REVERSED AND REMANDED and Opinion Filed November 12, 2019




                                                         S
                                          Court of Appeals
                                                             In The


                                   Fifth District of Texas at Dallas
                                                       No. 05-18-00969-CV

                                         CURTIS DAVIS, Appellant
                                                  V.
                                     STATE FARM LLOYDS, INC., Appellee

                               On Appeal from the 416th Judicial District Court
                                            Collin County, Texas
                                   Trial Court Cause No. 416-04980-2017


                                         MEMORANDUM OPINION
                                Before Justices Whitehill, Schenck, and Rosenberg1
                                           Opinion by Justice Whitehill

          Appellant Curtis Davis sued his insurance carrier, appellee State Farm Lloyds, Inc., for

underinsured motorist (UIM) benefits. His policy excluded UIM coverage if he settled his claim

against an underinsured driver without State Farm’s written consent, and State Farm won summary

judgment based on evidence that Davis did just that. Davis appealed, and the pivotal questions

before us are (i) was State Farm required to prove it was prejudiced by Davis’s settlement and, if

so, (ii) did State Farm conclusively prove prejudice? We answer the first question yes and the

second question no, and we therefore reverse the summary judgment.




   1
       The Hon. Barbara Rosenberg, Justice, Assigned
                                                          I. BACKGROUND

A.         Facts

           We draw the facts from the pleadings and the summary judgment evidence as appropriate.

           In August 2013, Davis was in a two-vehicle traffic accident in which he and Jose Manuel

Vicencio-Hernandez were the drivers. At that time, Davis was covered by a State Farm insurance

policy. Vicencio-Hernandez was underinsured, and Davis notified State Farm that he anticipated

presenting a UIM benefits claim.

           Davis’s policy did not provide UIM coverage if he “settles the claim without [State Farm’s]

written consent.”

           In June 2014, State Farm sent Davis a letter saying among other things that

                     Davis’s claim was transferred to State Farm’s Subrogation services and that State
                      Farm would attempt to recover its payments to Davis from whoever was
                      responsible for his loss.

                     Davis should tell State Farm if he was represented by an attorney so it could
                      communicate with that lawyer.

                     Davis should not sign any release or accept any payments that might affect State
                      Farm’s interests in recovering from responsible parties sums that State Farm paid
                      Davis for his losses.

           Other evidence showed that on or about January 13, 2016, another insurance company sent

to Bill Kennedy (apparently Davis’s lawyer) settlement checks totaling $30,000 and a release.

           Although the record does not show how State Farm learned of that settlement, the next day,

State Farm transmitted a letter to “Nnk Legal Group” (apparently Kennedy’s law firm) that Davis’s

insurance policy required him to secure State Farm’s written consent to settle with any potentially

liable person.2 The letter also said that failure to obtain State Farm’s consent might forfeit Davis’s

UIM coverage.



      2
        This letter bears the same addressee’s address as the prior day’s settlement transmittal letter and Mr. Kennedy’s address on the original
petition he filed for Davis.

                                                                     –2–
       Nevertheless, Davis subsequently signed a release of his claim against Vicencio-

Hernandez. Davis testified in a deposition that he never got permission from State Farm to settle

his claim against Vicencio-Hernandez and his insurer.

B.     Procedural History

       Davis sued State Farm, asserting claims for UIM benefits, contract breach, Insurance Code

violations, and a declaration of his rights and duties under the policy.

       State Farm answered and moved for summary judgment based on one ground: Davis’s

settlement without State Farm’s consent triggered the policy exclusion and entitled State Farm to

a take-nothing summary judgment.

       Davis’s response argued that the trial court should deny State Farm’s motion because State

Farm had not proved that Davis’s settlement prejudiced it.

       The trial court granted State Farm’s motion, and Davis timely appealed.

                                           II. ANALYSIS

       Davis’s sole issue argues that the summary judgment is erroneous because State Farm

adduced no evidence of prejudice as Texas law requires. We agree.

A.     Standard of Review

       We review a summary judgment de novo. Knopf v. Gray, 545 S.W.3d 542, 545 (Tex.

2018) (per curiam).

       State Farm’s motion was a traditional motion, so its burden was to conclusively negate an

element of Davis’s claims or conclusively establish every element of an affirmative defense. See

Durham v. Children’s Med. Ctr. of Dallas, 488 S.W.3d 485, 489 (Tex. App.—Dallas 2016, pet.

denied). We take evidence favorable to the nonmovant as true, and we indulge every reasonable

inference and resolve every doubt in the nonmovant’s favor. Dallas Morning News, Inc. v. Tatum,

554 S.W.3d 614, 624 (Tex. 2018).


                                                –3–
B.         Was State Farm obliged to conclusively prove that Davis’s settlement prejudiced it?

           Yes, according to Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691 (Tex. 1994).

           The Hernandez case addressed the effect of a UIM insured’s violation of a consent-to-settle

clause.3 The court held that such a violation should be analyzed under the rule that a contracting

party’s prior material breach discharges or excuses the other party from performing. Id. at 692.

The court further held that an insured’s breach of the consent-to-settle clause is material if it

extinguishes a valuable subrogation right.                              Id. at 693.            Conversely, if “any extinguished

subrogation right has no value,” the insurer is not prejudiced and the insured’s breach is not

material. Id. Finally, the insurer must show that it has been prejudiced by the insured’s settlement

without consent.4 Id. at 692.

           In Hernandez, the insured’s suit for UIM benefits was tried to the bench, and the parties

stipulated that the insurer had not incurred any financial loss from the insured’s settlement with

and release of the underinsured motorist. Id. The supreme court held that the stipulation

established the absence of prejudice and that the trial court therefore properly rendered judgment

for the insured. Id. at 694.

           Thus, Hernandez establishes that, in the UIM context, an insured’s failure to comply with

a consent-to-settlement clause is treated as a potential prior material breach. See generally Tarron

Gartner-Ilai & Whitney Warren, “Dueling Canons” Texas Supreme Court’s Continued Debate

Over the Material Breach Rule, 13 J. TEX. INS. L. 33, 35–37 (2015) (discussing prior material

breach rule as applied in various Texas Supreme Court insurance cases). Prior material breach is




      3
        The policy at issue in Hernandez provided, “This insurance does not apply . . . to [damages] with respect to which the insured . . . shall,
without written consent of the company, make any settlement with any person or organization who may be legally liable therefor[.]” 875 S.W.2d
at 692 n.1. No one argues that the clause in Davis’s policy is materially different from the Hernandez consent-to-settlement clause, and we perceive
no material difference.
      4
        This is apparently the majority rule: “The vast majority of courts considering similar notice-of-settlement or consent-to-settle clauses have
held that the insurer has the burden of establishing that an unauthorized settlement had an actual adverse effect on the insurer’s interests.” Hasper
v. Ctr, Mut. Ins. Co., 723 N.W.2d 409, 413 (N.D. 2006).

                                                                       –4–
an affirmative defense. 701 Katy Bldg., L.P. v. John Wheat Gibson, P.C., No. 05-16-00193-CV,

2017 WL 3634335, at *5 (Tex. App.—Dallas Aug. 24, 2017, pet. denied) (mem. op.); see also

Hernandez, 875 S.W.2d at 692 (insurer must show prejudice). Thus, State Farm had the burden

of conclusively proving that Davis’s settlement prejudiced State Farm and thus constituted a prior

material breach discharging State Farm’s duty to perform. See Durham, 488 S.W.3d at 489

(summary judgment movant relying on affirmative defense must conclusively prove every element

of the defense).

       The Eastland Court of Appeals applied these principles to scanty summary judgment

evidence in Elwess v. Farm Bureau County Mutual Insurance Co. of Texas, No. 11-12-00339-CV,

2014 WL 6755662 (Tex. App.—Eastland Nov. 26, 2014, no pet.) (mem. op.). In that case, the

insured (Elwess) settled with an allegedly underinsured motorist without his insurer’s consent.

Elwess then sued his insurer for UIM benefits, and the insurer won summary judgment based in

part on Elwess’s settlement without consent. The court of appeals reversed, holding that the

insurer’s evidence was too weak to conclusively establish prejudice. Id. at *2. The insurer’s only

evidence of prejudice was a police report that said the other motorist had another insurance policy

with a named insurance company. The court of appeals held that the police report did not

conclusively establish prejudice because there was no “competent summary judgment evidence to

show that the policy actually existed, that the policy was in effect at the time of the accident, and

that the policy provided coverage under the circumstances.” Id.; see also Davis v. Allstate Ins.

Co., 945 S.W.2d 844, 846 (Tex. App.—Houston [1st Dist.] 1997, no pet.) (reversing take-nothing

summary judgment against UIM insured who settled without consent because evidence raised fact

issue as to prejudice).

       State Farm makes several arguments in response. First, it states that the supreme court

enforced a UIM consent-to-settlement clause in Guaranty County Mutual Insurance Co. v. Kline,

                                                –5–
845 S.W.2d 810, 811 (Tex. 1992) (per curiam). However, Hernandez expressly acknowledged

Kline’s holding just before holding that the clause is unenforceable unless the insurer shows

prejudice. 875 S.W.2d at 692; cf. id. at 694 (Enoch, J., dissenting) (arguing that the Hernandez

majority opinion was inconsistent with Kline). To the extent Kline held that the insurer can enforce

the clause without proving prejudice, Hernandez overruled it.

       Next, State Farm cites several liability insurance cases for the premise that a complete

failure of notice to the insurer establishes prejudice as a matter of law. See Nat’l Union Fire Ins.

Co. v. Crocker, 246 S.W.3d 603, 604–05 (Tex. 2008) (additional insured never notified his liability

insurer of suit against him); Liberty Mut. Ins. Co. v. Cruz, 883 S.W.2d 164, 165–66 (Tex. 1993)

(per curiam) (insured never notified its liability insurer of suit against it); Jenkins v. State & Cty.

Mut. Fire Ins. Co., 287 S.W.3d 891, 899 (Tex. App.—Fort Worth 2009, pet. denied) (allegedly

insured individual never notified liability insurer of suit against him); Md. Cas. Co. v. Am. Home

Assur. Co., 277 S.W.3d 107, 109 (Tex. App.—Houston [1st Dist.] 2009, pet. dism’d by agr.)

(alleged insured never notified liability insurer of suit against it); Crocker v. Nat’l Union Fire Ins.

Co. of Pittsburgh, PA, 526 F.3d 240 (5th Cir. 2008) (per curiam); Motiva Enters., LLC v. St. Paul

Fire & Marine Ins. Co., 445 F.3d 381, 382 (5th Cir. 2006) (insured settled claim against it without

notice to liability insurer); see also PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 631 (Tex.

2008) (insured gave late notice of claim to liability insurer).

       We are unpersuaded by State Farm’s argument because its cases are distinguishable—they

involve a different kind of insurance (liability insurance, not UIM first-party coverage) and

different policy provisions (clauses requiring the insured to give notice of a claim or suit rather

than to obtain consent to a settlement).

       Moreover, State Farm’s cases involve a different kind of prejudice from that involved in

UIM cases. When an insured doesn’t give its liability insurer notice of a claim before the insured

                                                 –6–
suffers an adverse judgment or enters a settlement, courts have held that the insurer is prejudiced

as a matter of law because the insurer is wholly denied its ability to defend the lawsuit or participate

in the settlement. See Liberty Mut. Ins. Co., 883 S.W.2d at 165–66; Md. Cas. Co., 277 S.W.3d at

117; Motiva Enters., 445 F.3d at 386.

           On the other hand, the UIM context involves a different kind of prejudice—loss of a

possibly valuable subrogation right rather than loss of a chance to defend against liability. See

Hernandez, 875 S.W.2d at 693. And Hernandez expressly places the burden on the insurer to

show that it has been prejudiced by the insured’s failure to obtain consent to the settlement, 875

S.W.2d at 692, which necessarily implies that the mere fact of an unconsented settlement isn’t

enough. Because Hernandez is precisely on point and the supreme court has never overruled it,

we follow it rather than the liability insurance cases that State Farm cites.

           Finally, at oral argument State Farm urged that Greene v. Farmers Insurance Exchange,

446 S.W.3d 761 (Tex. 2014), supports its position. Greene was a first-party insurance case, but

its similarity to UIM cases ends there.                           The question presented in Greene was whether a

homeowners insurer was required to prove prejudice to defeat a fire damage claim if (i) the policy

provided that coverage would be suspended sixty days after the house became vacant and (ii) the

insurer proved that the homeowner moved out of the house more than sixty days before the loss.

Id. at 762–63. The supreme court held that the insurer was not required to prove prejudice to avoid

coverage, and distinguished Hernandez because the Hernandez insured breached the policy by

settling without the insurer’s consent but the Greene insured did not breach the policy by moving

out of the house. Id. at 767–69. The same facts that distinguished Hernandez from Greene also

distinguish the instant case from Greene. Thus, Hernandez remains controlling in this case.5


     5
       We note that the Fifth Circuit has held in an unpublished opinion that a UIM insurer was entitled to summary judgment based on nothing
more than evidence that its insured settled with the underinsured motorist without giving his insurer notice or obtaining its consent. Gonzalez v.
Philadelphia Indem. Ins. Co., 663 F. App’x 302, 305–06 (5th Cir. 2016) (applying Texas law). The UIM endorsement in Gonzalez was different


                                                                      –7–
           Accordingly, we hold that (i) State Farm was required to conclusively prove it was

prejudiced by Davis’s unconsented-to settlement with Vicencio-Hernandez and (ii) State Farm’s

evidence that Davis settled without State Farm’s consent, standing alone, was insufficient to carry

that burden.

C.         Did State Farm conclusively prove that Davis’s settlement prejudiced it?

           No. State Farm adduced no evidence that a subrogation right against Vincencio-Hernandez

would have had some value or that Davis’s settlement prejudiced State Farm in any other way.

           State Farm does not argue that it produced any evidence that Vicencio-Hernandez had

assets available to satisfy a subrogation judgment. Rather, it argues that Davis’s settlement caused

prejudice because State Farm “was prevented from doing anything or conducting any investigation

to protect its interest under the consent to settle provision.” State Farm complains that Davis’s

settlement “eliminated State Farm’s ability to conduct a thorough financial check of [Vicencio-

Hernandez]” and asserts that, after so much time has passed, it will be difficult for State Farm to

locate Vicencio-Hernandez and to discover his assets without the aid of civil process.

           We reject State Farm’s argument for two reasons. First, Hernandez did not recognize

difficulty in proving the value of a potential subrogation claim as sufficient prejudice. On the

contrary, Hernandez indicates that the only kind of prejudice sufficient to make a consent-to-

settlement breach material is loss of a valuable subrogation right:

           In the context of an underinsured motorist claim, there may be instances when an
           insured’s settlement without the insurer’s consent prevents the insurer from
           receiving the anticipated benefit from the insurance contract; specifically, the
           settlement may extinguish a valuable subrogation right.

875 S.W.2d at 693 (emphasis added). If the allegedly underinsured motorist has no assets available

to satisfy, even in part, a subrogation judgment, the subrogation right has no value. See id. at 693–



from the one involved in this case, so it may be distinguishable. See id. at 304. But to the extent Gonzalez conflicts with our opinion, we believe
it interpreted Texas law incorrectly.

                                                                      –8–
94. Although proving that the underinsured motorist was not judgment proof might be difficult in

some cases, Hernandez doesn’t suggest this difficulty can amount to prejudice sufficient to make

a consent-to-settlement clause breach material. We find no post-Hernandez case adopting such a

premise, and we decline to do so here.

       Second, even assuming Hernandez’s prejudice requirement can be satisfied with proof that

an insured’s settlement has made it difficult to prove that the insurer’s subrogation right was

valuable, State Farm adduced no such proof here. As the summary judgment movant, State Farm

bore the burden to conclusively prove prejudice. See Durham, 488 S.W.3d at 489 (movant relying

on affirmative defense must conclusively prove every element of the defense). But it produced no

evidence that it ever tried to locate Vicencio-Hernandez or investigate his assets, much less that

Davis’s settlement caused State Farm actual difficulty in this regard. Thus, even assuming that

prejudice can take the form of difficulty in establishing that a lost subrogation right was valuable,

State Farm has not shown such prejudice in this case.

                                         III. CONCLUSION

       We sustain Davis’s sole issue on appeal, reverse the summary judgment, and remand the

case for further proceedings consistent with this opinion.




                                                   /Bill Whitehill/
                                                   BILL WHITEHILL
                                                   JUSTICE


180969F.P05




                                                –9–
                                        S
                               Court of Appeals
                        Fifth District of Texas at Dallas
                                      JUDGMENT

 CURTIS DAVIS, Appellant                            On Appeal from the 416th Judicial District
                                                    Court, Collin County, Texas
 No. 05-18-00969-CV         V.                      Trial Court Cause No. 416-04980-2017.
                                                    Opinion delivered by Justice Whitehill.
 STATE FARM LLOYDS, INC., Appellee                  Justices Schenck and Rosenberg
                                                    participating.

       In accordance with this Court’s opinion of this date, the judgment of the trial court is
REVERSED and this cause is REMANDED to the trial court for further proceedings consistent
with the opinion.

       It is ORDERED that appellant Curtis Davis recover his costs of this appeal from
appellee State Farm Lloyds, Inc.


Judgment entered November 12, 2019




                                             –10–
