Settlement Between Insured and Tortfeasor Before Insurance Payment

An insurance company loses its right of subrogation when an insured settles with a tortfeasor prior to payment by the insurer. See Foundation Reserve Ins. Co. v. Cody, 458 S.W.2d 214, 216 (Tex. Civ. App.-Dallas 1970, no writ). However, the supreme court has held, even when there is a settlement-without-consent exclusion, an insurer may escape liability only when the insurer is actually prejudiced by the insured's settlement with the tortfeasor. See Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 693 (Tex. 1994) (interpreting provision of uninsured/underinsured motorist policy). In Hernandez, the supreme court reasoned that one party's material breach of a contract discharges or excuses the other party's obligation to perform. See id. at 692. A factor in determining the materiality of the breach is "the extent to which the nonbreaching party will be deprived of the benefit that it could have reasonably anticipated from full performance." Id. at 693. The supreme court noted that, in those instances where any extinguished subrogation right had no value, the insurer might not be deprived of the contract's expected benefit. See id. And where the insurer was not prejudiced by the settlement, the breach was not material. See id.