obligated to pay under the UIM coverage. The insured reasonably could have read the exhaustion clause to require her to...

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