DEBRA GILBERT V. NATIONWIDE MUTUAL INSURANCE COMPANY
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2007-SC-000078-DG
DEBRA GILBERT
V.
APPELLANT
ON REVIEW FROM COURT OF APPEALS
CASE NO . 2005-CA-002338-MR
JEFFERSON CIRCUIT COURT NO. 02-CI-003761
NATIONWIDE MUTUAL
INSURANCE COMPANY
APPELLEE
OPINION OF THE COURT BY JUSTICE ABRAMSON
REVERSING AND REMANDING
We accepted discretionary review in this auto insurance case to consider
whether an insured's failure to bring suit against the tortfeasor within the
limitations period violates a contract provision whereby the insured undertakes
to "do nothing to prejudice" the insurance company's right to subrogation. The
Court of Appeals held that failure to bring timely suit violated the contract, and
thus that insurance coverage was properly denied . We disagree and reverse .
RELEVANT FACTS
On May 22, 2000, a tractor-trailer owned by Prime, Inc., and operated by
Michael Baldanza, went out of control as it rounded a curve on Interstate 65 in
Louisville . The fully loaded rig tipped over and fell on a 1994 Nissan Altima
owned by Debra Gilbert and operated at the time by Gilbert's daughter, Nicole
Schindler. Fortunately, and amazingly, Schindler escaped with relatively minor
injuries, but Gilbert's vehicle was crushed and totaled . Gilbert promptly gave
notice of the accident to her auto insurer, Nationwide Mutual Insurance
Company. Gilbert and Nationwide were also in contact with Prime's insurer,
Reliance Insurance Company, and after a preliminary investigation, Reliance's
agent indicated to Gilbert and Nationwide that Reliance accepted Prime's
liability for the accident and so would handle both Schindler's bodily injury
claim and Gilbert's collision claim. Gilbert therefore did not initiate a collision
claim under her Nationwide policy, and Nationwide apparently closed Gilbert's
collision file.
Notwithstanding Reliance's assurances, Schindler was eventually obliged
to bring suit against Prime for her personal injury damages . Gilbert did not
join her property damage claim to her daughter's suit, but assumed that her
loss would be paid once her daughter's claim had been resolved . Schindler's
personal injury claim was not settled until December 2003, more than two
years after .the May 2000 accident. When Gilbert then demanded
reimbursement for the destruction of her vehicle, Prime asserted the statute of
limitations and repudiated her claim . Gilbert was then permitted to intervene
in her daughter's suit against Prime and also made a collision damage claim
under her own policy with Nationwide . Nationwide, too, refused to pay,
whereupon Gilbert joined it as a party to her suit against Prime .
In separate orders entered July 26, 2005, the Jefferson Circuit Court
granted summary judgment to both Prime and Nationwide . The trial court
ruled that Gilbert's claim against Prime was barred by the two-year statute of
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limitations applicable to tort actions arising from the use of a motor vehicle .
KRS 304 .39-230 . Gilbert's claim against Nationwide was foreclosed, the court
ruled, by a policy provision requiring Gilbert "to do nothing to prejudice"
Nationwide's subrogation rights . Gilbert had prejudiced those rights, the court
concluded, by allowing the lapse of her (and hence her subrogee's) property
damage claim against Prime .
Gilbert sought review in the Court of Appeals, which affirmed both
rulings. In an Opinion rendered December 22, 2006, the Court agreed with the
trial court that Gilbert's suit was untimely and that her failure to sue Prime
within the limitations period prejudiced Nationwide's subrogation right, a
contract violation that excused Nationwide from providing collision benefits.
Having accepted Gilbert's motion for discretionary review to consider this
second issue, which potentially affects a large number of Kentucky insurance
contracts, we now reverse.
ANALYSIS
As Nationwide notes, the collision coverage provided in Gilbert's policy"We will pay for loss to your auto caused by collision or upset."-is qualified by
the following subrogation clause:
We have the right of subrogation under the . . .
physical damage . . . coverages in this policy. This
means that after paying a loss to you or others under
this policy, we will have the insured's right to sue for
or otherwise recover such loss from anyone else who
may be liable . Also, we may require reimbursement
from the insured out of any settlement or judgment
that duplicates our payments . These provisions will
be applied in accordance with state law. Any insured
will sign such papers, and do whatever else is
necessary, to transfer these rights to us, and will do
nothing to prejudice them .
Nationwide contends, and the courts below agreed, that by allowing her
property damage claim against the tortfeasor to lapse, Gilbert effectively
destroyed Nationwide's subrogation right and thus breached this clause of her
policy.
In support of this conclusion, Nationwide relies on Remedial System of
Loaning v . New Hampshire Fire Insurance Company, 227 Ky. 652, 13 S .W.2d
1005 (1929), in which an insured extinguished his insurer's subrogation right
by settling with the tortfeasor and releasing it from all liability. Upholding the
dismissal of the insured's subsequent claim against the insurer, the Court
explained that,
if the assured, by voluntary action, unreservedly
releases a wrongdoer for damage done to the insured
property, he thereby discharges the insurance
company to the extent its right of subrogation may
have been defeated by such action of the assured .
13 S.W .2d at 1006 .
Where the insurer has been provided with notice of the insured's loss,
however, as Nationwide was here, other courts have distinguished cases such
as Remedial System, in which the insured's affirmative act has prejudiced the
subrogation right, from cases, such as this one, where the insured "failed" to
bring suit. M. DeMatteo Construction Company v. Century Indemnity
Company, 182 F. Supp .2d 146 (D . Mass. 2001) ; Uptegraft v. Home Insurance
Company, 662 P.2d 681 (Okla. 1983) ; Jones v. Integral Insurance Company,
631 So . 2d 1132 (Fla. Ct. App . 1994) . As these courts have explained,
subrogation clauses such as Nationwide's (which, of course, must be construed
narrowly against the insurance company drafter, Wine v. Globe American
Casualty Company, 917 S .W.2d 558 (Ky. 1996)), do not by themselves impose
on the insured an affirmative duty to bring suit against the alleged tortfeasor.
They require the insured "do nothing to prejudice" the insurer's subrogation
rights, but they do not require her to initiate suit on the insurer's behalf. As
the M. DeMatteo Construction Company court stated,
If the Insurers had wanted to create an affirmative
duty for the insured to pursue any claim against a
third-party tortfeasor before the running of the statute
of limitations, then it would have been simple for the
Insurers to write such an obligation into the contract.
182 F. Supp.2d at 157 .
In fact, absent an affirmative, prejudicial act by the insured, timely
notice of the loss enables the insurer to take whatever steps it deems necessary
to protect its potential subrogation right. For example, as noted by the federal
district court in M. DeMatteo Construction Company,
[h]aving received such timely notice, the Insurers had
at least three options as to how to proceed to protect
their rights of subrogation : they could have provided
full coverage under the Policy and then independently
pursued a subrogation claim against [the tortfeasor] ; .
. . they could have required [the insured] to file a tort
claim against [the tortfeasor] ; . . . or they could have
directed [the insured] to negotiate with [the tortfeasor]
to extend the statute of limitations for filing an action .
182 F. Supp.2d at 158 .
We agree with these courts that the insurer, almost
always more knowledgeable about claims settlement practices than its insured,
should bear the principal burden of protecting its subrogation rights and that
those rights should not operate to defeat the insured's reasonable coverage
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expectations . This approach is consistent with the approach to settlements we
adopted in Coots v . Allstate Insurance Company , 853 S .W.2d 895 (Ky. 1993) .
Under that approach, since codified at KRS 304 .39-320, the insurer's potential
subrogation right is not allowed to interfere with the insured's interest in a
prompt settlement with the tortfeasor ; the subrogation right is protected by the
requirement that the insurer be given notice of the proposed settlement which
the insured has agreed to accept and an opportunity to intervene if it so
desires.
Here Nationwide had prompt notice of Gilbert's loss and her potential
claim, but it neither opted to intervene in the apparent agreement between
Gilbert and Reliance nor took any other steps to protect its subrogation rights .
In these circumstances, by providing Nationwide with notice, Gilbert satisfied
her contractual duty not to interfere with her insurer's ability to protect itself.
She thus preserved her contractual right to collision coverage . Her mere failure
subsequently to bring suit against Prime within the limitations period neither
violated any contractual duty nor defeated that coverage . The courts below
erred by ruling otherwise .
As a final note, we are aware that in Landgren v . Aetna Life 8v Casualty
Company, 322 N. E.2d 417 (Mass. 1975), a case similar to this one, the
Supreme Court of Massachusetts reached a contrary result . In Land ren, as
here, an insured notified her collision insurer of a loss but made no claim
under her policy because the tortfeasor's insurer had agreed to provide
coverage. That agreement apparently fell through, however, and after the
limitations period had expired the insured brought a claim against her insurer.
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In upholding a dismissal of the insured's claim, the Court opined that the
insured's initial representation to the collision insurer that she was not filing a
claim because of the agreement with the tortfeasor's insurer,
amounted to affirmative action which, coupled with
the [insured's] delay in presenting her claim,
prejudiced Aetna's right of subrogation and, therefore,
precluded the [insured] from recovery under her policy.
322 N .E.2d at 726-27 . Under our law, however, which has emphasized that
the insurer's right to subrogation must not be allowed to subordinate the
insured's right to coverage, we decline to characterize Gilbert's notice to
Nationwide that Reliance would cover her claim as an affirmative act
prejudicial to Nationwide's subrogation right. On the contrary, the notice
apprised Nationwide of Gilbert's potential claim and so afforded Nationwide an
adequate opportunity to take steps to preserve its rights if it so desired . As
noted above, this result comports with our prior cases placing on the potential
subrogee the primary burden of protecting itself.
CONCLUSION
In sum, the subrogation clause in Gilbert's insurance contract required
her to "do nothing to prejudice" Nationwide's subrogation right, but it did not
relieve Nationwide of its duty to protect itself, nor did it require Gilbert to act
affirmatively on Nationwide's behalf. In this case, Gilbert's prompt notice of
her loss satisfied her contractual duty. By its terms the subrogation clause did
not require Gilbert to bring suit against the tortfeasor, and her mere failure to
do so within the limitations period cannot, therefore, be deemed a contract
violation barring her recovery of collision benefits . Accordingly, we reverse that
portion of the December 22, 2006 Opinion of the Court of Appeals upholding
summary judgment in favor of Nationwide and remand to the Jefferson Circuit
Court for additional proceedings consistent with this Opinion .
All sitting . All concur .
COUNSEL FOR APPELLANT:
Charles E . Theiler, II
Sitlinger, McGlincy, Theiler 8, Karem
370 Starks Building
455 South Fourth Avenue
Louisville, KY 40202
COUNSEL FOR APPELLEE
NATIONWIDE MUTUAL INSURANCE COMPANY :
Gregory L. Smith
Smith 8s Hoskins
6010 Brownsboro Park Blvd .
Suite B
Louisville, KY 40207-1294
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