Schmidt v. Clothier
| Decision Date | 16 November 1983 |
| Docket Number | C6-82-993.,C9-82-244 |
| Citation | 12 Minn. 518,338 NW 2d 256 |
| Parties | H. Rosemarie SCHMIDT, etc., Respondent, v. Kevin J. CLOTHIER, et al., Defendants, Safeco Insurance Co., intervenor, Appellant, Edward Paskoff, et al., Respondents. H. Rosemarie SCHMIDT, etc., Respondent, v. Gerald Frank HOAG, Respondent, Linda Elizabeth Epperly, Respondent, and Minneapolis Special School District # 1, intervenor, Respondent, Safeco Insurance Co., intervenor, Appellant. |
| Court | Minnesota Supreme Court |
Arthur, Chapman & Michaelson, Lindsay G. Arthur, Jr., Minneapolis, for appellant Safeco Inc.
Hvass, Weisman & King, H. Frank J. Brixuis, Minneapolis, for respondent Schmidt.
Meshbesher, Singer & Spence, Fred Pritzker, Minneapolis, for respondent Paskoff.
James L. Haigh, Minneapolis, for respondent Gerald Hoag.
Robert V. Daly, Minneapolis, for respondent Linda Epperly.
Michael Stern, Minneapolis, for respondent Mpls. Special School Dist.
Paul E. Godlewski, Minneapolis, for amicus Minn. Trial Lawyers Ass'n.
Eric J. Magnuson, Minneapolis, for amicus Minn. Defense Lawyers Assoc.
Heard, considered, and decided by the court en banc.
These consolidated cases raise important questions of insurance law in the context of underinsurance coverage, settlements, and subrogation rights.
In the first case, Rosemarie Schmidt sued for the wrongful death of her husband, Lloyd H. Schmidt. On November 1, 1979, Mr. Schmidt was hit and killed by a truck driven by defendant Clothier and owned by Clothier's employer, defendant Furniture House of Hastings, Inc., which carried a $100,000 liability policy on the truck with St. Paul Fire and Marine Insurance Company (St. Paul Fire). St. Paul Fire offered to settle with Mrs. Schmidt for the $100,000 policy limit in exchange for a full release.
Mrs. Schmidt carried $100,000 of underinsurance coverage with appellant, Safeco Insurance Company (Safeco). Because it was clear that her damages exceeded $265,000, and thus that the liable parties were underinsured, Mrs. Schmidt notified Safeco that she intended to settle with St. Paul Fire. Safeco, in reliance on the cooperation clause in Mrs. Schmidt's policy and its claimed subrogation interest, refused to acquiesce in the settlement.
Mrs. Schmidt thereafter demanded arbitration of her underinsurance claim. Safeco refused to pay underinsured benefits to Mrs. Schmidt and refused as well to submit her claim to arbitration. After Mrs. Schmidt threatened to file a bad-faith lawsuit against it, Safeco tendered a check to Mrs. Schmidt in the amount of $100,000 but required her to agree to hold in trust for Safeco any recovery she obtained from any source and to fully release Safeco from any claim she might make.
Mrs. Schmidt, who had been without recovery from any source for the 2 years after her husband's death, then moved the Dakota County District Court for an order authorizing her to accept both the check from Safeco and the check from St. Paul Fire. The district court authorized Mrs. Schmidt to accept the $100,000 settlement offered by St. Paul Fire on behalf of itself and its insureds. Mrs. Schmidt was further authorized to execute a general release of all claims against the defendants. This portion of the order was stayed 10 days, to allow Safeco the opportunity to tender a check in the amount of $100,000 to Mrs. Schmidt to protect any subrogation interest which Safeco claimed against any of the defendants. If Safeco made such a tender, Mrs. Schmidt was ordered not to negotiate any settlement with St. Paul Fire or to sign any release. The court further ordered that within 10 days Safeco either pay its underinsured benefits of $100,000 to the plaintiff or submit the matter to arbitration. Safeco refused to pay underinsured benefits and ignored the order to arbitrate. Although the order was not appealable, we granted discretionary review.
In the second consolidated case, respondent Paskoff was injured on January 13, 1977, while a passenger in a car driven by Linda Epperly and owned by the Minneapolis Special School District No. 1, when Epperly's car collided with a car driven and owned by Gerald Hoag. Paskoff sued Hoag and Epperly. Hoag offered to settle for $22,000 out of his $25,000 liability policy, and Epperly offered $4,000 out of the school district's $300,000 policy.
Paskoff, who carried an underinsurance policy with Safeco, notified it of his intent to accept the settlement offers and sought Safeco's consent to the settlements as he was required to do under the Safeco policy. Safeco refused to consent, contending that settlement would impair its subrogation rights and that Paskoff was not entitled to underinsurance benefits until he had exhausted the limits of the defendants' liability policies.
Paskoff thereafter moved the Hennepin County District Court for an order authorizing him to execute the releases and negotiate the checks tendered to him by the defendants. The district court so ordered but, as did the court in Mrs. Schmidt's case, stayed the order 10 days to give Safeco the opportunity to exchange its check for $26,000 for the settlement drafts tendered to Paskoff in order to protect its subrogation interests. Safeco appealed from that order. Epperly eventually moved for a court order finding Paskoff in contempt for refusing to accept the settlements. The court ordered Paskoff to negotiate the settlement checks, and the defendants were thereafter released. Paskoff thus has received a recovery from the liability defendants, but Safeco has refused to process his underinsured claim.
The issues involved in these cases are (1) whether underinsurance benefits are available to the insured where the proposed settlement with the tortfeasor does not exhaust the tortfeasor's liability insurance and, if so, for what amount the underinsurer is liable, and (2) whether a general release executed as part of a settlement with the tortfeasor destroys the underinsurer's subrogation rights or precludes the insured from recovering underinsurance benefits.
These cases were briefed and argued extensively by the parties, as well as by two amici, the Minnesota Trial Lawyers Association and the Minnesota Defense Lawyers Association. All advocates have requested that we formulate a rule setting forth the rights and duties of the insured, the underinsurer, the liability insurer, and the tortfeasor.
In doing so we have kept in mind the purposes of the Minnesota no-fault automobile insurance act, Minn.Stat. §§ 65B.41-.71 (1982), which include relieving the economic hardships encountered by uncompensated accident victims, Minn.Stat. § 65B.42(1), encouraging proper medical treatment by assuring prompt payment for such treatment, Minn.Stat. § 65B.42(3), and speeding the administration of justice and easing the burden of litigation on the courts of this state, Minn.Stat. § 65B.42(4).
The first issue raised is whether policy exhaustion clauses are enforceable. Both underinsurance policies in these cases contained an exhaustion clause which provided: "We will pay under this coverage only after the limits of liability under any applicable bodily injury liability bonds or policies have been exhausted by payment of judgments or settlements." Enforcement of this clause in Paskoff's case would deny him any underinsurance benefits because he has settled within the limits of the defendants' liability policies.
Both Safeco and the Defense Lawyer amicus, however, have taken the position before this court that underinsurance benefits should be available, despite a below-limits settlement, where the injured person's damages are greater than the liability limits of the tortfeasor.1 They are willing to concede that the legislature intended underinsurance coverage to provide benefits in excess of the tortfeasor's liability limits and that the insured has a right to full control over the lawsuit against the tortfeasor, a control which would include the right to make the best settlement possible.
The purposes of the no-fault act, noted above, include those of easing the burden of litigation and encouraging prompt payment of claims. Enforcement of policy exhaustion clauses would produce results contrary to those purposes. It could serve to force an insured to litigate the claim to final judgment in order to exhaust the policy limits. Litigation expenses would lessen the insured's net recovery, the time involved in litigation would serve to delay payment to the insured, and the litigation itself would unnecessarily burden our court system. Where the best settlement available is less than the defendant's liability limits, the insured should not be forced to forego settlement and go to trial in order to determine the issue of damages. The insured has the right to accept what he or she considers the best settlement available and to proceed to arbitrate the underinsurance claim for a determination of whether the damages do indeed exceed the tortfeasor's liability limits. Thus, we hold that exhaustion clauses are void as against the policies of the no-fault act. The insured may recover underinsurance benefits where the total damages sustained (as determined by either arbitration or judgment) exceed the limits of the tortfeasor's liability policy even where the insured settles with the tortfeasor for less than the liability limits.2
Safeco and the Defense Lawyer amicus argue that, even though the insured should not be required to exhaust the tortfeasor's liability limits, the underinsurer is liable only for those damages suffered in excess of those limits, for it is only in this amount that the tortfeasor is truly "underinsured." Respondents and the Trial Lawyers amicus counter that, in order to effectuate the statute's policy of full compensation of accident victims, the underinsurer should be required to pay that amount by which the insured's damages exceed the settlement amount, i.e., the underinsurer must pay, as underinsurance...
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