Smith v. Nationwide Mutual Insurance Co.
Annotate this Case
Smith v. Nationwide Mutual Insurance Co. (2002-020); 175 Vt. 355; 830 A.2d 108
2003 VT 61
[Filed 27-Jun-2003]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
2003 VT 61
No. 2002-020
Michelle Smith Supreme Court
On Appeal from
v. Caledonia Superior Court
Nationwide Mutual Insurance Co. September Term, 2002
Dennis R. Pearson, J.
Joseph C. Benning, Lyndonville, for Plaintiff-Appellee.
John E. Brady and Brendan P. Donahue of Brady & Callahan, P.C.,
Springfield, for Defendant-Appellant.
PRESENT: Amestoy, C.J., Dooley, Morse (FN1), Johnson and Skoglund, JJ.
¶ 1. SKOGLUND, J. This is a declaratory judgment action
concerning automobile insurance. Defendant Nationwide Mutual Insurance
Company ("Nationwide") appeals from an order holding it liable to its
insured for a judgment entered against him in a lawsuit arising from an
automobile accident that Nationwide failed to defend. Nationwide argues
that it owed no defense because its insured breached its duties under the
contract of insurance and was unable to defend without his cooperation. We
hold that the insurer's obligations under the contract of insurance were
not relieved by the insured's actions in this case. We affirm.
¶ 2. The underlying facts of the tort litigation that generated
this suit and subsequent appeal are undisputed. In March 1995, plaintiff
Michelle Smith and her daughter were driving their automobile along Route
122 in Wheelock, Vermont, when they collided with a telephone pole that had
been downed after being hit by a vehicle driven by Wayne-Arthur: Sullivan.
Both Smith and her daughter were injured in the accident. A subsequent
state police accident report assigned Sullivan the entire fault for the
accident. At that time, Sullivan was insured under an automobile liability
insurance policy issued by defendant Nationwide.
¶ 3. Nationwide received appropriate notice of the accident and
conducted an investigation. Following its investigation, Nationwide
settled a personal injury claim with Smith's daughter and a property damage
claim for Smith's vehicle. Nationwide did not, however, resolve Smith's
personal injury claim. Consequently, Smith filed suit against Sullivan in
superior court to recover for her personal injuries. In February 1998,
Sullivan was personally served with the summons and complaint in
plaintiff's action. In response, Sullivan filed numerous pro se pleadings
challenging his personal identification and insisting that he be addressed
as "Wayne-Arthur: Sullivan." Based on these pleadings, the court
established personal jurisdiction over Sullivan.
¶ 4. Sullivan forwarded the relevant court documents to
Nationwide. Nationwide recognized its obligation to its insured under its
insurance policy and retained Attorney Michael Gannon to represent Sullivan
in Smith's personal injury suit. Gannon and Sullivan exchanged letters and
telephone calls, and met at least once to discuss Gannon's representation
of Sullivan. However, for reasons apparently stemming from a belief that
any and all court proceedings against him or in which he is involved
violate fundamental principles of natural law, the Uniform Commercial Code,
and state and federal constitutions, Sullivan objected to Gannon's filing
of an appearance on his behalf. As a result, Gannon did not enter an
appearance on behalf of Sullivan. Nationwide took no further action to
defend Sullivan or determine its coverage obligations.
¶ 5. Sullivan did not appear at a July 1998 merits hearing in
Smith v. Sullivan, Docket # 50-3-98 Cacv, and the trial court entered a
default judgment in favor of Smith. Subsequently, the trial court
scheduled, noticed, and held a damages hearing on November 13, 1998.
Nationwide had actual notice of the default judgment and at least ten days
prior notice of the damages hearing. Indeed, on November 3, Nationwide
sent a letter warning Sullivan of the possible consequences of his
"non-cooperation" with Nationwide and his designated attorney, noting that
"a money judgment may be entered against you" and that Nationwide would not
"indemnify you against any judgment." Neither Sullivan nor Nationwide
appeared at the hearing. Apart from the letter to Sullivan, Nationwide
took no additional steps to represent Sullivan's interests or its own
interests at the damages hearing. On November 30, the court entered a
judgment for Smith in the amount of $60,000.
¶ 6. In July 1999, Smith filed this action against Nationwide to
recover the damages the court had awarded her in her suit against Sullivan.
In its answer to Smith's complaint, Nationwide denied liability to
plaintiff based on what it characterized as Sullivan's failure to
cooperate. One year later, in July 2000, Nationwide filed a motion for
summary judgment, which was denied. After a period of discovery, Smith
filed her own motion for summary judgment. Nationwide opposed the motion
and renewed its own motion for summary judgment.
¶ 7. Following a hearing, the court issued a written decision
granting Smith's motion for summary judgment, denying Nationwide's
cross-motion, and ordering Nationwide to pay Smith the amount of damages
awarded in the underlying suit. The court held as a matter of law that
Sullivan did not breach the "assistance" clause of the policy, and that
Nationwide was not substantially prejudiced by Sullivan's conduct.
Nationwide filed a motion for reconsideration and a motion to amend the
judgment Smith had obtained against Sullivan. The court issued a
post-judgment order denying Nationwide's motion to reconsider, but granting
its motion to amend, reducing the amount of damages awarded to $50,000, the
per-person coverage limit of the policy. This appeal followed.
¶ 8. This Court's review of summary judgment is de novo, and in
proceeding with that review, we apply the same standard as the trial court.
Springfield Terminal Ry. Co. v. Agency of Transp., __ Vt. __, __, 816 A.2d 448, 452 (2002). Summary judgment is appropriate only where the record
demonstrates that there are no genuine issues of material fact and the
moving party is entitled to judgment as a matter of law. V.R.C.P. 56;
Guiel v. Allstate Ins. Co., 170 Vt. 464, 467, 756 A.2d 777, 780 (2000).
When evaluating a motion for summary judgment, we give the benefit of all
reasonable doubts and inferences to the nonmoving party. Sabia v. Neville,
165 Vt. 515, 523, 687 A.2d 469, 474 (1996). Here, both parties moved for
summary judgment at the trial level, and thus both were entitled to the
benefit of all reasonable doubts and inferences when judging the opposing
party's motion. Bixler v. Bullard, 172 Vt. 53, 57, 769 A.2d 690, 694
(2001).
¶ 9. Nationwide claims that the trial court erred in concluding:
(1) that Sullivan did not breach the "cooperation" or "assistance" clause
of the insurance policy; and (2) that Sullivan's conduct did not prejudice
Nationwide's ability to defend against plaintiff's personal injury claim.
In support of its claims, Nationwide raises several issues concerning the
ethical duties and obligations of counsel retained for Sullivan. In this
case, however, those ethical considerations do not affect the determination
of the insurer's and insured's obligations under the insurance policy. The
issues germane to this appeal are whether Sullivan's refusal to allow
insurance counsel to enter an appearance on his behalf breached the terms
of the insurance contract, and whether any such breach prejudiced
Nationwide's position relative to Smith's personal injury claim, therefore
relieving Nationwide of its obligations under the policy. We hold that
Nationwide was not prejudiced by Sullivan's actions and remains obligated
for the judgment entered against its insured.
¶ 10. An insured's refusal to cooperate with the terms of an
insurance contract can vitiate the policy and relieve the insurer of its
obligation to defend or indemnify the insured. Quintin v. Miller, 138 Vt.
487, 489, 417 A.2d 941, 942 (1980). An insurer attempting to avoid its
coverage obligations based on an insured's non-cooperation has the burden
of demonstrating the insured's lack of cooperation and "the actual
prejudice resulting therefrom." Am. Fid. Co. v. Kerr, 138 Vt. 359, 362,
416 A.2d 163, 165 (1980); see also Francis v. London Guar. & Accident Co.,
100 Vt. 425, 428, 138 A. 780, 781 (1927). Normally, the existence of
prejudice from non-cooperation is a question for the trier of fact. See
Coop. Fire Ins. Ass'n of Vt. v. White Caps, Inc., 166 Vt. 355, 363, 694 A.2d 34, 39 (1997). However, summary judgment on the issue of prejudice is
appropriate when the insurer fails to adduce any evidence that its
insured's breach placed the insurer in a substantially less favorable
position than it would have been had the insurer fully cooperated. See id.
at 362,361-64, 694 A.2d at 38-39. In this case, summary judgment was
appropriate.
¶ 11. To support its position that Sullivan's conduct breached the
insurance contract, Nationwide invokes what it calls the "cooperation"
clause of the policy. (FN2) The clause reads:
1. INSURED PERSONS' DUTIES
The insured will:
a) give us or our agent prompt notice of all losses and proof
of claim if required
b) notify the police of all theft losses.
c) promptly deliver to us all papers dealing with any claims
or suits.
d) submit to examination under oath as often as reasonably
requested by us.
e) assist us with any claim or suit . . . .
An insurance contract is construed "according to its terms and the
evident intent of the parties as expressed in the policy language." Ulm v.
Ford Motor Co., 170 Vt. 281, 295, 750 A.2d 981, 992 (2000). Disputed terms
are assigned their plain, ordinary, and popular meaning. Id. Any
ambiguities in disputed terms are resolved in favor of the insured and
against the compensated insurer responsible for drafting those provisions.
State v. CNA Ins. Cos., 172 Vt. 318, 324, 779 A.2d 662, 667 (2001); Boyer
v. Am. Cas. Co., 332 F.2d 708, 711 (2d. Cir. 1964) (applying Vermont law).
As the parties have recognized, the meaning and content of the term
"assist" as it is employed in the policy lends itself to various
interpretations. Consequently, we will interpret the disputed term in
favor of the insured.
¶ 12. The primary purpose of a cooperation clause is to enable
insurers to make a proper investigation while the information is fresh,
enable them to decide upon their obligations, and protect them from
fraudulent and false claims. See 14 L. Russ, Couch on Insurance § 199:4,
at 199-13 (2002) (describing primary purpose of cooperation clause); cf.
Northshire Communications, Inc. v. AIU Ins. Co., __ Vt. __, __, 811 A.2d 216, 221 (2001) (purpose of prompt-notice provision as allowing an insurer
to "form an intelligent estimate of its rights and liabilities, to afford
it an opportunity for investigation, and to prevent fraud and imposition
upon it.") (internal quotations omitted); White Caps, 166 Vt. at 361, 694 A.2d at 38 . As we explain below, the primary purpose of the cooperation
clause in Sullivan's policy was substantially met in this case when
Sullivan promptly delivered notice of the accident and provided the
relevant court documents to Nationwide.
¶ 13. To be sure, Sullivan made it difficult for Nationwide to
proceed in the underlying suit. As the trial court observed, Sullivan's
recalcitrance presented Nationwide with "a delicate conundrum."
Nationwide's reaction to Sullivan's behavior, however, must be evaluated in
light of the rationale, or more accurately, the irrationality behind
Sullivan's objection to participation in the suit. According to
Nationwide, Sullivan objected to Gannon entering an appearance on his
behalf because he "believed Plaintiff's counsel had knowingly misstated his
name as 'Wayne Sullivan' rather than 'Wayne-Arthur: Sullivan' in the . . .
Complaint," and as a result, felt that there was no valid court action
pending against him. Notwithstanding this asserted position, Sullivan's
objections and refusal to officially participate in court proceedings were
selective. Sullivan filed what the trial court labeled "numerous, and
voluminous pro se 'pleadings' with the [c]ourt" in the civil suit.
Additionally, Sullivan's objections to Gannon's representation had nothing
to do with the substance or merits of any defense that might have been
presented on his behalf; his refusal was based on philosophical positions
unrelated to the particular lawsuit itself. Nationwide fully comprehended
the futile nature of Sullivan's proposed approach to Smith's suit -
pretending that it did not legally exist - and his unique views of the
legal system in general, and acknowledged as much in a letter chiding
Sullivan for sending documents the insurer deemed "largely rambling
pseudo-legal gibberish which are nonsensical at best and unintelligible at
worst."
¶ 14. Nationwide had responsibilities and obligations under the
contract as well. The policy authorized Nationwide to retain defense
counsel for Sullivan in the underlying tort claim and assigned control and
management of the defense to Nationwide. It obligated Nationwide to
"defend at our expense, with attorneys of our choice, any suit against the
insured where jurisdiction of the court has been obtained without reference
to our obligations in this policy. We may investigate, negotiate, and
settle any claim or suit as we think appropriate." Relying on the
affidavit submitted by Nationwide's adjuster/claims agent, the trial court
found that Nationwide would have been in complete control of the merits and
the substance of any defense presented in the tort claims case. We agree
with this conclusion.
¶ 15. As the trial court found, again based on the affidavit of
Nationwide's adjuster/claims agent, Nationwide failed to suggest anything
that Sullivan himself did, or did not do, which would have served to
materially assist in the actual preparation and presentation of the
contemplated defense. Sullivan's conduct may have frustrated Nationwide,
but a cooperation or "assistance" clause, like a prompt-notice provision of
an insurance contract, should not function as "a technical escape-hatch by
which to deny coverage in the absence of prejudice." White Caps, 166 Vt.
at 362, 694 A.2d at 38 (internal quotations omitted). An insured's
failure to cooperate with its insurer will not relieve the insurer of its
coverage obligations unless that non-cooperation has, in a significant way,
hindered or precluded the insurer from presenting a credible defense to the
underlying claim. Allstate Ins. Co. v. State Farm Mut. Auto. Ins. Co., 767 A.2d 831, 844 (Md. 2001) (prejudice resulted when insured's non-cooperation
precluded insurer from offering any evidence in defense of the claim); see
also Quintin, 138 Vt. at 48-90, 417 A.2d at 943 (insurer not obligated to
defend following insured's intentional concealment or misrepresentation of
material fact that individual injured on insured's premises was an
employee, which policy excluded from coverage). The fundamental question
in this appeal, therefore, is not whether Sullivan made it difficult for
Nationwide when he chose, in his fashion, to ignore the lawsuit, but
whether that position prejudiced Nationwide's position relative to the
litigation.
¶ 16. In arguing that it was prejudiced, Nationwide contends that
Sullivan's refusal to permit Attorney Gannon to appear and defend precluded
Gannon from "conducting discovery, taking depositions, etc., or in any way
challenging Plaintiff's evidence." However, as the trial court noted,
Nationwide was able to determine that it was obligated to defend Sullivan
in the underlying tort claim and was able to conduct discovery sufficient
to settle claims with Smith's daughter for her personal injuries and with
Smith for damage to her vehicle.
¶ 17. Nationwide's investigation also resulted in the insurer's
belief that issues of proximate cause and comparative negligence were
present in the case. Nationwide avers that the difficulties posed by
Sullivan resulted in Gannon's inability to present evidence of plaintiff's
alleged "preexisting degenerative condition," thus preventing a challenge
to the proximate cause and value of plaintiff's alleged damages. From the
affidavit of Nationwide's insurance adjuster, it appears that Gannon would
also have asserted comparative negligence by claiming that Smith was
operating her vehicle at an improper rate of speed at the time of the
accident. Thus, it appears that the insurer was able to make a proper
investigation while the information was fresh, and to decide upon its
contractual obligations. These results demonstrate that Sullivan's prompt
notification to Nationwide of the underlying suit went a long way toward
fulfilling the purpose of the cooperation or "assistance" clause.
¶ 18. Nationwide argues that it could not defend the suit because
Sullivan refused to allow Gannon to represent him. While Gannon may not
have been ethically permitted to enter an appearance on Sullivan's behalf,
Nationwide had several viable options available to it. To protect its own
interests in Smith's tort action, Nationwide, through its own independent
counsel, could have notified Smith's counsel of its predicament so that
Smith could join Nationwide in the suit. Nationwide could have moved for
intervention pursuant to V.R.C.P. 24 to alert the trial court to its
difficulties with its insured. See V.R.C.P. 24(a) (providing for
intervention of right when "the applicant claims an interest relating to
the property or transaction which is the subject of the action and the
applicant is so situated that the disposition of the action may as a
practical matter impair or impede the applicant's ability to protect that
interest, unless the applicant's interest is adequately represented by
existing parties"); Ulm, 170 Vt. at 294, 750 A.2d at 991 (insurer moved for
and was granted intervener status in motor vehicle passenger's products
liability claim against manufacturer); see also Davila v. Arlasky, 857 F. Supp. 1258, 1260 (N.D. Ill. 1994) (court granted insurer's motion to
intervene in light of insured's failure to appear and unwillingness or
inability to pay judgments entered against him). Nationwide could have
petitioned the court for a declaratory judgment to determine its coverage
obligations under the policy before entry of the default judgment.
Commercial Ins. Co. of N.J. v. Papandrea, 121 Vt. 386, 392, 159 A.2d 333, 337 (1960) (declaratory judgment useful and the court should grant it when
it clarifies "the legal relations of the parties or if it will terminate
the uncertainty and insecurity of the controversy "); Farm Bureau Mut.
Auto. Ins. Co. v. Houle, 118 Vt. 154, 158, 102 A.2d 326, 329 (1954)
(establishing availability of declaratory judgment to determine an
insurer's obligations under a contract of insurance). Additionally,
Nationwide could have moved to enjoin plaintiff's underlying claim while
the trial court considered the insurer's petition for declaratory relief.
See State v. Glens Falls Ins. Co., 134 Vt. 443, 450, 365 A.2d 243, 247
(1976) (citing Houle for the proposition that insurer has "powerful remedy
of enjoining claimant's action at law to prevent irreparable damage . . .
to an insurer" when insured will not assent to non-waiver agreement). (FN3)
¶ 19. Notwithstanding the availability of these options,
Nationwide did nothing. In discharging their duties specified in and
incident to the insurance policy, an insurer and an insured owe to each
other a duty of good faith and fidelity. Peerless Cas. Co. v. Cole, 121
Vt. 258, 265, 155 A.2d 866, 871 (1959). Therefore, if a policy of
insurance gives an insurer control over the handling of a claim, including
decisions concerning litigation and settlement, as the policy did in this
case, then the insurer must conscientiously fulfill that duty. See
Rodriguez v. Am. Ambassador Cas. Co., 4 F. Supp. 2d 1153, 1156 (M.D. Fla.
1998), aff'd, 170 F.3d 188 (11th Cir. 1999) .
¶ 20. Despite its knowledge of Sullivan's skewed perception of the
merits of Smith's personal injury action, Nationwide's efforts to fulfill
its contractual obligation to properly control the lawsuit consisted merely
of urging its insured to allow counsel to enter an appearance on his
behalf. As the trial court noted, "[i]nstead of somehow bringing the
problem [with Sullivan] to the attention of the [c]ourt, or the Department
of Banking and Insurance, or someone, Nationwide chose to remain silent
about its dilemma and let a default judgment be entered against Sullivan."
Nationwide's meager effort distinguishes this case from others where an
insurer's due diligence was a critical factor in evaluating an insured's
alleged breach of a cooperation clause. To successfully invoke a defense
of non-cooperation, diligent effort to secure the cooperation of a
recalcitrant insured is required, and, as found by one court, it includes
more than simply sending letters to the insured, or telephoning them and
requesting their appearance at trial when insurer "could have done much
more to secure [their insured's] cooperation." Wallace v. Woolfolk, 728 N.E.2d 816, 820 (Ill. App. Ct. 2000) (insurer failed to make diligent
efforts to obtain cooperation of insured by sending her six letters and
making one telephone call, where insurer had reason to know that insured
was either not receiving letters or ignoring them). While diligent efforts
must be evaluated in light of the specific circumstances involved in each
particular case, an insurer's burden is substantial. See Thrasher v. U.S.
Liab. Ins. Co., 225 N.E.2d 503, 508 (N.Y. 1967) ("[T]he burden of proving
the lack of co-operation is a heavy one indeed."). Although additional
letters or requests may have made no difference with Sullivan, it was
proper for the court to consider Nationwide's actions, or lack thereof,
when assessing whether or not insurer failed "to assist," and whether or
not Sullivan's action prejudiced Nationwide.
¶ 21. Nationwide cannot assert prejudice with regard to its
ability to conduct a defense that it never attempted to mount. See White
Caps, 166 Vt. at 364, 694 A.2d at 38 (stating analogous proposition that
"[a]n insurer cannot assert prejudice with regard to its ability to conduct
an investigation that it never even tried to conduct.") (internal
quotations omitted). Given the options available to Nationwide, and its
apparent tactical decision to take no action following Sullivan's
objections to counsel's representation, we cannot conclude that Sullivan's
conduct prejudiced Nationwide by placing it in a "substantially less
favorable position than it would have been in," had Sullivan not raised
objections to participating in the litigation. Id. at 362, 694 A.2d at 38
(internal quotations omitted).
¶ 22. We recognize that, had Nationwide gone forward with a
defense of Smith's suit, it may well have been proceeding without
Sullivan's cooperation. The absence of the insured, however, does not
alone establish prejudice; Nationwide must show that its insured's absence
actually prejudiced its ability to mount a defense. See Kerr, 138 Vt. at
362, 416 A.2d at 165 (insurer must prove that lack of cooperation of its
insured by nonattendance at trial caused actual prejudice). In this case,
Sullivan's presence and participation at trial would not have assisted
Nationwide in asserting that Smith has a pre-existing degenerative
condition. Nor could Sullivan have assisted Nationwide in asserting the
defense of comparative negligence. According to the State Police Accident
Report appended to Nationwide's motion for summary judgment, Sullivan
revealed at the accident scene that he had no idea why he lost control of
his vehicle and flipped it off the roadway after knocking down a telephone
pole across the northbound lane. Smith, traveling north, collided with the
telephone pole and the wires that hung from it. At the time Smith collided
with the pole, Sullivan was in his overturned vehicle, which was in the
river over the side of the road. As such, it does not appear that Sullivan
could have added relevant or substantive information as to Smith's
vehicular operation.
¶ 23. Nationwide, however, rejects any suggestion that it was
required to clarify its position, arguing that, while this Court's holding
in Houle, 118 Vt. at 158, 102 A.2d at 329, affords insurers the opportunity
to petition for declaratory relief, the Court's decision did not negate
other options available to the insurer, such as denying liability and
risking a suit on the policy in the event that the plaintiff obtains a
judgment against its insured. The Court in Houle did not specifically
endorse inaction as Nationwide avers, although it acknowledged that the
option existed. See id. at 157-58, 102 A.2d at 328-29.
¶ 24. In the fifty years since Houle, preemptive suits to
determine coverage obligations have become a common approach of insurers in
Vermont. See e.g., N. Sec. Ins. Co. v. Perron, 172 Vt. 204, 207, 777 A.2d 151, 153 (2001) (homeowner's liability insurer brought declaratory action
alleging no duty to defend its insured in tort action); Champlain Cas. Co.
v. Agency Rent-A-Car, Inc., 168 Vt. 91, 92, 716 A.2d 810, 811 (1998)
(insurer petitioned for declaratory relief to determine coverage
obligations); Kerr, 138 Vt. at 360, 416 A.2d at 164 (insurer sought
declaratory judgment with regard to coverage obligations). Some
jurisdictions require an insurer to determine its coverage obligations
before the underlying tort action is complete. See Employers Ins. of Wausau
v. Ehlco Liquidating Trust, 708 N.E.2d 1122, 1138 (Ill. 1999) ("Where an
insurer waits to bring its declaratory judgment action until after the
underlying action has been resolved by a judgment or settlement, the
insurer's declaratory judgment action is untimely as a matter of law.");
Cen. Mut. Ins. Co. v. Kammerling, 571 N.E.2d 806, 749 (Ill. App. Ct. 1991)
("[A] liability insurer in doubt over whether it has a duty to defend its
insured, cannot simply stand on the sidelines and wait until the tort
action is complete before contesting the question of coverage.") (quoting
Reis v. Aetna Cas. & Sur. Co., 387 N.E.2d 700, 704 (Ill. App. Ct. 1978));
see also State Farm Fire & Cas. Co. v. T.B. ex rel. Bruce, 762 N.E.2d 1227,
1230-31 (Ind. 2002) (insurer who elects not to defend under a reservation
of rights agreement in the underlying tort action, or does not file a
declaratory judgment action, proceeds "at the insurer's peril" because that
insurer is bound by the matters determined in the lawsuit under the
doctrine of collateral estoppel). To do nothing is rarely a reasonable
option. See Palermo v. Fireman's Fund Ins. Co., 676 N.E.2d 1158, 1163
(Mass. App. Ct. 1997) ("An insurer who unjustifiably refuses or fails to
defend its insured, even in good faith, assumes the consequential risks of
that breach of its insurance contract [including] . . . liability for the
amount of the judgment reflecting claims covered by the policy . . . .").
¶ 25. Considering the overarching policy considerations addressed
in Vermont's Financial Responsibility and Compulsory Insurance Law, 23
V.S.A. §§ 800-810, we conclude that doing nothing is not an option
available to an insurer in these circumstances. Confronted with an
uncooperative insured, an automobile liability insurance provider must
protect its interest by filing a declaratory judgment action for a judicial
determination of its obligations under the insurance policy, or move to
intervene, or take some action to assure the viability and availability of
insurance coverage consistent with the purpose of the Financial
Responsibility and Compulsory Insurance law.
¶ 26. This approach is entirely consistent with an insurer's duty
to defend its insured and the overriding purpose for mandatory automobile
liability insurance. Chapter 11 of Title 23, entitled "Financial
Responsibility and Insurance," creates compulsory automobile liability
insurance for all owners or operators of motor vehicles in the state. See
23 V.S.A. § 800(a). This act is designed to "protect the public and ensure
that those motor vehicle operators who cause accidents for which they are
liable have adequate resources to satisfy any claims which arise
therefrom." Wright v. Malloy, 373 F. Supp. 1011, 1016 (D. Vt. 1974)
(interpreting Vermont law), aff'd, 419 U.S. 987 (1974); Agency Rent-A-Car,
Inc., 168 Vt. at 101, 716 A.2d at 816 (citing Malloy with approval).
Nationwide's behavior in this case frustrates the policy embodied in the
statute. As the trial court recognized:
that statutory scheme, and legislative policy determination, would
be sorely frustrated if the mandated insurance coverage were to be
lost to otherwise innocent motorists because an arguably negligent
driver, who is covered by such insurance . . . 'refuses' to
'allow' the insurer to enter an appearance . . . thereby giving
the carrier some arguable basis, as here, to declare its primary
coverage responsibility to be void and thus unavailable to the
injured motorist.
¶ 27. Consistent with Vermont's Financial Responsibility and
Compulsory Insurance Law, automobile liability insurers with a duty to
defend must make good faith and diligent efforts to fulfill their
contractual obligation, which includes a demonstration that the insurer
"acted diligently in seeking to bring about the insured's co-operation."
Thrasher, 225 N.E.2d at 508. The defense of lack of cooperation penalizes
a plaintiff for the action of an insured over whom the plaintiff has no
control, and frustrates the policy of this state that resources be
available to recompense innocent tort victims of motor vehicle accidents.
¶ 28. Nationwide failed to show that its insured breached his
contractual duty to assist and failed to show that its position relative to
the underlying claim was prejudiced by insured's conduct. See Kerr, 138
Vt. at 362, 694 A.2d at 165. Therefore, Nationwide was not relieved of its
coverage obligations and remains obligated to compensate Smith for the
damages awarded her. See Peerless Cas. Co., 121 Vt. at 264, 155 A.2d at
871 (when insured's legal liability is established, insurer's obligation to
pay injured persons becomes absolute under 23 V.S.A. §§ 800-810, Vermont's
Motor Vehicle Financial Responsibility and Insurance Law).
Affirmed.
FOR THE COURT:
_______________________________________
Associate Justice
------------------------------------------------------------------------------
Footnotes
FN1. Justice Morse sat at oral argument but did not participate in this
decision.
FN2. The trial court, while referring to the correct amendatory endorsement
of the Nationwide automobile liability policy, incorrectly quoted language
from the "general policy conditions" of "Nationwide's Century II Auto
Policy." The "assistance" clause recited by the trial court was replaced
by amendatory endorsement 1523B and is the operative contractual language
at issue in this appeal.
FN3. In addition, Nationwide could have settled Smith's claim without
assistance from Sullivan, as it did with the other claims stemming from the
accident.
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