Westv.Insurance Corporation of New York

The Court of Appeals of Washington, Division OneMay 23, 2005
127 Wn. App. 1035 (Wash. Ct. App. 2005)
127 Wn. App. 1035127 Wash. App. 1035

No. 53989-2-I

Filed: May 23, 2005 UNPUBLISHED OPINION

Appeal from Superior Court of King County. Docket No: 02-2-31424-4. Judgment or order under review. Date filed: 03/15/2004. Judge signing: Hon. Douglas D. McBroom.

Counsel for Appellant(s), Jerret E. Sale, Bullivant Houser Bailey PC, 1601 5th Ave Ste 2300, Seattle, WA 98101-1618.

Matthew J. Sekits, Bullivant Houser Bailey PC, 1601 5th Ave Ste 2300, Seattle, WA 98101-1618.

Counsel for Respondent(s), John P. Walsh, Attorney at Law, PO Box 22418, Seattle, WA 98122-0418.


Taxicab passenger Joseph West was injured in a car accident. He sued the at-fault driver and the automobile's owner, and obtained a default judgment. The default judgment was later vacated when the tortfeasors' insurance company paid West the maximum amount allowed by the policies. West is now suing the taxicab driver's insurance company for underinsured motorist coverage, arguing that the default judgment obligated it to provide coverage. The trial court granted partial summary judgment in West's favor, and the insurance company appeals. We hold that because a judgment, once vacated, has no force or effect, an underinsurer is not bound by a vacated default judgment. We reverse and remand for further proceedings.

FACTS

In February 2001, Joseph West was a passenger in a taxicab when another car collided with the cab and injured West. The at-fault driver, Brian McConnell, was driving a car owned by his passenger, Ivan Gjertsen. Allstate Insurance insured McConnell and his policy had a limit of $25,000. Allstate also insured Gjertsen, and his policy had a limit of $50,000. The taxicab owner had underinsured motorist (UIM) insurance through The Insurance Company of New York (INSCORP), with a policy limit of $25,000 per person or $50,000 per accident.

On January 22, 2002, West notified INSCORP that he had filed a lawsuit against McConnell and Gjertsen, but they were avoiding service. West also stated that he intended to file a claim for UIM benefits with INSCORP, and he asked INSCORP to provide a copy of its policy so West could determine whether it contained an arbitration clause. On September 12, 2002, a trial court entered a default judgment against McConnell and Gjertsen for approximately $673,000 plus fees and costs. West immediately notified INSCORP of the default judgment. One week later, West told INSCORP that he was interested in settling the claim with Allstate, and he informed INSCORP of the Allstate policies' limits. West asked INSCORP to research whether it would be interested in buying out Allstate's claim against McConnell and Gjertsen.

An insurer may pay benefits to an injured party and then seek to recover from the tortfeasor. Hamilton v. Farmers Ins. Co. of Wash., 107 Wn.2d 721, 734, 733 P.2d 213 (1987).

On September 30, 2002, West wrote INSCORP to demand arbitration. Four days later, Allstate offered to pay West $75,000, the limits on McConnell's and Gjertsen's policies, as a full and final settlement. In exchange, West agreed to dismiss the default judgment, and he immediately notified INSCORP of the agreement. The trial court later entered a stipulated order setting aside the default judgment. Shortly thereafter, INSCORP notified West that it was not interested in buying Allstate's claim, and it asked West to explain why he was entitled to UIM benefits. On October 18, 2002, INSCORP again wrote West reiterating that it was not denying coverage, but that there were disputes that required arbitration.

On October 25, 2002, West filed suit against INSCORP, alleging breach of fiduciary duties, breach of administrative duties, violation of the Consumer Protection Act, negligence, and bad faith. In his complaint, West claimed that INSCORP had improperly denied him UIM coverage. One month later, West filed an amended complaint, adding a breach of contract claim. He also alleged, for the first time, that he notified INSCORP of the pending suit against McConnell and Gjertsen, that INSCORP knew or should have known that West would obtain a default judgment, and that INSCORP failed to intervene in the action. West asked the court to rule that the default judgment obligated INSCORP to pay him the entire amount of the UIM policy. In the alternative, West asked the court to compel arbitration.

If these facts appear confusing, that is because they are confusing. West demanded arbitration from INSCORP, INSCORP agreed, but then West sued INSCORP anyway. It was not until one month after he filed his suit that West began arguing the issue currently before us.

In December 2002, INSCORP wrote West stating that because the default judgment had been vacated, it did not obligate INSCORP to pay the full UIM policy amount. INSCORP reiterated its desire to arbitrate the action to determine whether and how much it must pay. There was no arbitration and in June 2003, INSCORP moved to compel arbitration and stay the action. West responded that the default judgment obligated INSCORP to pay the full amount of the UIM policy so arbitration was unnecessary. The trial court denied INSCORP's motion.

In October 2003, West moved for partial summary judgment, again arguing that the default judgment obligated INSCORP to pay him UIM benefits. The trial court granted the motion, ruling that West was entitled to $25,000, the UIM policy limit, plus prejudgment interest. In March 2004, the court entered final judgment on its order granting partial summary judgment. INSCORP appeals.

DISCUSSION

In reviewing a trial court's decision to grant summary judgment, we consider all facts and reasonable inferences in the light most favorable to the nonmoving party. Absent a genuine issue of material fact, the moving party is entitled to summary judgment as a matter of law. This case raises questions of law, which we review de novo.

Mason v. Kenyon Zero Storage, 71 Wn. App. 5, 8-9, 856 P.2d 410 (1993).

Condor Enters., Inc. v. Boise Cascade Corp., 71 Wn. App. 48, 54, 856 P.2d 713 (1993) (citing CR 56(c); Marincovich v. Tarabochia, 114 Wn.2d 271, 274, 787 P.2d 562 (1990)).

Mains Farm Homeowners Ass'n v. Worthington, 121 Wn.2d 810, 813, 854 P.2d 1072 (1993).

It is undisputed that West is an `insured' under INSCORP's UIM policy, and that he would be entitled to UIM coverage if the compensation he received from Allstate were insufficient to cover his damages. INSCORP argues that whether the Allstate payment adequately compensated West for his injuries is in dispute. West argues, and the trial court agreed, that this is not in dispute because the default judgment clearly established that West's damages exceed Allstate's payment, and therefore INSCORP must pay West the UIM policy maximum. But as INSCORP points out, the default judgment was later vacated. We must therefore determine whether a UIM insurer is bound by a default judgment against tortfeasors in an underlying action when that judgment is later vacated.

It is well-settled that if a UIM insurer knows about and has the opportunity to intervene in an action brought by its insured against an underinsured tortfeasor, it is bound by the judgment the insured ultimately obtains. There is no dispute here that INSCORP knew about and had an opportunity to intervene in West's action against McConnell and Gjertsen. Thus, INSCORP would normally be bound by the default judgment entered in that action. But three weeks after the default judgment was entered, West notified INSCORP that he had agreed to set aside the judgment. And three weeks later, the court vacated the judgment. A vacated judgment `is of no force or effect and the rights of the parties are left as though no such judgment had ever been entered.' Therefore, INSCORP could not possibly be bound by the default judgment because the judgment, in essence, never existed. While the default judgment established that West's damages exceeded the amount the tortfeasors' insurance company paid, the judgment was vacated. And without the default judgment, there was nothing to establish West's damages and nothing to bind INSCORP. An issue of fact therefore remains about the amount of West's actual damages which will determine whether, and the extent to which, he is entitled to UIM coverage. West cites no authority to the contrary. He relies on Lenzi v. Redland Ins. Co., which held that UIM insurers are bound by default judgments entered against tortfeasors if they had timely notice and ample opportunity to intervene in the lawsuit but declined to do so. But Lenzi did not involve a vacated default judgment. In fact, the Lenzi court noted that a UIM insurer could move to vacate a default judgment after learning of it, strongly suggesting that a UIM insurer would not be bound by a default judgment that was later vacated. We hold that a UIM insurer cannot be bound by a default judgment entered against tortfeasors in the underlying action if that judgment is later vacated. Therefore, the trial court cannot order INSCORP to pay West until an arbitrator determines the amount of his damages.

Lenzi v. Redland Ins. Co., 140 Wn.2d 267, 273, 996 P.2d 603 (2000); Fisher v. Allstate Ins. Co., 136 Wn.2d 240, 246, 961 P.2d 350 (1998); Finney v. Farmers Ins. Co., 21 Wn. App. 601, 618, 586 P.2d 519 (1978), aff'd, 92 Wn.2d 748, 600 P.2d 1272 (1979).

In re Estate of Couch, 45 Wn. App. 631, 634, 726 P.2d 1007 (1986) (citing Weber v. Biddle, 72 Wn.2d 22, 28, 431 P.2d 705 (1967)) (emphasis added).

This issue should be resolved by arbitration, as INSCORP's policy clearly required.

Id. at 269.

Id. at 278 n. 8.

Moreover, INSCORP had no duty to pay West immediately upon the entry of the default judgment. This is especially so in light of Lenzi's comment that a UIM insurer could move to vacate a default judgment after learning of it. And INSCORP had no reason to believe that West expected immediate payment, as he never demanded payment but instead asked for arbitration. In fact, West demanded arbitration after the default judgment was entered. It was not until almost one month after West filed his lawsuit that he began arguing that the default judgment bound INSCORP.

Id.

We reverse the trial court's summary judgment order and remand for further proceedings.

West also argues that INSCORP acted in bad faith. But the trial court did not rule on that claim. In fact, the judge specifically found that `Plaintiff's claim for UIM coverage is separable from Plaintiff's claims for bad faith and violations of the Washington Consumer Protection Act (`CPA').' He further wrote `[t]he only remaining issues left for trial are those related to additional violations of Bad Faith, Consumer Protection Act, attorney fees and damages.' Because the trial court specifically preserved West's bad faith claim for further litigation once we decided INSCORP's appeal, we decline to reach this issue. However, to the extent that the trial court found that INSCORP's failure to pay UIM benefits was bad faith, we reverse.

COX and BAKER, JJ., Concur.