Washington v. Milbank Ins. Co.
| Decision Date | 15 May 1997 |
| Docket Number | No. C2-95-2627,C2-95-2627 |
| Parties | Ruth WASHINGTON, et al., Respondents, v. MILBANK INSURANCE COMPANY, petitioner, Appellant. |
| Court | Minnesota Supreme Court |
Syllabus by the Court
There are two options available for insureds who want to pursue an underinsured motorist claim against their insurance company. Under option one, the insured may pursue a tort action against the tortfeasor to conclusion in district court, and then, if the judgment exceeds the limits of the tortfeasor's insurance policy, pursue a claim for underinsurance benefits. Under option two, the insured may settle the tort action for "the best settlement," give a Schmidt-Clothier notice to the underinsurer, and then maintain a claim for underinsurance benefits.
Mahoney, Dougherty and Mahoney, P.A., Victor E. Lund, Kenneth P. Gleason, Minneapolis, for appellant.
David G. Mueller and Associates, Bradley H. Ratgen, Minneapolis, for respondents.
Meshbesher and Spence, Ltd., Michael C. Shyder, Richard A. Ruohonen, Minnesota Trial Lawyers Assn., Minneapolis, amicus curiae.
Heard, considered, and decided by the court en banc.
This declaratory judgment action was brought by Ruth and Booker Washington (Washingtons) to compel Milbank Insurance Company (Milbank) to arbitrate the Washingtons' underinsured motorist (UIM) claim. The Washingtons' UIM claim arose from Mrs. Washington's involvement in a motor vehicle accident on November 11, 1989, with Junauld Presley (Presley) who was insured by State Farm Insurance Company (State Farm) with a liability coverage limit of $50,000. Mrs. Washington was insured by Milbank under an automobile insurance policy which afforded her UIM coverage of $100,000. At the time of the accident, Mrs. Washington was in the course and scope of her employment and, as such, her employer's workers' compensation insurer, State Fund Insurance (State Fund), paid Mrs. Washington medical and wage loss benefits pursuant to Minnesota's Workers' Compensation Act.
On May 17, 1991, the Washingtons commenced a third-party action against Presley in Hennepin County District Court, claiming damages in excess of $50,000. At a pretrial settlement conference, State Fund entered into a settlement agreement 1 with Presley and State Farm for $20,000, leaving $30,000 of liability coverage from which the Washingtons could recover. The Washingtons made an offer to settle their claims against Presley for $20,000 of the remaining $30,000 of coverage provided by State Farm. The settlement offer was accepted and the Washingtons' lawsuit against Presley was dismissed.
Pursuant to Schmidt v. Clothier, 338 N.W.2d 256 (Minn.1983), the Washingtons informed Milbank that they had reached a settlement with Presley and offered Milbank the opportunity to substitute its $20,000 draft for State Farm's draft, thereby preserving any subrogation rights Milbank had against Presley and State Farm. Milbank chose to substitute its draft for State Farm's, but insisted that the Washingtons agree that Milbank's $20,000 payment was a loan and demanded that the Washingtons sign a loan agreement. The terms of the agreement, captioned "Agreement Regarding Underinsured Motorist Coverage Effectuating Provisions of Schmidt v. Clothier," included the following:
1. Milbank herewith tenders to Washington the sum of $20,000.00 as a loan, subject to repayment upon the terms set out below.
2. Washington accepts the loan.
3. Washington will reject the offer of State Farm and Presley for the Naig 2 settlement above and will continue in good faith to vigorously prosecute her claim and action against Presley.
4. Washington will repay the loan only out of proceeds of recovery from State Farm and/or Presley by settlement or judgment. Repayment shall be made beginning with the first dollar of any recovery. As to this amount, it is understood and agreed that Milbank's repayment right is as creditor and not as subrogee. Interest will be paid on the loan at the judgment rate and only to the extent that Washington actually recovers prejudgment interest upon her claims against Presley.
5. If after receipt of the loan proceeds herein, Washington or her attorneys shall decline to further proceed with the action now pending against Presley, Washington agrees that Milbank may designate attorneys to be substituted to continue prosecution of the action (upon any reasonable compensation agreement to be determined by Milbank) and Washington will fully cooperate with Milbank and attorneys retained for her by it.
6. Washington retains the right to settle her claim against Presley at any time subject to Schmidt v. Clothier and later case law thereon.
The Washingtons signed the loan agreement and then proceeded to make a demand for UIM arbitration pursuant to the terms of the underinsurance provisions of their insurance policy with Milbank. Milbank declined to arbitrate, claiming that this court's decision in Employers Mut. Cos. v. Nordstrom, 495 N.W.2d 855 (Minn.1993), and paragraph 3 of the loan agreement, required the Washingtons "to pursue the tortfeasor to conclusion before [they are] entitled to arbitrate the UIM claim." Based on Milbank's refusal to arbitrate, the Washingtons commenced a new lawsuit against Presley alleging the same causes of action they brought in the 1991 lawsuit in an effort to satisfy the terms of the loan agreement. The district court, in Washington v. Presley, granted Presley's motion to dismiss based on its conclusion that:
(1) A settlement agreement was reached between the Washingtons and State Farm;
(2) Notice of settlement had been given to Milbank;
(3) Milbank had preserved its subrogation interest against Presley and State Farm;
(4) Milbank was the real party in interest in the proceedings; and
(5) The Washingtons had no further cause of action against Presley.
No. PI 95-5250 (order and memorandum). That decision was appealed by the Washingtons to the court of appeals. The court of appeals, in an unpublished opinion, affirmed, holding that the district court had properly ruled that Milbank "was the real party in interest" in the action. Washington v. Presley, No. C2-95-2093 at 5, 1996 WL 162634 (Minn.App. April 9, 1996).
The Washingtons subsequently commenced this declaratory judgment action against Milbank. Milbank moved for an order directing the Washingtons to proceed with the tort action against Presley until they either obtained a final judgment against Presley in an amount in excess of Presley's liability insurance policy limits; or agreed to a settlement with Presley for an amount equal to Presley's liability insurance policy limits; or reached a settlement with Presley in an amount approved by Milbank. The district court, in Washington v. Milbank Ins. Co., ruled that:
(1) Milbank was entitled to pursue a tort claim after resolution of the underlying claim by substituting its draft for the settlement between the Washingtons and State Farm;
(2) The substitution created a subrogation right on behalf of Milbank;
(3) The UIM claim ripened at the time of substitution and the UIM claim must be resolved prior to the UIM insurer taking action on the subrogation claim; and,
(4) Demanding that the Washingtons proceed in the tort action after substitution would discourage settlements and would be against public policy.
No. CT 95-08503 (4th Dist.Minn. Nov. 14, 1995) (order and memorandum). The court directed the matter to immediate arbitration, and Milbank appealed. The court of appeals, in Washington v. Milbank Ins. Co., 551 N.W.2d 513 (Minn.App.1996), affirmed. We granted Milbank's petition for further review and now affirm.
The facts before us are undisputed. When the facts of a case are not in dispute, this court applies a de novo standard of review to determine whether the lower courts erred in their application of the law. Dean v. American Family Mut. Ins. Co., 535 N.W.2d 342, 343 (Minn.1995).
This case again presents the question of what is the proper procedure for an insured to follow when seeking UIM benefits from its insurance company. Milbank contends that the following three issues must be addressed in order to answer that question.
(1) Whether the substitution of drafts by an underinsurer to an underinsurance claimant is a "recovery" entitling the claimant to pursue immediate arbitration...
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