Dohney v. Allstate Ins. Co.

• Decision Date: 16 August 2001
• Docket Number: No. C5-01-252.,C5-01-252.
• Citation: 632 N.W.2d 598
• Parties: Emmett DOHNEY, Respondent, v. ALLSTATE INSURANCE COMPANY, a foreign corporation, Petitioner, Appellant.
• Court: Minnesota Supreme Court

632 N.W.2d 598

Emmett DOHNEY, Respondent, v. ALLSTATE INSURANCE COMPANY, a foreign corporation, Petitioner, Appellant.

No. C5-01-252.

Supreme Court of Minnesota.

August 16, 2001.

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.

Heard, considered, and decided by the court en banc.

OPINION

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:

I. 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 on the plaintiff's failure to reach the "best settlement" with the tortfeasor?

II. If so, does the court apply an objective or subjective test in determining whether the best settlement was reached?

III. 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 caused 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 per 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. In December 1999, Dohney sued Allstate in Minnesota state court, seeking UIM benefits. Allstate removed the matter to federal district court on diversity grounds. In a deposition, Dohney stated that he did not recall why he settled with Larsen for $20,000 when his claimed damages exceeded $50,000, except that he thought it was all Amex would pay. Citing attorney-client privilege, Dohney refused to answer questions about his attorney's advice on settlement. Allstate's subpoena to depose Dohney's attorney on the matter was quashed by the federal district court.

Allstate moved for summary judgment or in the alternative requested that the federal court certify a question to the Minnesota Supreme Court under Minn.Stat. § 480.065 (2000). The federal court granted the request to certify and issued an order and the certification. The parties stipulated to the facts in the order. As part of the facts, the court included the following statement: "Based upon the parties' stipulation of facts, the Court considers it probable that in the absence of [Allstate's] underinsured motorist insurance policy, [Dohney] could have settled his case with Ms. Larsen for more than $20,000."

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. Minnesota Statutes §§ 65B.41-65B.71 (2000) are the no-fault automobile insurance provisions. Sections 65B.43, subd. 17 & subd. 19, and 65B.49, subd. 3a & subd. 4a (2000), govern UIM coverage. There are four general types of UIM coverage systems—difference of limits, damages less limits, limits less paid, and damages less paid—and Minnesota has utilized each of these types at some point in the last 30 years. Theodore J. Smetak, Underinsured Motorist Coverage in Minnesota: Old Precedents in a New Era, 24 Wm. Mitchell L.Rev. 857, 865-66 (1998).

While the Minnesota legislature has made significant changes to the UIM provisions, the definition of what is an underinsured motorist has remained essentially the same since the implementation of the No-Fault Act in 1975. A motorist is underinsured, and UIM benefits are therefore applicable, if "a bodily injury liability policy applies at the time of the accident but its limit for bodily injury liability is less than the amount needed to compensate the insured for actual damages." Minn.Stat. § 65B.43, subd. 17. Therefore, UIM benefits only become available if the tortfeasor's policy limits are less than the actual damages sustained by the injured UIM policyholder. In the present case, for purposes of the certified questions only, Larsen's vehicle was underinsured.

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. Minn.Stat. § 65B.25 (1971); Jacobson v. Ill. Farmers Ins. Co., 264 N.W.2d 804, 807 (Minn.1978). At that time, the UIM coverage was a "difference of limits" coverage, which meant that UIM benefits would become available only to the extent that the damages and the UIM policy limit were greater than the limit on the tortfeasor's policy. Lick v. Dairyland Ins. Co., 258 N.W.2d 791, 793-94 (Minn.1977). Another way of explaining this type of coverage is that the amount of UIM benefits payable were calculated by subtracting the tortfeasor's policy limit from the injured UIM policyholder's UIM limit. Id. Thus, each insured controls his maximum recovery by choosing the amount of UIM coverage to carry. Id.

On January 1, 1975, the No-Fault Act became effective 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 Minn.Stat.§ 65B.49, subd. 6 (1976). As "damages less limits" coverage, the amount of UIM benefits available is calculated by subtracting the tortfeasor's policy limit from the injured UIM policyholder's damages, with the caveat that UIM payments could not exceed the UIM limit. Under this "damages less limits" coverage, below policy limit settlements with the tortfeasor were allowed, but the injured UIM policyholder would have to absorb the gap—UIM coverage would not be applied to cover the difference between the limit of the tortfeasor's policy and the below-limit settlement amount. Schmidt, 338 N.W.2d at 261. In essence, UIM coverage would begin at the limit of the tortfeasor's policy, but the UIM insurer could not require the insured to exhaust the tortfeasor's policy limits in order to be eligible for UIM benefits as long as the insured could prove that the tortfeasor's vehicle was actually underinsured. Id. at 260-61.

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 settlement or proceed to trial. Id. In either scenario, UIM payments would be available, but the insured would be forced to absorb the gap between the below-limit settlement amount and the tortfeasor's policy limit. Id.

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...