Mahoney, Dougherty and Mahoney, P.A.

Newsletters

Victor E. Lund

The court of appeals has issued an interesting opinion holding that notice of an accident provided to an insurer more than four years after the event and after a lawsuit arising out of the accident had already been settled was not too late. The insured failed to show any prejudice arising out of the delay to defeat the claim. North Star Mutual Insurance Company v. Midwest Family Mutual Insurance Company , 634 N.W.2d 216 (Minn. App. 2001). The claim arose out of maintenance of a motor vehicle in 1993. Smith, with the assistance of Harvieux, was changing a tire on Swenson's van. Smith was doing the maintenance in his own barn on his own farm. He knew that the tire was the wrong size for the van. The tire exploded upon inflation. Harvieux was seriously injured. North Star insured Smith with a farm liability policy. Secura was Smith's auto insurer. Midwest Family insured Swenson's vehicle. Harvieux collected no-fault benefits from his own auto insurer. He sued Smith in April 1997. Smith tendered defense to North Star, the farm liability insurer. North Star paid $235,000 in settlement in May 1998. Neither of the auto insurers knew anything about the claim, lawsuit or settlement until 1999. North Star sued Midwest Family and Secura for contribution on the theory that auto policies were closer to the risk than a farm liability policy. Both companies raised the notice as a defense. The court dismissed Secura on an easier basis. Secura insured the van. Smith was changing a tire with Swenson's permission. Changing a tire is plainly maintenance of the motor vehicle. Although a permissive driver is the agent of the owner under the Safety Responsibility Act, and is generally an insured under the omnibus clause of an auto policy, those rules do not apply to a permissive mechanic. Even if Swenson gave Smith permission to change the tire, he was not an insured under Swenson's policy. Secura was entitled to a dismissal.

Midwest had no such defense. It argued in vain that it should be dismissed based on late notice. The court was unable to see any prejudice even though Midwest was unable to investigate the accident scene. The accident was not complicated. The tire and rim were mismatched. The assembly exploded. There was no question that the explosion caused the injuries and that the injuries were serious enough to justify the settlement.

The court distinguished an earlier decision, Hooper v. Zurich American , 552 N.W.2d 31 (Minn. App. 1996), in which it seemed to say the opposite, i.e., that lack of notice until after judgment and settlement of two underlying lawsuits was prejudicial and that no reasonable factfinder could conclude otherwise. The North Star court acknowledged Hooper but stated that the language in question was mere dicta and that it really was a fact question. Consequently, North Star was entitled to contribution from Midwest Family for the full amount of its policy limits, $50,000. The Hooper court had found prejudice because late notice had deprived the company of any opportunity to participate in the litigation or settlement discussions. Midwest Family certainly had no opportunity to participate in settlement discussions with Harvieux. However, there was no prejudice because the Midwest Auto policy plainly covered the claim, its coverage had priority, and its limits would have been exhausted by any reasonable settlement anyway. The opinion suggests, without actually saying so, that the court may have been more likely to find prejudice if Midwest had had $1 million in coverage.

HIGH COURT BROADENS MEANING OF ACCIDENT.

Victor E. Lund

The Minnesota Supreme Court has issued an important opinion which significantly expands the scope of the term "accident" in liability policies. The decision, American Family Insurance Co. v. Walser , 628 N.W.2d 605 (Minn. 2001), reversed one court of appeals decision and called into question a long line of cases which had applied a more narrow view of accidents. The injury in Walser resulted from horseplay in the gymnasium at school. One student was hanging on a basketball hoop. Two other students pulled him down from the hoop. He managed to hurt himself when he hit the floor. The two pranksters acknowledged that they intended to pull the third student down, but that they did not intend to inflict any injury. American Family insured Walser, one of the pranksters, with a homeowner's policy providing coverage for occurrences defined as accidents. American Family denied coverage on the grounds that there was no occurrence and even if there was, the intentional act exclusion applied. The trial court disagreed with American Family. Although the boys may have intended to pull the third boy down, there was no intent to cause the resulting injury. The trial court found that the injury was an accident and the intentional act exclusion did not apply.

The court of appeals reversed in an unpublished decision. (Appellate No. C1-00-349, Minn. App. August 22, 2000). Horseplay or not, the incident was a tort and the conductwas intentional. The court of appeals concluded that there was no accident and therefore no coverage. It relied on several of its own decisions from recent years, for example, Gilman v. State Farm , 526 N.W.2d 378 (Minn. App. 1995). The Gilman court had held that an intentional tackle which had produced an unintended broken ankle was not an accident and so the tackler had no coverage for the claim.

Walser then went up to the supreme court which reversed. The court went back to the old definition of accident in Hauenstein v. St. Paul-Mercury Indemnity Co. , 242 Minn. 354, 65 N.W.2d 122, 126 (1954), i.e., "an unexpected, unforeseen, or undesigned happening or consequence. . . ." (The court of appeals had relied on the same definition.) The court emphasized that the Hauenstein definition means that there is an accident whenever the act which produces the injury or the resulting injury is not intended or foreseen. The supreme court criticized the court of appeals for recent decisions such as Gilman in which it had cited Hauenstein but ignored that portion of the definition holding that an unintended result can still be an accident even where the action producing that result is intended. The court made it clear that its holding did not detract at all from previous case law dealing with actions so reprehensible (sexual abuse of children, for example) that an intent to injure could be inferred as a matter of law. However, under the Hauenstein definition, the injury resulting from the horseplay in the gymnasium was an accident and American Family was obligated to provide coverage for the claim.

Justice Stringer dissented. He would have held with the court of appeals that it makes no difference whether the result is intended. If the insured intended the act, it can't be an accident.

The Walser decision certainly expands the scope of the definition of accident from what has prevailed in the last 5-10 years. The expansion in coverage may prove to be dramatic. One of the court of appeals' decisions which the supreme court called into question is Sage Company v. Insurance Company of North America , 480 N.W.2d 695 (Minn. App. 1992). Sage presented the claim of a company seeking coverage for a lawsuit alleging age discrimination by a former employee. The act giving rise to the claim was one of the partners firing the employee. The company tried to get coverage by claiming that even if the act of firing an employee was not an accident, the resulting damages were unintended and consequently accidental. The court of appeals didn't buy it in 1992. Judge Short thought that the act was the very antitheses of an accident. Now that reasoning is in doubt.

More recently, the court of appeals relied on the supreme court's Walser decision in finding that a concrete mixing plant conducted its business accidentally. LaCrescent Concrete, Inc. v. Reliance National Indemnity Co. , (Unpublished, C1-01-264, October 16, 2001). LaCrescent Concrete operated its concrete mixing plant in Houston County. As far as one can tell from the opinion, it conducted its business pretty much like any other concrete mixing plant. Two persons who owned homes in the vicinity of the plant complained that its operations disturbed their peace and quiet by producing loud noises at unreasonable times and discharged toxic dust onto their property. Apparently no one disputed that these allegations arguably raised a claim for property damage as defined. However, Reliance denied coverage claiming that there was no allegation of an occurrence, i.e., no accident. The trial court agreed. It must have reached that decision before the supreme court's Walser decision came down. Reliance had relied on Sage and Gilman but those decisions no longer provided much support by the time the court of appeals decided. There was no showing that LaCrescent intended to cause the property damage which the claimants alleged. Consequently, Reliance was obligated to defend.

The LaCrescent decision seems like a bit of a stretch. Businesses generally don't conduct their business by accident. This reasoning may be an invitation to insurers to place restrictive definitions of accidents in their policies.

EMPLOYER SUBROGATION.

Patrick E. Mahoney

The Minnesota Court of Appeals recently decided a case ( Olson v. Blesener , File No. C3-01-377, decided September 3, 2001) addressing the question of whether an employer who elects not to carry workers' compensation insurance, when not required to do so by statute, is entitled to subrogation from a third-party tortfeasor when the employer voluntarily pays lost wages to its employee in an effort to protect its own interests.

The plaintiff was a 50% shareholder in, and an employee of, Olson Brothers Construction, Inc., when he was injured as a result of the negligence of the defendant. Following the injury, the employer continued to pay wages and benefits to the plaintiff until the plaintiff returned to work. At trial, a jury returned a verdict finding 80% of the negligence to be that of the defendant and 20% to the plaintiff. An award of damages was made, including lost wages.

The plaintiff was a 50% shareholder and an employee of the corporation, and as a result was not entitled to workers' compensation and had, in fact, elected not to be insured.

Because no workers' compensation benefits were paid, the Court felt that Minn. Stat. § 176.061 (the provision for recovery of benefits from a liable third party in workers' compensation) was not applicable.

The Court felt that this was an issue of general subrogation law at common law. The Court felt that the corporation, by protecting its interests by paying wages to the plaintiff during his period of disability, became entitled to subrogation against the responsible third party. The Court agreed with the district court's conclusion that public policy is advanced by encouraging voluntary payments by employers to its injured employees/owners rather than requiring the employee/owner to forego all payments until resolution of a tort action.

This case is therefore one not about workers' compensation but about subrogation, although it does point out the inherent problems with employees/owners of small corporations who are not covered for workers' compensation and suffer injuries and the fallout that can result therefrom.

CORPORATE ALTER EGO.

Patrick E. Mahoney

The Minnesota Supreme Court decided a case ( Gunderson v. Harrington , File No. C7-00-999, decided September 6, 2001) dealing with issues of corporate law and identity of employer under the Minnesota Workers' Compensation Act, as well as the intentional injury exception to the exclusive remedy provision of the Minnesota Workers' Compensation Act.

In the instant case, the employee/plaintiff worked as a receptionist for a dentist. During her employment she was hit on the back of the head multiple times by the dentist, and brought a civil claim for damages. The matter was dismissed by the district court on summary judgment, affirmed by the Court of Appeals and the Supreme Court, on the issue of the exclusive remedy provision of the Minnesota Workers' Compensation Act. The crux of the issue was whether the dentist, who had incorporated his business as a professional corporation, would be deemed to be the employer or whether, as an employee of a corporation, he would be deemed a co-employee of the employee/plaintiff.

In this case, the Court felt that because the dentist was the president and sole shareholder of the professional corporation, he was the "alter ego" of the corporation, and therefore was deemed to be the employer. Thus, the plaintiff/employee's sole remedy would be under theMinnesota Workers' Compensation Act (she had previously received workers' compensation benefits for her injuries).

The Court also addressed the question of whether the plaintiff/employee had raised the general issue of material fact relative to claiming that the intentional injury exception to the exclusive remedy provision of the Minnesota Workers' Compensation Act applied, allowing her to proceed with a direct claim against the defendant as either a co-employee or employer. The Court felt that the plaintiff/employee had failed to raise a general issue of material fact based on her testimony that she did not believe the dentist meant to harm her when he struck her on the back of the head.

There was a vigorous dissent from the majority opinion authored by Justice Gilbert. The basic thrust of the dissent was that the majority adopted the alter ego rationale without any basis therefor. The dissent was of the opinion that the corporation was the employer and the dentist would be a co-employee, thus there would be no preclusion of the plaintiff's claims for damages under the exclusive remedy provision. They also felt that equity itself would bar the claim of the dentist for an equitable determination of an alter ego status, given his lack of clean hands.

The dissent also felt that the plaintiff/employee had proven a prima facie case for an intentional tort, allowing her to proceed with a claim that the intentional injury exception to the exclusive remedy provision would apply and that there was a question of fact as to whether or not the dentist intended to injure his employee.