State Farm v. Brown – Insurer Fights Punitive Damages in Accident Claim

Plaintiffs in the recent Alabama Court of Civil Appeals case of State Farm Mutual Automobile Insurance v. Brown were seriously injured in a car accident with an at-fault driver who was underinsured, meaning he lacked enough insurance to cover all of their losses.
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Fortunately, plaintiffs had an underinsured motorist (UIM) policy with defendant insurer. Plaintiffs subsequently sued the at-fault driver for negligence, and also named their own insurer as a defendant in order to recover UIM benefits.

The liability insurer of the at-fault driver subsequently offered to settle the case for $200,000, which represented the driver’s policy limits. Plaintiffs informed their own insurer of the claim. The insurer then took action under a precedent set by the Alabama Supreme Court in 1991 with Lambert v. State Farm.

In Lambert, the supreme court ruled that a UIM insurance company can prevent the release of a tortfeasor from liability (which is what would happen if the settlement agreement was accepted) by advancing to its insured an amount equal to the tortfeasor’s settlement offer. The reason to do this would be to protect the insurance company’s right to subrogation, or recovering an offset from the other insurance company.