Emmеtt DOHNEY, Respondent, v. ALLSTATE INSURANCE COMPANY, a foreign corporation, Petitioner, Appellant.
No. C5-01-252.
Supreme Court of Minnesota.
Aug. 16, 2001.
632 N.W.2d 598
Accordingly, I would affirm the court of appeals and remand this case to the district court to determine the statutory interest amount with credit for interest earned on deposit.
PAUL H. ANDERSON, Justice (dissenting).
I join in the dissent of Justice GILBERT.
Eric J. Magnuson, Mark A. Fredrickson, Rider, Bennett, Egan & Arundel, LLP, Minneapolis, for appellant.
Jeffrey M. Ellis, PLLC, Minneapolis, for respondent.
William L. Davidson, Timothy J. O‘Connor, Lind, Jensen, Sullivan & Peterson, P.A., Minneapolis, for amicus curiae MDLA.
PAUL H. ANDERSON, Justice.
The following reformulated questions of law were certified to us by the United States District Court for the District of Minnesota:
- Where a plaintiff settles with a tortfeasor for 40% of the tortfeasor‘s liability limits after giving the plaintiff‘s insurer notice under Schmidt v. Clothier, 338 N.W.2d 256 (Minn.1983), may the plaintiff‘s insurer deny an underinsured motorist claim based оn the plaintiff‘s failure to reach the “best settlement” with the tortfeasor?
- If so, does the court apply an objective or subjective test in determining whether the best settlement was reached?
- If the plaintiff fails to satisfy the best settlement test, what is the effect on any underinsured motorist claim he may have filed?
We answer the first question in the negative and therefore it is unnecessary for us to address the other two certified questions.
Emmett Dohney was involved in a car accident with Laurel Larsen on January 25, 1995. Larsen was solely responsible for the accident. As a result of the accident, Dohney incurred medical bills of over $23,000. Dohney asserts that the accident сaused ongoing headaches, wage loss, pain and suffering, and loss of future earning capacity, which he claims resulted in damages greater than $50,000. At the time of the accident, Larsen was insured for $50,000 per injury and $100,000 per occurrence through American Express Property & Casualty Insurance Company (Amex). Through his attorney, Dohney negotiated a settlement with Larsen and Amex for $20,000.
Dohney was insured for underinsured motorist (UIM) benefits through Allstate Insurance Company. Dohney‘s UIM policy was for $100,000. On September 28, 1998, Dohney‘s attorney sent a letter to Allstate informing Allstate about the proposed settlement with Amex. In the letter, the attorney requested that Allstate substitute its draft for Amex‘s pеr the settlement procedure outlined in Schmidt v. Clothier, 338 N.W.2d 256 (Minn.1983). In the letter, the attorney incorrectly stated that the limit on Larsen‘s Amex policy was $30,000.1 Approximately two weeks later, Allstate received a letter from Amex stating that the proposed settlement was for $20,000 on a $50,000 policy. Allstate refused to substitute its draft. Dohney then settled with Amex for $20,000.
Allstate moved for summary judgment or in the alternative requested that the federal court certify a question to the Minnesota Supreme Court under
We accepted the certification and reformulated the federal court‘s questions.2 We also granted a motion of the Minnesota Defense Lawyers Association (MDLA) to file a brief as an amicus curiae.
I.
The certified questions presented are matters of law, which we review de novo. Foley v. Honeywell, 488 N.W.2d 268, 270 (Minn.1992). The underlying issues involve statutory interpretation and interpretation of insurance contracts, which are both legal issues that we review de novo. Hibbing Educ. Ass‘n v. Pub. Employment Relations Bd., 369 N.W.2d 527, 529 (Minn.1985); State Farm Ins. Cos. v. Seefeld, 481 N.W.2d 62, 64 (Minn.1992).
Before we specifically address the best settlement certified question, it is first necessary to establish some overall understanding of Minnesota‘s no-fault insurance scheme and in particular the provisions relating to UIM coverage.
While the Minnesota legislature has made significant changes to the UIM provisions, the definition of what is an underinsured motorist has remained essentially
Before the No-Fault Act became effective in 1975, insurers were required to make UIM coverage available to an insured, but insureds were required to affirmatively opt for UIM coverage or they would not receive the benefits.
On January 1, 1975, the No-Fault Act became еffective and as part of the act, insurers were required to offer UIM coverage, and UIM coverage shifted from “difference of limits” to “damages less limits” or “add-on” coverage. Act of April 11, 1974, ch. 408, § 9, 1974 Minn. Laws 773, codified at
In Schmidt, we weighed the interests of the insured in controlling the timing and terms of settlement against the interests of the UIM insurer in protecting subrogation rights against the tortfeasor. Id. at 260-63. We decided that the proper procedure would be for an insured party to notify his UIM insurer of any potential below-limit settlement. Id. at 263. The UIM insurer would then have the opportunity to substitute its payment to the insured for an amount equal to the settlement and thus preserve its subrogation rights against the tortfeasor. Id. If the UIM insurer did not substitute its draft payment, the insured could settle with the tortfeasor, the UIM insurer and the insured would then proceed to arbitrate the UIM claim, and the UIM insurer would waive any subrogation rights against the tortfeasor and her insurer. Id. If the UIM insurer did substitute its draft, it could then take action against the tortfeasor and her insurer to attempt to obtain a better
The dissent in Schmidt agreed with the notice and substitution requirements, but disagreed that the insured should have to absorb the gap created by a below-limit settlement with the tortfeasor. Id. at 264 (Todd and Amdahl, JJ., concurring and dissenting; Scott, J., dissenting). The dissent stated that this gap rule would have “a very bad practical effect” in that it would not allow the insured to negotiate a reasonable settlement unless the insured was willing to bear the financial loss of a below-limit settlement. Id. The dissent explained that the notice and substitution requirements would correct problems resulting from any incentive the insured might have to settle for less than the tortfeasor‘s policy limit created by having the UIM insurer cover the gap. Id. The position advocated by the dissent was that UIM coverage should start at the point where the settlement with the tortfeasor left off, with the notice and substitution procedures protecting the interests of the UIM insurer. Id. The dissent stated:
The injured party should negotiate the best possible settlement. The offer is communicated to the underinsured carrier. If it is not satisfied, the offer should be rejected, the underinsured carrier should immediately pay the amount of the offer to the injured party, and they should immediately proceed to arbitration. This method places in the underinsured carrier the ability to manage its role in the pending claim tо its best advantage without imposing any financial burden on the injured party.
Id.
In 1980, the legislature repealed the UIM provisions; therefore, from April 1980 until October 1985, there were no UIM statutes in effect in Minnesota. Smetak, 24 Wm. Mitchell L.Rev. at 870. In 1985, the legislature made major revisions in the No-Fault Act and for the first time made minimum amounts of UIM coverage mandatory. Act of June 27, 1985, ch. 10, § 68, 1985 First Special Session Minn. Laws 1840, codified at
In 1989, the legislature again modified the No-Fault Act and these chаnges are what govern UIM policies today. UIM coverage is once again “add on” coverage, as it was when we decided Schmidt. Act of May 19, 1989, ch. 213, § 2, 1989 Minn. Laws 648, codified at
With this understanding of Minnesota‘s No-Fault law, we proceed to address the certified questions. Allstate and MDLA urge us to answer yes to the first question and allow UIM insurers to challenge a UIM claim on the basis that the insured failed to reach the best settlement with the tortfeasor. Allstate and MDLA argue that such a defense is the only way to prevent less expensive UIM coverage from being converted to third-party liability coverage and to balance the competing interests of the UIM insurers and their insureds.
In essence, Allstate and MDLA argue that the Schmidt notice and substitution procedure provide inadequate protection of a UIM insurer‘s subrogation rights. They argue that substitution requires the insurer to bear the risk that the below-limit settlement was the best settlement, or in other words, that the actual liability of the tortfeasor was below the settlement amount. In support of its position that we require more from a settlement than just an insured‘s best settlement, Allstate cites to a number of cases in which we disallowed uninsured motorist (UM) or UIM benefits after a settlement due to concerns about overcompensation to the insured. Employers Mut. Cos. v. Nordstrom, 495 N.W.2d 855, 857 n. 3 (Minn.1993) (characterizing the court of appeals’ decision in Royal-Milbank Ins. Co. v. Busse, 474 N.W.2d 441 (Minn.App.1991)); Dairyland Ins. Co. v. Starkey, 535 N.W.2d 363 (Minn. 1995); Gusk v. Farm Bureau Mut. Ins. Co., 559 N.W.2d 421 (Minn.1997). However, contrary to Allstate‘s assertion, none of these cases stand for the proposition that a UIM insurer may challenge an insured‘s below-limit settlement with the tortfeasor as not the best settlement.4 Here, Dohney
We used the best settlement language in Schmidt when we explained why an insured party does not need to exhaust the liability limits of the tortfeasor‘s policy in order to be eligible for UIM benefits. Id. We stated that “[t]he insured has the right tо accept what he or she considers the best settlement available and to proceed to arbitrate the underinsurance claim * * *” Id. at 261 (emphasis added). Here, the dissent fails to appreciate the fact that the best settlement language as included in Schmidt was the insured‘s best settlement, not a UIM insurer‘s best settlement or even a court-determined best settlement. Id. However, in Schmidt we did echo some of the concerns of Allstate and the MDLA that if the UIM insurer was forced to cover the gap created by a below-limit settlement, the insured “would have no incentive to obtain the best settlement.” Id. at 261.
Allstate and MDLA expand on these concerns, and Allstate asserts that without an incentive to make a best settlement, an insured “would be able to convert inexpensive underinsured motorist vehicle coverage into additional, not-bargained-for, third-party liability coverage, * * *” They further argue that this process results in a shift of the cost of defense from insureds and liability insurers to UIM insurers. In order to stop this shift, Allstate and the MDLA suggest that the words best settlement as we used them in Schmidt should mean more than just the insured‘s best settlement and that failure to meet an objective best settlement standard should provide the UIM insurer with a defense to the entire UIM claim or at least to covering the gap.
In asking us to allow a best settlement defense, Allstate and the MDLA outline a number of potential tests we could adopt for determining whether an insured reached the best settlement. The first is a subjective best settlement test that would require a court to inquire into the reasons why an insured settled below the tortfeasor‘s liability limit. Based on our language in Nordstrom, this inquiry would focus on whether the insured settled “in good faith.” 495 N.W.2d at 858. Both Allstate and Dohney argue that a subjective test is unworkable and would create more litigation and delay.
A second alternative test would be an objective/bright line test to determine whether an insured has made the best settlement. Allstate proposes a set percentage rule of 90%, which would establish that in order for a settlement tо be a best settlement, the insured must settle at or above 90% of the tortfeasor‘s policy limit. Allstate stated that the 90% figure was not critical, but that the important feature of
Finally, while Allstate is correct that we did reaffirm “our clear policy against overcompensation” in Gusk, we did so while also reaffirming the very procedures that Allstate is arguing against here. Gusk, 559 N.W.2d at 425.
Dohney counters this argument by pointing out that a 90% sеt percentage rule is an arbitrary rule, which frustrates the purposes of the No-Fault Act by requiring insureds to litigate to final judgment just as the exhaustion requirement did. Dohney also argues that the policy reasons we endorsed in Schmidt when declaring exhaustion clauses void apply with equal force to a set percentage. Finally, Dohney argues that a set percentage rule of 90% will eliminate any incentive insurers have for offering settlements over 90% of the policy limits.
Dohney correctly points out some of the problems with a set percentage rule. Further, a 90% rule, or any rule establishing a set percentage, is troublesome because it fails to aсcommodate those situations in which an insured may be justified in accepting a settlement significantly below the policy limits. Broton, 428 N.W.2d at 89 (recognizing reasons why an insured may accept a below-limit settlement).
In the alternative, Allstate proposes a test based on a concurring opinion of Minnesota Court of Appeals Judge Jack Davies that would address some of the deficiencies of the 90% proposal. See United States Automobile Ass‘n v. Morgan, No. C1-96-1333, 1997 WL 360595 at *3 (Minn.App. July 1, 1997) (Davies, J., concurring specially), rev. denied (Minn. Oct. 1, 1997). Judge Davies concluded that an insurer should be able to challenge an “improvident” below-limit settlement. Id. Judge Davies explained the gap issue in terms of “coverage gaps” and “liability-based gaps.” Id. Gaps created because of exhausted coverage or insurer insolvency are legitimate “coverage gaps” resulting from a best settlement. But gaps created by settlements founded on uncertain liability or comparative fault are “liability-based gaps” and represent settlements that do not meet the best-settlement standard. Id. Judge Davies concluded that UIM insurers should be required to pay coverage gaps, but should not be required to pay liability-based gaps. Id. Under this proposal, only below-limit settlements resulting from coverage gaps would be best settlements.
Allstate acknowledges that Judge Davies’ approach would result in additional litigation because there would be a need to determine the reasons for each below-limit settlement. In addition to the increased litigation that may result, this approach ignores other justifications why—aside from coverage-based reasons—an injured insured should be able to accept a below-limit settlement. For example, in Broton, we specifically referenced uncertain liability as one reason why an insured would settle for less than the limit of the tortfeasor‘s policy. 428 N.W.2d at 89. In Schmidt we recognized time and litigation costs as other reasons why an insured may choose to accept a below-limit settlement. 338 N.W.2d at 260.
The MDLA offers yet a fourth test to determine whether a bеst settlement was reached—a multi-factor test. MDLA suggests that “[a]bsent other factors justifying * * * a substantial discount, * * * if a claimant agrees to take less than 50% of a tortfeasor‘s available liability limits, it strongly suggests that the tortfeasor is not underinsured as a matter of law.” In essence, the MDLA suggests a rebuttable presumption that the settlement was not a best settlement if it was less than 50% of
The MDLA test has the appeal of incorpоrating many of the positive aspects of the other tests. It utilizes a bright line rule, but is not as arbitrary as the 90% rule. It also recognizes the coverage gap issues that Judge Davies raised and, as a multi-factor test, would allow for consideration of any other factors the court would consider important in a specific case such as time delay and uncertainty. However, the MDLA test would require a court to make the best settlement determination in every case. Additionally, even though MDLA has labeled its test as an objective test, under the test each court would need to not only look at objective factors, but determine subjectively how to weigh competing findings. Finally, while this test is comprehensive, it is quite uncertain and could spawn significant litigation.
Each of the best settlement tests proposed provides some benefit over our current procedures. However, each test presents its own consequences that will operate to undermine the purposes of the No-Fault Act, such as easing the burden of litigation and encouraging prompt payment of claims.6 Schmidt, 338 N.W.2d at 260. While Allstate is correct that we have stepped in and altered UIM procedures in the past, we are hesitant to judicially alter the UIM procedures established by the legislature and in the process possibly adversely affect the delicate balance between the rights of UIM insureds and UIM insurers.
We have been balancing the interests of UIM insurers and insureds in light of the purposes of Minnesota‘s No-Fault law ever since the Act‘s enactment in 1975. In Schmidt, when holding that exhaustion clauses violated the policies of the No-Fault Act and were therefore void, we adopted the procedure for notice and substitution to preserve the UIM insurer‘s subrogation rights and the insured‘s right to settle. 338 N.W.2d at 261. In Nordstrom, we held that an insured must first recover from a tortfeasor before proceeding to arbitrate a UIM claim, because this was “the fairest solution” to both UIM insurers and insureds. 495 N.W.2d at 858. In Oanes v. Allstate Ins. Co., we reaffirmed our support of the Schmidt rule as an accommodation of the interests оf both the UIM insurer and the insured and stated that the notice and substitution process “protects both the UIM claimant‘s ability to settle with the tortfeasor and also the UIM insurer‘s subrogation interest.” 617 N.W.2d 401, 407 n. 3 (Minn.2000).
Following these modifications, the legislature weighed the interests of insureds and insurers against the purposes of the No-Fault Act and made significant revisions to the Act. Despite the concerns we expressed in Schmidt, the legislature amended the UIM provisions to require UIM insurers to cover the gap created by below-limit settlements. In 1989, after we noted that insurers were now required to cover the gap, the legislature again amended the act, but chose to retain the gap rule.
Because we answered the first certified question in the negative, it is unnecessary to address the other certified questions.
First Certified Question answered in the negative.
STRINGER, Justice (dissenting).
I respectfully dissent. While I agree with many of the concerns expressed by the majority regarding developments in the law of underinsured motorist (UIM) coverage that seem to have led to what appears to be an imbalance in the rights of injured parties with respect to their UIM coverage, I do not agree with the conclusion to write out of our carefully crafted UIM jurisprudence the established principle that a UIM insured must negotiate a “best settlement” under the circumstances with the tortfeasor. As the majority notes, this court has been instrumental in shaping the law on UIM coverage. E.g., Employers Mut. Cos. v. Nordstrom, 495 N.W.2d 855 (Minn.1993), Broton v. W. Nat‘l Mut. Ins. Co., 428 N.W.2d 85 (Minn. 1988), Schmidt v. Clothier, 338 N.W.2d 256 (Minn.1983). We should not now condone a practice that creates an imbalаnce between the rights of the respective parties. Therefore, I respectfully dissent.
I begin with black letter statutory and case law that a UIM claim is premised on a showing that the vehicle causing the injury is in fact underinsured, Broton, 428 N.W.2d at 90—that is, the tortfeasor‘s liability policy limit is less than the amount needed to compensate the insured for actual damages.
As the majority notes, in Schmidt v. Clothier we held that a claimant may settle for less than the tortfeasor‘s policy limits and still maintain a UIM claim. 338 N.W.2d at 261. Ironically however, the ruling of the majority here puts in place the very concern we had in Schmidt—that a below-the-limits settlement would provide a lack of incentive for the claimant to obtain the best settlement and lessen the incentive of the liability carrier to make the best offer, and further, underinsurance benefits would be converted to third party coverage. Id. This is precisely what the majority is condoning here.
Inherent in Schmidt, 338 N.W.2d at 260-61, and restated again in Nordstrom, 495 N.W.2d at 857, is that an injured party has two options with respect to UIM coverage—pursue a tort action to conclusion in the trial court and if the judgment exceeds the liability limits, pursue the underinsured carrier; or second, settle the tort claim “for the best settlement” and give the Schmidt-Clothier notice to the underinsurer with the opportunity to substitute its payment for that of liability carrier for the tortfeasor. In Nordstrom, we stated:
* * * the injured claimant can either (1) pursue a tort claim to a conclusion in a district court action, and then, if the judgment exceeds the liability limits, pursue underinsured benefits; or (2) settle the tort claim for “the best settlement,” give a Schmidt-Clothier notice to the underinsurer, and then maintain a claim for underinsured benefits.
495 N.W.2d at 857. In answering the first certified question in the negative, this court has abandoned the best settlement principle and the imbalance we feared in Schmidt is now firmly established in our UIM jurisprudence.
In a curious contradiction, the majority proclaims that with the 1985 legislative amendment, the state of the law is “exactly as it would have been in 1983 had the dissenters prevailed in Schmidt * * *” While that may have been true before the court‘s ruling here, it is not true after the ruling because the dissenters in Schmidt emphasized the need for the “best possible settlement” to achieve the balance of affording the UIM carrier the right to manage the claim process without placing a financial burden on the claimant. Schmidt, 338 N.W.2d at 264 (Todd and Amdahl, JJ., concurring and dissenting, Scott, J., dissenting). In now dispensing with the need for the best possible settlement, the majority unravels the logical fabric woven by the dissenters in Schmidt that achieved the balance they sought and the legislature later adopted in 1985.
Claimant argues that the substitution of draft procedure set forth in Schmidt provides adequate protection to the UIM carrier. It does not, because if the UIM carrier declines to substitute its own payment for that of the tortfeasor‘s liability carrier, it risks expоsure to a claim for the gap between the settlement amount and the tortfeasor‘s policy limits that may simply have come about due to a weak case of liability—an exposure for which the UIM carrier was not paid a premium and has no obligation to provide. On the other hand, if the UIM carrier substitutes its draft it runs the risk of not being able to recover
Thus, I would conclude that the UIM carrier must be permitted to challenge its insured‘s settlement with the third party tortfeasor as to whether it was a best settlеment under the circumstances. Respondent‘s argument that it would be unworkable to establish such a process because it would inject the court into a quagmire of issues relating to whether the settlement was the best is an overstatement. The majority notes the variety of proposals for such an analysis. Whatever the process, it could simply be made a part of the UIM arbitration and take into account a variety of facts that would bear on whether the settlement with the tortfeasor was in fact the best, or whether it was reached for some collateral purpose—such as relating to UIM coverage. Inquiry could be directed toward thе percentage of the settlement relating to the tortfeasor liability limit, the benefit to the claimant of an early resolution of his or her claim in avoiding protracted litigation, the time value of an immediate payment, or any combination of these or other considerations relevant to whether the settlement was in fact the best. It need not delve into questions of liability or damages. Faced with circumstances as obvious as those now before the court, the task would not be difficult.
Therefore, I respectfully dissent and would bring an immediate halt to what appears to be misuse of the nature and purpose of UIM coverage.
LANCASTER, Justice (dissenting).
I join in the dissent of Justice STRINGER.
Notes
When a plaintiff settles with a tortfeasor for 40% of the tortfeasor‘s liability limits, does the plaintiff satisfy the requirement of Schmidt v. Clothier, 338 N.W.2d 256 (Minn.1983), and Employers Mut. Cos. v. Nordstrom, 495 N.W.2d 855 (Minn.1993), that he reach the best settlement with the tortfeasor before submitting his claim for underinsured motorist benefits?
A. Does the Court apply an objective or subjective test in analyzing the best settlement test?
B. If the plaintiff fails to satisfy the best settlement test, what is the effect on any underinsured motorist case he may have filed? Judge Davies recognized this in his special concurrence in Morgan, No. C1-96-1333, 1997 WL 360595 at *3.
Liability on underinsured motor vehicles. With respect to underinsured motorist coverage, the maximum liability of an insurer is the amount of damages sustained but not recovered from the insurance policy of the driver or owner of any underinsured at fault vehicle. * * * However, in no event shall the underinsured motorist carrier have to pay more than the amount of its underinsured motorist limits.
(Emphasis removed.)
In Starkey, the claimant‘s case establishing damages and fault went to trial and fault was apportioned between the two other drivers, one of whom was insured аnd one of whom was uninsured. The total damages as found by the jury did not exceed the insured driver‘s policy limits. 535 N.W.2d at 363-64. Before judgment was entered, the claimant settled with the insured driver for slightly under the jury verdict and attempted to collect UM benefits for the full amount of the uninsured driver‘s liability as apportioned by the jury. Id. We did not allow the claimant to collect more than the jury‘s verdict and in denying any UM claim, distinguished this case from settlement cases because in Starkey the damages and fault had already been established by a jury. Id. at 364-65.