Pfeffer v. State Auto. and Cas. Underwriters

• Decision Date: 25 April 1980
• Docket Number: No. 49716.,49716.
• Citation: 292 NW 2d 743
• Parties: John PFEFFER, Respondent, v. STATE AUTOMOBILE AND CASUALTY UNDERWRITERS INSURANCE COMPANY, Appellant.
• Court: Minnesota Supreme Court

292 N.W.2d 743 (1980)

John PFEFFER, Respondent, v. STATE AUTOMOBILE AND CASUALTY UNDERWRITERS INSURANCE COMPANY, Appellant.

No. 49716.

Supreme Court of Minnesota.

April 25, 1980.

Barnett, Ratelle, Hennessy, Vander Vort, Stasel & Herzog and W. Scott Herzog, Minneapolis, for appellant.

Joseph W. Parris and Donald W. Fett, Hector, for respondent.

Heard before ROGOSHESKE, KELLY and TODD, JJ., and considered and decided by the court en banc.

KELLY, Justice.

After a trial in an action for a declaratory judgment between State Automobile and Casualty Underwriters Insurance Company, a no-fault insurer, and John Pfeffer, its insured, the trial court held that State Auto, which had already paid out benefits to Pfeffer, had no subrogation rights to the proceeds received by Pfeffer in a settlement with a third-party tortfeasor where the total amount that Pfeffer received from all sources would not completely compensate him for his injuries. Judgment was entered in accordance with this holding, and State Auto appeals from that judgment. We affirm.

The plaintiff/respondent John Pfeffer was a passenger in a car driven on a highway near Sleepy Eye by Joseph Fernkes on December 4, 1975. Also riding in Fernkes' car was one Timothy Ruskamp. Fernkes' car hit an icy patch and skidded into the left lane where it collided with a vehicle driven by one Ira Rutherford, an agent for American Milk Producers, Inc. (AMPI). Ruskamp was killed in the accident, and Pfeffer sustained severe injuries, especially to his right arm. As partial compensation for his injuries, Pfeffer received $30,000 in benefits from his insurer, State Automobile and Casualty Underwriters Insurance Company, under a no-fault policy issued pursuant to chapter 65B of the Minnesota Statutes. The money was apportioned $20,000 for medical expenses and $10,000 for wage loss, and it represented the limits of the policy.

Since it was allowed by law, Pfeffer brought suit against Fernkes, Rutherford, and AMPI, alleging negligence and seeking to recover damages.¹ Subsequently, State Auto informed both Rutherford and Fernkes' insurer, Iowa Mutual Insurance Company, by letters that it was claiming a $30,000 subrogation right in any proceeds that Pfeffer might recover from them. The case then went to trial. Even though agents for State Auto apparently knew of the lawsuit, State Auto did not attempt to intervene as a party to protect its claimed subrogation right.

During the trial, while the trial judge was considering a pending motion by AMPI for a directed verdict, the three parties to the lawsuit settled the case. In settlement, the two defendants agreed to pay Pfeffer a total of $57,500 for a general release, Fernkes contributing $50,000, or the limits of his liability policy, and AMPI contributing $7,500. The lawyer for Fernkes, however, obviously desired to protect his client with regard to the alleged subrogation claim by State Auto.² Thus, Fernkes' insurer, Iowa Mutual, issued its payment in two drafts, draft one for $20,000 to John Pfeffer and Joseph Parris his attorney; and draft two for $30,000 to State Auto "and Joseph Parris their attorney."

Draft two was originally issued only to State Auto without Parris' name appearing thereon. However, the attorney for Fernkes and Iowa Mutual, on his own, returned the check to the company asking that attorney Parris' name be added. He did this because of his apprehension that Parris might have some claim to attorneys' fees from the portion of the settlement apparently intended to satisfy State Auto's alleged subrogation claim. After Parris' name had been inserted on the $30,000 draft, it was then apparently delivered to Parris, who forwarded it to State Auto for its endorsement. State Auto returned the draft to Iowa Mutual demanding that the draft be re-issued without Parris being listed as one of the payees. Iowa Mutual refused, and returned the draft to Parris.

Pfeffer then brought this declaratory judgment action, asking for a legal determination that State Auto had no statutory subrogation right in the settlement with Fernkes and AMPI until Pfeffer had been fully compensated, and that therefore State Auto was not entitled to the $30,000. Pfeffer also contended that, if State Auto did have a subrogation right, he was entitled to reasonable compensation for fees and expenses incurred in collecting the subrogated amount for State Auto.

After a court trial, the district court ruled that the overriding purposes of the no-fault law were to provide for relief for uncompensated victims of automobile accidents and to prevent double recovery. Thus, he reasoned, the statutory subrogation right of a no-fault insurer (who has paid out benefits) to the settlement proceeds recovered by its insured from a third-party tortfeasor was not meant to apply unless and until the insured was fully compensated for his injuries; or, in other words, the subrogation right was only meant to apply to prevent double recovery by the insured. The trial court found as a fact that compensation for Pfeffer's injuries would require at least $100,000.³ Since the total of the settlement and no-fault proceeds was only $87,500, subrogation was not required to prevent double recovery. Therefore, State Auto's claim to $30,000 of the settlement was denied.

The issue presented on appeal is: Does State Auto have a subrogation right, to the extent of the no-fault benefits paid, in any proceeds of the settlement reached by John Pfeffer, Joseph Fernkes and AMPI?⁴

In 1974, the Minnesota Legislature enacted the Minnesota No-Fault Automobile Insurance Act. The basic reason for enactment was to modify some of the alleged inequities of the then totally fault-based reparations system for personal injuries occurring in motor vehicle accidents, by requiring drivers to have insurance policies that provide compensation for certain of such injuries regardless of fault. The purposes of the Act are explained in Minn.Stat. § 65B.42 (1978), and they include encouraging promptness of payment for medical treatment, prevention of overcompensation for minor injuries, and relief of the economic distress of uncompensated victims.

Even though an injured party has secured no-fault benefits under his insurance policy, he may nonetheless bring an action in tort for economic loss if, due to policy limits or exclusions, he is not adequately compensated. Minn.Stat. § 65B.51, subd. 2 (1978). He may also bring an action for noneconomic detriment if the expenses attributable to his injuries rise above a certain level, or if his injury results in long disability, permanent disfigurement, or death. Minn.Stat. § 65B.51, subd. 3(2) (1978).

In addition, Minn.Stat. § 65B.53, subd. 2 (1974) (amended 1976)⁵ provided the subrogation rights of the no-fault insurer in any recovery from a third party tortfeasor:

To the extent permitted by section 65B.51, subdivision 1, a reparation obligor paying or obligated to pay basic or optional economic loss benefits shall be subrogated to the extent of benefits paid or payable to any cause of action to recover damages for economic loss which the person to whom the basic or optional economic loss benefits were paid or payable has brought under the terms of section 65B.51, subdivision 3 against another person whose negligence was the direct and proximate cause of the injury for which the basic economic loss benefits were paid or payable.

Minn.Stat. § 65B.51, subd. 1 (1974) (amended 1976), referred to in the statute above, provided that a no-fault insurer had no subrogation rights unless the insured had actually "commenced" a civil action for noneconomic detriment against a tortfeasor. Thus, if an injured insured settled a case with a third party tortfeasor merely by the threat of a suit without actually "commencing" it, the no-fault insurer clearly would have no subrogation rights.

Because in the present case the injured insured, John Pfeffer, had actually commenced a suit against Fernkes and AMPI, alleging causal negligence, it would superficially appear that State Auto should be "subrogated to the extent of benefits paid or payable to his cause of action" under Section 65B.53, subd. 2. If State Auto has an unconditional statutory subrogation right in this case, it would follow that State Auto should receive either $30,000, or $30,000 reduced by attorneys' fees and expenses, because that is what the parties apparently agreed that right was worth to achieve a settlement.

Pfeffer, however, argues, and the trial court held, that, under the facts of this case, State Auto never achieved any subrogation rights because, even with the combined proceeds of the settlement and the no-fault benefits, Pfeffer was not adequately compensated for his injuries. Plaintiff argues that the overriding purposes behind the No-Fault Act in general indicate that State Auto's rights under section 65B.53 subd. 2 are inchoate or conditional, not arising unless or until the insured is fully compensated. The case most relied on for this argument is Milbank Mutual Insurance Co. v. Kluver, 302 Minn. 310, 225 N.W.2d 230 (1974).

In Milbank Mutual, the defendant was involved in an automobile accident caused by the negligence of an uninsured motorist. She was paid a total of $26,300 by her insurer in compensation for her injuries based on the uninsured motorist, collision, and medical expenses coverages in her automobile insurance policy. Subsequently she commenced a dram shop action against the liquor store and bar that had allegedly been negligent in selling liquor to the uninsured motorist. She explicitly notified her insurer of the dram shop action, stating that she did not believe that the insurer had any subrogation rights. The defendant then settled with the two dram shop defendants for a total of $41,500. Her total damages were stipulated by the parties to be $70,000.

Defendant's uninsured-motorist insurer then brought suit for subrogation claiming that under Minn.Stat. § 65B.22...