Jones v. State Farm Mutual Automobile Insurance

155 S.E.2d 118 (1967) 270 N.C. 454

Charles A. JONES
v.
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY.

No. 293.

Supreme Court of North Carolina.

June 20, 1967.

Elbert E. Foster and Nick J. Miller, Charlotte, for plaintiff appellee.

Carpenter, Webb & Golding, Charlotte, for defendant appellant.

Atty. Gen. T. W. Bruton and Asst. Atty. Gen. Bernard A. Harrell for the State as amici curiae.

BOBBITT, Justice.

The Vehicle Financial Responsibility Act of 1957, G.S. Chapter 20, Article 13, requires every owner of a motor vehicle, as a prerequisite to the registration thereof, to show "proof of financial responsibility" in the manner prescribed by the Motor Vehicle Safety and Financial Responsibility Act of 1953, G.S. Chapter 20, Article 9A. G.S. § 20-314.

The manifest purpose of the 1957 Act was to provide protection, within the required limits, to persons injured or damaged by the negligent operation of a motor vehicle; and, in respect of a "motor vehicle liability policy," to provide such protection notwithstanding violations of policy provisions by the owner subsequent to accidents on which such injured parties base their claims. Swain v. Nationwide Mutual Insurance Co., 253 N.C. 120, 126, 16 S.E.2d 482, 487. "The primary purpose of compulsory motor vehicle liability insurance is to compensate innocent victims who have been injured by financially irresponsible motorists." Nationwide Mutual Insurance Co. v. Roberts, 261 N.C. 285, 290, 134 S.E.2d 654, 659. The 1957 Act is a remedial statute and will be liberally construed "to carry out its beneficent purpose of providing compensation to those who have been injured by automobiles." 7 Am.Jur.2d, Automobile Insurance § 6; Moore v. Hartford Fire Insurance Co., N.C., 155 S.E.2d 128.

When sued by plaintiff, Brown did not turn over to defendant either the summons or the complaint; nor did he notify defendant that he had been sued. With reference to accidents occurring prior to the effective date of the 1957 Act, such policy violations would constitute a valid and complete defense. Muncie v. Travelers Insurance Co., 253 N.C. 74, 116 S.E.2d 474, and cases cited; Clemmons v. Nationwide Mutual Insurance Co., 267 N.C. 495, 148 S.E.2d 640. The law as stated in Muncie and in Clemmons is presently applicable to coverage "in excess of or in addition to the coverage specified for a motor vehicle liability policy" as defined in G.S. § 20-279.21. In this connection, see G.S. § 20-279.21(g). However, as to the compulsory coverage provided by a "motor vehicle liability policy," as defined in G.S. § 20-279.21, issued as "proof of financial responsibility" as defined in G.S. § 20-279.1, the statute provides explicitly that "no violation of said policy shall defeat or void said policy." G.S. § 20-279.21(f) (1). The policy here under consideration provides such compulsory coverage and no more.

If defendant had voluntarily issued its "motor vehicle liability policy" to Brown, Swain v. Nationwide Mutual Insurance Co., supra, and Lane v. Iowa Mutual Insurance Co., 258 N.C. 318, 128 S.E.2d 398, would control decision and require affirmance. Also, see Royal Indemnity Co. v. Olmstead, 9 Cir., 193 F.2d 451, 31 A.L.R. 2d 635, and Annotation, 31 A.L.R. 2d 645 et seq. The factual situations in Swain and in the present action are alike in all essentials except that in Swain the policy was issued voluntarily and here the policy was issued as an assigned risk policy. Relevant to the constitutional questions raised in Swain, this Court said: "When defendant voluntarily issued its policy to Owens, it did so with full knowledge that the provisions of G.S. § 20-279.21(f) (1) became a part thereof as fully as if written therein; and, having voluntarily assumed the risk, it may not challenge the constitutionality of the statutory provisions." In Lane, although the policy was referred to as an assigned risk policy, the constitutional question with reference thereto which the defendant attempted to raise for the first time in this Court was not decided or discussed. Lane was decided on authority of Swain.

The question for decision is whether G.S. § 20-279.21(f) (1) when applied to an assigned risk policy issued in compliance with the plan set forth in G.S. § 20-279.34 and regulations pursuant thereto "deprives the defendant of its property without due process of law and otherwise than by the law of the land in contravention of the Fourteenth Amendment to the Constitution of the United States of America and Sections 1 and 17 of Article I of the Constitution of North Carolina."

All briefs refer to this question as one of first impression.

The pleadings herein raise no issues as to Brown's actionable negligence or as to the extent of plaintiff's injuries. The question presented is whether plaintiff is entitled to recover from this defendant the amount of the judgment plaintiff obtained against Brown. Defendant contends that the judgment of the court below, which requires that it pay the amount of plaintiff's judgment against Brown notwithstanding it had no notice of or opportunity to defend said action, constitutes a denial of his constitutional right to procedural due process.

We consider first whether plaintiff could have instituted and maintained an action against defendant otherwise than on the judgment he obtained against Brown.

In the Annotation, "Joinder of insurer and insured under policy of compulsory indemnity or liability insurance in action by injured third person," in 20 A.L.R. 2d 1097, at p. 1102, the author states: "In the absence of particular statutory or policy provisions which in some instances have induced the courts to depart therefrom, the prevailing rule is that the insurer under a compulsory insurance policy may be joined as a defendant with the insured in an action by an injured third person, on the theory that, under the statutes requiring and controlling compulsory insurance, a direct or joint right is created in favor of the injured person against both the insured and the insurer." (Our italics.)

With reference to required coverage provided for the protection of the public by carriers operating under the authority of licenses granted by the North Carolina Utilities Commission, G.S. § 62-274 provides that no "insurance company or surety executing any insurance policy, bond, or other security for the protection of the public, as provided in § 62-268, or as provided in § 62-112, (shall) be joined with the assured carrier in any action or suit for damages, debt, or claim thereby secured * * *." In connection with such carriers, attention is directed to Harrison v. Southern Transit Co., 192 N.C. 545, 135 S.E. 460, and Williams v. Frederickson Motor Exp. Lines, 195 N.C. 682, 143 S.E. 256. In Harrison, based on a 1925 statute, it was held that a judgment against the carrier was not a prerequisite to a suit on the policy or bond, and that it was proper for plaintiff to join the insured carrier and its insurer in the same action. In Williams, in accordance with the express provisions of the 1927 Act referred to therein, which repealed the 1925 Act on which Harrison was based, it was held that the insurer could not be joined in an action against the insured.

In Watson v. Employers Liability Assur. Corp., 348 U.S. 66, 75 S. Ct. 166, 99 L. Ed. 74, the Louisiana statute there under consideration gave an injured person a right of direct action against the insurer before final determination of the insured's obligation to pay, and expressly recognized, as to injury occurring in Louisiana, such right of direct action irrespective of whether the policy sued upon was written or delivered in Louisiana, and notwithstanding it contained a clause forbidding such direct action. The statute also required that a foreign insurance company consent to such direct action in order to obtain a certificate to do business in the state. It was held that this statute did not violate the due process clause of the Fourteenth Amendment in respect of an injury occurring in Louisiana even though the particular policy was negotiated, issued and delivered in another state.

We find no North Carolina statute other than G.S. § 62-274, quoted above, authorizing or prohibiting a suit against a liability insurer alone or jointly with its insured by a person allegedly injured by the negligence of the insured. Whether, in the absence of a controlling statutory or policy provision plaintiff could have sued defendant alone or jointly with Brown in an action to determine Brown's liability, if any, to plaintiff, is not presented.

The policy issued by defendant to Brown contains the following provisions: "No action shall lie against the company unless, as a condition precedent thereto, the insured shall have fully complied with all the terms of this policy, nor until the amount of the insured's obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company. Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall thereafter be entitled to recover under this policy to the extent of the insurance afforded by this policy. Nothing contained in this policy shall give any person or organization any right to join the company as a co-defendant in any action against the insured to determine the insured's liability."

Under the insuring agreements of the policy, defendant became obligated "(t)o pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages" because of personal injuries or property damage caused by accident and arising out of the ownership, maintenance or use of the insured automobile.

As provided in G.S. § 20-279.21(f) (1), this liability became absolute when plaintiff's injury and damage occurred notwithstanding Brown's subsequent violations of his obligations to defendant under the policy provisions. Brown's liability to plaintiff was established by a judgment obtained in accordance with approved legal procedure. As between plaintiff and Brown, all requirements of due process were met. The provision in the "no action" clause with reference to judgment "after actual trial" is valid only when construed as a defense to a judgment obtained against an insured by consent or through collusion. Although invalid in the respects and to the extent indicated, we are of opinion, and so decide, that the "no action" clause precludes an injured person from instituting and maintaining an action against the insurer otherwise than on a judgment properly obtained against the insured through approved legal procedure.

Defendant elected to incorporate the quoted provision in the policy it issued to Brown. By reason thereof, plaintiff had no right to institute and maintain an action against defendant unless and until Brown's liability to plaintiff had been determined by judgment.

As required by the policy provisions, plaintiff sued and obtained judgment against Brown in accordance with approved legal procedure. Unless and until set aside, this judgment constituted a final adjudication and determination of Brown's legal liability to plaintiff. In this connection, see Sanders v. Chavis, 243 N.C. 380, 90 S.E.2d 749; also, Sanders v. Travelers Indemnity Company, 144 F. Supp. 742 (M.D. N.C.). The record discloses no ground on which defendant can defeat Brown's obligation to plaintiff.

We see no reason why defendant cannot, if it so desires, delete its "no action" clause from assigned risk or other policies providing coverage within the compulsory limits. Too, we refrain from discussing possibilities with reference to the adoption of new statutory or policy provisions that would assure notice to defendant of the pendency of an action against its insured before a judgment that would bind defendant could be entered. These are matters to be considered by defendant and its counsel in the light of all relevant factors.

Plaintiff, in compliance with the provisions of the policy issued by defendant to Brown pursued the only remedy available to him, that is, an action against Brown in which he obtained judgment establishing Brown's legal liability to him. Defendant is obligated to discharge Brown's liability as established by said judgment. The fact that defendant had no knowledge or notice of plaintiff's action against Brown before judgment had been entered does not constitute a denial of procedural due process.

There remains for consideration whether the judgment of the court below denies to defendant its constitutional right to substantive due process. G.S. § 20-279.21(f) (1), as interpreted and applied by this Court, deprives it of defenses otherwise available under its (standard) policy provisions. Defendant contends the requirement that it be so bound by a policy issued on a risk it did not voluntarily accept constitutes a denial of substantive due process.

The assigned risk plan authorized by G.S. § 20-279.34 is "for the equitable apportionment" among insurance carriers licensed to write motor vehicle insurance in this State or "those applicants for motor vehicle liability policies who are required to file proof of financial responsibility under this article (9A) but who are unable to secure such insurance through ordinary methods." All insurance carriers, as a prerequisite to engaging and writing such insurance in this State, must subscribe to, and participate in, the plans and procedures constituting the assigned risk plan.

In California State Auto. Asso., etc. v. Maloney, 341 U.S. 105, 71 S. Ct. 601, 95 L. Ed. 788, it was held that the provisions of a compulsory assigned risk law of California did not violate the due process clause of the Fourteenth Amendment. The basic factual situation is well summarized by the reporter (L. Ed.) as follows: "The right of an insurance association to do business in California was revoked for its failure to comply with a statute which made it mandatory on all automobile liability insurers to subscribe to a plan for the equitable apportionment among such insurers of applicants who are in good faith entitled to but are unable to procure such insurance through ordinary methods." The plaintiff having failed to subscribe to such plan, the Insurance Commissioner had suspended its license to transact automobile liability insurance business in California. The plaintiff's unsuccessful action was for "a writ of mandate" to compel the Insurance Commissioner to restore its right to do business without subscribing to said California act.

Clearly, the fact that defendant is required to issue assigned risk policies as a condition of transacting liability insurance business in North Carolina does not constitute a denial of due process in violation of State and Federal constitutional provisions.

The gist of defendant's contentions is stated in an assignment of error as follows: "A statutory scheme which compels the issue of a policy under the Assigned Risk Plan without providing reasonable means for notice to the insurer and opportunity to defend a suit against the Assigned Risk insured concurrently permits arbitrary, unreasonable, and unnecessary windfall to the personal injury claimant and an unreasonable, arbitrary, capricious, forfeiture and loss to the insurer. Permitting an accident victim to recover `damages' through default proceedings in excess of legitimate compensation for injury actually incurred bears no real and substantial relationship to a valid statutory policy intended to assure the accident victim of just compensation for his injuries."

Defendant assigns as error the court's failure to make requested findings of fact. The requested findings involve primarily evidential facts tending to support the court's Finding of Fact No. 17, namely, "that the assigned risk portion of defendant's business in North Carolina, when considered separate and apart from all other automobile liability insurance business it does in North Carolina, has not been profitable and defendant has lost money thereon which makes this type of business undesirable."

As stated by Mr. Justice Douglas in California State Auto. Asso., etc. v. Maloney, supra: "(T)he state requires in the public interest each member of a business to assume a pro rata share of a burden which modern conditions have made incident to the business." Defendant's status is the same as that of all companies licensed to write motor vehicle liability insurance in this State. It assumes its pro rata part and no more of whatever additional burden is placed on it by the Assigned Risk Plan. If liability insurance carriers are required to conduct their business and issue policies at rates that are confiscatory and are thereby deprived of substantive due process, the remedy is by a general direct attack upon such rates on these grounds, not by way of defense in an action involving one policy issued in ordinary course in compliance with the regulations of the Assigned Risk Plan.

G.S. § 20-279.34 provides that the Commissioner of Insurance "is authorized but not required to establish rates for assigned risk liability policies which are higher than approved manual rates". Defendant asserts that "(i)n those states other than North Carolina in which the defendant operates under an Assigned Risk Plan, there is some differential or surcharge to the insured affording to the company a greater premium for this class of business." Pertinent to this contention, the court's Finding of Fact No. 5 is as follows: "For persons who purchase their automobile liability insurance through the Assigned Risk Plan, the rates are exactly the same for the same coverage limits and for the same individuals under the same circumstances whether the insurance is written through the Plan or voluntarily in the regular market." (Our italics.) The meaning is clarified by the following testimony of defendant's witness, the assistant manager of the North Carolina Automobile Assigned Risk Plan: "It is the Commissioner of Insurance who makes the determination that applicants for assigned risk insurance would pay the same rates as those people with the same driving record who buy automobile insurance on the open market." There is no evidence as to policies, if any, issued voluntarily to persons whose driving record ordinarily would necessitate that they obtain liability insurance under the Assigned Risk Plan. If the rates established for assigned risk liability policies under the Assigned Risk Plan are confiscatory and therefore deny substantive due process, the remedy is by general direct attack upon such rates on these grounds, not by way of defense in an action involving one policy issued in regular course in compliance with the regulations of the Assigned Risk Plan.

It may be advisable to provide by statute or by policy provision that a liability insurer be given an opportunity, notwithstanding policy violations by its insured, to contest, in an action against it, alone or jointly with its insured, issues as to its insured's liability and the extent of damage to the injured party. Presumably, defendant prefers that no action be instituted against it except on a judgment, obtained in a prior action to which it was not a party, which finally adjudicates and determines the liability of its insured.

Defendant refers to a possible windfall to plaintiff. These facts are noted: Plaintiff's counsel did not act in haste to obtain judgment by default and inquiry or final judgment. Moreover, the record furnishes no basis for a finding that Brown was not legally liable to plaintiff or that the jury awarded excessive damages. Nor is there any suggestion of collusion between plaintiff and Brown.

It is noted again that this action relates solely to compulsory coverage provided by a "motor vehicle liability policy" issued as "proof of financial responsibility." It is noted also that the policy issued by defendant to Brown contained the provision authorized by G.S. § 20-279.21(h), to wit: "Any motor vehicle liability policy may provide that the insured shall reimburse the insurance carrier for any payment the insurance carrier would not have been obligated to make under the terms of the policy except for the provisions of this article."

For the reasons stated, we are of opinion, and so decide, that the judgment of the court below should be and is affimed.

Affirmed.

PARKER, J., concurs in the result.

PLESS, J., dissents.