Insured’s Settlement Submarines Subrogation

In a decision consistent with other jurisdictions, the Washington State Court of Appeals held that if an insurer denies coverage and its insured settles with the tortfeasor, the insurer’s subrogation rights can be terminated by that settlement. Further, the settlement does not breach the policy’s impairment of recovery rights provision. Vision One LLC v. RSUI, — P.3d — (October 19, 2010, Division II)

In Vision One, shoring equipment supporting a poured concrete slab collapsed during the construction of a condominium complex. Vision’s insurer denied the insurance claim and Vision sued the carrier for breach of contract, bad faith, and violations of the Consumer Protection Act. Vision also sued the contractor for supplying the shoring equipment. Vision settled with the contractor and the settlement released the contractor from liability. The insurer moved to dismiss the breach of contract claims by arguing that Vision breached the insurance contract by impairing the insurer’s subrogation rights against the tortfeasor. The trial court denied the motion and the Court of Appeals affirmed.

The Vision insurance policy provided: "If by any act or agreement after a ‘loss’ you impair our right to recover from others liable for the ‘loss’, we will not pay you for that ‘loss.’" There were no Washington cases on point. Looking to other jurisdictions, the Court found many agree that when an insurer denies liability and the insured settles, the insurer is estopped from claiming that the insured breached the policy by impairing the insurer’s recovery rights. The explanation in Stephens v. State Farm Mutual Auto Insurance Co. was persuasive: "…admittedly the subrogation rights of the insurer could be compromised by a settlement. However the denial is a breach of contract on the part of the insurer and its breach should, by rights, relieve the insured of the punitive effects of his failure to comply with the consent provisions of the insurance policy."

The Court felt it important to note that in Vision One the insured settled with the tortfeasor only after the carrier denied the claim. This was not a case where (1) the tortfeasor knows of the insurer’s payment and right of subrogation, (2) the insurer does not consent, and (3) the settlement does not exhaust the tortfeasor’s assets. (Leader National subrogation rights not extinguished) or where the insured breached the contract first by settling and extinguishing the insurer’s recovery rights before submitting an insurance claim (Kalamazoo subrogation rights not extinguished). The Court concluded in Vision One that if the insurer properly denied the claim, the insurer is not harmed by the settlement. However, if the insurer improperly denied the claim, then the carrier breached the contract first.

The import of the case is that an insured in Washington may waive its carrier’s subrogation rights.  Accordingly, subrogating carriers should act quickly in pursuing subrogation and making third parties aware of their claim. Otherwise, what initially could have been a viable subrogation case may turn into a recommendation to close. 

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