Premature settlement may bar underinsured motorist coverage

An insured’s premature settlement with a tortfeasor prevented summary judgment in his favor on an underinsured motorist coverage claim.

The plaintiff was seriously injured in a motor vehicle accident and sought UIM benefits from the defendant insurer. After the tortfeasor’s insurer tendered its liability limits, the plaintiff notified the defendant, triggering the statutory 30-day period in which the insurer could consent to the settlement or advance the settlement amount to preserve its rights.

Before that period expired, however, the plaintiff executed a covenant not to enforce judgment and accepted the settlement proceeds. The defendant later attempted to advance the settlement amount within the statutory period, but the plaintiff rejected the payment and pursued arbitration. The trial court confirmed a $1 million arbitration award and concluded the defendant had waived its subrogation rights.

The North Carolina Court of Appeals reversed. The court held that North Carolina’s UIM statute contemplates a tentative settlement during the 30-day review period. By completing the settlement before that period expired, the plaintiff deprived the defendant of its statutory right to evaluate and approve the settlement or protect its subrogation interests. An insurer cannot meaningfully approve a settlement that has already been finalized.

The court further held that the defendant retained contractual and common law rights to consent to settlement. Because a breach of those rights does not automatically bar coverage, the case had to be remanded for a determination of whether the defendant was materially prejudiced by the plaintiff’s premature settlement.

The 15 page opinion is Hyatt v. Callahan, Lawyers Weekly No. 011-094-26.