The opinion of the court was delivered by: KATZ
This is a declaratory judgment action brought by Prudential Property & Casualty Insurance Co. ("Prudential"). Prudential is seeking to prevent the defendant, Habib Nayerahamadi, from claiming supplementary uninsured motorist benefits under a Prudential auto insurance policy. The parties have submitted stipulated facts and cross-motions for summary judgment.
According to the stipulated facts, Mr. Nayerahamadi had an accident while driving a friend's 1982 Honda Civic that was insured by Prudential. The other car involved in the accident was insured by Allstate. Mr. Nayerahamadi lodged a claim against the driver of the other vehicle; the claim was settled for $15,000, the limit on the other driver's Allstate insurance policy. As a condition of the settlement, Mr. Nayerahamadi executed a release discharging the other driver from all claims arising out of the accident.
Mr. Nayerahamadi seeks to recover underinsured motorist benefits from Prudential under the policy covering the car he was driving, which had $25,000 supplementary uninsured motorist (or "underinsured motorist") coverage. Prudential maintains that it is not required to pay any benefits because Mr. Nayerahamadi settled his claim against the other driver without obtaining Prudential's consent, in violation of the policy terms. Prudential also argues that if it is liable to Mr. Nayerahamadi for benefits, the maximum amount it can be required to pay is $10,000 (the difference between the $25,000 policy limit and the $15,000 Mr. Nayerahamadi received in settlement). These two arguments are discussed below.
The Prudential policy at issue contains the following clause:
Neither you, your legal representative, nor anyone else entitled to payment under this part may settle with anyone responsible for the accident without our consent. If, before we make payment under this part, you or your legal representative starts any legal action against anyone responsible for the accident, you or your legal representative must immediately send us a copy of the legal documents served relating to this action.
Prudential claims that Mr. Nayerahamadi's execution of a settlement and release with Allstate and the other driver, without its consent, violated this clause. Therefore, he should not be entitled to collect any benefits under the policy.
Defendant urges the court to invalidate the consent-to-settle clause because it would allow the insurance company to block settlements and thus evade liability for underinsured motorist benefits. The underinsured motorist clause contains the following restriction:
We won't have to make any payments under this coverage until all the bonds and insurance policies which apply to the injury have been used up in paying court judgments or settlements.
Prudential counters that the consent-to-settle clause is necessary to protect its subrogation rights, which in this case were extinguished by Mr. Nayerahamadi's settlement with the tortfeasor.
Several courts have addressed the question of whether a consent-to-settle clause in an uninsured motorist policy is valid, and have reached different conclusions. See Annot., Uninsured Motorist Clause: Validity and Construction of Clause Excluding Liability Where Insured, Without Insurer's Consent, Makes a Settlement With, or Obtains Judgment Against, A Person Liable, 25 ALR3d. 1275. According to insurance law treatises, the majority of courts upheld such consent-to-settle clauses as reasonable protection of the insurer's subrogation rights. 8D Appelman on Insurance § 5132; 12A Couch on Insurance § 45:645. Those courts that hold consent-to-settle clauses void tend to take the position that such clauses would harm the insured by allowing the insurer to withhold consent whether or not it has any justification. I do not interpret these clauses as giving the insurer the absolute, unfettered right to withhold consent; rather, an insurance company has a duty to consent to a reasonable settlement. See 12A Couch on Insurance 45:645 ("Generally prejudice must be ...