The Alabama Supreme Court recently issued an opinion holding an insured can still prove they are “legally entitled to recover” damages under the terms of an uninsured / underinsured motorist policy even if the tortfeasor files for bankruptcy.
In Easterling v. Progressive Specialty Insurance Company, the Plaintiffs were injured when their vehicle was rear-ended. The Easterlings sued the tortfeasor and also named their insurer, Progressive Specialty Insurance Company (“Progressive”), as a defendant, seeking uninsured/underinsured motorist (“UIM”) benefits. Before trial, the tortfeasor filed a suggestion of bankruptcy and moved that the case “should be ceased.” In response, Progressive filed a motion for summary judgment, arguing that under Alabama law, a plaintiff may seek to recover UIM benefits from his insurer only if the plaintiff is “legally entitled to recover damages” from the tortfeasor. See Ala. Code 1975, Section 32-7-23(a). Following a hearing, the trial court granted Progressive’s motion, holding because of the tortfeasor’s bankruptcy filing, Plaintiffs could no longer obtain a judgment that the tortfeasor would be responsible for that would require the UIM carrier to pay. The Plaintiffs appealed.
On appeal to the Alabama Supreme Court, the Plaintiffs cited authority from the 11th federal Circuit Court of Appeals for the proposition that a bankruptcy discharge protects only the filing debtor and will not act to enjoin a creditor from taking action against another who might also be liable to the creditor, including an insurer who may be secondarily liable. The Supreme Court explained that “legally entitled to recover” refers to the insured’s ability to prove the merits of the underlying tort claim against the UIM tortfeasor. Here, the tortfeasor’s bankruptcy limited the Plaintiffs’ ability to collect damages from the tortfeasor if they successfully demonstrated the merits of their claims against her. However, it was not a determination of the merits of the tortfeasor’s liability. The Court further pointed out that the Bankruptcy Code is not violated by the continuation of an action to permit an injured plaintiff to proceed against a discharged debtor in order to ultimately recover against an insurer. Put another way, the Bankruptcy Code permits a creditor to continue an action directly against the debtor for the purpose of establishing liability when establishment of that liability is a prerequisite to recovery from another entity. The Supreme Court thus concluded that there was nothing preventing the Plaintiffs from proving they were entitled to recover from the tortfeasor, and that only their ability to collect directly from her was enjoined. The Court found any injunction against proceeding directly against the debtor, therefore, in no way extends to the Plaintiffs’ own insurer.
Although in some ways this holding may broaden a key policy provision for purposes of UIM coverage, the Alabama Supreme Court’s decision does provide further guidance as to the circumstances which may affect whether an insured can show they are “legally entitled to recover.”