Lynn Norman Morris v. Texas Farmers Insurance--Appeal from 18th District Court of Johnson County

IN THE

TENTH COURT OF APPEALS

No. 10-94-022-CV

LYNN NORMAN MORRIS,

Appellant

v.

TEXAS FARMERS INSURANCE,

Appellee

From the 18th District Court

Johnson County, Texas

Trial Court # 302-92

O P I N I O N

FACTUAL BACKGROUND

Morris appeals the granting of a summary judgment in favor of Texas Farmers Insurance Companies (Farmers). He sustained serious injuries as the result of a March 18, 1991, automobile accident in Johnson County near Burleson in which he was driving a car owned by Todd Whiteley and insured by Farmers. Morris was rear-ended by a vehicle driven by Myra Carter and insured by State Farm Mutual Automobile Insurance Company (State Farm). Morris filed a liability claim with State Farm, the third-party carrier, and against his own underinsured motorist carrier, Allstate Insurance Company (Allstate). Morris also made a claim for underinsured motorists benefits from Farmers, the uninsured motorist-underinsured motorist (UM-UIM) carrier of the owner of the car that Morris had been driving at the time of the accident.

Initially, Farmers denied that it covered the Whiteley vehicle. After later admitting that it did in fact have insurance on the car owned by Whiteley, Farmers then claimed it was relieved of liability because Morris had allegedly settled his third-party claim against Carter and State Farm without Farmers' consent. While Morris' underinsured motorist suit was pending against Farmers, Farmers filed and was granted a summary judgment on October 22, 1993. We will reverse and remand.

Since this case was tried and the appellate process begun, the Texas Supreme Court has issued its opinion in Hernandez v. Gulf Group Lloyds, 37 Tex. Sup. Ct. J. 731 (April 30, 1994). In Hernandez, the precise question facing the Supreme Court was whether an insurer may deny a UM/UIM motorist claim on the basis of a "settlement without consent" exclusion clause absent any showing that the settlement prejudiced the insurer exactly the same question we must answer in the case before us. The Supreme Court held that "an insurer may escape liability on the basis of a settlement-without-consent exclusion only when the insurer is actually prejudiced by the insured's settlement with the tort-feasor." Hernandez at 732. (Emphasis supplied). The facts of Hernandez are analogous to those in the present case, with one critical exception. In Hernandez, the trial court in its findings and conclusions stated that Gulf, the insurer of the tort-feasor, had suffered no material prejudice because of the Hernandezes' failure to comply with the settlement-without-consent exclusion and that "invocation of the exclusion would deprive the Hernandezes of protection required under the Texas Uninsured/Underinsured Motorist Statute, Tex. Ins. Code Ann. art. 5.06-1 (Vernon 1981)". Id at 733.

The Hernandezes did not dispute the validity of the settlement-without-consent exclusion. See Guaranty County Mut. Ins. Co v. Kline, 845 S.W.2d 810, 811 (Tex. 1992). They argued, and the Supreme Court agreed, that such an exclusion is unenforceable without a showing by the insurer that it has been prejudiced by the insured's failure to obtain consent. Hernandez at 732. Moreover, the Supreme Court in Hernandez further stated that, because insurance policies are contracts, they are subject to the rules that generally govern contracts. Id. at 732. And, a basic tenet of contract law is that, when one party to a contract commits a material breach, the other party is excused from any obligation he would have otherwise been expected to perform under the contract. Id. In evaluating the materiality of a breach, the courts will consider, among other factors, the extent to which the nonbreaching party will be deprived of the benefit that it could reasonably have anticipated from the performance. Id. at 733.

In this context, there may be instances when an insured's settlement without the insurer's consent prevents the insurer from receiving the anticipated benefit from the contract; that is, the settlement may destroy a valuable subrogation right. For example, in Liberty Mut. Ins. Co. v. Cruz, S.W.2d (Tex. 1994), the insured's failure to provide notice of suit prejudiced the insurer as a matter of law. In other instances, the insurer may not be deprived of the contract's expected benefit because any extinguished subrogation right has no value and thus the insured's breach would not be material. Hernandez at 733. The Supreme Court thus held in Hernandez that an insurer who is not prejudiced by an insured's settlement may not deny coverage under a UM/UIM policy that contains a settlement-without-consent clause. Id. at 733-34.

Thus, under Hernandez, we must conclude that in light of the summary-judgment evidence, Farmers failed to prove as a matter of law that it had been prejudiced and that Morris had committed a material breach of the policy. In Hernandez, the insurer had stipulated, in addition to other relevant matters, that it had not been prejudiced because the tort-feasor had no assets other than the State Farm policy. Id. at 733. Farmers is thus not excused from its obligation to perform under the UM-UIM contract as a matter of law. We reverse the summary judgment in favor of Farmers and remand to the trial court for trial on the merits to resolve the disputed factual issues.

BOBBY L. CUMMINGS

Justice

Before Chief Justice Thomas,

Justice Cummings, and

Justice Vance

Reversed and remanded

Opinion delivered and filed July 13, 1994

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