Nationwide Mutual Insurance v. Voland

HOLLANDER, Judge. The Circuit Court for Baltimore County granted a Motion to Enforce Settlement filed by Kenneth Voland, appellee, against Nationwide Mutual Insurance Company, appellant. From an order directing payment of $5,000 plus interest to Voland, Nationwide has appealed. For the reasons discussed below, we shall affirm.

Factual Background The material facts are undisputed. On December 5, 1991, Voland was involved in an automobile collision with Douglas Franklin. On September 17, 1992, Voland sued Franklin in the Circuit Court for Baltimore County to recover for injuries he sustained in the accident. An Amended Complaint adding Nationwide as a defendant was filed on May 3, 1993 and served on May 12, 1993.

In the Amended Complaint, Voland alleged that Nationwide, his own insurance carrier, had breached the uninsured-motorist (“UM”) and underinsuredmotorist (“UIM”) clauses of its insurance policy by denying Voland’s claim for damages in excess of Franklin’s insurance policy limits. On May 4, 1993, State Farm Mutual Automobile Insurance Co., Franklin’s insurance carrier, extended an offer to settle Voland’s case for $50,000, which constituted the limit of Franklin’s liability coverage. Voland’s counsel accepted the offer on May 27, 1993, but did not inform Nationwide of that settlement. Thereafter, on June 3, 1993, Voland signed a one-page “Release.” 1 Counsel for both Voland and Franklin also ²²⁸ executed a Stipulation of Dismissal. 2 In a.letter dated June 3, 1993, Nationwide sent Voland’s counsel a request for a settlement demand.

Voland’s attorney responded, on June 15, 1993, with a demand of $25,000. Nationwide then filed its Answer on June 24, 1993. Subsequently, on July 13, 1993, Nationwide’s claims representative offered $5,000 in settlement which Voland’s attorney accepted. Although Nationwide issued a check to Voland that same day, it never sent the check.

The parties agree that, as of July 13, 1993, Voland’s counsel had not informed Nationwide of Voland’s settlement with Franklin, but he did not make any false statements to Nationwide or otherwise actively conceal facts from the insurer. Further, Nationwide’s claims representative did not inquire as to the status of the underlying tort litigation before reaching an agreement with Voland’s attorney, even though it had known for several months of Voland’s suit against Franklin. On July 21, 1993, Nationwide learned of the settlement agreement between Voland and Franklin through Franklin’s attorney. Several weeks later, when Voland inquired as to the status of Nationwide’s settlement check, Nationwide advised that it would not pay the money; in its view, Voland had breached the insurance contract by failing to obtain Nationwide’s consent prior to settling with Franklin.

Based on Voland’s execution of the Release, Nationwide also contended that its subrogation rights had been compromised. 3 Accord ²²⁹ ingly, on August 26, 1993, Voland filed a Motion to Enforce Settlement, which was heard by Judge Robert E. Cahill on March 11, 1994. In its opinion of March 21, 1994, the trial court concluded that neither the Release nor the Stipulation of Dismissal vitiated the settlement agreement. 4 The court further noted that the UM/UIM endorsement did not expressly require Voland to advise Nationwide of the status of his suit against Franklin. The court thus framed the issue in the following way: The question to be decided, therefore, is whether Nationwide had a duty to determine the status of the tort case before it agreed to settle with the plaintiff. If it did, it will be deemed to have waived its right to rely on the language in the exclusion as the basis for revoking its settlement agreement.

The court determined that its decision was controlled by paragraph 8 of the “Limits and Conditions of Payment” section of the policy. It provides: “We will not pay any underinsured motorists loss until the limits of all bodily injury liability coverage available from any source have been exhausted by payment of settlements or judgments.” (Emphasis added). The court interpreted this language to mean that Nationwide would not be obliged to pay any claims under the ²³⁰ UIM clause until after its insured had exhausted the tortfeasor’s insurance coverage. As applied to this case, the court determined that Voland’s receipt of the policy limits from Franklin’s insurance carrier was a “condition precedent” to Nationwide’s duty to pay under the UIM clause.

Accordingly, the court held that Nationwide either knew that the condition precedent had been satisfied or had waived its right to be told of it. Consequently, the court ordered Nationwide to pay Voland $5,000 plus interest from July 13, 1993. 5 Issues Presented Nationwide presents the following issues for our consideration: 1. “When the insurance contract between [Voland] and [Nationwide] clearly requires in its ‘Trust Agreement’ section that [Voland] do nothing to prejudice [Nationwide’s] rights of recovery against a tortfeasor, was it error for the trial judge to find that the general release and Stipulation of Dismissal signed by [Voland] in conjunction with a settlement with [Franklin] did not breach the insurance contract and therefore did not vitiate [Nationwide’s] later settlement with [Voland]?” 2. “When [Nationwide’s] insurance policy contains a coverage exclusion which requires [Nationwide’s] consent to [Voland’s] settlement with any liable party before [Nationwide’s] Underinsured Motorist insurance will apply, and [Nationwide] is unaware of a prior settlement between [Voland] and [Franklin], was it error for the trial judge to ²³¹ find that if [Nationwide] had a duty to determine the status of the underlying tort case before it agreed to its own settlement with [Voland], that it waived its right to rely upon the language in the exclusion as the basis for revoking its settlement agreement?” 3. “Although not conclusively determined in the ruling, was the trial judge in error when he found that [Nationwide’s] Exclusion and Trust Agreement provisions apply only to the uninsured motorist and have no application to payments made in excess of the limit of the tortfeasor’s liability coverage?” Voland frames the issues as follows: 1. “Was the settlement agreement entered into by both parties binding upon. [Nationwide]?” 2. “Does [Nationwide’s] ‘Trust Agreement’ provision in its policy conflict with the purpose of Underinsured Motorist coverage?” We answer Voland’s first issue in the affirmative and, consequently, we answer Nation-wide’s first issue in the negative. We hold that Nationwide’s settlement agreement was valid and enforceable. With respect to the enforceability of the settlement agreement, we conclude that Voland’s counsel had no affirmative duty to disclose his earlier settlement with Franklin.

If Voland’s suit against Nationwide had not settled and, instead, proceeded to trial, Nationwide may have had a meritorious claim or defense, whether based on the insurance policy or otherwise. As the enforceability of the parties’ settlement agreement does not turn on the language of the insurance policy, we decline to answer any of the remaining issues. Discussion An agreement to settle a lawsuit is a contract and is governed by ordinary contract principles. See Creamer v. Helferstay, 294 Md. 107 , 448 A.2d 332 (1982).

It is undisputed here that the parties had agreed to settle; the terms required Nationwide to pay Voland $5,000 in exchange for Voland’s ²³² agreement to dismiss, with prejudice, his breach of contract claim against Nationwide. As we have noted, Nationwide argues that, prior to accepting Nationwide’s settlement offer, Voland had an affirmative duty under the insurance policy to disclose that he had settled with Franklin, executed the Release, and filed the Stipulation of Dismissal. Nationwide contends that it would never have offered to settle had it known of the Release 6 and, due to Voland’s breach of contract, it had no obligation to pay anything under the UM/UIM clauses of the policy. Therefore, Nationwide concludes, Voland’s breach rendered the settlement unenforceable.

Nationwide also argues that it had no duty to investigate and apprise itself of the status of the underlying litigation, and that its ignorance of the status of that case—a unilateral mistake of fact—entitles Nationwide to a rescission of the agreement. Nationwide’s arguments are without merit. In the absence of a settlement agreement between Voland and Nationwide, Voland’s execution of the Release or the Stipulation, or both, may have constituted a breach of Nationwide’s insurance policy to the extent Voland failed to protect Nationwide’s rights. See Cleaveland v. C & P Telephone Co., 225 Md. 47, 51-52 , 169 A.2d 446 (1961) (settlement with tortfeasor, without insurer’s consent, prior to payment on claim destroys insurer’s right of subrogation).

If so, Voland’s breach would have provided Nationwide with a meritorious defense to Voland’s contract claim. See, e.g., Glenn L. Martin Co. v. Fidelity-Baltimore Nat’l Bank & Trust Co., 218 Md. 28, 37 , 145 A.2d 267 (1958) (when one party has breached, other party may rely on that breach as defense); see also, Hubler Rentals, Inc. v. Roadway Express, Inc., 637 F.2d 257, 260 (4th Cir.1981) (in the right circumstances, a court may, under ²³³ Maryland law, refuse to allow recovery by either party when both have breached). We need not resolve that thorny issue, however, because Nationwide and Voland did settle. We are unaware of any authority—and Nationwide has not presented any— that stands for the proposition that, in the absence of fraud, a party’s post-settlement discovery of a meritorious claim or defense, such as a pre-settlement breach, excuses that party’s performance under a settlement agreement.

The law is, in fact, to the contrary. See Fiege v. Boehm, 210 Md. at 361, 123 A.2d 316 . The parties do not dispute that the settlement agreement constitutes a facially valid agreement, complete with offer, acceptance, and consideration. 7 When parties settle a case, they give up any meritorious claims or defenses they may have had in order to avoid further litigation. See, e.g., Fiege, 210 Md. at 360-63 , 123 A.2d 316 ; Eastern Environmental v. Industrial Park, 45 Md.App. 512, 520 , 413 A.2d 1355 (1980).

When a contractual promise is aleatory in character, the performance being expressly made conditional upon an uncertain and hazardous event, the promisee bets that it will happen and the promisor that it will not. The consideration exchanged for such a promise varies in proportion to their opinions as to probability. They consciously assume the risk. If the event occurs, ... [the promisor] is a loser; if it fails to occur, ... it is [the promisee] who is loser.

The opinion of one of them as to probability is thus shown to have been erroneous; but his mistake is not ground for rescission, because he consciously assumed the risk. An insurer can not escape payment of the amount promised ²³⁴ because the insured was most unexpectedly struck by lightning two days after execution of the policy. An insured can not get restitution of his insurance premiums because he has paid them for forty years and has never had a fire.... The same result obtains in any case where the risk of the existence of some factor ... is consciously considered in agreeing upon terms.

There is no mistake; instead, there is awareness of the uncertainty, a conscious ignorance of the future. This is why an ordinary compromise of a doubtful or disputed claim is not subject to rescission when one of the parties turns out to have been correct in his assertions and the other incorrect. They were aware of the uncertainty, estimated their chances, and fixed the compensation accordingly. 3 Corbin on Contracts § 598, at