Faber v. Roelofs

• Decision Date: 14 January 1977
• Docket Number: Nos. 45805 and 45818,E,No. 581,581,s. 45805 and 45818
• Parties: Eleanor FABER, as Mother and Natural Guardian of Kim Faber, a Minor, and Wilbert Faber, Individually, Respondents, v. James ROELOFS, Respondent, Independent School Districtdgerton, Respondent, Mutual Service Casualty Insurance Company, Respondent-Appellant, Dean Gruys, Respondent, Tri-State Mutual Insurance Co., Appellant-Respondent. Eleanor FABER, as Mother and Natural Guardian of Kim Faber, a Minor, and Wilbert Faber, Individually, Respondents, v. INDEPENDENT SCHOOL DISTRICT NO. 581, EDGERTON, Respondent, Tri-State Mutual Insurance Co., Appellant-Respondent.
• Court: Minnesota Supreme Court

Page 817

250 N.W.2d 817

311 Minn. 428

Eleanor FABER, as Mother and Natural Guardian of Kim Faber, a Minor, and Wilbert Faber, Individually, Respondents, v. James ROELOFS, Respondent, Independent School District No. 581, Edgerton, Respondent, Mutual Service Casualty Insurance Company, Respondent-Appellant, Dean Gruys, Respondent,

Tri-State Mutual Insurance Co., Appellant-Respondent.

Eleanor FABER, as Mother and Natural Guardian of Kim Faber, a Minor, and Wilbert Faber, Individually, Respondents, v. INDEPENDENT SCHOOL DISTRICT NO. 581, EDGERTON, Respondent, Tri-State Mutual Insurance Co., Appellant-Respondent.

Nos. 45805 and 45818.

Supreme Court of Minnesota.

Jan. 14, 1977.

Rehearing Denied Feb. 10, 1977.

Syllabus by the Court

1. A liability insurer which undertakes control of the defense of a suit against its insured without giving notice of a reservation of rights is estopped from later denying coverage for the liability under the policy. Oehme v. Johnson, 181 Minn. 138, 231 N.W. 817 (1930).

2. An insurer which contracts to pay on behalf of the insured all damages for bodily injury arising out of the use of an automobile is liable under the policy when a person is run over by the subject vehicle and the insured is legally obligated to pay damages for the injury sustained.

3. Under the terms of the policy at issue in this case, when a minor is injured the minor's parent's claim for recovery of the minor's medical expenses does not make the parent a separate 'person' for purposes of recovering more than the policy limits of liability for 'bodily injury' to 'each person.' Holtz v. Mutual Service Cas. Co., 264 Minn. 121, 117 N.W.2d 767 (1962); Holmgren v. Heisick, 287 Minn. 386, 178 N.W.2d 854 (1970).

Faegre & Benson and Wright W. Brooks, Minneapolis, for Tri-State Mut. ins. co.

Erickson Zierke, Kuderer, Utermarck & McKenna, Charles R. Zierke and D. Gerald Wilhelm, Fairmont, for Mutual Service Cas. Ins. Co.

Winter, Lundquist, Sherwood & Athens and Marvin E. Lundquist, Wheaton, for Faber and others.

Rice, Evans & Christensen, Pipestone, for Roelofs.

Peterson, Popovich, Knutson & Flynn, James E. Knutson, and Ronald C. Ruud, St. Paul, for Ind. Sch. Dist. 581.

Brecht, Hedeen & Hughes, Worthington, for Gruys.

Heard before OTIS, PETERSON, and YETKA, JJ., and considered and decided by the court en banc.

OTIS, Justice.

This case was before us two years ago, in Faber v. Roelofs, 298 Minn. 16, 212 N.W.2d 856 (1973). Kim Faber was a student at the Edgerton Christian Elementary School. He was injured as he ran out into the street alongside his school bus, slipped, and fell under the wheels. The bus was owned by defendant James Roelofs, driven by defendant Arnold Brouwer, hired by Independent School District No. 581, and serviced students at the Christian Elementary School. The jury found the owner of the bus not negligent, the driver not negligent, the Christian Elementary School 25-percent negligent, the school district 20-percent negligent on each of two items of negligence, and Kim 35-percent negligent. Damages of $145,800 for Kim and $66,000 to Wilbert Faber, Kim's father, for Kim's medical expenses, were reduced to $94,770 and $42,900. Judgment was entered against the school district for the $42,900 amount. With respect to the $94,700 amount it was ordered:

'That the Plaintiff, Kim Faber, is entitled to Judgment against the Defendant, Independent School District No. 581, Edgerton, in the amount of $50,000.00; that said plaintiff is also entitled to Judgment for such additional amount as may be subsequently determined to have been covered by insurance in accordance with Minnesota , statutes 466.06, but not to exceed the sum of $44,770.00.'

This was the judgment which we affirmed. In 1974, Wilbert Faber died and Kim's mother, Eleanor Faber, was substituted as a plaintiff for Wilbert Faber.

This appeal concerns the liability for this judgment on the part of two insurers, Tri-State Mutual Insurance Company and Mutual Service Casualty Insurance Company. ¹ The school district has a general liability policy with Tri-State with limits of $50,000 for bodily injury to each person. The school district is an additional insured under Roelofs' automobile liability policy with Mutual, with the same limits of liability. The three issues involved in this appeal are: (1) Is coverage for this judgment available to the school district under the Tri-State policy? (2) Is coverage also available under the Mutual policy? (3) If coverage is available from Tri-State, is Tri-State liable for $50,000 or for $100,000? The trial court held that coverage was available under both policies and that Tri-State was liable for up to $100,000. We affirm as to the coverage questions, but reverse on the issue of the extent of Tri-State's liability.

I

The Tri-State policy contained the following exclusion:

'The insurance does not apply to bodily injury or property damage arising out of the ownership, maintenance, operation, use, loading or unloading of any aircraft, automobile or watercraft owned, operated or hired by or for the insured or any officer, employee or member of the teaching, supervisory or administrative staff thereof. For the purpose of this exclusion the word 'hired' shall be deemed to include any contract to furnish transportation of pupils to and from schools.'

The school district was found liable because of its negligence (1) in acting or failing to act in establishing a bus route, and (2) in acting or failing to act in establishing bus loading and unloading procedures. Whether or not coverage was afforded for this liability under the terms of the policy, Tri-State is nevertheless estopped from denying coverage because of its action in controlling the defense of the action without a reservation of rights. ² Tri-State controlled the school district's defense from the initiation of the action through the first appeal in this court. It never gave notice of a reservation of its right to deny coverage. ³ Upon such facts, our decisions, which are fully discussed in Oehme v. Johnson, 181 Minn. 138, 231 N.W. 817 (1930), ⁴ hold that Tri-State is estopped from denying liability under the policy. In Oehme, we cited with approval the following language from Employers L.A. Corp. v. Chicago & Big Muddy C. & C. Co., 141 F. 962, 964 (7 Cir. 1905):

'The act of the plaintiff in error, in taking control and dominion of the action for damages, and keeping such control and dominion until judgment was entered, without notice to the defendant in error that it did not consider itself liable under the policy--thereby taking from the defendant in error the control and dominion of the action--is such a construction of the policy, by contemporaneous acts, as estops plaintiff in error from denying liability, now that that action is at an end. To take any other view of this case, would be to hold that the assurer could effectually tie the hands of the assured, in an action that might, or might not, on a close construction of the policy, be covered by the terms of the policy, and then, the cause being determined against it, insist that upon a closer reading of the policy, the assured ought to have been left to make its own defense, and at its own risk. This cannot be the law.' 181 Minn. 152, 231 N.W. 822.

Tri-State argues that the insured must be shown to have been prejudiced by the insurer's conduct before the insurer can be estopped from raising the defense of noncoverage. Such is the rule with respect to an insurer who withdraws from the case before trial. ⁵ It has been argued that the same policy should apply in cases such as the one at bar. ⁶ However, under our rule prejudice to the insured will be conclusively presumed when the insurer exercises complete control over the defense without a reservation of rights.

In Tozer v. Ocean Accident & Guarantee Corp., 94 Minn. 478, 103 N.W. 509 (1905), the policy at issue did not afford coverage for injuries to a child employed contrary to the child labor law. Such an employee was injured, and the insurer undertook to defend the claim. The plaintiff offered to settle for $5,000, the amount of the policy limits, and the insurer refused. Eventually a plaintiff's verdict of $7,750 was returned. At that point, the insurer denied liability under the policy. We held that the insurer was liable for the policy amount of $5,000. Mr. Justice Brown argued in dissent that no prejudice had been shown other than to the extent that the eventual liability ($7,750) exceeded the plaintiff's settlement offer ($5,000), and that allowing the insured to recover the entire policy amount allowed him to recover when he was not prejudiced by the insurer's actions. The majority, by not indicating in the face of this dissent specifically how the insured was prejudiced, but by holding that the insurer will be estopped from denying liability when to do so will prejudice the insured, implicitly held that prejudice will be presumed from the act of the insurer in controlling the defense.

Prejudice is presumed because the insurer, by taking control of the defense without a reservation of rights, takes away from the insured his right to control the defense as he sees fit and to make or negotiate a settlement. Oehme v. Johnson, 181 Minn. 138, 151, 231 N.W. 817, 822 (1930); Simons v. Cowan, 217 Minn. 317, 14 N.W.2d 356 (1944); Gamble-Skogmo, Inc. v. St. Paul Mercury Ind. Co., 242 Minn. 91, 103, 64 N.W.2d 380, 388 (1954). Because the insurer has available to him the simple procedure of giving a notice of reservation of rights, to estop him from denying liability when he controls the defense without having given such a notice is not a harsh result. ⁷

Tri-State then argues that it cannot be estopped by its action in controlling the defense because it was required to defend the action under Republic Vanguard Ins. Co. v. Buehl, 295 Minn. 327, 204 N.W.2d 426 (1973), which held that an insurer has a duty to defend the insured if at...