State v. Continental Cas. Co.

• Decision Date: 22 August 1994
• Docket Number: No. 20666,20666
• Citation: 879 P.2d 1111,126 Idaho 178
• Parties: , 94 Ed. Law Rep. 548 STATE of Idaho, Plaintiff-Respondent, and Idaho State University, Plaintiff, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellant. CONTINENTAL CASUALTY COMPANY, Third Party Plaintiff-Appellant, v. COMPASS INSURANCE COMPANY, Third Party Defendant. Boise, May 1994
• Court: Idaho Supreme Court

Page 1111

879 P.2d 1111

126 Idaho 178, 94 Ed. Law Rep. 548

STATE of Idaho, Plaintiff-Respondent, and Idaho State University, Plaintiff, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellant.

CONTINENTAL CASUALTY COMPANY, Third Party Plaintiff-Appellant, v. COMPASS INSURANCE COMPANY, Third Party Defendant.

No. 20666.

Supreme Court of Idaho,

Boise, May 1994.

Aug. 22, 1994.

[126 Idaho 180] Hall, Farley, Oberrecht and Blanton, Boise, for appellant/third party plaintiff-appellant. Michael P. Tone argued.

Larry EchoHawk, Idaho Atty. Gen., Cosho, Humphrey, Greener & Welsh, Boise, for respondent. Howard Humphrey argued.

SILAK, Justice.

This case involves a dispute over insurance coverage. After the State of Idaho paid $375,000 to settle a claim brought against Idaho State University (ISU), the State sought payment of insurance proceeds from Continental Casualty Company (Continental), which had issued ISU a liability policy covering the University against losses incurred as a result of lawsuits. When Continental refused to pay the State's demand, the State filed a declaratory judgment action to recover the insurance proceeds. Continental filed a third party claim against Compass Insurance Company, which had paid the State $150,000 to cover losses incurred in the lawsuit against the University, under a liability policy issued to the State. Continental contended that if the State was allowed to recover from Continental, Continental should be entitled to recover against Compass under the theory of equitable subrogation. After the State and Continental filed cross-motions for summary judgment, the district court denied Continental's motion, dismissed Compass from the lawsuit, and granted summary judgment to the State. Continental appeals from the district court's order of summary judgment.

FACTS AND PROCEDURAL BACKGROUND

This is the second time this case has reached this Court for decision. The facts leading up to the Court's first decision, State v. Continental Cas. Co., 121 Idaho 938, 829 P.2d 528 (1992) (Continental I ), are stated succinctly in that opinion:

In this insurance coverage dispute the State of Idaho brought this action against Continental Casualty Company seeking declaratory relief and a money judgment for coverage under the terms of a Board of Education liability (BEL) insurance policy issued to Idaho State University (ISU) for the year 1981. In its action, the State of Idaho, for itself and on behalf of Idaho State University (ISU) seeks recovery for payments made by the Bureau of Risk Management (BRM) in defending and settling employment discharge, tort and civil rights claims in Hale v. Walsh, 113 Idaho 759, 747 P.2d 1288 (Ct.App.1987).

At the time in question, Compass Insurance Company (Compass) also provided insurance coverage to ISU and the State of Idaho. Compass paid BRM $150,000.00 for a policy holder's release with respect to the Hale claim, and BRM used a portion of these funds to reimburse ISU for defense costs it had incurred. Compass was joined in this action as a third party defendant by Continental which claimed Compass had paid less than its share of the Hale claim.

Continental, BRM and ISU all filed motions for summary judgment. The trial court denied Continental's motion in its entirety and granted summary judgment Continental I, 121 Idaho at 938-39, 829 P.2d at 528-29. In Continental I, we held that the State could not recover on the insurance contract against Continental because only ISU was named as an insured in the Continental policy, and neither the State nor the Bureau of Risk Management (BRM) were the same legal entity as ISU. The Court further held that ISU could not recover in its own name under the Continental policy because the policy required Continental to pay only for a "covered loss," and ISU never suffered a covered loss because BRM, not ISU, paid the liability on the Hale lawsuit. Accordingly, we reversed the district court's order of summary judgment and remanded the case for further proceedings.

[126 Idaho 181] in favor of BRM and ISU. In addition, on its own motion, the trial court entered summary judgment in favor of Compass because it viewed Continental's action against Compass as being moot.

On remand, the district court granted the State's motion to amend its complaint to allege claims for equitable subrogation and indemnity. The State and Continental then filed cross-motions for summary judgment. Following this Court's decision in Continental I, ISU was dismissed as a party to the action. In its Memorandum Decision on remand, the district court concluded that the State, having satisfied ISU's liability, stood in the shoes of ISU and was entitled to recover the defense and settlement costs from Continental under the doctrine of equitable subrogation. The district court entered judgment in favor of the State against Continental for $746,592.16 as covered losses in the Hale lawsuit. The district court also awarded the State its costs and attorney fees in this action against Continental. Continental has appealed from this Memorandum Decision and Summary Judgment.

ISSUES ON APPEAL

Continental's appeal raises four issues for us to decide:

1. Whether the State is entitled to reimbursement from Continental under the principle of equitable subrogation.

2. Whether the State acted as ISU's insurer in paying the Hale settlement, which would allow Continental to avoid liability under the "other insurance" provision of Continental's policy.

3. Whether, assuming Continental is required to reimburse the State, Continental is entitled to a set-off for the $150,000 which Compass already paid the State under its general liability policy.

4. Whether the trial court erred in granting summary judgment to Compass.

ANALYSIS

1. Whether the State is Entitled to Payment from Continental Under the Principle of Equitable Subrogation.

This Court has previously stated the following with respect to the doctrine of equitable subrogation:

"Generally speaking, it is only in cases where one advances money to pay the debt of another to protect his own rights that a court of equity substitutes him in place of the creditor as a matter of course, without any express agreement to that effect. The doctrine of subrogation is not administered as a legal right, but the principle is applied to subserve the ends of justice and to do equity. It does not rest on contract, and no general rule can be laid down which will afford a test in all cases for its application, and whether the doctrine is applicable to any particular case depends upon the peculiar facts and circumstances of such case."

Chenery v. Agri-Lines Corp., 115 Idaho 281, 285, 766 P.2d 751, 755 (1988) (quoting Houghtelin v. Diehl, 47 Idaho 636, 639-40, 277 P. 699, 700 (1929)). "For the right of subrogation to arise, it is first essential that the party making a payment to a third person is under an obligation to make such a payment or has a recognizable interest to protect." Chenery, 115 Idaho at 285, 766 P.2d at 755 (quoting Williams v. Johnston, 92 Idaho 292, 442 P.2d 178 (1968)).

"A person voluntarily satisfying the debt or default of another can claim no right of subrogation, but it is apparently sufficient if there is practical compulsion to pay, although there may be no strict legal obligation to do so, or if, because of mistake Chenery, 115 Idaho at 286, 766 P.2d at 756 (quoting 83 C.J.S. § 16 SUBROGATION, at 617-18).

[126 Idaho 182] the payor believes that it is his legal duty to pay."

Continental argued to the district court that the State voluntarily paid the debt of ISU, without any legal obligation or practical compulsion to do so, and therefore the State is not entitled to equitable subrogation. The district court concluded, to the contrary, that the State did not pay ISU's debt to the Hales as a mere volunteer, but in order to protect the State's assets in the State General Fund. We agree.

Under I.C. § 6-922, ISU would have looked to the State for money to satisfy any portion of its liability which arose under the Idaho Tort Claims Act (ITCA), and which was not covered by insurance. This statute states:

6-922. Payment by state of claims or judgments when no insurance.--In the event no insurance has been procured by the state to pay a claim or judgment arising under the provisions of this act, the claim or judgment shall be paid from the next appropriation of the state instrumentality whose tortious conduct gave rise to the claim.

Thus, that portion of ISU's liability to the Hales which arose under the ITCA, and for which there was no available insurance, would have been paid from the next appropriation of state funds to ISU. Before the State paid the Hales $375,000 to settle the lawsuit, Continental had refused to cover ISU for any amount more than $130,000. The $150,000 paid by Compass barely covered ISU's defense costs. Thus, at the time the State paid the Hales to settle the lawsuit, it was reasonable for the State to believe that ISU's liability to the Hales arose under the provisions of the ITCA, that the liability would exceed the amount of available insurance, and therefore ISU would have to request additional money in its next appropriation from the State to satisfy its liability to the Hales. At the same time, the amount of ISU's liability to the Hales was increasing at an interest rate of 18% per year. The district court properly concluded:

[H]ad the State not paid the defense costs and settlement for ISU, the costs and settlement would continue to accrue interest until the next appropriation (assuming the legislature approved the appropriation) costing the State and its tax payers additional monies. Therefore, the Court concludes that the State did make the payments under an obligation to protect the interests of the state and its citizens and did not make the payments as a mere volunteer.

We agree. The State did not pay ISU's debt to the Hales as a mere volunteer, but because it had a ...