[Cite as Ferrando v. Auto-Owners Mut. Ins. Co., 98 Ohio St.3d 186, 2002-Ohio-7217.]




    FERRANDO ET AL., APPELLANTS, v. AUTO-OWNERS MUTUAL INSURANCE
   COMPANY ET AL.; PERSONAL SERVICE INSURANCE COMPANY, APPELLEE.
   [Cite as Ferrando v. Auto-Owners Mut. Ins. Co., 98 Ohio St.3d 186, 2002-
                                      Ohio-7217.]
Insurance — Underinsured motorist coverage — When insurer’s denial of
        uninsured motorist coverage is premised on insured’s breach of prompt-
        notice provision of insurance policy, insurer is relieved of obligation to
        provide coverage only if it is prejudiced by the delay — When insurer’s
        denial of underinsured motorist coverage is premised on insured’s
        breach of consent-to-settle or other subrogation provision of insurance
        policy, insurer is relieved of obligation to provide coverage only if it is
        prejudiced by the failure to protect its subrogation rights.
(No. 2001-1843 — Submitted October 15, 2002 — Decided December 27, 2002.)
   APPEAL from the Court of Appeals for Ashtabula County, No. 2000-A-0038.
                                 __________________

                               SYLLABUS OF THE COURT
1. When an insurer’s denial of underinsured motorist coverage is premised on the
        insured’s breach of a prompt-notice provision in a policy of insurance, the
        insurer is relieved of the obligation to provide coverage if it is prejudiced
        by the insured’s unreasonable delay in giving notice.               An insured’s
        unreasonable delay in giving notice is presumed prejudicial to the insurer
        absent evidence to the contrary.
2. When an insurer’s denial of underinsured motorist coverage is premised on the
        insured’s breach of a consent-to-settle or other subrogation-related
        provision in a policy of insurance, the insurer is relieved of the obligation
                             SUPREME COURT OF OHIO




       to provide coverage if it is prejudiced by the failure to protect its
       subrogation rights. An insured’s breach of such a provision is presumed
       prejudicial to the insurer absent evidence to the contrary.          (Bogan v.
       Progressive Cas. Ins. Co. [1988], 36 Ohio St.3d 22, 521 N.E.2d 447,
       paragraph four of the syllabus, overruled in part.)
                               __________________

       ALICE ROBIE RESNICK, J.
       {¶1}    This appeal requires us to consider whether a provider of
underinsured or uninsured motorist (“UIM”) coverage may be released from its
obligation to provide coverage due to the failure of a claimant to notify the insurer
of a potential claim prior to settlement with and full release of the tortfeasor who
caused the injury giving rise to the potential claim. The motor vehicle insurance
policy at issue requires that the insurer be given prompt notice of a UIM claim
and requires the consent of the insurer prior to settlement. For the reasons that
follow, we determine that the insurer is released from the obligation to provide
UIM coverage when the insurer is prejudiced by the lack of reasonable notice or
by the insured’s failure to obtain consent to settle prior to the insured’s settlement
with and release of the tortfeasor. We reverse the judgment of the court of
appeals and remand this cause to the trial court for further proceedings.
                                          I
                           Facts and Procedural History
       {¶2}    The facts of this case are basically undisputed. On February 28,
1994, plaintiff-appellant Isler J. Ferrando, an employee of the city of Ashtabula,
was driving a city-owned vehicle in the course of his employment on a public
road when he observed a truck lose part of its load onto the roadway. Ferrando
stopped his vehicle and got out. While Ferrando was clearing the roadway, the
driver of the truck backed up and struck and injured him.




                                          2
                                January Term, 2002




       {¶3}    Ferrando and his wife, plaintiff-appellant Maria Ferrando, sued the
tortfeasor and notified their own insurance carrier, defendant Auto-Owners
Mutual Insurance Company (“Auto-Owners”), of their potential UIM claim. The
parties agree that the tortfeasor had liability insurance with a limit of $12,500. On
April 1, 1997, Auto-Owners gave permission to the Ferrandos to settle with the
tortfeasor for his policy limit of $12,500 and to release him from all claims. They
did so on May 20, 1997.
       {¶4}    The Ferrandos then pursued a UIM claim against Auto-Owners
under the same case number of the suit they had filed against the tortfeasor,
claiming that their damages were in excess of $12,500. During the pursuit of this
claim, it came to light that the city of Ashtabula carried UIM coverage on the
vehicle Ferrando was driving at the time he was injured. This UIM coverage was
part of a motor vehicle insurance policy Ashtabula had with defendant-appellee
Personal Service Insurance Company (“Personal Service”).              When it was
discovered that Personal Service was a provider of UIM coverage under the city’s
policy, Auto-Owners sought to implead Personal Service as a third-party
defendant. The parties agree that that action was dismissed without prejudice by a
stipulation of all involved parties on January 13, 1998.
       {¶5}    On January 12, 1999, the Ferrandos filed a complaint for
declaratory judgment in the Court of Common Pleas of Ashtabula County,
naming Auto-Owners and Personal Service as defendants. The Ferrandos sought
a declaration that they were insureds entitled to UIM payments under each policy.
       {¶6}    All parties moved for summary judgment. Personal Service argued
that the Ferrandos had failed to comply with several provisions in the UIM policy
it had issued to Ashtabula and so should be unable to collect under that policy.
Specifically, Personal Service asserted that it was not notified of the accident until
approximately three and a half years after its occurrence when Auto-Owners
attempted to implead it in the first suit filed by the Ferrandos and that it had no




                                          3
                             SUPREME COURT OF OHIO




knowledge of any accident or any possible claim prior to that time. Personal
Service argued that this delay in notice violated the policy’s requirement of
“prompt notice” of any accident, claim, suit, or loss.
       {¶7}    Furthermore, Personal Service argued that the Ferrandos, by
settling with and releasing the tortfeasor from liability without notifying Personal
Service and without giving it an opportunity to consent to the settlement, had
failed to protect the insurer’s subrogation rights, thereby materially breaching the
policy requirements that the insured obtain the consent of the insurer before
settling any claim and that the insured not impair the subrogation rights of the
insurer.
       {¶8}    In its motion for summary judgment urging the trial court to
declare that Personal Service was the primary provider of UIM coverage, Auto-
Owners argued that notice of the accident to Personal Service was timely under
the circumstances because the Ferrandos notified Personal Service as soon as they
discovered that UIM coverage existed under the city’s policy. Auto-Owners
asserted that such a policy carried by a city normally would not be expected to
include UIM coverage on city vehicles, so that the Ferrandos could not be faulted
for failing to discover the coverage earlier.
       {¶9}    In their motion for summary judgment, the Ferrandos agreed with
Auto-Owners that notice to Personal Service was reasonably given under the facts
of this case and argued that, because Auto-Owners had consented to a settlement
with and release of the tortfeasor, Personal Service would also have consented
and so was not prejudiced by the notice’s timing.
       {¶10} The trial court granted summary judgment to the Ferrandos,
declaring that they were entitled to UIM coverage under both their policy with
Auto-Owners and the city’s policy with Personal Service and that the Ferrandos’
claims for UIM damages would be paid by the two insurers on a pro rata basis. In
deciding that UIM coverage was available under the city’s policy with Personal




                                          4
                                January Term, 2002




Service, the trial court, citing no cases in support of its ruling on this question,
reasoned as follows:
       {¶11} “Personal Service contends that it is not liable to the Plaintiffs due
to their failure to give timely notice of the underinsured claim and failing to
obtain its consent before releasing [the tortfeasor].    It is obvious that Auto-
Owners released [the tortfeasor] from any further liability due to insufficiency of
assets on [the tortfeasor’s] part for any further claim by Plaintiffs or Auto-
Owners. It is equally obvious to the Court that neither Plaintiffs [n]or Auto-
Owners initially knew there was any additional insurance coverage[;] otherwise
Personal Service would have been promptly notified. Under the circumstances of
this case, the Court finds Personal Service was reasonably notified once it became
known that the City of Ashtabula maintained uninsured/underinsured coverage for
its employees. Personal Service is not prejudiced by any late notice regarding this
claim by the Plaintiffs. [The tortfeasor] had insufficient assets for Auto-Owners
to pursue and any action by Personal Service against [the tortfeasor] would result
in it coming up substantially empty handed. Personal Service should not be
allowed to escape its liability because it didn’t waive its right to pursue [a
tortfeasor] without significant assets.”
       {¶12} Personal Service appealed the trial court’s judgment to the Court of
Appeals for Ashtabula County. Auto-Owners did not appeal.
       {¶13} The court of appeals reversed the judgment of the trial court and
entered judgment for Personal Service, finding that UIM coverage was not
available to the Ferrandos under the city’s policy with Personal Service for two
separate reasons.      First, the court of appeals determined that the Ferrandos
materially breached the consent-to-settle provision of that policy when they failed
to notify Personal Service and give it an opportunity to consent prior to their
settlement with and release of the tortfeasor, thereby destroying Personal
Service’s subrogation rights. The court of appeals held that compliance with the




                                           5
                             SUPREME COURT OF OHIO




consent-to-settle provision was a condition to UIM coverage and that it was
irrelevant that the insurer might not have been prejudiced by the settlement and
release.
       {¶14} Second, the court of appeals found that the failure to notify
Personal Service of the accident or claim until three and a half years after the
accident was unreasonable and that the Ferrandos did not rebut the presumption of
prejudice to the insurer that arose from the delay in notice.
       {¶15} The cause is now before this court pursuant to the allowance of a
discretionary appeal.
                                          II
                               The Policy Provisions
       {¶16} The insurance policy the city had with Personal Service at the time
of this accident provided: “In the event of ‘accident’, claim, ‘suit’ or ‘loss’, you
must give us or our authorized representative prompt notice of the ‘accident’ or
‘loss’. Include:
       {¶17} “(1) How, when and where the ‘accident’ or ‘loss’ occurred;
       {¶18} “(2) The ‘insured’s’ name and address; and
       {¶19} “(3) To the extent possible, the names and addresses of any injured
persons and witnesses.”
       {¶20} In addition, if there was an accident, claim, suit, or loss, the policy
required a claimant to “promptly send us copies of the legal papers if a suit is
brought.”
       {¶21} The policy also provided, “This insurance does not apply to: (1)
Any claim settled without our consent.”
       {¶22} The policy also contained a subrogation clause that stated, “If any
person or organization to or for whom we make payment under this Coverage
Form has rights to recover damages from another, those rights are transferred to




                                          6
                                January Term, 2002




us. That person or organization must do everything necessary to secure our rights
and must do nothing after ‘accident’ or ‘loss’ to impair them.”
       {¶23} It is undisputed that Personal Service did not receive notice of the
Ferrandos’ UIM claim until approximately three and a half years after the
accident.   It is also undisputed that Personal Service had no opportunity to
evaluate the Ferrandos’ settlement with and release of the tortfeasor because it
was not notified before the settlement and release took place, so that Personal
Service was unable to exercise the subrogation rights retained by it in the
insurance policy with the city. It is apparent that a breach of several of the
applicable policy provisions may have occurred.           We must consider the
consequences of these possible breaches as we determine whether recovery in this
case under the UIM coverage provided by Personal Service is unavailable as a
matter of law, as the court of appeals held.
       {¶24} Because this case comes to us a result of the trial court’s ruling on
the parties’ summary judgment motions, we review this appeal consistent with the
standards of Civ.R. 56(C). Summary judgment is appropriate when there is no
genuine issue as to any material fact and reasonable minds can reach only one
conclusion, which is adverse to the party against whom the motion is made,
entitling the moving party to judgment as a matter of law. The evidence must be
strongly construed in favor of the nonmoving party.
                                         III
                     Overview of Case Law from Other States
       {¶25} The court of appeals focused on two points in finding that UIM
coverage was not available in the circumstances of this case for two separate
reasons—the Ferrandos’ breach of the prompt-notice provision of the policy and
their breach of the consent-to-settle provision of the policy. Before we consider
existing Ohio law on these questions, it will first be helpful to consider how the
majority of jurisdictions determines the effect that breaches of these policy




                                          7
                             SUPREME COURT OF OHIO




provisions have on the availability of UIM coverage.            There are certain
similarities in the ways most jurisdictions evaluate breaches of both of these types
of provisions. Although this case requires us to devote special attention to those
cases that considered these questions in the context of UIM coverage, other cases
not involving UIM coverage also apply many of the same standards supported by
the same general reasoning and are included in our analysis where appropriate.
       {¶26} The focus in these types of cases, for breach of either of those two
policy provisions, is first on whether the provision is valid.      Second, if the
provision is valid, was it actually breached in the circumstances of the case?
Third, if an actual breach occurred, was the breach a material breach that
precludes coverage under the UIM policy or a technical breach that will not void
coverage under the facts of the case?
       {¶27} It is in how the materiality of the breach is determined that courts
generally differ in their approach. A minority of states—those that follow the
“traditional approach”—find all breaches to be material, with the result being that
in those states a breach of a policy provision (such as a prompt-notice clause) by
an insured seeking UIM coverage automatically relieves the UIM insurer of the
obligation to provide coverage. States that follow the majority view, on the other
hand, now have abandoned this traditional approach in favor of a modern trend
that finds that a breach is material, so as to preclude coverage, only when the
insurer is prejudiced by the breach.
       {¶28} Some courts have looked to Restatement of the Law 2d, Contracts
(1981), Section 241, “Circumstances Significant in Determining Whether a
Failure is Material,” to determine whether a particular breach was material, so that
it discharges a UIM insurer from the obligation to provide coverage. Among the
circumstances for consideration are “the extent to which the injured party will be
deprived of the benefit which he reasonably expected,” Section 241(a), and “the
extent to which the party failing to perform * * * will suffer forfeiture,” Section




                                         8
                                January Term, 2002




241(c). See Hernandez v. Gulf Group Lloyds (Tex.1994), 875 S.W.2d 691, 693
(“The less the non-breaching party is deprived of the expected benefit, the less
material the breach”; when the UIM insurer is not prejudiced by the breach, the
insured’s breach is not material).
       {¶29} Within the group of states inquiring into prejudice, some states
place the burden on the insurer to show prejudice, and some states place the
burden on the insured to show a lack of prejudice.
                                         A
                             Prompt-Notice Provisions
       {¶30} In situations involving a breach of a requirement of prompt notice,
most states find that the provision is valid, that the provision has been breached
when notice was not reasonably given in the circumstances, but that the failure of
notice will serve as a material breach of the insurance contract only when the
unreasonable notice is prejudicial to the insurer. Many states place the burden of
showing prejudice on the insurer, while a significant number of states place the
burden on the insured. If notice is unreasonably given but the insurer suffers no
prejudice, the breach is treated as nonmaterial and the insurer’s obligation to
provide coverage remains in effect.
                                         1
         Is Prejudice to the Insurer Relevant in Late-Notice UIM Cases?
       {¶31} Two cases that illustrate the competing approaches of various
states are Alcazar v. Hayes (Tenn.1998), 982 S.W.2d 845, and Clementi v.
Nationwide Mut. Fire Ins. Co. (Colo.2001), 16 P.3d 223. In those cases, the
Supreme Courts of Tennessee and Colorado recently decided to follow the
modern trend requiring an inquiry into prejudice in delayed-notice UIM cases and
overruled or disapproved of past decisions that had adhered to the traditional rule.
       {¶32} In Alcazar, 982 S.W.2d at 848, a case involving an insured’s
attempt to recover from his UIM insurer despite the failure to give timely notice




                                         9
                            SUPREME COURT OF OHIO




of the accident giving rise to the claim, the court found the sole issue for its
review to be “whether an insured, who fails to comply with the notice provision
of his or her insurance policy, may nevertheless enforce the policy in the event
that the insurer has not been prejudiced by the delay.” The court noted that
Tennessee for many years had adhered to the traditional common-law approach
that notice is a condition precedent to recovery under the policy and that untimely
notice vitiated any need for a showing of prejudice. Id. at 849, citing Hartford
Acc. & Indemn. Co. v. Creasy (Tenn.1975), 530 S.W.2d 778, 779, which cited
Phoenix Cotton Oil Co. v. Royal Indemn. Co. (1918), 140 Tenn. 438, 205 S.W.
128.
       {¶33} The Alcazar court stated that this traditional approach is “grounded
on a strict contractual interpretation methodology” with “underlying public policy
rationales,” such as that the insurer should be able to make a prompt and adequate
investigation and prepare for defense of its claim, to protect against fraudulent
claims, and be in a position to settle claims so that litigation can be minimized.
Alcazar, 982 S.W.2d at 849, citing Creasy, 530 S.W.2d at 779, and quoting 1
Holmes & Rhodes, Appleman on Insurance (2d Ed.1996) 542, Section 4.30 (“An
adequate investigation often cannot be made where notice is long delayed”);
Clementi, 16 P.3d at 226-227.
       {¶34} Very few courts today follow the traditional approach in notice
cases. The Alcazar court, 982 S.W.2d at 850, noted that while the “overwhelming
majority” of jurisdictions once followed the traditional approach, the number of
jurisdictions that continue to apply that approach has “dwindled dramatically.”
“In recent years a ‘modern trend’ has developed, and a vast majority of
jurisdictions now consider whether the insurer has been prejudiced by the
insured’s untimely notice.” Id. See, also, Annotation, Modern Status of Rules
Requiring Liability Insurer to Show Prejudice to Escape Liability Because of
Insured’s Failure or Delay in Giving Notice of Accident or Claim, or in




                                        10
                                January Term, 2002




Forwarding Suit Papers (1984 & Supp.2002), 32 A.L.R.4th 141, 157, Section 5[a],
1984 WL 263380. Furthermore, in Alcazar, 982 S.W.2d at 853, the court stated
that its “research indicates that only two states [New York and Colorado] whose
highest courts have considered the issue within the last twenty years have
continued to strictly adhere to the traditional approach.” The cases cited in
support of that statement were Am. Home Assur. Co. v. Internatl. Ins. Co. (1997),
90 N.Y.2d 433, 661 N.Y.S.2d 584, 684 N.E.2d 14, and Marez v. Dairyland Ins.
Co. (Colo.1981), 638 P.2d 286. Marez was the case disapproved of two years
after Alcazar was decided in Clementi, 16 P.3d at 224, in which the Supreme
Court of Colorado rejected the traditional approach in late-notice UIM cases and
followed the modern trend of requiring a prejudice inquiry in such cases.
       {¶35} Moreover, the Alcazar court, 982 S.W.2d at 850, pointed to three
pervasive rationales that support the shift to the modern trend of requiring
prejudice in late-notice UIM cases to relieve an insurer of the obligation to
provide coverage. The first is “the adhesive nature of insurance contracts.” In
support of this rationale, the court in Alcazar noted that “most insurance policies
are form contracts drafted by the insurer, and the insured has little, if any,
bargaining power.” Id. See, also, Brakeman v. Potomac Ins. Co. (1977), 472 Pa.
66, 72, 371 A.2d 193 (the traditional view of the strict contractual approach “fails
to recognize the true nature of the relationship between insurance companies and
their insureds”); Clementi, 16 P.3d at 229, quoting from Huizar v. Allstate Ins.
Co. (Colo.1998), 952 P.2d 342, 344 (courts bear a “heightened responsibility” to
scrutinize policies that may compromise the interests of the insured).
       {¶36} The second rationale that supports the modern trend, according to
Alcazar, 982 S.W.2d at 850, is “the public policy objective of compensating tort
victims.” In Brakeman, 472 Pa. at 76, 371 A.2d 193, fn. 8, the court noted that
there is a public interest in automobile insurance contracts of compensating
accident victims, including innocent parties, and that this interest is not served by




                                         11
                             SUPREME COURT OF OHIO




an approach that prevents an accident victim from recovering from an insurer who
was not prejudiced by the late notice.
       {¶37} The third major rationale articulated in Alcazar, 982 S.W.2d at
850, that supports the modern trend is “the inequity of the insurer receiving a
windfall due to a technicality.”         The Alcazar court reasoned that “notice
requirements are devised in order to insulate the insurer from prejudice and, thus,
in the absence of prejudice the notice provisions should not be strictly enforced.”
Id. at 851. Another way to look at this particular rationale is that the modern
trend of requiring prejudice is concerned with the traditional rule’s “severity of
forfeiting one’s insurance benefits based on the technical violation of a notice
provision.” Clementi, 16 P.3d at 230. See, also, Brakeman, 472 Pa. at 76, 371
A.2d 193 (for 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”).
       {¶38} As noted in Clementi, 16 P.3d at 230, some courts that favor the
modern trend support their position by pointing to the Restatement of the Law 2d,
Contracts (1981), Section 229, which provides: “To the extent that the non-
occurrence of a condition would cause disproportionate forfeiture, a court may
excuse the non-occurrence of that condition unless its occurrence was a material
part of the agreed exchange.” See, also, Alcazar, 982 S.W.2d at 853, which found
that “the notice requirement is immaterial to the insurance contract in the event
that the insurer is not prejudiced” and that otherwise a “disproportionate
forfeiture” would ensue, as illustrated in Comment b to Section 229:             “In
determining whether the forfeiture is ‘disproportionate,’ a court must weigh the
extent of the forfeiture by the obligee against the importance to the obligor of the
risk from which he sought to be protected and the degree to which that protection
will be lost if the non-occurrence of the condition is excused to the extent required




                                           12
                                 January Term, 2002




to prevent forfeiture. The character of the agreement may, as in the case of
insurance agreements, affect the rigor with which the requirement is applied.”
                                           2
   When Prejudice to the Insurer Is Relevant, Who Bears the Burden of Proof?
        {¶39} In states that follow the modern trend and require a showing that
an insurer has been prejudiced before the insurer will be discharged from the
obligation to provide UIM coverage in a delayed-notice situation, there are three
basic approaches to follow in deciding who should bear the burden of proof in
showing prejudice.
        {¶40} According to the Alcazar court, “A clear plurality of states hold
that once it is demonstrated that the insured breached the notice provision, the
burden of proof is allocated to the insurer to prove that it has been prejudiced by
the breach.” 982 S.W.2d at 853-854 (listing decisions). See, also, Clementi, 16
P.3d at 230-231 (listing decisions). One reason given for placing the burden of
proof of prejudice on the insurer is that it is the insurer that is seeking to escape its
obligations under an adhesive contract, so that the equities favor the insured party.
See Alcazar, 982 S.W.2d at 854; Clementi, 16 P.3d at 231; Brakeman, 472 Pa. at
77, 371 A.2d 193. Another reason is that the insurer is in a better position to
prove that there was prejudice than the insured party is to prove lack of prejudice,
since the insured with the burden of proof must prove a negative—that the insurer
was not prejudiced. Alcazar, 982 S.W.2d at 854; Clementi, 16 P.3d at 231-232.
        {¶41} A number of states follow the second approach, finding that when
the insured breaches the notice provision, a rebuttable presumption arises that the
insurer is prejudiced by the breach. It is then up to the insured to rebut the
presumption of prejudice in order to collect under the UIM policy. Alcazar, 982
S.W.2d at 854 (listing cases). See Clementi, 16 P.3d at 231 (listing cases); Aetna
Cas. & Sur. Co. v. Murphy (1988), 206 Conn. 409, 419, 538 A.2d 219. The
justifications for this approach are (1) that it is not inequitable to place the burden




                                           13
                              SUPREME COURT OF OHIO




of proof on the insured because that is the party who violated the contractual
notice provision, and (2) that the insured, as the person who was involved in the
accident, is better positioned to demonstrate that crucial information has not been
lost and vital witnesses are still available. See Alcazar, 982 S.W.2d at 855. See,
also, Miller v. Dilts (Ind.1984), 463 N.E.2d 257, 265-266 (possibility of adequate
investigation by insurance company can be frustrated by delayed notice, so it is
not unfair to require injured party to establish some evidence that prejudice to
insurer did not result from the late notice).
       {¶42} As a third possible approach in this type of case, a few states
include prejudice to the insurer as one of several factors that are considered in
determining whether the insured gave timely notice to the insurer. Other factors
within that approach are the insured’s excuse for the delay, the length of the
delay, and the level of sophistication of the insured. See Alcazar, 982 S.W.2d at
855-856 (listing cases), and Clementi, 16 P.3d at 231.         This approach was
criticized as unsound in both Alcazar and Clementi, each of which reasoned that
prejudice to the insurer is not a factor that has a bearing on the reasonableness of
the insured’s delay in giving notice and that the inquiry into reasonableness of
notice and the inquiry into prejudice to the insurer are separate and distinct. See
982 S.W.2d at 855-856; 16 P.3d at 232.
       {¶43} After determining that the traditional rule should be abandoned in
favor of a rule that considers whether the insurer has been prejudiced in delayed-
notice UIM cases, the courts in Alcazar and Clementi reached different
conclusions on who should bear the burden of proof. In Alcazar, 982 S.W.2d at
856, the Supreme Court of Tennessee analogized the late-notice situation before it
to one of unjust enrichment, in which “an undeserving party seeks forgiveness for
his or her own breach.” See, also, Murphy, 206 Conn. at 420, 538 A.2d 219
(unjust enrichment, restitution, and forfeiture are based on similar principles;
party seeking extraordinary relief, based on what is “fair,” should bear burden of




                                          14
                               January Term, 2002




proof). The Alcazar court found that when the insured failed to provide timely
notice, and therefore breached the insurance policy, it is presumed that the UIM
insurer has been prejudiced by the late notice. The presumption of prejudice can
be rebutted if the insured proffers “competent evidence that the insurer was not
prejudiced by the insured’s delay.” Id.
       {¶44} In Clementi, 16 P.3d at 231-232, the Supreme Court of Colorado
agreed with those courts that determined that the burden should be on the insurer
to demonstrate the existence of prejudice in late-notice UIM cases. That court
held that “once it has been established that an insured has unreasonably provided
delayed notice to an insurer, an insurer may only deny benefits if it can prove by a
preponderance of the evidence that it was prejudiced by the delay.” Id. at 232.
                                          B
           Consent-to-Settle and Other Subrogation-Related Provisions
       {¶45} The primary reason that consent-to-settle clauses are included in
UIM policies is to protect the insurer’s subrogation rights. Many UIM insurance
policies contain other, or additional, clauses that also have the primary purpose of
furthering the insurer’s subrogation rights. Courts generally are consistent in
applying the same approach in evaluating the effects of breaches of any of the
subrogation-related clauses. Therefore, we do not confine our review of cases to
only those that involved consent-to-settle clauses, but also include cases that may
have involved other subrogation-related provisions.
       {¶46} In situations involving breach of a consent-to-settle provision or a
different provision concerned with protecting subrogation rights, most states find
that the provision is valid, that the provision is breached when the insured settles
with and releases a tortfeasor without giving the UIM insurer a reasonable
opportunity to consent to the settlement (or to pay the insured in lieu of giving
consent), and that the breach is material only when the insured is prejudiced by it.
Of the states that inquire into prejudice, some states place the burden of showing




                                          15
                             SUPREME COURT OF OHIO




prejudice on the insurer, and some place the burden on the insured. Most of the
focus in the prejudice inquiry is on whether the tortfeasor had enough assets
beyond the limits of his or her liability insurance policy that the failure of the
insured to obtain the consent of the insurer prior to the settlement and release of
the tortfeasor destroyed the insurer’s ability to recover additional damages from
the tortfeasor.
        {¶47} While most jurisdictions uphold consent-to-settle provisions, some
states have found them invalid, either generally or in certain situations. See, e.g.,
Longworth v. Van Houten (App.Div.1988), 223 N.J.Super. 174, 184, 538 A.2d
414 (in a UIM context, a consent-to-settle provision “frustrates the legislative
purpose of providing maximum and expeditious protection to the innocent victims
of financially irresponsible motorists”); Elovich v. Nationwide Ins. Co. (1985),
104 Wash.2d 543, 553, 707 P.2d 1319 (consent-to-settle provision interferes with
the legislative intent to grant the UIM insured a right to recover full compensation
for injuries); Coots v. Allstate Ins. Co. (Ky.1993), 853 S.W.2d 895, 901 (for UIM
coverage to accomplish its remedial purpose, “the UIM carrier’s contractual
subrogation right must not obstruct the UIM insured’s right to settle for the policy
limits even if it means releasing subrogation”).        See, generally, Annotation,
Validity, Construction, and Effect of “No-Consent-to-Settlement” Exclusion
Clauses in Automobile Insurance Policy (1982 & Supp.2002), 18 A.L.R.4th 249,
276, Section 8, 1983 WL 198824.
        {¶48} Among those states that recognize consent-to-settle provisions as
valid, a few jurisdictions still follow the traditional rule and find that, as a matter
of law, an insured who breaches a consent-to-settle clause (or other provision
concerned with the insurer’s subrogation interests) cannot recover from his or her
UIM insurer. See, e.g., Stevens v. Merchants Mut. Ins. Co. (1991), 135 N.H. 26,
30, 599 A.2d 490 (holding that “enforcement of the permission to settle clause is
not dependent on a showing of prejudice to the insurer”). See, also, Dalke v.




                                          16
                               January Term, 2002




Allstate Ins. Co. (1997), 23 Kan.App.2d 742, 935 P.2d 1067 (failure of insured to
notify UIM insurer of the settlement with and release of tortfeasor in accordance
with state statute worked forfeiture of right to recover under UIM coverage; no
need to consider prejudice to insurer); Lee v. Auto-Owners Ins. Co. (1996), 218
Mich.App. 672, 554 N.W.2d 610 (consent-to-settle clause to be enforced as
written, without inquiring into prejudice); Manzo v. AMICA Mut. Ins. Co.
(R.I.1995), 666 A.2d 417 (violation of consent-to-settle clause precludes UIM
coverage as matter of law), but, see, Fraioli v. Metro. Prop. & Cas. Ins. Co.
(R.I.2000), 748 A.2d 273, 275-276 (allowing an exception to the rule of Manzo
“under the narrow facts” of the case).
       {¶49} However, among most of the states that recognize consent-to-settle
provisions as valid, an inquiry into prejudice is necessary following a breach of
those or similar subrogation-related provisions before recovery under the UIM
policy is forfeited. See, e.g., Shelter Mut. Ins. Co. v. Bough (1992), 310 Ark. 21,
834 S.W.2d 637; Southeastern Fid. Ins. Co. v. Earnest (Fla.App.1981), 395 So.2d
230; State Farm Fire & Cas. Co. v. Pacific Rent-All, Inc. (1999), 90 Hawaii. 315,
978 P.2d 753; Bantz v. Bongard (1993), 124 Idaho 780, 864 P.2d 618; Kapadia v.
Preferred Risk Mut. Ins. Co. (Iowa 1988), 418 N.W.2d 848; Greenvall v. Maine
Mut. Fire Ins. Co. (Me.1998), 715 A.2d 949; MacInnis v. Aetna Life & Cas. Co.
(1988), 403 Mass. 220, 526 N.E.2d 1255; Am. Family Mut. Ins. Co. v. Baumann
(Minn.1990), 459 N.W.2d 923; Tegtmeyer v. Snellen (Mo.App.1990), 791 S.W.2d
737; Sorensen v. Farmers Ins. Exchange (1996), 279 Mont. 291, 927 P.2d 1002;
Hernandez, 875 S.W.2d 691; Thiringer v. Am. Motors Ins. Co. (1978), 91
Wash.2d 215, 588 P.2d 191; Kronjaeger v. Buckeye Union Ins. Co. (1997), 200
W.Va. 570, 490 S.E.2d 657; Ranes v. Am. Family Mut. Ins. Co. (1998), 219
Wis.2d 49, 580 N.W.2d 197.
       {¶50} In those states that favor the majority approach, many of the same
general principles that apply in situations involving breach-of-notice provisions in




                                         17
                             SUPREME COURT OF OHIO




UIM contracts also apply in situations involving breach of consent-to-settle or
other subrogation-related provisions in UIM contracts. As in late-notice cases,
there are strong indications that many courts considering policy breaches in cases
involving consent-to-settle or other subrogation-related clauses generally are loath
to sanction a forfeiture of coverage. See 3 Widiss, Uninsured and Underinsured
Motorist Insurance (2d Rev.Ed.1998) 512-513, Section 43.5 (“There is now a
significant body of judicial precedents for the proposition that in order to justify
foreclosing an insured’s right to indemnification from an otherwise applicable
underinsured motorist coverage, an insurer must show that it was prejudiced by
the settlement of the tort claim”).
       {¶51} Courts that impose a prejudice requirement in cases involving a
breach of a consent-to-settle or other subrogation-related clause do so because of
a perception that breaches of such provisions often have little prejudicial effect on
the insurer’s ability to protect its interests. “The loss of an insurer’s subrogation
right may not be significant. In many instances, pursuit of any recovery from an
insured tortfeasor beyond the available liability insurance would be fruitless.” Id.
at 510. That proposition is illustrated by an example taken from an often quoted
Florida appellate court decision:
       {¶52} “There was overwhelming evidence that the negligent motorist,
who was an impoverished maid, was completely judgment-proof. For this reason,
the record fully supports the determination that the release was ‘demonstrably
immaterial’ to any otherwise-existing ability of [the insurer] to recover. * * * A
judgment against [the tortfeasor] would not have been worth the paper it was
printed on and no reasonable person would have expended the costs, let alone the
attorney’s fees, it would have required to get it.” Earnest, 395 So.2d at 231; see 3
Widiss, Uninsured and Underinsured Motorist Insurance, at 510.
       {¶53} As in cases involving an inquiry into UIM insurer prejudice in
delayed-notice cases, some states in cases inquiring into UIM insurer prejudice




                                         18
                               January Term, 2002




involving breach of a consent-to-settle or other subrogation-related provision
place the burden of showing prejudice on the insurer, and some states place the
burden of showing a lack of prejudice on the insured. An example of the former
is Greenvall, 715 A.2d at 954, in which the Supreme Judicial Court of Maine
required the insurer to demonstrate that prejudice resulted from the loss of
subrogation rights before recovery under the UIM policy could be denied. See,
also, Sorensen, 279 Mont. at 296, 927 P.2d 1002. Alternatively, in Ranes, 219
Wis.2d at 61-62, 580 N.W.2d 197, the Supreme Court of Wisconsin imposed a
rebuttable presumption of prejudice, placing “the onus on the breaching party who
failed to provide notice.” See, also, Baumann, 459 N.W.2d at 927.
                                        IV
                             Decisions of This Court
       {¶54} Now that the general approach to breaches of these two clauses has
been set forth, we consider what the current approach in Ohio is. Several recent
precedents of this court have considered fact patterns in which notice and/or
consent-to-settle (or similar) provisions were alleged to have been breached. We
will review those decisions in some detail, as they provide the specific context for
our inquiry.
       {¶55} For our purposes, there are three types of fact situations that must
be distinguished from each other to illustrate the spectrum of possible scenarios in
these cases. First, several of the recent cases in this court, Bogan v. Progressive
Cas. Ins. Co. (1988), 36 Ohio St.3d 22, 521 N.E.2d 447; McDonald v. Republic-
Franklin Ins. Co. (1989), 45 Ohio St.3d 27, 543 N.E.2d 456; and Fulmer v. Insura
Prop. & Cas. Co. (2002), 94 Ohio St.3d 85, 760 N.E.2d 392, have involved an
alleged breach of a consent-to-settle clause and/or a provision implicating
subrogation rights, in a situation that did not also involve any issue regarding
notice. Second, two of the recent cases decided by this court, Ruby v. Midwestern
Indemn. Co. (1988), 40 Ohio St.3d 159, 532 N.E.2d 730; and Hartford Cas. Ins.




                                        19
                             SUPREME COURT OF OHIO




Co. v. Easley (1991), 62 Ohio St.3d 232, 581 N.E.2d 526, involved an alleged
breach of a subrogation-related provision and an alleged failure of notice of some
type. Finally, while no recent decisions of this court have involved an alleged
breach of a prompt-notice provision with no accompanying issue of a breach of a
consent-to-settle or subrogation provision in a UIM coverage context, several
courts of appeals that have encountered that situation have relied on the reasoning
in the above cases to resolve those disputes, and we include that situation to round
out our overall inquiry.
                                         A
     Asserted Violation of Subrogation-Related Provision But Not of Notice
                      Provision—Bogan, McDonald, and Fulmer
       {¶56} In Bogan, 36 Ohio St.3d at 22-25, 521 N.E.2d 447, the insured
parties were involved in an automobile accident with a tortfeasor and claimed that
their damages exceeded the tortfeasor’s policy limit. After the accident, the
insureds promptly notified their UIM insurer of a potential claim and soon after
sought the consent of their UIM insurer to their settlement with and release of the
tortfeasor for an amount less than the tortfeasor’s policy limit. The UIM insurer
did not consent to the settlement, but the insureds settled with and released the
tortfeasor anyway and then filed suit against their insurer for UIM coverage. As
the case came to this court, several clauses in the insurance policy were at issue,
including a consent-to-settle clause, an exhaustion clause, and a standard
subrogation clause.
       {¶57} This court’s opinion yielded five syllabus paragraphs. Of those,
three syllabus paragraphs (paragraphs one, three, and five) involved the
circumstances under which a UIM provider may withhold consent to a proposed
settlement with the tortfeasor. Those syllabus paragraphs and the analyses that
gave rise to them are not directly relevant to the case sub judice because the UIM
insurer in this case never had notice of the settlement with and release of the




                                        20
                                     January Term, 2002




tortfeasor before it was accomplished. Another syllabus paragraph (paragraph
two) involved the exhaustion clause in the policy and also is not directly relevant
to the issues raised in this case.
        {¶58} The only part of Bogan that is specifically relevant to the issues we
consider is paragraph four of the syllabus. That syllabus paragraph provides:
        {¶59} “Based upon the established common law and further strengthened
by the specific statutory provision, R.C. 3937.18, a subrogation clause is
reasonably includable in contracts providing underinsured motorist insurance.
Such a clause is therefore both a valid and enforceable precondition to the duty to
provide underinsured motorist coverage.”
        {¶60} In the body of the Bogan opinion supporting this syllabus
paragraph, this court stated, “[A] right of subrogation, the protection of which is a
precondition to underinsured motorist coverage, is a full and present right in and
of itself wholly independent of whether a later judgment obtained by use of such
right will be reduced to collection from the tortfeasor. * * * It is, therefore, both
just and reasonable that an insurer require, as a precondition to coverage, not that
such subrogation rights will result in reimbursement to the insurer, but that the
injured party not compromise with the tortfeasor in such a way as to destroy the
insurer’s subrogation right.         Such compromise clearly prejudices the present
subrogation right of the injured party’s insurer.” (Emphasis sic.) Id. at 31, 521
N.E.2d 447.
        {¶61} Based on the foregoing reasoning, this court in Bogan in effect
held that when an insured party seeking coverage from its UIM insurer has
executed a settlement with and release of the tortfeasor precluding the insurer
from exercising its subrogation rights, a material breach of the insurance contract
has occurred that discharges the UIM insurer from the obligation to provide UIM
coverage.




                                             21
                             SUPREME COURT OF OHIO




       {¶62} The Ferrandos argue that this court’s subsequent decisions in
McDonald and Fulmer have eroded the part of Bogan that is relevant to this case
to the point that the reasoning in Bogan is no longer supportable and urge that we
should finish the process by overruling paragraph four of the syllabus of Bogan,
since in the Ferrandos’ view it has for all intents and purposes been overruled
already.   While it is apparent that McDonald and Fulmer have modified or
overruled significant parts of Bogan, the core reasoning in Bogan that is
implicated in this case remains untouched by those decisions, and we cannot fault
the court of appeals below for applying Bogan to find UIM coverage unavailable.
If we do reconsider the rationale of Bogan as pertinent to the issues in this case, it
is not because Bogan’s syllabus paragraph four has been sub silentio overruled in
those cases, but because we perceive flaws in the essential reasoning underlying
that syllabus paragraph.
       {¶63} In McDonald, this court revisited one of the issues raised in Bogan,
deciding that, in some cases when an insurer fails to consent to the settlement
with and release of a tortfeasor, the insured party seeking UIM coverage may still
be able to recover under the UIM policy, even though the insurer’s subrogation
rights may have been destroyed.        This court modified paragraph five of the
syllabus of Bogan regarding an insurer who does not consent to a proposed
settlement with and release of the tortfeasor after notification, and found that a
subrogation clause would be voided if the insurer failed to respond within a
reasonable time to notification of the settlement offer. 45 Ohio St.3d at 30-31,
543 N.E.2d 456.
       {¶64} It is important to note that McDonald, like Bogan, involved a UIM
insurer that had received prompt notice from its insured of the proposed
settlement and therefore is significantly different in its facts from the instant case.
One statement from McDonald that is relevant to the situation we consider is the
court’s observation that “an insured who destroys his insurer’s subrogation rights




                                          22
                                January Term, 2002




without the insurer’s knowledge does so at his peril.” 45 Ohio St.3d at 31, 543
N.E.2d 456.
       {¶65} Fulmer, like Bogan and McDonald, involved an insured party who
notified her UIM insurer of a negotiated settlement with and release of the
tortfeasor (for less than the tortfeasor’s policy limits) and who did not receive
consent to the settlement. The insured settled despite the lack of consent and
sought recovery under the UIM policy. Fulmer, 94 Ohio St.3d at 86-88, 760
N.E.2d 392. This court’s opinion addressed issues regarding the lack of consent
of the insurer to the settlement, destruction of the insurer’s subrogation rights, and
the alleged breach of the exhaustion clause of the policy. This court, in paragraph
one of the syllabus of Fulmer, formally overruled paragraph five of the syllabus
of Bogan, regarding the consequences of the insurer’s own failure to act to protect
its subrogation rights. Also, at paragraph two of the syllabus of Fulmer, this court
applied and clarified Bogan’s reasoning in paragraph two of the syllabus of that
case regarding exhaustion clauses that were at issue in both cases. However, this
court’s opinion in Fulmer did not consider Bogan’s fourth syllabus paragraph, and
that syllabus paragraph and supporting discussion remain very relevant to our
inquiry.
                                          B
      Asserted Violation of Both Subrogation-Related Provision and Notice
                            Provision—Ruby and Easley
       {¶66} In Ruby, the insureds notified their insurance agent 11 months after
the accident at issue that they had a potential claim under their UIM policy and
later asked their UIM insurer to approve a settlement with the tortfeasor’s
insurance company. The insureds did not get consent from their UIM insurer to
settle but settled anyway with the tortfeasor’s insurance company for the
tortfeasor’s policy limits and released the tortfeasor’s estate. 40 Ohio St.3d at
159-160, 532 N.E.2d 730.




                                         23
                            SUPREME COURT OF OHIO




       {¶67} This court concluded in a less than totally clear opinion that the
insureds “so interfered with the subrogation rights of [the UIM insurer] that the
underinsurance liability of [the UIM insurer] should be completely discharged.”
Id. at 160, 532 N.E.2d 730.       This court noted that the UIM policy under
consideration required that if an accident occurred, prompt notice be provided to
the insurer and also required the insured party to protect the insurer’s subrogation
rights. Id. at 161, 532 N.E.2d 730. In Ruby, this court held at the syllabus, “A
provision in an insurance policy requiring ‘prompt’ notice to the insurer requires
notice within a reasonable time in light of all the surrounding facts and
circumstances.”    In finding that the insureds “failed to meet the crucial
precondition of protecting” the UIM insurer’s subrogation rights, this court
reasoned that “unreasonable delay in the giving of notice may be presumed
prejudicial to the insurer absent evidence to the contrary.” Id. at 161, 532 N.E.2d
730.
       {¶68} The court went on to state: “We need not decide whether an
eleven-month delay is so unreasonable that prejudice should be presumed, as
there is ample evidence that [the UIM insurer] was in fact prejudiced by the
delay.” Id. One of the reasons given for the finding of prejudice was that the
delay in notice deprived the UIM insurer of an opportunity to investigate the
claim. Id. Another was that the insureds, by executing a release that precluded
the UIM insurer from exercising its subrogation rights, materially breached their
insurance contract and thereby discharged the insurer from the coverage
obligation. Id. at 162, 532 N.E.2d 730. As support for this reason, this court cited
Bogan, 36 Ohio St.3d at 31, 521 N.E.2d 447.
       {¶69} Because the case sub judice, like Ruby, involves breaches of both a
prompt-notice provision and a subrogation provision, Ruby is the most relevant
precedent from this court in our consideration. We note that in this case, unlike in
Ruby, there was no request for the consent of the UIM insurer before the




                                        24
                                January Term, 2002




settlement with and release of the tortfeasor occurred, so that the two cases are not
identical factually. However, Ruby’s underlying rationale, especially in the way it
tied the lack of prompt notice with the prejudicial effects of the destruction of
subrogation rights, remains valid precedent despite its somewhat unfocused
analysis.
       {¶70} It may be helpful to point out that there are two different types of
“notice” inquiries that actually are possible in the types of cases we consider as
relevant to this case and that should not be confused. Both of these notice
inquiries are present in the case sub judice. One of those inquiries focuses on a
“prompt notice” clause specifically contained in an insurance policy that requires
that an insured promptly give notice of an accident or claim to the UIM insurer.
The other type of notice at issue is the notice inquiry that can be an inherent part
of the question whether a consent-to-settle clause was complied with. For an
insured to obtain consent from a UIM insurer to a proposed settlement, the
insured first must give notice to the insurer that a settlement is being
contemplated.
       {¶71} In Bogan, McDonald, and Fulmer, neither of the two notices was
at issue, as both types of notice had been provided. In Ruby, the notice inquiry
focused on the insured’s alleged failure to promptly notify the UIM insurer of the
accident at issue. The insured, however, had given the UIM insurer notice of the
contemplated settlement prior to its later finalization without the insurer’s
consent. It appears that this court’s focus in Ruby was more on the subrogation
aspects of that case than on the notice aspects. In this case, Personal Service
claims that the Ferrandos failed to give prompt notice of the accident or claim, as
specifically required by the policy.     At the same time, it is undisputed that
Personal Service never received notice of the proposed settlement before it was
finalized.




                                         25
                            SUPREME COURT OF OHIO




       {¶72} In Easley, the alleged failure of notice was not a breach of a
prompt-notice provision in a UIM policy but an alleged failure of notice to the
UIM insurer of a specific UIM claim prior to a proposed, and then finalized,
settlement with and release of the tortfeasor. The insurer contended in a motion
for summary judgment, and the trial court and court of appeals both found, that no
UIM benefits were available because the failure of notice of the settlement, along
with the subsequent release, prejudiced the insurer’s subrogation rights. Id., 62
Ohio St.3d at 234, 581 N.E.2d 526.
       {¶73} In reversing the judgment of the court of appeals, this court
focused on what it termed a “notable distinction” that made the case factually
different from similar cases such as McDonald. 62 Ohio St.3d at 235, 581 N.E.2d
526. That fact was that the person who was attempting to recover under the UIM
policy (Easley) was not a named insured under the policy, but was someone who
had borrowed the named insured’s automobile with permission, so that there was
no contractual relationship between Easley and the automobile owner’s UIM
insurer. This court noted that Easley had attempted to notify the UIM insurer, but
that the owner of the automobile, for some reason, impeded Easley’s efforts to
determine whether UIM coverage existed and to find out details of that possible
coverage, stating that “Easley was confronted with a difficult, if not impossible,
task of determining the existence of any underinsurance benefits that Easley may
have been entitled to receive.” Id.
       {¶74} Consequently, this court concluded that “a genuine issue of
material fact exists as to whether [the UIM insurer] received notice of Easley’s
underinsurance claim before the release * * * was executed.” This court further
concluded that an issue of material fact existed as to whether the notice received
by the UIM insurer gave it a reasonable time to respond to Easley, pursuant to
paragraph three of the syllabus of McDonald. Easley, 62 Ohio St.3d at 235-236,
581 N.E.2d 526.




                                       26
                                January Term, 2002




       {¶75} In the case sub judice, as in Easley, the Ferrandos make a claim
under a policy of insurance in which they are not named insureds, and they have
no contractual relationship with Personal Service. This salient fact is relevant to
whether Personal Service received reasonable notice of their UIM claim, which
will be discussed later in this opinion.
                                           C
 Asserted Violation of Prompt-Notice Provision But Not of Subrogation-Related
                                      Provision
       {¶76} This court has not considered a case involving a breach of a
prompt-notice provision in a UIM context when there was no accompanying issue
regarding compromise of the UIM insurer’s subrogation rights. In a case that did
not involve motor vehicle insurance coverage, Ormet Primary Aluminum Corp. v.
Employers Ins. of Wausau (2000), 88 Ohio St.3d 292, 302-303, 725 N.E.2d 646,
this court explained the general reasons underlying notice provisions:
       {¶77} “Notice provisions in insurance contracts serve many purposes.
Notice provisions allow the insurer to become aware of occurrences early enough
that it can have a meaningful opportunity to investigate. Ruby v. Midwestern
Indemn. Co. (1988), 40 Ohio St.3d 159, 161, 532 N.E.2d 730, 732. In addition, it
provides the insurer the ability to determine whether the allegations state a claim
that is covered by the policy. It allows the insurer to step in and control the
potential litigation, protect its own interests, maintain the proper reserves in its
accounts, and pursue possible subrogation claims. Further, it allows insurers to
make timely investigations of occurrences in order to evaluate claims and to
defend against fraudulent, invalid, or excessive claims.” (Citations omitted.)
       {¶78} In the portion of its opinion addressing the Ferrandos’ alleged
breach of the notice provision, the court of appeals determined that it was
necessary to inquire into insurer prejudice before UIM coverage will be forfeited
for breach of a notice provision. The court of appeals relied on Ormet, Ruby, and




                                           27
                            SUPREME COURT OF OHIO




several Ohio appellate decisions to support its conclusion that a presumption of
prejudice arises when an insured gives unreasonably late notice to a UIM insurer,
and to place the burden on the insured to present evidence to rebut the
presumption of prejudice.
       {¶79} To the extent that the court of appeals required an inquiry into
insurer prejudice before UIM coverage would be forfeited for breach of a prompt-
notice provision, we fully agree with the reasoning of the court of appeals, finding
it consistent with previous pronouncements of this court. This court in Ruby, 40
Ohio St.3d at 161, 532 N.E.2d 730, stated, “Unreasonable delay in the giving of
notice may be presumed prejudicial to the insurer absent evidence to the
contrary.” Furthermore, in Ormet, this court determined that the untimely notice
of an environmental claim by the insured party prejudiced the insurers under the
facts of that case. Id. at 305, 725 N.E.2d 646. By inquiring into prejudice to the
insurer in that case, instead of finding that the unreasonably late notice in and of
itself caused a forfeiture of the coverage, this court indicated that Ohio does not
follow the traditional rule in late-notice cases but follows the modern trend of
inquiring into prejudice. Although Ormet was not a UIM case and did not involve
motor vehicle insurance, its core reasoning is applicable here.
       {¶80} We recognize that the court of appeals’ determination in this case
that a presumption of prejudice applies and that the insured bears the burden of
overcoming it is directly drawn from this court’s reasoning in Ruby. Ohio’s law
on this portion of our inquiry therefore is consistent with that of Tennessee, as
established in Alcazar, 982 S.W.2d 845, which reasoned that the insured, as the
party that breached a provision in the insurance policy and seeks relief from the
consequences of that breach, should bear the burden of showing that the insurer
was not prejudiced.
       {¶81} Accordingly, we hold that when an insurer’s denial of UIM
coverage is premised on the insured’s breach of a prompt-notice provision in a




                                         28
                                January Term, 2002




policy of insurance, the insurer is relieved of the obligation to provide coverage if
it is prejudiced by the insured’s unreasonable delay in giving notice. An insured’s
unreasonable delay in giving notice is presumed prejudicial to the insurer absent
evidence to the contrary.
                                         V
               Paragraph Four of the Syllabus of Bogan Reassessed
       {¶82} We turn now to considering that portion of the court of appeals’
decision regarding the consequences of a breach of a consent-to-settle clause in a
UIM policy. The court of appeals applied paragraph four of the syllabus of
Bogan to determine that there is no need to inquire into insurer prejudice when
such a clause is breached. By providing in paragraph four of the syllabus that
compliance with a subrogation clause is a “precondition” to UIM coverage, and
by stating in the body of the opinion that if the insured compromises with the
tortfeasor in a way that destroys the UIM insurer’s subrogation right, then the
insurer is prejudiced (see 36 Ohio St.3d at 31, 521 N.E.2d 447), Bogan in effect
mandated the ultimate conclusion reached in the case sub judice by the court of
appeals. Accordingly, the trial court’s resolution of this issue was not consistent
with Bogan. The trial court decision did not cite Bogan and gave no reasons for
not following it.
       {¶83} As an initial matter, we accept the Bogan court’s determination,
expressed in the first sentence of paragraph four of the syllabus of that case, that
subrogation clauses are valid provisions in UIM policies. As do the majority of
states, we find consent-to-settle clauses valid and enforceable in Ohio.
       {¶84} However, our consideration of all the factors discussed thus far
makes it evident that the time has come to reconsider the second sentence of
paragraph four of the syllabus of Bogan. As explained above, our precedents
essentially require that UIM coverage be forfeited for breach of a prompt-notice
provision only when the insurer is prejudiced by that breach. We see no reason




                                         29
                             SUPREME COURT OF OHIO




for a breach of a consent-to-settle clause or other subrogation-related provision in
a UIM policy to be evaluated any differently than a breach of a prompt-notice
provision. It is not logical that the breach of a notice provision should necessitate
an inquiry into prejudice while the breach of a consent-to-settle provision should
be deemed prejudicial to the insurer in all cases as a matter of law. To be
consistent, the same fundamental inquiry should be applied in either case.
       {¶85} Furthermore, the rule requiring an inquiry into prejudice is the
accepted rule in a significant majority of states, and this rule also appears sound
when applied in cases involving breach of a consent-to-settle or other
subrogation-related provision; a clear majority of states also require an inquiry
into prejudice in those cases. The reasons relied on by a majority of states,
detailed above, to impose a prejudice requirement in such cases are compelling.
       {¶86} This case presents an opportunity to harmonize the standards for
evaluating two very comparable situations that implicate essentially the same
interests and present no persuasive reasons for differing rules. As the Supreme
Judicial Court of Massachusetts stated in MacInnis, 403 Mass. at 223, 526 N.E.2d
1255: “Because the purpose of a consent-to-settlement provision is essentially
similar to that of a notice of claim provision (both give an insurer notice and an
opportunity to protect its interests), the prejudice standard should apply to both.”
See, also, Greenvall, 715 A.2d at 954 (court’s holding in prior case that insurer
must suffer prejudice from breach of notice provision in order to deny coverage
should be extended to require demonstration of prejudice for denial of coverage
based on loss of subrogation rights).
       {¶87} As in cases involving a breach of a prompt-notice provision, a
presumption of prejudice should be applied when evaluating the effects of the
breach of a consent-to-settle or other subrogation-related provision. As in breach
of prompt-notice cases, we find that the burden of presenting evidence to show a
lack of prejudice should be on the insured who has failed to comply with the




                                         30
                                 January Term, 2002




terms of the policy. An additional reason for applying a presumption of prejudice
with the burden of presenting evidence on the insured is that the General
Assembly has specifically allowed a right of subrogation to providers of UIM
coverage.   See Bogan, 36 Ohio St.3d at 29, 521 N.E.2d 447 (quoting R.C.
3937.18[E], now R.C. 3937.18[J]); Ruby, 40 Ohio St.3d at 160-161, 532 N.E.2d
730; McDonald, 45 Ohio St.3d at 29, 543 N.E.2d 456. However, simply because
the General Assembly has allowed subrogation does not prevent courts from
inquiring into insurer prejudice when a subrogation-related clause is not strictly
complied with.     If the insurer has suffered no prejudice from the insured’s
technical breach, it is difficult to justify permitting the insurer to deny coverage.
       {¶88} For those reasons, we join the majority of states and hold that
when an insurer’s denial of UIM coverage is premised on the insured’s breach of
a consent-to-settle or other subrogation-related provision in a policy of insurance,
the insurer is relieved of the obligation to provide coverage if it is prejudiced by
the failure to protect its subrogation rights.      An insured’s breach of such a
provision is presumed prejudicial to the insurer absent evidence to the contrary.
We therefore overrule in part paragraph four of the syllabus of Bogan, and
disagree with Bogan’s accompanying rationale to the extent that it held that a
consent-to-settle provision is an absolute precondition to recovery that is
materially breached whenever it is not complied with. We also disapprove of any
reasoning within Bogan, Ruby, and McDonald that is inconsistent with our
holding.
                                          VI
                  Application of the Standards Discussed Above
                                          A
                                General Application
       {¶89} Based on our discussion thus far, a court evaluating whether a
prompt-notice or consent-to-settle (or other subrogation-related) provision in a




                                          31
                             SUPREME COURT OF OHIO




UIM policy was breached, and, if so, the effects of the breach, must conduct a
two-step inquiry as described in further detail below.         The first step is to
determine whether a breach of the provision at issue actually occurred. The
second step is, if a breach did occur, was the insurer prejudiced so that UIM
coverage must be forfeited? See Clementi, 16 P.3d at 231 (two-step approach is
appropriate in late-notice cases: preliminary determination is whether an insured’s
notice was untimely; second step is whether the insurer was prejudiced by the
untimely notice).
       {¶90} The two-step approach in late-notice cases requires that the court
first determine whether the insured’s notice was timely. This determination is
based on asking whether the UIM insurer received notice “within a reasonable
time in light of all the surrounding facts and circumstances.” Ruby, syllabus. If
the insurer did receive notice within a reasonable time, the notice inquiry is at an
end, the notice provision was not breached, and UIM coverage is not precluded.
If the insurer did not receive reasonable notice, the next step is to inquire whether
the insurer was prejudiced. Unreasonable notice gives rise to a presumption of
prejudice to the insurer, which the insured bears the burden of presenting
evidence to rebut.
       {¶91} In cases involving the alleged breach of a consent-to-settle or other
subrogation-related clause, the first step is to determine whether the provision
actually was breached. If it was not, the inquiry is at an end, and UIM coverage
must be provided. Also, if the insurer failed to respond within a reasonable time
to a request for consent to the settlement offer, or unjustifiably withheld consent,
the release will not preclude recovery under the UIM policy, and the subrogation
clause will be disregarded. McDonald, paragraphs two and three of the syllabus;
Fulmer, paragraph one of the syllabus.          If the consent-to-settle or other
subrogation-related clause was breached, the second step is to determine whether
the UIM insurer was prejudiced. If a breach occurred, a presumption of prejudice




                                         32
                                January Term, 2002




to the insurer arises, which the insured party bears the burden of presenting
evidence to rebut.
                                          B
                       Application to the Facts of This Case
       {¶92} In this case, it is clear that the consent-to-settle clause was
breached. However, it is not clear that the prompt-notice provision was breached,
even though notice was not given immediately. The Ferrandos were required to
give notice within a reasonable time “in light of all the surrounding facts and
circumstances.” Ruby, syllabus.
       {¶93} It is logical that the longer the delay in giving notice, the more
likely that the notice was unreasonable, in that a lengthy delay is more apt to
frustrate the purposes of a prompt-notice clause.         However, we decline to
establish a rule in this case that a delay in notice of a particular length of time is
unreasonable in all cases. We simply find that, under the specific facts of this
case, the notice was not so late to be unreasonable as a matter of law.
       {¶94} The inquiry into reasonableness of the notice is specifically
complicated by one fact in this case. The Ferrandos’ UIM claim against Personal
Service is under the city’s policy with that insurer and is not through any contract
of insurance that the Ferrandos themselves ever had with Personal Service. The
Ferrandos promptly notified their own UIM insurer, Auto-Owners, of their
potential claim but were unaware that the city’s policy with Personal Service
might also provide a source of UIM coverage.
       {¶95} That the Ferrandos were not named insureds to the Personal
Service policy does not relieve them of the responsibility to comply with its
terms. In Bantz, supra, 124 Idaho at 785, 864 P.2d 618, the Supreme Court of
Idaho concluded that “a third party beneficiary of an insurance policy must
comply with all the terms and provisions of an insurance policy which apply to
that beneficiary. It would be manifestly unfair to allow a third party beneficiary




                                         33
                            SUPREME COURT OF OHIO




to collect the benefits of the insurance policy without fulfilling the obligations
therein.”   In Easley, this court did not excuse the third party seeking UIM
coverage from complying with the policy’s provisions but recognized that when
an additional insured seeks to recover under a UIM policy, special circumstances
can complicate the inquiry into the reasonableness of the notice provided.
       {¶96} In this case, there is therefore an initial question of fact whether the
notice provided by the Ferrandos was reasonable. The general approach to this
question is described in Annotation, Liability Insurance: Timeliness of Notice of
Accident by Additional Insured (1973), 47 A.L.R.3d 199, 202, Section 2[a], 1973
WL 33743:
       {¶97} “[C]ourts have generally construed such language [requiring that
prompt notice of an accident be given to an insurer] to mean that notice must be
given within a reasonable time under the circumstances of the case. * * *
       {¶98} “Where coverage is sought by an additional insured, that is, by a
person who is not the named insured under the policy * * * the most common
reason for failure of such additional insured to give timely notice to the named
insured’s insurer is that the additional insured was not aware of the fact that he
was covered under the policy issued to the named insured. Courts have generally
held that where an additional insured’s ignorance of coverage is understandable,
and where notice is given promptly after the additional insured becomes aware of
possible coverage, even a long period of delay is excusable * * *. However,
courts place limits on their liberality with respect to excusing delayed notice by
holding generally that ignorance of coverage is no excuse where the additional
insured failed to exercise due diligence in investigating possible coverage, a
caveat which is usually invoked where the facts are such that the additional
insured should have looked into the matter of coverage sooner than he did.”
(Footnotes omitted.) See, also, Burke v. Liberty Mut. Ins. Co. (1994), 201 A.D.2d
773, 607 N.Y.S.2d 483 (“an additional insured’s ignorance of the policy




                                         34
                                January Term, 2002




provisions will excuse his failure to satisfy its requirements only if the lack of
knowledge is reasonable under all the circumstances”).
       {¶99} The trial court resolved that issue in favor of the Ferrandos, finding
that they were reasonable in notifying Personal Service once they discovered that
coverage existed.    However, the trial court’s decision makes no mention of
whether the Ferrandos should have made a more diligent inquiry into the
existence of UIM coverage under the Personal Service policy than they did. The
Ferrandos never supplied any evidence to support their claim to the trial court that
such coverage is rarely provided in a city’s policy such as this one. In light of our
decision today, such an inquiry is relevant to this question, and the Ferrandos
have raised an issue of fact as to the reasonableness of their notice.
       {¶100} The trial court also found that Personal Service was not prejudiced
by the late notice. However, if the Ferrandos’ notice was reasonably given, there
would have been no need to consider whether the insurer was prejudiced. We
agree with the Alcazar and Clementi courts that the reasonableness inquiry and
the prejudice inquiry are separate and distinct. To the extent that the trial court
may have considered a possible lack of prejudice as a factor going to the
reasonableness of the Ferrandos’ notice, we disapprove of that approach.
       {¶101} We therefore hold that a genuine issue of material fact exists as to
whether the Ferrandos’ notice to Personal Service was reasonably given. The
resolution of that issue will determine whether further inquiry is necessary
regarding the delayed-notice issue. If as a factual matter notice was reasonably
given, then no breach of the prompt-notice policy provision occurred, and the
insurer’s obligation to provide coverage is not excused pursuant to that provision.
However, if the trial court determines that notice was not reasonably given, then a
breach of the policy did occur, and the next step is for the trial court to determine
whether the insurer was prejudiced by that breach. In its initial determination, it
is not clear which party the trial court assigned the burden of demonstrating




                                          35
                             SUPREME COURT OF OHIO




prejudice. Pursuant to our decision today, the insured party bears the burden of
presenting evidence to rebut a presumption of prejudice.
       {¶102} This answer as to whether notice was reasonably given will also
play a role in determining the amount of prejudice to the insurer from the failure
of the Ferrandos to get the consent of Personal Service to settle with the
tortfeasor. The trial court failed to follow paragraph four of the syllabus of Bogan
in evaluating this issue and should have held, given Bogan’s validity at the time,
that the Ferrandos were not entitled to UIM coverage due to their breach of the
consent-to-settle provision. Therefore, the trial court should not have inquired
into insurer prejudice on this particular issue. However, since we have now
overruled Bogan’s holding that a subrogation clause is an absolute condition to
coverage, prejudice to the insurer is relevant.
       {¶103} It is apparent that the consent-to-settle clause was breached in this
case, but the prejudicial effect on the insurer may be minimal, depending on the
value of the subrogation rights sought to be protected. The fact that Auto-Owners
gave the Ferrandos consent to settle with the tortfeasor for his policy limits should
have some effect on the resolution of the prejudice question, but the record is
devoid of evidence as to why that permission was given, and further inquiry into
that issue is warranted pursuant to the standards set forth in this opinion.
       {¶104} In conclusion, there is a genuine issue of material fact as to
whether the Ferrandos provided reasonable notice of this accident to Personal
Service, the provider of the UIM coverage at issue. If reasonable notice was not
provided, then there is a genuine issue of material fact as to whether Personal
Service was prejudiced by the Ferrandos’ breach of the prompt-notice provision.
While it is apparent that the Ferrandos breached the consent-to-settle provision of
the UIM policy, there is a genuine issue of material fact as to whether Personal
Service was prejudiced by that breach. We reverse the judgment of the court of




                                          36
                                January Term, 2002




appeals and remand this cause to the trial court for further proceedings consistent
with this opinion.
                                                                 Judgment reversed
                                                                and cause remanded.
       DOUGLAS, F.E. SWEENEY and PFEIFER, JJ., concur.
       MOYER, C.J., concurs in paragraph one of the syllabus and dissents from
paragraph two of the syllabus, the opinion, and the judgment.
       LUNDBERG Stratton, J., concurs in part and dissents in part.
       COOK, J., dissents.
                              __________________

       LUNDBERG STRATTON, J., concurring in part and dissenting in part.
       {¶105} I concur with paragraph one of the syllabus; however, I
respectfully dissent from paragraph two of the syllabus that overrules, in part,
paragraph four of the syllabus of Bogan v. Progressive Cas. Ins. Co. (1988), 36
Ohio St.3d 22, 521 N.E.2d 447. There are different reasons behind the consent-
to-settle or subrogation clause that I believe justify enforcing the contract clause
without any inquiry into prejudice caused by a breach.
       {¶106} The consent-to-settle provision in the policy preserves the insurer’s
right of subrogation against the tortfeasor. A number of factors might influence
an insurer’s decision whether to consent to a settlement, including but not limited
to the insurer’s business practices, the particular policy limits, the policy
language, the claims history of the insured, a cost-benefit analysis of the claim,
and the potential for reimbursement from the tortfeasor. If the insured breaches
the consent-to-settle or subrogation provisions of the policy, the insured’s right of
subrogation is destroyed.        Once destroyed, the right is gone forever.
Consequently, destruction of that existing right by a third party, through no fault
of the insurer, is prejudicial as a matter of law. The insurer is denied the




                                         37
                             SUPREME COURT OF OHIO




opportunity to investigate, while the third party may have had little incentive to
investigate or preserve evidence. The insurer is unable to protect against fraud and
collusion or to determine whether its subrogated claim is collectible or whether
the tortfeasor is judgment-proof. The insurer should be the party to ultimately
decide whether to pursue its subrogation rights.
        {¶107} In Ohio, the right of subrogation is recognized by statute and by
the courts. It does not depend upon whether the insurer will be successful in
exercising the right. Bogan described an insurer’s right of subrogation as “a full
and present right in and of itself wholly independent of whether a later judgment
obtained by use of such right will be reduced to collection from the tortfeasor.”
36 Ohio St.3d at 31, 521 N.E.2d 447. It is “ ‘real and existing’ ” when a
settlement releases the tortfeasor. Id. The Bogan court, therefore, concluded that
it was “both just and reasonable that an insurer require, as a precondition to
coverage, not that such subrogation rights will result in reimbursement to the
insurer, but that the injured party not compromise with the tortfeasor in such a
way as to destroy the insurer’s subrogation right.      Such compromise clearly
prejudices the present subrogation right of the injured party’s insurer.” (Emphasis
sic.) Id.
        {¶108} By requiring a factual inquiry into the prejudicial effect of any
breach, the majority is now injecting more uncertainty into the insurance industry
and creating more litigation. It renders meaningless contractual provisions of the
policy and the statutory right of subrogation. It will require a factual inquiry
every time there is a breach of the consent-to-settle or subrogation provisions and
place the decision about subrogation in the hands of courts and juries instead of
with the insurer. Furthermore, all the time and money spent to determine the
value, if any, of the subrogation right is for naught, since the tortfeasor has
already been released from any further liability.




                                         38
                               January Term, 2002




       {¶109} As an Ohio court reasoned, “whether subrogation rights have been
destroyed or the insurance carrier prejudiced thereby should not be determined on
a case by case basis depending on the collectibility of the tortfeasor. Just because
the tortfeasor may appear to be uncollectible today does not mean he or she will
be uncollectible tomorrow. The tortfeasor may inherit a fortune, win the lottery
or secure a lucrative employment. The collectibility of the underlying tortfeasor
is irrelevant in determining whether an insurance carrier is prejudiced by its
insured’s destruction of its subrogation rights.” Ungur v. Buckeye Union Ins. Co.
(Mar. 26, 2002), Cuyahoga C.P. No. 448778, at 5.
       {¶110} Here, the insurer’s subrogation right is rooted in Ohio case law,
contract, and statute. In the event of an insured’s breach of the consent-to-settle
or subrogation provisions of the insurance policy, there should be no need to
prove actual prejudice to relieve the insurer of the obligation to provide coverage.
Therefore, I respectfully dissent from paragraph two of the syllabus.
                          ________________________
       Nurenberg, Plevin, Heller & McCarthy Co., L.P.A., and Kathleen J. St.
John, for appellants.
       Baker & Hackenberg and I. James Hackenberg, for appellee.
       Elk & Elk Co., L.P.A., and Todd O. Rosenberg, urging reversal for amicus
curiae Ohio Academy of Trial Lawyers.
       Bricker & Eckler, L.L.P., Kurtis A. Tunnell, Anne Marie Sferra and
Robert Katz, urging affirmance for amici curiae American Insurance Association,
National Association of Independent Insurers, Alliance of American Insurers,
Ohio Chapter of the National Federation of Independent Business, Ohio
Manufacturer’s Association, Ohio Farm Bureau Federation, Ohio Chemistry
Technology Council, and Ohio Council of Retail Merchants.




                                        39
                          SUPREME COURT OF OHIO




       Keener, Doucher, Curley & Patterson, W. Charles Curley and Jenifer J.
Murphy, urging affirmance for amicus curiae Ohio Association of Civil Trial
Attorneys.
                           __________________




                                     40
