explaining that a notice requirement "normally operates to benefit the insured as well as the insurance company" because the insurance company, through expertise and resources unavailable to the average insured, can gain "full information about the circumstances of the case" which it can use to "proceed to disposition"
How later courts described this case
- explaining that a notice requirement "normally operates to benefit the insured as well as the insurance company" because the insurance company, through expertise and resources unavailable to the average insured, can gain "full information about the circumstances of the case" which it can use to "proceed to disposition"
- reasoning that "[a]llowing an insurance company, which has collected full premiums for coverage, to refuse compensation to an accident victim or insured on the ground of late notice, where it is not shown timely notice would have put the company in a more favorable position, is unduly severe and inequitable"
- stating that “[allowing an insurance company, which has collected full premiums for coverage, to refuse compensation to an accident victim or insured on the ground of late notice, where it is not shown timely notice would have put the company in a more favorable position, is unduly severe and inequitable”
- concluding that “[wjhere the insurance company’s interests have not been harmed by a late notice ... the reason behind the notice condition in the policy is lacking, and it follows neither logic nor fairness to relieve the insurance company of its obligations under the policy”
Written by the judges who cited it.
Distinguished
Distinguished by State Farm Mutual Automobile Insurance v. Foster, 585 Pa. 529 (2005)
The Superior Court did not err in concluding that Brakeman was inapplicable, and the denial of uninsured coverage to Foster was proper.
Distinguished by Lloyd v. Pennsylvania Medical Professional Liability Catastrophe Loss Fund, 573 Pa. 114 (2003)
However, Brakeman is inapposite to the case sub judice.
Distinguished by TPLC, Inc. v. United National Insurance, 44 F.3d 1484 (1995)
As an alternative ground for his ruling for the insurer, the judge in Clemente said that his ruling was supported by the character of the policy, there a “claims-made” policy; the judge noted that some courts have held that the Brakeman prejudice requirement is inapplicable to claims-made policies, and he applied that view as an alternative basis for his ruling. 791 F.Supp. at 121-22.
Distinguished by Clinical Perfusionists, Inc. v. St. Paul Fire & Marine Insurance, 336 Md. 685 (1994)
Co. where we noted that the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, concluded that the Brakeman analysis was inapplicable to the claims made policy there involved.
The opinion
ROBERTS, Justice,
concurring and dissenting.
Appellant, Potomac Insurance Company (Potomac), insured a vehicle owned by Edward J. Baker. Mr. Baker’s son, David, was involved in a motor vehicle accident in which appellee, Allan E. Brakeman, was injured. The accident occurred on March 3, 1970, but Potomac did not receive written notice of the accident until October 3, 1970, and refused to defend its insured in the action brought by Brakeman because of late notice of the claim. *79 Brakeman and the insured reached a settlement after the jury was sworn but before evidence was presented. The court entered a judgment reflecting the settlement of the parties for the face amount of the policy, $10,000. Brakeman then brought this action against Potomac as a third party beneficiary of the policy for the amount of the judgment against the insured. The jury returned a verdict of $10,000 against Potomac but the trial court granted judgment n. o. v. on the ground that late notice by the insured relieved Potomac of any obligation.
I agree with the majority that the insured’s failure to comply with the notice provisions of the insurance policy should not, by itself, relieve an insurer of its obligations under a liability insurance policy. An insurance carrier should be required to prove that the failure to comply with the notice provisions of the policy prejudiced its position. Because this Court announces a new rule of decision, I also agree that this case should be remanded to the trial court to afford Potomac an opportunity to establish prejudice. Unlike the majority, however, I am not persuaded that Potomac’s alleged reliance on past case law justifies allowing Potomac a second opportunity to litigate its insured’s liability or the amount of Brakeman’s damages.
Today’s decision that insurers must prove prejudice to be relieved of their obligation to defend an insured who fails to give timely notice is consistent with the clear trend of the law. 1 Balancing the equities between the insurance carrier which refused to defend its insured, al *80 beit in reliance on prior law, and the injured party, who settled with the insured and was successful in persuading this Court to adopt a new rule, the injured party should be given the benefit of our decision. 2 To permit Potomac to litigate the issues of its insured’s liability and Brakeman’s damages is unfair to both the insured and Brakeman. After Potomac refused to defend against Brakeman’s claim, the insured was entitled to settle; by breaching its promise to defend, Potomac lost its right to control the suit. The purpose of an insurance policy is to ensure that if claims are brought against the insured, the insurer will defend and pay the amount of a settlement or judgment. If the insured’s late notice did not relieve Potomac of its obligations under the insurance policy, it is unfair to give Potomac a second opportunity to absolve itself of liability. Allowing Potomac to litigate liability and damages is also unfair to Brakeman. By settling with the insured, Brakeman chose the certainty of settling for the amount of the policy and sacrificed the possibility of a higher verdict against the insured. Moreover, to penalize both the insured and the injured party for a good faith settlement because the insurance company relied on prior cases is contrary to public policy which favors good faith settlements of claims. 3
*81 However, Potomac should not be bound by the settlement between the insured and Brakeman unless it was made in good faith. E. g. Traders & Gen. Ins. Co. v. Rudco Oil & Gas Co., 129 F.2d 621 (10th Cir. 1942). Thus, I would remand to determine (1) whether Potomac suffered prejudice because of the late notice of Brakeman’s claim, and (2) whether the settlement was made in good faith.
Because I do not believe that a new trial on liability and damages is warranted, I find it necessary to address Potomac’s claim that Brakeman cannot recover from Potomac because the insured did not comply with the “actual trial” provision of the insurance policy. The “actual trial” provision provides:
“No action shall lie against the company unless, as a condition precedent thereto, the insured shall have fully complied with all of the terms of this policy, nor until the amount of the insured’s obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company.”
Potomac contends that the insured settled the claim without actual trial or Potomac’s consent and therefore Brakeman, as a third party beneficiary to the policy, is precluded from maintaining an action against Potomac. I do not agree.
If on remand, Potomac fails to prove that it was prejudiced by the late notice, Potomac has unjustifiably refused to defend its insured and has thereby breached the insurance contract. See Springfield v. Indemnity Ins. Co. of N. A., 361 Pa. 461 , 64 A.2d 761 (1949); Conroy v. Commercial Cas. Ins. Co., 292 Pa. 219 , 140 A. 905 (1928); accord, American Mut. Liability Ins. Co. v. Buckley & Co., 117 F.2d 845 (3d Cir. 1941); Zeitz v. Zurich Gen. Accident and Liability Ins. Co., 165 Pa.Super. *82 295 , 67 A .2d 742 (1949); Conrad v. Duffin, 158 Pa.Super. 305 , 44 A.2d 770 (1945); Kelly v. Kass, 154 Pa.Super. 267 , 35 A.2d 531 (1944); see generally, 49 A.L.R.2d 694 (1956). Where an insurance carrier breaches its insurance contract by unjustifiably refusing to defend its insured, it cannot assert as a defense to an action by the insured or the injured party that the insured did not comply with the “actual trial” provisions of the insurance contract. St. Louis Dressed Beef v. Maryland Cas. Co., 201 U.S. 173 , 26 S.Ct. 400 , 50 L.Ed. 712 (1926); Traders and Gen. Ins. Co. v. Rudco Oil and Gas Co., 129 F.2d 621 (10th Cir. 1942); Hardware Mut. Cas. Co. v. Hilderbrandt, 119 F.2d 291 (10th Cir. 1941); Antichi v. New York Indem. Co., 126 Cal.App. 284 , 14 P.2d 598 (1932); Roberts v. Fireman’s Insurance Co., 376 Pa. 99 , 101 A.2d 747 (1954); Murphy and Co. v. Manufacturers’ Cas. Co., 89 Pa.Super. 281 (1926); Pioneer Cas. Co. v. Jefferson, 456 S.W.2d 410 (Tex.Civ.App.1970); American Fidelity & Cas. Co. v. Williams, 34 S.W.2d 396 (Tex. Civ.App. 1930); 48 A.L.R.2d 1082 (1973).
In the seminal case of St. Louis Dressed Beef v. Maryland Cas. Co., supra, the United States Supreme Court held that an insurance company which unjustifiably refuses to defend its insured cannot rely on an “actual trial” provision in the insurance policy as a defense to a suit by the insured to recover the amount of the settlement between the injured party and the insured. Justice Holmes noted:
“The . . . [insurer], by its refusal, cut at the very root of the mutual obligation, and put an end to its right to demand further compliance with the supposed term of the contract . . . . The . [insurer], by its abdication, put . . . [the insured] in its place, with all its rights.”
201 U.S. at 181 , 26 S.Ct. at 403 .
*83 In Murphy & Co. v. Manufacturers’ Cas. Co., 89 Pa.Super. 281 (1926), 4 cited with approval in Roberts v. Fireman’s Ins. Co., 376 Pa. 99 , 101 A.2d 747 (1954), the insurance company refused to defend its insured and denied liability under the policy. The insured settled with the injured party and brought suit against the insurer. The insurer asserted that its insured could not recover because it had not complied with the “actual trial” provisions of the policy. The court held, however, that this compliance with this provision was predicated upon the insurer’s obligation to defend the insured.
“[Wjhen the company unequivocally repudiated a liability under the policy, it was in no position to insist that the insured must do nothing until an action was brought against it and then press the case to final judgment, instead of making settlement of the loss advantageous to both insurer and insured. The insurance company’s initial repudiation of the contract in denying liability under the policy relieved the insured of strict performance of those provisions intended for the protection of the insurer only if it recognized the *84 liability and assumed charge of the matters relating to the claim.”
Id. at 286.
Therefore if Potomac breached its contract to its insured, it cannot assert as a defense that its insured did not comply with the “actual trial” provision of the insurance policy. 5
Moreover, if Potomac breached its insurance contract, it should be obligated to pay the amount of the settlement and should not be allowed a second opportunity to litigate its insured’s liability or Brakeman’s damages. See American Mut. Liability Ins. Co. v. Buckley & Co., supra; Noreika v. Pennsylvania Indem. Corp., 135 Pa. Super. 474 , 5 A.2d 619 (1939); Murphy & Co. v. Manufacturers’ Cas. Co., supra; 49 A.L.R.2d 694 (1956). However, Potomac should only be bound by the settlement if it was made in good faith. E. g. Traders & Gen. Ins. Co. v. Rudco Oil and Gas Co., supra; Hardware Mut. Cas. Co. v. Hilderbrandt, supra; Jones v. Southern Surety Co., 210 Iowa 61 , 230 N.W. 381 (1929); Butler Bros. v. American Fidelity Co., 120 Minn. 157 , 139 N.W. 355 (1913); W. I. Anderson & Co. v. American Mut. Liability Ins. Co., 211 N.C. 23 , 188 S.E. 642 (1936); United States Fidelity & Guaranty Co. v. Pressler, 185 S.W. 326 (Tex.Civ.App.1916); 49 A.L.R.2d 694 (1956); but see Martinique Shoes, Inc. v. New York Progressive Wood *85 Heel Co., 207 Pa.Super. 404 , 217 A.2d 781 (1966); Murphy & Co. v. Manufacturers’ Cas. Co., supra (dictum).
In Butler Bros. v. American Fidelity Co., 120 Minn. 157, 169 , 139 N.W. 355, 359-60 (1913), the court held that a settlement between the insured and the injured party was presumptive evidence of the liability of the insured and the amount of damages. The court noted:
“Though there are decisions that seem to support the view that the insured, if he settles the case, takes his chances of being able to prove, in an action to recover of the insurer, that there was a liability imposed by law on the insured, and that the amount paid was not excessive, this view does not appeal to our idea of equity or law. In effect it would preclude the insured from in good faith compromising an action against him when the insurer has refused to settle or defend it, contrary to its agreement. The insured, in order to protect himself, must permit the issue to be tried, and a judgment rendered, or must take his chances of being able to prove, in the action against the insurer, that he was in fact liable in the original action. This would be an ungrateful and often a difficult task. It would mean that the insured must establish his own negligence. Nor does it seem right that a settlement made in good faith by the insured, when the result of the case is in doubt, though it be to the advantage of both the insured and the insurer, should relieve the insurer from liability for its breach of contract, unless the insured proves affirmatively that it was liable in the case settled. If there was bad faith, if the action at the time it is compromised appears clearly to be without merit, so that the payment of any sum is a mere gratuity, we can readily concede that the amount paid cannot be recovered of the insurer. But where the insurer has agreed to settle or defend all claims within the policy . . . and has refused to do either, thus breaching its contract, and compelling the *86 insured to defend the action, we hold that the insured may in good faith make a settlement of the action, and may recover the amount paid on such settlement of the insurer, unless it is made to appear affirmatively that there could have been no recovery had the action been tried.”
In Traders & Gen. Ins. Co. v. Rudco Oil and Gas Co., 129 F.2d 621, 626 (10th Cir. 1942), the United States Court of Appeals for the Tenth Circuit observed:
“If . ... the insurer denies liability for the asserted claims and refuses to defend in the name of the assured or to acknowledge any duty or obligation' arising under the contract of insurance, the assured is released from the covenant against settlement or interference and may assume control of the litigation, defend in his own name, or effect a reasonable and prudent settlement of the claims or suits, and thereafter assert his rights under the policy; in which event, his right to recover against the insurer is generally measured by the coverage of the policy and the reasonableness of the settlement.” (citations omitted) 6
After an insurance carrier has unjustifiably, refused to defend an insured, the insured should not have to risk a full trial. “Why should the assured be required to wait until after the storm before seeking refuge.” Trader & Gen. Ins. Co. v. Rudco Oil and Gas Co., 129 F.2d 621, 627 (10th Cir. 1942). The insurer’s breach releases the insured from the “actual trial” requirement, and he should *87 be permitted to effect a good faith settlement. I see no reason this principle should not apply because the insurance company’s failure to defend would have been excused under prior cases. The insured should not be forced to litigate the issues of liability and damages after he has settled in good faith.
Although the issues of the insured’s liability and the injured party’s damages may be relevant to the determination whether a settlement was made in good faith, they are not controlling. If, for example, there was some doubt as to the insured’s liability, but a risk of substantial damages, the insured should not be penalized for a reasonable settlement. The standard is not whether the insured or the injured party can establish liability in the action against the insurer, but whether in the circumstances of the case, it was reasonable to settle the claim. E. g. Butler Bros. v. American Fidelity Co., supra. Since there was no reason to determine whether the settlement between Brakeman and the insured was made in good faith, I would remand to afford the parties an opportunity to present evidence on this issue.
I would therefore remand to determine (1) whether Potomac was prejudiced by the late notice and (2) whether the settlement was reached in good faith. Unlike the majority, I would not allow Potomac to directly litigate the issues of its insured’s liability and the amount of Brakeman’s damages as long as the settlement was entered into in good faith. A limited remand is more consonant with the public policy of encouraging settlements and avoiding unnecessary litigation.
. E. g., State Farm Mutual Ins. Co. v. Murnion, 439 F.2d 945 (9th Cir. 1971); Lindus v. Northern Ins. Co., 103 Ariz. 160 , 438 P.2d 311 (1968); State Farm Mutual Automobile Ins. Co. v. Johnson, 320 A.2d 345 (Del.Super.Ct.1974); Cooper v. Government Employees Ins. Co., 51 N.J. 86 , 237 A.2d 870 (1968); Keith v. Lutzweit, 106 Ohio App. 123 , 153 N.E.2d 695 (1957); Factory Mutual Liability Ins. Co. v. Kennedy, 256 S.C. 376 , 182 S.E.2d 727 (1971); Oregon Automobile Insurance Co. v. Salzberg, 85 Wash.2d 372 , 535 P.2d 816 (1975); Note, The Materiality of Prejudice to the Insurer as a Result of the Insured’s Failure to Give Timely Notice, 74 Dick.L.Rev, 260 (1970).
. As Judge Cercone of the Pennsylvania Superior Court noted in his concurring opinion in this case:
“The result also comports with the everstrengthening public policy that innocent victims of automobile accidents should not go uncompensated unless strong countervailing reasons exist therefor.”
Brakeman v. Potomac Insurance Company, 236 Pa.Super. 320, 329, 333 , 344 A.2d 555, 559, 561 (1975) (concurring opinion of Cercone, J., joined by Hoffman and Spaeth, JJ.).
. The law has long favored and encouraged settlements by parties. Our overburdened judicial system could hardly function without the settlement of disputes without trials. Efforts or practices which discourage good faith settlements are contrary to public policy. It is unsound to penalize the insured and the injured party for settling in good faith after the insurer has refused to defend.
. Appellants assert that Murphy is inapposite because the insurance company did not dispute its insured’s liability or the amount of the settlement. There is dictum in Murphy to the effect that an insurance company is not absolutely bound by a settlement between its insured and the injured party. 89 Pa.Super. at 285 . (“The insurance company was not absolutely bound by the settlement; it could have defended on the ground that [the insured party] had no enforceable claim against [the insured], or that the amount was excessive.”). However, this dictum has no effect on the court’s holding that an insurance company waives its rights to insist that an insured comply with the “actual trial” provision of the policy after the insurer has unjustifiably refused to defend the insured. As discussed infra, an insurance carrier is not absolutely bound by the settlement between the insured and the injured party. In order to bind the insurer, the settlement must have been made in good faith. E. g. Butler Bros. v. American Fidelity Co., 120 Minn. 157 , 139 N.W. 355 (1913). The issues whether the insured was liable and the amount of the damages are relevant to this determination, although these issues are not directly open to litigation in the action by the insured or the injured party against the insurance company.
. I see no reason to distinguish between suits by the insured and suits by the injured party. In Wright v. Allstate Insurance Co., 285 S.W.2d 376 (Tex.Civ.App.1955), there is dictum to the effect that waiver of the conditions of the insurance policy after the insurer has breached the insurance contract is “personal to the insured.” I do not agree. I see no basis to differentiate between the insured and the injured party where the insurer has breached its duty to defend the insured. In light of the public policy that innocent victims should not go uncompensated without good reason and that good faith settlements should be encouraged, I would permit the injured party to maintain an- action against the insurer whenever the insured could maintain such an action. As long as the settlement between the insured and the injured party is entered into in good faith, I would permit the injured party to recover against the insurance carrier.
. Accord, Jones v. Southern Surety Co., 210 Iowa 61, 69 , 230 N. W. 381, 385-86 (1929)
“By so violating its duty and waiving its right to defend, [the insurer] authorized the insured to conduct the defense in good faith and thereunder in good faith to make such settlement as ordinary or reasonable prudence and caution might dictate to be advisable, and waived the right to demand prosecution of the action to final judgment. Settlement made by the insured in good faith in circumstances not raising an inference of imprudence is presumptive evidence of liability and of the amount thereof.” (citations omitted)