Author(s): Simeon Orlowski

UNINSURED MOTORIST EXCLUSION TRIGGERED UPON SETTLEMENT OR JUDGMENT WITHOUT INSURER’S CONSENT INAPPLICABLE IF SETTLEMENT OR JUDGMENT IS SET ASIDE

In Smith v MEEMIC, a published decision released by the Court of Appeals on 9/10/09, the plaintiff had been injured in an automobile accident with an uninsured motorist. The plaintiff claimed UM benefits from the Defendant MEEMIC. The plaintiff filed suit against the uninsured motorist and sent MEEMIC a letter informing MEEMIC that she was proceeding toward obtaining a default judgment against the uninsured motorist. MEEMIC did not respond to the letter.

The plaintiff eventually obtained a default judgment against the uninsured motorist. Having received no response from MEEMIC, the plaintiff filed suit against MEEMIC. Defendant MEEMIC moved for summary disposition arguing that the “no settlement/no judgment” clause of its policy excluded UM coverage because the plaintiff had obtained a default judgment against the uninsured motorist without MEEMIC’s consent.

After the summary disposition motion was filed, but before it was heard, the default judgment against the uninsured motorist was set aside. Plaintiff argued to the trial court that the defendant’s Motion for Summary Disposition should be denied as the plaintiff was not presently in violation of the policy. The trial court rejected the plaintiff’s arguments and concluded that the moment the plaintiff obtained a default judgment, she was in breach of the contract. Because the contract included no remedial provision for retroactively undoing the violation, the plaintiff’s breach was fixed at the time it was committed. The plaintiff appealed the summary disposition entered in favor of MEEMIC and the Court of Appeals reversed.

The relevant exclusion read:

This exclusion does not apply to bodily injury sustained by an insured person: if the resulting cause of action is settled or prosecuted to judgment without our knowledge or consent.

The defendant MEEMIC argued that Lee v Auto Owners, 218 Mich App 672 (1996) and Linebaugh v Farm Bureau, 224 Mich App 494 (1997) hold that a default judgment entered against an uninsured motorist triggered the exclusion even if there is no prejudice to the insurer. However, the Court of Appeals noted that neither of those cases involved a judgment against the uninsured motorist being set aside. Rather, both Lee and Linebaugh involved a refusal to set aside the judgment. Because Lee and Linebaugh do not address the specific issue in this case, the court found them to be inapplicable. The court concludes that once the default judgment was set aside, the defendant was not entitled to summary disposition.

Judgments that have been set aside are nullities. When the default judgment against the uninsured motorist was set aside, it was as if no judgment had ever been rendered. Without a judgment against the uninsured motorist, the exclusion was no longer applicable.

The court further said that even if the language of the exclusion could overcome the nullifying effect of the court’s decision to set aside the default judgment, the exclusion in this policy did not do so because it is written in the present tense. The exclusion provides that coverage is precluded if the case “is settled or prosecuted to judgment,” and not if it “once was” or “has been at some point” prosecuted to judgment. Once the default judgment was set aside, the case was no longer currently settled or prosecuted to judgment making the exclusion inapplicable.

“Accordingly, we hold that where an insurance policy contains an exclusionary provision that is triggered upon settlement or judgment without the knowledge and consent of the insurer, if the default judgment or settlement is set aside such that an insurer retains its rights of subrogation, the exclusion does not apply.”