A recent federal case out of the Eastern District of Texas, Sherman Division, highlights an important but occasionally misunderstood rule in UM/UIM litigation – that the insurer’s consent to an insured’s settlement with the third-party driver is no substitute for a legal judgment establishing liability and damages, which remains a condition precedent to coverage.   The phrase “legally entitled to recover” under the UM/UIM section of the auto policy means that a plaintiff must obtain a judgment against the third-party driver before any duty to pay can be triggered. Absent a legal judgment establishing the tortfeasor’s liability and damages, a UM/UIM carrier has no duty to pay and cannot be held liable for a breach of contract, even if the carrier consents to a plaintiff’s settlement with the third-party driver.

In Adepipe v. Safeco Insurance, 2018 WL 295428, after Plaintiff was involved in a car accident, he settled with the third-party driver’s carrier, State Farm, for policy limits after receiving consent from Defendant Safeco Insurance Company.  Plaintiff then sued Safeco, asserting that the damages he sustained from the accident exceeded the State Farm settlement, and sought UM/UIM benefits under his auto policy.

Safeco moved to dismiss, claiming that Plaintiff had not alleged that he had obtained a judgment against the third-party driver, a condition precedent to coverage.  The court found that Safeco had no legal duty to pay without a judgment establishing liability and damages and that Safeco’s consent to settle with the third-party driver did not constitute a legal judgment against said driver. Texas courts that have addressed the issue of consent have held that insurers were not foreclosed or estopped from arguing that the insured was not entitled to coverage simply because they approved of the third-party settlement. See In re State Auto Prop. & Cas. Ins. Co., 348 S.W.3d 499, 502 (Tex. App.— Dallas 2011, pet. struck) (“[w]hile [the insurer] consented to [the insured’s] settlement with [the third party], such consent does not constitute a judgment on the merits of that action”); see also In re State Farm Mut. Auto. Ins. Co., 395 S.W.3d 229, 238 (Tex. App.—El Paso 2012, no pet.) (similar).

The court also held that Plaintiff could not state claims under the prompt payment statute or under the Texas Insurance Code or DTPA for bad faith violations.