Great Northern Oil Co. v. St. Paul Fire & Marine Ins. Co.

• Decision Date: 13 August 1971
• Docket Number: No. 42757,42757
• Citation: 189 N.W.2d 404,291 Minn. 97
• Parties: GREAT NORTHERN OIL COMPANY, Respondent, v. ST. PAUL FIRE AND MARINE INSURANCE CO. et al., Appellants.
• Court: Minnesota Supreme Court

Page 404

189 N.W.2d 404

291 Minn. 97

GREAT NORTHERN OIL COMPANY, Respondent, v. ST. PAUL FIRE AND MARINE INSURANCE CO. et al., Appellants.

No. 42757.

Supreme Court of Minnesota Aug. 13, 1971.

Syllabus by the Court

Upon the record before us, there exists no reason in equity or public policy to preclude plaintiff-insured from pursuing recovery for business-interruption loss upon a policy of 'all-risk' insurance issued by defendants on the ground that the insured's actions prior to loss--release of a contractor by an exculpatory clause in a construction contract from liability for negligently causing loss--defeated the insurers' rights of subrogation against the contractor.

Meagher, Geer, Markham & Anderson, and M. J. Coyne, O. C. Adamson II, and William D. Flaskamp, Minneapolis, for appellants.

O'Connor, Green, Thomas, Walters & Kelly, and L. T. Merrigan, Minneapolis, for respondent.

Heard before KNUTSON, C.J., and MURPHY, ROGOSHESKE, PETERSON, and ROLLOFF, JJ.

OPINION

ROGOSHESKE, Justice.

Defendant insurance companies appeal from an order striking a defense from their joint answer. ¹

The issue presented is whether plaintiff-insured, who, prior to a business-interruption loss and by an exculpatory clause in a construction contract, released the contractor from liability for negligently causing the loss, is precluded from pursuing recovery upon a policy of 'all-risk' insurance in force prior to the release on the ground that exculpation defeated defendant insurance companies' subrogation rights against the contractor. We hold that plaintiff is not thereby precluded from recovering under the policy and affirm the trial court's order.

Plaintiff, Great Northern Oil Company, owns and operates an oil refinery at Pine Bend in Dakota County, Minnesota. On August 12, 1964, plaintiff procured from the several defendants a 3-year policy of 'all-risk' insurance covering, among other things, losses due to the interruption of plaintiff's business. The aggregate amount of coverage is $3,000,000. The insurance policy provided:

'(H) SUBROGATION. In the event of any payment under this policy the Company shall be subrogated to all the Insured's rights of recovery therefor against any person or organization and the Insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. The Insured shall do nothing after loss to prejudice such rights.'

On February 7, 1967, during the term of the policy, plaintiff-insured entered into an agreement with the Litwin Corporation, Inc., for the construction of catalytic cracking expansion facilities, designed to materially increase plaintiff's production. So far as pertinent to the question presented, the construction agreement limited Litwin's liability for bodily injury and damage to plaintiff's property during construction and, by an exculpatory clause, provided that 'Contractor shall not be responsible or held liable for any damages or liability for loss of use of the Work, loss of profits therefrom, or business interruption thereof however the same may be caused.'

On June 16, 1967, a crane accident caused damage to the partially completed construction work. Plaintiff brought this action against defendants-insurers, contending that the accident had caused it to suffer a substantial business-interruption loss for which defendants are responsible under the terms of the all-risk insurance policy. The defendants' joint answer generally denied that plaintiff had sustained any loss covered by the policy and further alleged that the insured could not recover under the policy because the insured, by releasing Litwin from liability before the accident occurred, had defeated the insurers' rights of subrogation under the policy. The parties made cross-motions for summary judgment on this latter claim, and the court granted plaintiff's motion, striking the foregoing specific defense. Defendants appeal. We affirm and hold that plaintiff, in the absence of a prohibition in the insurance contract against entering into any exculpatory agreements, is not precluded from pursuing its action to recover its loss under the insurance policy.

Subrogation is a normal incident of a contract of insurance. Aetna Life Ins. Co. v. Moses, 287 U.S. 530, 53 S.Ct. 231, 77 L.Ed. 477. Its existence does not necessarily depend on the terms of the contract but on the nature of the contract of insurance and on general principles of equity. Bacich v. Homeland Ins. Co., 212 Minn. 375, 3 N.W.2d 665.

Whether or not the insurance policy expressly reserves subrogation rights, it is the universal rule that upon payment of a loss, an insurer is entitled to pursue those rights which the insured may have against a third party whose negligence or wrongful act caused the loss. See, Board of Trustees of First Congregational Church of Austin v. Cream City Mutual Ins. Co., 255 Minn. 347, 96 N.W.2d 690. However, the insurer, as the subrogee, is entitled to no greater rights than those which the insured-subrogor possesses at the time the subrogee asserts the claim, as the subrogee merely 'steps into the shoes' of the subrogor. Employers Liability Assur. Corp. v. Morse, 261 Minn. 259, 263, 111 N.W.2d 620, 624. As an application of this rule, it is thus well established that an insured may defeat the insurance company's rights of subrogation by (1) settling with the wrongdoer after loss but before payment of the insurance (e.g., Bacich v. Homeland Ins. Co. Supra; Harter v. American Eagle Fire Ins. Co. (6 Cir.) 60 F.2d 245); (2) settling with the wrongdoer after payment under the policy (e.g., National Union Fire Ins. Co. v. Grimes, 278 Minn. 45, 153 N.W.2d 152); or (3) entering into an agreement of release with the wrongdoer before the policy issued (e.g., Hartford Fire Ins. Co. v. Chicago, M. & St. P. Ry. Co., 175 U.S. 91, 20 S.Ct. 33, 44 L.Ed. 84).

Unlike the foregoing examples, here plaintiff, by the construction contract (executed subsequent to the issuance of the policy but prior to loss), exonerated the contractor from any potential liability for damages resulting by way of business interruption, 'however the same may be caused.' The parties appear in agreement that this broad language includes damages caused by the contractor's own negligence. Cf. General Mills v. Goldman (8 Cir.) 184 F.2d 359. Such exculpatory agreements releasing a contracting party from liability caused by his own negligence are not uncommon in modern-day construction contracts. They are designed to distribute the burden or risks inherent in the performance of such contracts in such a way as to eliminate foreseeable disputes and to reduce the cost of construction. ² Such agreements do not contravene public policy, are valid, and are enforceable. Independent School Dist. No. 877 v. Loberg Plumbing & Heating Co., 266 Minn. 426, 123 N.W.2d 793. ³

Although there appears to be no case specifically so holding, we assume, as do the parties, that an unambiguous and broad exculpatory agreement of the type used in this case defeats the subrogation rights of the insurance company against the contractor even though it was made subsequent to the issuance of the policy and prior to loss. ⁴ Upon the assumption that subrogation rights are defeated by a release made after issuance of the policy and before loss, the question arises as to whether such impairment of subrogation rights should also preclude plaintiff from pursuing recovery under the all-risk insurance policy.

Treatises contain language which states generally that a release of liability given to a tortfeasor by the insured bars the insured's right of action on the policy because it destroys the insurer's right of subrogation. 6 Appleman, Insurance Law and Practice, § 4093; 44 Am.Jur. (2d) Insurance, § 1839. However, analysis of the cases cited in support of the rule reveals that it was derived from cases in which defeat of the insurer's right of subrogation occurs after loss. E.g., Bacich v. Homeland Ins. Co. Supra. Some of the cited cases have held that the insured is precluded from recovery on a policy where he has defeated the insurer's right of subrogation by an agreement made before loss. However, in all such cases the insurance policies provided expressly that relinquishment of the insured's rights against a potential wrongdoer rendered the policy void. Kennedy Brothers v. Iowa State Ins. Co., 119 Iowa 29, 91 N.W. 831; Fayerweather v. Phenix Ins. Co., 118 N.Y. 324, 23 N.E. 192; Southard v. Minneapolis, St. P. & S.S.M. Ry. Co., 60 Minn. 382, 62 N.W. 442, 619.

Defendants vigorously argue that an insured who, without reservation, releases all claims for damages against a potential wrongdoing either after or prior to loss, thereby defeating the right of subrogation accorded an insurer by the terms of an insurance policy, should be precluded from making recovery upon...