Consent to sue clause violates public policy

Law Reporter, Nov 1998

Consent to sue clause violates public policy.

Peterman v. State Farm Mut. Auto. Ins. Co., 961 P.2d 487 (Colo. 1998).

The Colorado Supreme Court held a consent to sue clause in an automobile insurance contract was void as against public policy.

Here, the Petermans' car was hit by an uninsured tractor-trailer owned by a construction company. The Petermans carried a car insurance policy with State Farm that included uninsured motorist (UM) coverage. The policy contained an arbitration clause, as well as a consent to sue clause that provided State Farm was not bound by any judgment obtained without its written consent.

The Petermans sued the construction company and notified State Farm. State Farm did not respond. After the Petermans obtained a default judgment, they filed a claim with State Farm for the policy limit of $300,000 in UM benefits. State Farm refused to pay, arguing its liability was subject to arbitration. The Petermans then sued State Farm, alleging breach of contract and bad faith. The trial court granted plaintiffs summary judgment. The appellate court reversed, holding the arbitration clause was enforceable and State Farm had not waived its right to arbitrate. Reversing, the state high court noted that the purpose of the state's UM statute is to offer insureds injured by uninsured motorists the same protection that is available for insureds injured by insured motorists. The court found the consent to sue clause here dilutes, conditions, and limits the statutorily mandated coverage and, thus, is void as against public policy. The clause requires an insured to expend additional resources to undertake a second proceeding to prove liability and damages if an insurer does not consent to be bound by the tort judgment against the uninsured motorist, the court said.

Moreover, the court ruled that an arbitration clause relating to UM coverage is valid and enforceable. The right to arbitrate may be waived, however, if an insurer has notice of an action brought by its insured against an uninsured motorist but fails to intervene. Here, the court found State Farm had waived its right to arbitrate because it had been notified repeatedly of plaintiffs' action but refused to assert a demand for arbitration.

Consequently, the court remanded.

Plaintiffs' Counsel: *Donald L. McBee, Grand Junction, Colo. Steven Taffet, Boulder, Colo.

Amicus Curiae Counsel:

Bradley A. Levin, Denver, Colo.