H. Rosemarie SCHMIDT, etc., Respondent, v. Kevin J. CLOTHIER, et al., Defendants, Safeco Insurance Co., intervenor, Appellant, Edward Paskoff, et al., Respondents. H. Rosemarie SCHMIDT, etc., Respondent, v. Gerald Frank HOAG, Respondent, Linda Elizabeth Epperly, Respondent, and Minneapolis Special School District # 1, intervenor, Respondent, Safeco Insurance Co., intervenor, Appellant.
C9-82-244, C6-82-993
Supreme Court of Minnesota
Sept. 23, 1983
Rehearing Denied Nov. 16, 1983
SIMONETT, Justice (concurring specially).
I join in Justice Scott‘s concurrence.
KELLEY, Justice (concurring specially).
I join in Justice Scott‘s concurrence.
COYNE, Justice (concurring specially).
I join in Justice Scott‘s concurrence.
Hvass, Weisman & King, H. Frank J. Brixuis, Minneapolis, for respondent Schmidt.
Meshbesher, Singer & Spence, Fred Pritzker, Minneapolis, for respondent Paskoff.
James L. Haigh, Minneapolis, for respondent Gerald Hoag.
Robert V. Daly, Minneapolis, for respondent Linda Epperly.
Paul E. Godlewski, Minneapolis, for amicus Minn. Trial Lawyers Ass‘n.
Eric J. Magnuson, Minneapolis, for amicus Minn. Defense Lawyers Assoc.
WAHL, Justice.
These consolidated cases raise important questions of insurance law in the context of underinsurance coverage, settlements, and subrogation rights.
In the first case, Rosemarie Schmidt sued for the wrongful death of her husband, Lloyd H. Schmidt. On November 1, 1979, Mr. Schmidt was hit and killed by a truck driven by defendant Clothier and owned by Clothier‘s employer, defendant Furniture House of Hastings, Inc., which carried a $100,000 liability policy on the truck with St. Paul Fire and Marine Insurance Company (St. Paul Fire). St. Paul Fire offered to settle with Mrs. Schmidt for the $100,000 policy limit in exchange for a full release.
Mrs. Schmidt carried $100,000 of underinsurance coverage with appellant, Safeco Insurance Company (Safeco). Because it was clear that her damages exceeded $265,000, and thus that the liable parties were underinsured, Mrs. Schmidt notified Safeco that she intended to settle with St. Paul Fire. Safeco, in reliance on the cooperation clause in Mrs. Schmidt‘s policy and its claimed subrogation interest, refused to acquiesce in the settlement.
Mrs. Schmidt thereafter demanded arbitration of her underinsurance claim. Safeco refused to pay underinsured benefits to Mrs. Schmidt and refused as well to submit her claim to arbitration. After Mrs. Schmidt threatened to file a bad-faith lawsuit against it, Safeco tendered a check to Mrs. Schmidt in the amount of $100,000 but required her to agree to hold in trust for Safeco any recovery she obtained from any source and to fully release Safeco from any claim she might make.
Mrs. Schmidt, who had been without recovery from any source for the 2 years after her husband‘s death, then moved the Dakota County District Court for an order authorizing her to accept both the check from Safeco and the check from St. Paul Fire. The district court authorized Mrs. Schmidt to accept the $100,000 settlement offered by St. Paul Fire on behalf of itself and its insureds. Mrs. Schmidt was further authorized to execute a general release of all claims against the defendants. This portion of the order was stayed 10 days, to allow Safeco the opportunity to tender a check in the amount of $100,000 to Mrs. Schmidt to protect any subrogation interest which Safeco claimed against any of the defendants. If Safeco made such a tender, Mrs. Schmidt was ordered not to negotiate any settlement with St. Paul Fire or to sign any release. The court further ordered that within 10 days Safeco either pay its underinsured benefits of $100,000 to the plaintiff or submit the matter to arbitration. Safeco refused to pay underinsured benefits and ignored the order to arbitrate. Although the order was not appealable, we granted discretionary review.
In the second consolidated case, respondent Paskoff was injured on January 13, 1977, while a passenger in a car driven by Linda Epperly and owned by the Minneapolis Special School District No. 1, when Epperly‘s car collided with a car driven and owned by Gerald Hoag. Paskoff sued Hoag and Epperly. Hoag offered to settle for $22,000 out of his $25,000 liability policy, and Epperly offered $4,000 out of the school district‘s $300,000 policy.
Paskoff, who carried an underinsurance policy with Safeco, notified it of his intent to accept the settlement offers and sought Safeco‘s consent to the settlements as he was required to do under the Safeco policy. Safeco refused to consent, contending that settlement would impair its subrogation rights and that Paskoff was not entitled to underinsurance benefits until he had exhausted the limits of the defendants’ liability policies.
The issues involved in these cases are (1) whether underinsurance benefits are available to the insured where the proposed settlement with the tortfeasor does not exhaust the tortfeasor‘s liability insurance and, if so, for what amount the underinsurer is liable, and (2) whether a general release executed as part of a settlement with the tortfeasor destroys the underinsurer‘s subrogation rights or precludes the insured from recovering underinsurance benefits.
These cases were briefed and argued extensively by the parties, as well as by two amici, the Minnesota Trial Lawyers Association and the Minnesota Defense Lawyers Association. All advocates have requested that we formulate a rule setting forth the rights and duties of the insured, the underinsurer, the liability insurer, and the tortfeasor.
In doing so we have kept in mind the purposes of the Minnesota no-fault automobile insurance act,
The first issue raised is whether policy exhaustion clauses are enforceable. Both underinsurance policies in these cases contained an exhaustion clause which provided: “We will pay under this coverage only after the limits of liability under any applicable bodily injury liability bonds or policies have been exhausted by payment of judgments or settlements.” Enforcement of this clause in Paskoff‘s case would deny him any underinsurance benefits because he has settled within the limits of the defendants’ liability policies.
Both Safeco and the Defense Lawyer amicus, however, have taken the position before this court that underinsurance benefits should be available, despite a below-limits settlement, where the injured person‘s damages are greater than the liability limits of the tortfeasor.1 They are willing to concede that the legislature intended underinsurance coverage to provide benefits in excess of the tortfeasor‘s liability limits and that the insured has a right to full control over the lawsuit against the tortfeasor, a control which would include the right to make the best settlement possible.
The purposes of the no-fault act, noted above, include those of easing the burden of litigation and encouraging prompt payment of claims. Enforcement of policy exhaustion clauses would produce results contrary to those purposes. It could serve to force an insured to litigate the claim to final judgment in order to exhaust the policy limits. Litigation expenses would lessen the insured‘s net recovery, the time involved in litigation would serve to delay payment to the insured, and the litigation itself would unnecessarily burden our court system. Where the best settlement available is less than the defendant‘s liability limits, the insured should not be forced to forego settlement and go to trial
Safeco and the Defense Lawyer amicus argue that, even though the insured should not be required to exhaust the tortfeasor‘s liability limits, the underinsurer is liable only for those damages suffered in excess of those limits, for it is only in this amount that the tortfeasor is truly “underinsured.” Respondents and the Trial Lawyers amicus counter that, in order to effectuate the statute‘s policy of full compensation of accident victims, the underinsurer should be required to pay that amount by which the insured‘s damages exceed the settlement amount, i.e., the underinsurer must pay, as underinsurance benefits, the “gap” between the defendant‘s liability limits and what the insured has accepted as a settlement.
In resolving this question we must look to the language of the statutory provision in effect when these causes of action arose, which made mandatory offers of underinsured motorist benefits coverage. That provision required carriers to offer underinsurance coverage whereby the reparation obligor agrees to pay damages the insured is legally entitled to recover on account of a motor vehicle accident but which are uncompensated because the total damages exceed the residual bodily injury liability limit of the owner of the other vehicle.
We conclude that the insured cannot obtain a below-limit settlement from the tortfeasor and then recoup the “gap” from the underinsurance carrier. Practically, the insured would have no incentive to obtain the best settlement if he or she is assured of recovering the “gap” from the underinsurer. Use of underinsurance benefits in this way runs counter to the agreement of the parties. It would also place the underinsurer at an unfair disadvantage in which it had no control over the insured‘s right to settle but yet had to pay the difference between the settlement and the liability limits. It might also lessen the incentive of the liability carrier to make its best offer to the claimant. We hold that the underinsurer is liable only for the amount of damages suffered by the insured in excess of the liability limits of the defendant. This holding permits the underinsurance claim to be processed immediately, without regard to any eventual settlement, for the underinsurer‘s liability depends not on the settlement but rather on the readily ascertainable liability limit of the defendant.
Safeco next argues that settlement by the insured with the tortfeasor destroys its subrogation rights and therefore precludes recovery by the insured of the underinsurance benefits granted by
Safeco contends that destruction of its potential subrogation rights precludes recovery of underinsurance benefits by its insureds. Safeco cites Bacich v. Homeland Insurance Co., 212 Minn. 375, 3 N.W.2d 665 (1942), which held that the insured‘s release of a tortfeasor barred recovery under his insurance policy because the release had destroyed the insurer‘s subrogation rights. Since Bacich was decided, however, the Minnesota legislature enacted the Minnesota no-fault automobile insurance act. Safeco recognizes that the policies of that act override Bacich and require a different result here. It is the public policy of Minnesota that injured persons should not, by virtue of having purchased underinsurance, be placed in a financial position inferior to that which they would have held had the tortfeasor been fully insured. See Milbank Mutual Insurance Co. v. Kluver, 302 Minn. 310, 313, 225 N.W.2d 230, 232 (1974). Thus, we hold that settlement and release of an underinsured tortfeasor does not preclude recovery of underinsurance benefits.
Respondents and the Trial Lawyers amicus take the position that subrogation rights for underinsurance benefits will never arise in the context of settlement. They argue that subrogation rights exist only when the injured person has been fully compensated and only to the extent necessary to prevent double recovery by the insured. Id. Since the underinsurer is in a position to prevent double recovery, they claim, subrogation will never arise when its insured settles with an underinsured tortfeasor.
Subrogation rights depend on “general principles of equity and the nature of the contract of insurance.” Bacich v. Homeland Insurance Co., 212 Minn. at 376, 3 N.W.2d at 665. In Kluver, the insurer was attempting to recoup benefits it had paid by obtaining the proceeds of a settlement reached by its insured with two liquor vendors who had sold liquor to the uninsured tortfeasor. We held that the insured was entitled to retain the settlement proceeds because the insurance benefits and the settlement amount together did not fully compensate her for her injuries. In that case, the equities to be balanced, the insurer‘s right to recoup benefits paid and the injured person‘s right to obtain full compensation, weighed in favor of our public policy favoring full compensation of injured persons. Clearly, in the cases before us, under the rule of Kluver, the underinsurer would not be able to recover underinsurance benefits from settlements obtained by its insured from liability defendants because, by definition, the injured person has not been fully compensated.
Safeco argues, however, that it should not be denied the right to pursue the underinsured tortfeasor for benefits it has paid. In the situation before us, the equities to be balanced are those between the underinsurer, which has paid benefits, and the underinsured tortfeasor, who has not paid for the damages he or she has caused.
If, on the other hand, damages were substantially more than the liability limits and the tortfeasor had substantial assets, the underinsurer could substitute its payment to the insured in an amount equal to the tentative settlement. In this situation, the underinsurer‘s payment would protect its subrogation rights to the extent of the payment, and the insured would receive the amount of the settlement offer in cash. The underinsurer would then have to arbitrate the underinsured claim and could, thereafter, attempt to negotiate a better settlement or could proceed to trial in the insured‘s name. We note again that prompt assessment, arbitration, and payment of underinsurance claims will protect the underinsurer‘s subrogation rights, and the underinsurer will avoid having to choose later between either acquiescing in the settlement or substituting its check for the amount of the settlement offer.
The district courts gave the underinsurer 10 days in which to make this assessment in cases where the underinsurer had failed to pay underinsurance benefits by the time a tentative settlement had been reached. We conclude that in the future 30 days from the written notice of the tentative settlement agreement is a more reasonable time period, and so the procedure set out in the district court orders should hereafter be modified.
In applying this procedure to the cases before us, we find that Safeco has, in Mrs. Schmidt‘s case, lost its ability to either protect its subrogation rights or to deny its liability for underinsurance benefits. The district court order gave Safeco the choice of either paying Mrs. Schmidt $100,000 in underinsurance benefits or submitting her claim to arbitration. The order compelling arbitration was not appealable under
In Paskoff‘s case, the defendants have already been released. Safeco could have protected its subrogation rights by substituting its check for the checks and releases tendered by the liability insurers. It could then have arbitrated the underinsurance claim with its insured and thereafter have proceeded against the tortfeasor. It chose not to do this. Thus, we hold that Safeco must proceed to arbitration of Paskoff‘s underinsurance claim and is liable to pay the amount, if any, by which Paskoff‘s
The district court orders are affirmed.
TODD, Justice (concurring and dissenting).
I concur in the majority opinion except that portion which requires the injured party to obtain less than full compensation in order to expedite the total claim. That portion of the opinion is inconsistent with the rest of the opinion. The so-called “gap” arises when the liability carrier tenders less than the full amount of its coverage. The majority concludes that the injured party would have no incentive to seek maximum recovery if the underinsured carrier is responsible for all amounts due over and above the proposed settlement amount. This approach ignores the solution provided in the opinion itself and has a very bad practical effect. If allowed to stand the injured party will not be able to negotiate any reasonable settlement with the liability carrier unless willing to bear a financial loss. This is not necessary. The majority opinion provides the solution. 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 to its best advantage without imposing any financial burden on the injured party.
AMDAHL, Chief Justice (concurring and dissenting)
I join in the concurrence and dissent of Mr. Justice Todd.
SCOTT, Justice (dissenting)
I join in the dissent of Mr. Justice Todd.
COYNE, J., took no part in the consideration or decision of this case.