Mahoney, Dougherty, Mahoney

May 1999

Table of Contents
Safety Responsibility Act Does Not Apply To ATV
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Supreme Court Changes Underinsurer's Subrogation
No-Fault Arbitration Limited To $10,000
Environmental Update
The Court Of Appeals Refuses To Recognize A Claim For Invasion Of Privacy
Safety Responsibility Act Does Not Apply To Co-Owner

Victor Lund, Editor.

Mahoney, Dougherty and Mahoney, P.A. distributes this newsletter to its clients and others to keep them informed about developments in the area of tort and insurance law. The articles are not intended to be legal advice and should not be relied on without counsel.

Mahoney, Dougherty and Mahoney, P.A.
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Minneapolis, MN 55404
Tel: 612-339-5863
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Safety Responsibility Act Does Not Apply To ATV

by Victor Lund

The Court of Appeals issued another decision involving the Safety Responsibility Act and concluded that the statute does not apply to an ATV. Northstar Mutual Insurance Co. v. Raincloud , 563 N.W.2d 270 (Minn. App. 1997).

The Lians owned an ATV. The Rainclouds visited the Lians. Raincloud asked if her 12 year old daughter could use the ATV. The Lians agreed and the 12 year old drove the machine. Later and without the Lians' knowledge or permission, Mrs. Raincloud started driving the ATV with her two children riding on the back. She lost control and rolled it over killing one of the children. The issue was whether Mrs. Raincloud was an insured under the Lians' homeowners policy as a person operating the ATV with the named insured's consent.

The Court of Appeals held that Raincloud was not an additional insured. The Lians gave Mrs. Raincloud neither express nor implied permission to use the three-wheeler. An ATV is not considered a motor vehicle, so an auto policy would not provide coverage. Since an ATV is not a motor vehicle, the Safety Responsibility Act does not apply. The initial permission rule of motor vehicles does not apply. Coverage, if any, must be found under a homeowner policy.

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Supreme Court Changes Underinsurer's Subrogation

by Victor Lund

The Supreme Court recently issued a far-reaching decision dealing with an underinsurer's subrogation rights against the tortfeasor who actually caused the damages. Washington v. Milbank , 562 N.W.2d 801 (Minn. 1997). The specific issue to go up on appeal was whether a claim for UIM arbitration is ripe where the tortfeasor offers a below-limit settlement and the underinsurer substitutes its draft to preserve its right of subrogation.

Under the familiar rule of Nordstrom , a claim for UIM arbitration is not ripe until the plaintiff has recovered from the tortfeasor, either by settlement or judgment. But what if the underinsurer substitutes its draft for a below-limits offer by the tortfeasor? There is no judgment against the tortfeasor. There is no settlement. Schmidt v. Clothier gives the underinsurer the right to substitute its draft. The claimant must then return the tortfeasor's money and release agreement. But is it enough of a recovery to allow UIM arbitration to go forward? The Supreme Court has now answered this question. A claim for UIM arbitration is ripe where the UIM insurer substitutes its draft for a below-limits offer and arbitration must go forward. The court went on to make the following unfortunate observations in a footnote:

Technically, no settlement is reached when the UIM carrier follows the Schmidt Clothier procedure and substitutes its draft for that of the tortfeasor's insurance company. However, the UIM carrier's substitution operates as the equivalent of settlement between the party claiming damages and the tortfeasor because the tortfeasor is released from further ;liability to the party claiming damages, but, at the same time, the UIM insurer retains a subrogation right against the tortfeasor's insurance company. 562 N.W.2d at 806.

If this opinion had come from the Court of Appeals, we would say that it is plainly wrong. However, since it comes from the Supreme Court, it is now the law of the state. In spite of that, we still think it is plainly wrong and that some future case should correct it.

When the UIM insurer substitutes its draft, the tortfeasor is not released. That is the point of making the substitute payment. Now according to the Supreme Court's view, the tortfeasor is released and there is no possibility of preserving a subrogation claim against his personal assets. However, when the court decided Schmidt v. Clothier , the only reason to make substituted payment was to preserve a claim for subrogation against the tortfeasor's personal assets. Now, the only subrogation claim is against the tortfeasor's insurance company. This, of course, is nonsensical since Minnesota does not have a direct action statute. Apparently, direct actions are now permitted for this kind of claim.

Several weeks later, the Court of Appeals issued an opinion dealing with the issue of below-limits settlements. United States Automobile Association v. Morgan (Minn. App., unpublished 7/1/97).

In Morgan , the liability gap was a quarter ofa million dollars. The tortfeasor had coverage limits of a half million and offered to settle for $250,000 which the plaintiff accepted. The plaintiff then gave proper Schmidt v. Clothier notice.

The underinsurer did not substitute its draft but brought a declaratory action to determine that the settlement was not the "best settlement" that Schmidt v. Clothier discussed. In other words, if the claimant truly believes that damages are in excess of a half million dollars, a settlement for half that must be fraudulent. The Court of Appeals disagreed. The Schmidt v. Clothier framework is an underinsurer's only means of challenging a settlement with a tortfeasor. Since the underinsurer did not substitute its draft, it faced the possibility of paying the entire quarter of a million dollar gap. If the damages were $510,000, the liability carrier would pay $250,000 and UIM would pay $260,000. On the other hand, this procedure is not without risk for plaintiffs. If total damages turn out to be $490,000, the underinsurer will pay nothing.

In an interesting concurring opinion, Judge Davies sympathized with the UIM insurer's dilemma. He suggested that below-limit settlement offers are the result of either "coverage gaps," which arise because liability coverage is exhausted or the liability insurer goes bankrupt, or "liability-based gaps," resulting from comparative fault or unclear liability. In Judge Davies' view, the law should obligate UIM carriers to meet coverage gaps, but not liability-based gaps. That is an interesting idea but it is not the law, nor is it likely to become the law.

No-Fault Arbitration Limited To $10,000

by Dale Lindman

The Court of Appeals has reaffirmed that the jurisdiction of a no-fault arbitrator is limited to $10,000. An award in excess of $10,000 exceeds the power of the arbitrator and is void. Hippe v. American Family Insurance Co. , 565 N.W.2d 439 (Minn. App. 1997). Hippe was injured in an auto accident. Her no-fault insurer paid some medical expenses at first but then denied liability after a favorable IME. Hippe then submitted a claim for lost wages to American Family. While that request was pending, she filed for arbitration of the medical bills. The company denied the wage claim. Hippe added those amounts to her claim over the insurer's objection. The arbitrator awarded $24,000. The District Court refused to vacate the award but the Court of Appeals reversed. Hippe was seeking total no-fault benefits in excess of $10,000 at the time she filed her request for arbitration. The arbitrator has no jurisdiction to consider claims in excess of $10,000. The claimant can waive the excess amount or sue the insurer in District Court for the full amount but arbitrating a claim in excess of $10,000 is not an option.

Environmental Update

by Richard Mahoney

The Supreme Court issued a major opinion discussing coverage for environmental claims. Domtar, Inc. v. Niagara Fire Insurance Company , 563 N.W.2d 724 (Minn. 1997).

Domtar operated a tar refining plant in Duluth from 1924 to 1929 and again from 1934 to 1948. The plant was dismantled six or seven years later and sold to Morton Salt. The MPC discovered pollution at the site in 1987 and issued an RFRA in 1991. Domtar tried to get coverage from four companies that had insured it from 1956 through 1970. Later policies had valid exclusions and earlier policies could not be located. The claim for coverage was tried to a jury which found that damages started in 1933 and that some damages occurred in each of the policy periods in question. The trial court allocated damages for 64 years, i.e., from the date damages began (1933) to the start of remediation efforts. Each insurer was found liable for its time on the risk.

The Supreme Court for the most part affirmed. Its earlier decision of NSP v.Fidelity & Casualty Co. , 523 N.W.2d 657 (Minn. 1994) created the framework of apportioning damages across the entire time period when seepage occurred and making each insurer responsible by time on the risk. This framework applies in the absence of any evidence to the contrary. The court rejected Domtar's argument that the insurers should be responsible for all costs of remediation on the grounds that their policies promised to pay "all sums" which the insured was legally obligated to pay. The court rejected the insurer's defenses based on the owned property exclusion and exclusions for known losses or expected damages. There was insufficient evidence that Domtar intended to cause any harm to submit these issues to the jury.

The opinion has a troubling discussion of defense costs and indemnity. The discussion is troubling because it blurs the distinction between defense costs and indemnity. Indemnity is limited by the policy limits, but defense costs are unlimited. The court gives no hard and fast guidelines for determining what is defense and what is indemnity. This will undoubtedly be the subject of much future litigation.

The Court Of Appeals Refuses To Recognize A Claim For Invasion Of Privacy

by Gregory Zinn

Lake and Weber went to Mexico on spring break. As a joke, another roommate took a nude photograph of them together outside the shower in the hotel room. When they got back to the states, they brought all the film to the local Wal-Mart for developing.

Wal-Mart did not release the nude photograph on the grounds that it was obscene. Months later, rumors began to spread about their sexual orientation. It came to light that a Wal-Mart employee had shown the photographs to at least one other.

Lake and Weber sued alleging that Wal-Mart had invaded their privacy by developing and circulating a private photograph. The Court of Appeals affirmed dismissal of the complaint. Minnesota is one of three states that do not recognize a claim for invasion of privacy. The Supreme Court has consistently refused to recognize a claim for invasion of privacy. The panel stated that they found no reason why the claim should not be valid, but until the Supreme Court or the Legislature says otherwise, there is no such claim. Lake v. Wal-Mart Stores, Inc. , 566 N.W.2d 376 (Minn. App. 1997).

Safety Responsibility Act Does Not Apply To Co-Owner

by James Mahoney

The Safety Responsibility Act (Minn. Stat. §170.54) makes any permissive driver of an automobile the agent of the owner. If the car is owned jointly by two persons and one of them causes an accident, is the other owner liable under the Act? No, according to the Court of Appeals. Ridler v. Madsen , 565 N.W.2d 38 (Minn. App. 1997). Both Madsens jointly owned their car. The wife drove it negligently and caused serious injuries to Ridler. Ridler sued and collected the limits of the wife's auto policy but was still inadequately compensated. He tried to bring a claim against the husband as owner under the Safety Responsibility Act to collect the husband's personal assets. The Act does not reach so far. The Act specifically refers to "any person other than the owner." By its very terms, this does not apply to a co-owner. The purpose of the Act is to enhance safety on the highways and to make owners responsible for the negligent conduct of anyone whom they permit to use the car. An owner has the power to refuse permission to aperson who is unable or unwilling to drive safely. However, one owner has no power to refuse to allow another owner to use the car.