Krause v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 25 July 1969
• Docket Number: No. 37149,37149
• Citation: 169 N.W.2d 601,184 Neb. 588
• Parties: Joseph L. KRAUSE, Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a Corporation, Appellee.
• Court: Nebraska Supreme Court

Page 601

169 N.W.2d 601

184 Neb. 588

Joseph L. KRAUSE, Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a Corporation, Appellee.

No. 37149.

Supreme Court of Nebraska.

July 25, 1969.

Syllabus by the Court

1. A general demurrer tests the substantive legal rights of the parties upon admitted facts including proper and reasonable inferences of law and fact which may be drawn from facts which are well pleaded.

2. An insured's cause of action against the tort-feasor cannot be split; at all times there is one cause of action on the part of the insured against the tort-feasor.

3. Where the holder of the subrogation right asserts his right to equitable subrogation in the avails of litigation or settlement created by the efforts of insured and his attorney, and the insurance company fails to make, or fails to offer to make, itself a party to the action against the wrongdoer, or in any manner to assist in the prosecution of the claim or contribute towards the expense thereof, although having full knowledge of its pendency and object, the insured is entitled to retain a proportionate share of the expenses, including attorney's fees, incurred in the recovery from which the insurance company will benefit to the extent of its subrogation claim.

4. An insurer is entitled to subrogation, either by contract or in equity for the amount of the indemnity paid.

5. If the property loss is greater than the amount of insurance paid the action should be in the name of the insured, and the insured holds as much of the judgment recovered as the money paid by the insurer amounts to, in trust for the insurer.

William L. Howland, Lincoln, for appellant.

Healey & Healey, Lincoln, for appellee.

Heard before WHITE, C.J., CARTER, SPENCER, SMITH, McCOWN and NEWTON, JJ., and RONIN, District Judge.

WHITE, Chief Justice.

This is an action on behalf of the plaintiff, Joseph L. Krause, against the defendant State Farm Mutual Automobile Insurance Company, hereinafter referred to as State Farm, for reasonable attorney's fees. The plaintiff filed a petition in Lincoln municipal court in which he alleged two causes of action against State Farm. State Farm demurred, and the plaintiff filed an amended petition. State Farm demurred to the amended petition, plaintiff elected to stand upon his amended petition, and the municipal court dismissed the plaintiff's petition. Plaintiff appealed to the district court for Lancaster County, and State Farm filed a demurrer to plaintiff's petition on appeal. Plaintiff elected to stand on his petition on appeal, whereupon the district court entered an order dismissing plaintiff's action. After plaintiff's motion to vacate or in the alternative for a new trial was overruled by the district court, he appealed.

'A general demurrer tests the substantive legal rights of the parties upon admitted facts including proper and reasonable inferences of law and fact which be drawn from facts which are well pleaded.' Martindale v. State & etc., 181 Neb. 64, 147 N.W.2d 6.

The petition of plaintiff pleads the following facts: On August 1, 1964, Mr. Lowell Roumph was involved in an automobile accident with Mr. and Mrs. Leonard Kracman. At the time of the accident, Roumph had a $50 deductible collision policy with State Farm, his insurance carrier. The damage to the automobile was in excess of $1,400. State Farm indemnified Roumph to the extent of $1,350 and retained an equitable right of subrogation against the other parties involved.

The plaintiff was retained by Roumph as an attorney to represent him in his claim for damages to his automobile and for personal injuries sustained. After an investigation of the facts in preparation for filing an action against the Kracmans, and after substantial negotiations with Dairyland Insurance Company, the insurer of the Kracmans, settlement was made with Dairlyland Insurance Company. Throughout these negotiations State Farm was aware of the efforts of the plaintiff and acquiesced in, but did not in any way take part in, such negotiations or assist in reaching the settlement.

Apparently, the Dairyland Insurance Company made payment to State Farm for the amount of its subrogation claim. The plaintiff made demand on State Farm for the payment of reasonable compensation for his services and continued to do so for 90 days prior to the institution of this action against State Farm.

In plaintiff's petition, two causes of action were pleaded. In the first, the plaintiff contended that he was entitled to a reasonable attorney's fee for services rendered in connection with his negotiations for collecting the subrogation claim of State Farm against Dairyland Insurance Company, the tort-feasor insurance carrier. Plaintiff relies upon our holding in United Services Automobile Ass'n v. Hills, 172 Neb. 128, 109 N.W.2d 174, 2 A.L.R.3d 1422. At the outset, we discover that this whole field of litigation is confused because of the conflicting claims between the insured and insurer with reference to the avails of the tort law cause of action against the tort-feasor. In such cases various forms of recovery, as distinguished from substantive rights, have been construed by the courts to protect the subrogation carrier in its fundamental equitable right where it has paid the insured on a collision claim, and yet maintained the fundamental unity of the tort cause of action as against the right to split the avails. Nebraska is in harmony with the prevailing rule in most jurisdictions that the insured's cause of action against the tort-feasor cannot be split and that at all times there is one cause of action on the part of the insured against the tort-feasor. United Services Automobile Ass'n v. Hills, Supra; Shiman Bros. & Co., Inc. v. Nebraska National Hotel Co., 143 Neb. 404, 9 N.W.2d 807; Dixon v. Coffey, 161 Neb. 487, 73 N.W.2d 660; Hayward v. State Farm Mut. Automobile Ins. Co., 212 Minn. 500, 4 N.W.2d 316, 140 A.L.R. 1236. United Services Automobile Ass'n v. Hills, Supra, was a declaratory judgment proceeding in which the court held that it was, in substance, an interpleader action, since the tort-feasor insurance company had paid the subrogation claim to the insured's carrier, and had paid the total amount of the attorney's fee that it owed into court. The insurance carrier refused to pay the plaintiff's attorney and refused to permit him to handle or perform any services with regard to collection of the subrogation claim. In awarding the insured's attorney an attorney's fee proportionate to the amount of services he had rendered in collecting the subrogation claim along with the personal injury claim against the tort-feasor, this court laid down the substantive principle of liability as follows: 'The applicable rule is that where the holder of the subrogation right does not come into the action, whether he refuses to do so or acquiesces in the plaintiff's action, but accepts the avails of the litigation, he should be subjected to his proportionate share of the expenses thereof, including attorney's fees. In the early case of Newcomb v. Cincinnati Ins. Co., 22 Ohio St. 382, 10 Am.Rep. 746, the rule was stated as follows: 'Where the assured, as in case of partial insurance, sustains a loss, in excess of the reimbursement or compensation by the underwriter, he has an undoubted right to have it satisfied by action against the wrong-doer. But if, by such action, there comes into his hands, any sum for which, in equity and good conscience, he ought to account to the underwriter, reimbursement will, to that extent, be compelled in an action by the latter, based on his right in equity to subrogation. But the assured will not, in the forum of conscience, be required to account for more than the surplus, which may remain in his hands, after satisfying his own excess of loss in full, and his reasonable expenses incurred in its recovery; unless the underwriter shall, on notice and opportunity given, have contributed to, and made common cause with him, in the prosecution.' See, also, Svea Assurance Co. of Gothenburg, Sweden v. Packham, 92 Md. 464, 48 A. 359, 52 L.R.A. 95; Washtenaw Mut. Fire Ins. Co. v. Budd, 208 Mich. 483, 175 N.W. 231; Shawnee Fire Ins. Co. v. Cosgrove, 85 Kan. 296, 116 P. 819, 41 L.R.A.,N.S., 719; Camden Fire Ins. Ass'n v. Missouri, K. & T. Ry. Co., Tex.Civ.App., 175 S.W. 816; Annotation, 36 A.L.R. 1267.' (Emphasis supplied.) We note that since United Services Automobile Ass'n v. Hills, Supra, was filed it has become the leading case on the subject and has been followed in other jurisdictions, with perhaps one exception. See, Annotation, 2 A.L.R.3d 1422 et seq.

The declaration in that holding, emphasized above, is in effect that the insured is compelled to hold the amount of the subrogation claim for the benefit of his insured's carrier and to account to him for this amount in the avails of the action against the tort-feasor. Translated into orthodox legal language, this is simply a declaration impressing a trust upon the fund coming into the hands of the insured and requiring him, following a fiduciary's duty, to account for the proportionate amount of the proceeds corresponding with the subrogration right. It is elementary that subrogation is in its nature equitable and the rights being litigated here are equitable rights. It therefore follows that the insurance contract setting up and declaring the rights between the parties preserves the unity and control of the insured over his cause of action for personal injury and property damage against the tort-feasor, and yet fully protects the insurer's subrogation right. The right to an attorney's fee follows as a matter of course, since the services rendered by the attorney are beneficial to the administration of the trust and the rights of the beneficiary and as such he is entitled to a proportionate awad of an attorney's fee.

The applicable rule is well stated in the case of Parker v. Hardy, 73 S.D. 247, 41...