Appeal from the United States District Court for the Middle District of Pennsylvania, D.C. Civil No. 86-0385.
Sloviter, Scirica and Weis, Circuit Judges.
As a condition for the payment of underinsured motorist coverage benefits, defendant in this declaratory judgment action was required by the plaintiff carrier to exhaust the limits of the liability policy covering the driver responsible for the injuries. Because the costs of a structured settlement defendant had negotiated with the tortfeasor's insurance company were somewhat lower than its policy limits, the district court concluded that the exhaustion prerequisite had not been met. Therefore, recovery under the underinsured motorist provision was denied. A state appellate court in the relevant jurisdiction later expressed a contrary view compelling us to vacate and remand for further proceedings.
On July 2, 1982, near Harrisburg, Pennsylvania, Mrs. Farrell suffered serious injuries when an oncoming automobile driven by John J. Brennan crossed the center line and struck the car in which she was a passenger. Brennan's liability was clear. At the time of the accident, his blood alcohol level showed intoxication caused by several hours of drinking at a local bar. Brennan was a permissive user of a car that the Allstate Insurance Company insured under a policy with personal injury limits of $100,000/$300,000.
Mrs. Farrell brought suit against Brennan in the United States District Court for the Middle District of Pennsylvania. In November 1983, Allstate agreed to a structured settlement requiring periodic payments to Mrs. Farrell for twenty years and an immediate lump-sum payment for her attorney's fees. The total payments would amount to $187,500. Allstates total expense for the settlement, including its purchase of an annuity to fund the future installments, was $91,090.00. In negotiating the claim against Brennan, Allstate had refused to reveal the costs of the structured settlement*fn1 and did not disclose that information until the present litigation was underway.
While they were residents in New Jersey, Jane Farrell and her husband, Michael, had purchased the Aetna automobile insurance policy in force on the day of the accident. An endorsement provided for payments to the Farrells in the event of injury by an underinsured driver. The policy defined an underinsured driver as one whose liability coverage is less than the limits listed in the "underinsured driver" endorsement. Brennan was an underinsured driver because his $100,000 Allstate policy liability limit was lower than the $200,000 listed in the Farrells' policy with Aetna.
The Aetna endorsement contained the following language:
"The company shall not be obligated to make any payment because of bodily injury . . . to which this insurance applies and which arises out of the . . . use of an underinsured highway vehicle until after the limits of liability under all bodily injury . . . and liability bonds or insurance policies respectively applicable at the time of the accident . . . have been exhausted by payment of judgments or settlements."
The Aetna policy also stated that "this insurance does not apply . . . to bodily injury . . . with respect to which the . . . insured . . . shall, without written consent of the company, make any settlement with any person or organization who may be legally liable therefor."
During negotiations with Allstate, Mrs. Farrell's husband requested their attorney, Patrick T. Sullivan, to advise Aetna of the status of the discussions. Farrell wanted to "make sure Sullivan was covering all the bases," but neither the lawyer nor the Farrells informed Aetna about the settlement until six weeks after a general release was signed.*fn2
Aetna knew about the accident because it had paid various medical bills covered by its policy. Its first notification of the settlement with Allstate, however, came in a letter from Michael Farrell dated January 9, 1984. In that letter, Farrell submitted a claim for his wife's injuries to the extent that they had not been fully compensated by her settlement with Allstate. Aetna ultimately refused to pay on the grounds that it had not been notified before settlement and that Allstate's limits of liability had not been exhausted.*fn3
Aetna then commenced this declaratory judgment action. After the parties submitted a stipulation of undisputed facts, the district court found in favor of Aetna. The court rejected the contention that, because the structured settlement projected a pay-out of more than $100,000, Allstate's limits of liability had been exceeded. On the contrary, the court concluded that the settlement's actual cost of $91,090.00 left $8,910.00 remaining and, consequently, Jane Farrell had not exhausted Allstate's $100,000 limits. ...