This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. §480A.08, subd. 3 (2000).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

C9-01-1727

C0-01-1728

 

In the Matter of the Appointment of a

Trustee for the Next of Kin of

Steven Michael Freitag, decedent.

 

Elizabeth Freitag as a duly appointed

Trustee for the next of kin of

Steven Michael Freitag, deceased,

Respondent,

 

vs.

 

American Casualty Company of Reading,

Pennsylvania, defendant and third-party plaintiff,

Respondent,

 

vs.

 

Wayne B. Caraway,

Third-party Defendant,

State Fund Mutual Insurance Company,

Appellant.

 

 

Filed April 2, 2002

Affirmed

Toussaint, Chief Judge

 

Watonwan County District Court

File Nos. C90150/C399494

 

Steven R. Sunde, Sunde, Olson, Kircher & Zender, P.O. Box 506, St. James, MN 56081 (for respondent Elizabeth Freitag)

 

William M. Hart, Michael D. Hutchens, Meagher & Geer, P.L.L.P., 4200 Multifoods Tower, 33 South Sixth Street, Minneapolis, MN 55402 (for respondent American Casualty Co.)

 

Mark Chapin Hall, Lynn, Scharfenberg & Associates, P.O. Box 9470, Minneapolis, MN 55440-9470 (for appellant State Fund Mutual Insurance Co.)

 

            Considered and decided by Toussaint, Chief Judge, Lansing, Judge, and Poritsky, Judge.*

U N P U B L I S H E D   O P I N I O N

TOUSSAINT, Chief Judge

            This insurance dispute arises from a two-car accident in which Steven Freitag was killed while in the course of his employment with Wilcon Construction Company.  Workers’ compensation insurer State Fund Mutual Insurance Company appeals from consecutive orders denying it subrogation against (1) a substituted draft that underinsured-motorist insurer American Casualty Company of Reading, Pennsylvania, issued to Elizabeth Freitag, the wrongful-death trustee; and (2) proceeds from the underinsured-motorist settlement that American Casualty reached with Elizabeth Freitag.  Because under well-settled Minnesota law workers’-compensation insurers do not have a subrogation right against underinsured-motorist benefits, we affirm.

FACTS

 

            Steven Freitag was killed in an automobile accident in June 1999 while driving a pickup truck that Wilcon Construction Company owned.  State Fund Mutual Insurance Company (State Fund) paid workers’ compensation benefits to Elizabeth Freitag, who was later appointed trustee for her husband’s heirs and next of kin.

The accident occurred when Wayne Caraway collided with Freitag’s pickup truck after failing to obey a stop sign.  Caraway had liability insurance of $100,000 per person with State Farm Mutual Automobile Insurance Company (State Farm Mutual).  And Wilcon had underinsured-motorist (UIM) coverage with American Casualty Company of Reading, Pennsylvania (American Casualty), on the pickup truck Freitag was driving.  The parties agree that Freitag’s damages exceeded the liability policy’s $100,000 limit. 

            After State Farm Mutual offered its $100,000 policy limit to Elizabeth Freitag, Freitag notified American Casualty.  To preserve its subrogation rights against Caraway, American Casualty responded with a substituted draft pursuant to Schmidt v. Clothier, 338 N.W.2d 256, 263 (Minn. 1983).  Freitag then petitioned the district court to approve the settlement of her claim against Caraway and the distribution of proceeds. 

In an order dated September 13, 2000, the district court approved the settlement and the requested distribution of proceeds “without waiving [any] claim to * * * underinsured motorist benefits or any claim against Wayne Caraway or any other third party.”  The court rejected State Fund’s claim that it had a subrogation right against American Casualty’s substituted draft and ordered State Fund to endorse the draft.  

            Freitag then commenced an action against American Casualty for UIM benefits.  Through mediation, the parties settled both the liability claim and the UIM claim.  Under the settlement, State Farm Mutual paid its $100,000 liability-policy limit and American Casualty paid $500,000 out of its $1,000,000 underinsured-motorist-policy limit.  Freitag agreed to pay State Fund its $27,000 subrogation interest in the $100,000 liability settlement.  State Fund also received a $17,440 credit against future workers’-compensation benefits.   

            In July 2001, Freitag petitioned the district court for approval of the settlement and for distribution of the additional proceeds.  The district court granted Freitag’s petition in an order dated August 3, 2001, but it denied State Fund’s subrogation claim against the $500,000 in UIM benefits that American Casualty paid Freitag.  This appeal followed.

D E C I S I O N

            For several reasons, State Fund argues it has a subrogation right against the substituted draft American Casualty issued to Freitag and against proceeds from the underinsured-motorist settlement American Casualty reached with Freitag.  We disagree. 

            Relying on Jackson v. Zurich Am. Ins. Co., 542 N.W.2d 621, 624 (Minn. 1996), State Fund first argues that by failing to obtain Wilcon’s or State Fund’s consent before settling with Caraway, Freitag unilaterally settled Wilcon’s workers’-compensation subrogation claim in violation of Minnesota law.  The record does not support State Fund’s argument.

            Jackson recognizes that a portion of a claim against a third-party tortfeasor belongs to the employer and that the employer has the same right as the employee to control the disposition of that portion of the third-party claim that belongs to it.  Id. at 625. Accordingly, Jackson forbids an employee from settling an entire third-party action, including the employer’s subrogation interest, without the employer’s consent.  Id. at 624.  Here, Freitag did not settle the entire action against Caraway but only that portion of the action that belonged to her.  In its September 2000 order approving Freitag’s settlement with Caraway and State Farm, the district court expressly preserved “[any] claim to * * * uninsured motorist benefits or any claim against Wayne Caraway or any other third party.”  And in its August 2001 order approving Freitag’s $500,000 settlement with American Casualty, the district court awarded State Fund its $27,000 subrogation interest in the $100,000 settlement with Caraway and a $17,440 credit against future workers’ compensation benefits.  We thus reject State Fund’s argument that Freitag unilaterally compromised its subrogation interest in the $100,000 settlement with Caraway.

            State Fund next argues that the district court’s September 2000 order approving Freitag’s settlement with Caraway impermissibly extinguished State Fund’s subrogation interest in American Casualty’s $100,000 substituted draft.  Specifically, State Fund claims that because American Casualty substituted its draft for that of the tortfeasor’s liability insurer, the underinsured-motorist proceeds were converted into “first-party” liability proceeds owed by the tortfeasor.  We disagree.

            By issuing a substituted draft American Casualty merely preserved its subrogation right against Caraway to the extent of the payment.  See Schmidt, 338 N.W.2d at 263 (requiring insured to give UIM insurer notice of settlement with tortfeasor to enable UIM insurer to preserve its subrogation rights against the tortfeasor by “substituting” a draft in an amount equal to a tentative settlement).  Schmidt approved only a notice procedure whereby the UIM insurer can preserve its subrogation rights by paying the tortfeasor’s proposed settlement offer.  See Employer’s Mut. Cos. v. Nordstrom, 495 N.W.2d 855, 856 (Minn. 1983).  The underinsured-benefits claim can then proceed, and the UIM insurer can subsequently maintain a claim against the tortfeasor to recoup all or a portion of the sums it paid the claimant.  See id.  Schmidt does not, therefore, support State Fund’s claim that a substituted draft is “a substitute for the primary policy.”[1]  On the contrary, as State Farm Mutual’s subsequent $100,000 payment and State Fund’s $27,000 subrogation interest in that payment clearly show, after American Casualty issued Freitag a substituted draft for State Farm Mutual’s tentative settlement offer, the liability policy, and State Fund’s subrogation interest in the policy remained intact.  The substituted draft only delayed payment of State Fund’s subrogation interest.  Delays, however, are inherent in the procedure Schmidt approved.  

            State Fund also argues that the district court’s August 2001 order extinguished Wilcon and State Fund’s subrogation interest in Wilcon’s own UIM policy.  According to State Fund, because Wilcon was the named insured on American Casualty’s UIM policy, State Fund, through Wilcon, has a right to make a claim against its own insurance policy.  We cannot agree.

          The supreme court has expressly rejected the argument that an employer and a workers’-compensation carrier may subrogate against an uninsured-motorist policy when the employer is the named insured on the policy.  See Cooper v. Younkin, 339 N.W.2d 552, 553 (Minn. 1983)(holding that uninsured-motorist proceeds not converted from contract payments to damages because injured employee was beneficiary rather than contracting party and stating that “[r]egardless of who pays the premium, uninsured motorist coverage is simply a contract for the payment of a sum measured by the amount of damages which  the insured is legally entitled to recover from an uninsured third-party tortfeasor”); see also Hewitt v. Apollo Group, 490 N.W.2d 898, 902 (Minn. App. 1992) (applying Cooper to underinsured-motorist coverage), review denied (Minn. Nov. 17, 1992); W. Nat’l Mut. Ins. Co. v. Casper, 549 N.W.2d 914, 915-16 (Minn. 1996) (affirming ruling that arbitration award not subject to reduction by amount of workers’-compensation proceeds paid to employee where employee claimed underinsured-motorist benefits under his employer’s UIM policy).  Under well-settled Minnesota law, therefore, the fact that Wilcon is the named insured on the UIM policy with American Casualty does not permit Wilcon or State Fund to subrogate against the UIM policy.

            Finally, relying on Minn. Stat. § 176.061, subd. 10 (2000), State Fund argues it has a right to subrogate against the $500,000 in underinsured-motorist proceeds that American Casualty paid Freitag or against the unpaid portion of Wilcon’s $1,000,000 UIM policy with American Casualty.  State Fund’s argument ignores well-settled law, however.

            A workers’-compensation carrier’s subrogation right arises under Minn. Stat. § 176.061, subd. 10 (2000), and enables an insurer to step into the shoes of its insured.  See Share Health Plan, Inc. v. Marcotte, 495 N.W.2d 1, 3 (Minn. App. 1993 (“An insurer asserting a subrogation right ‘steps into the shoes’ of its insured.”) (citing St. Paul Fire & Marine Ins. Co. v. Perl, 415 N.W.2d 663, 665 (Minn. 1987)), review denied (Minn. Mar. 30, 1993).  But the right is limited to damages based on tort liability and does not extend to sums for which a third party is contractually liable.  Backhauls, Inc. v. Thake, 393 N.W.2d 427, 429 (Minn. App. 1986) (holding that workers’-compensation carrier’s subrogation right is limited to damages based on tort liability and does not extend to proceeds received under no-fault insurance policy), review denied (Minn. Nov. 19, 1986).  

            Accordingly, Minnesota courts have consistently held that an employer and a workers’-compensation carrier do not have a subrogation right against benefits paid by an uninsured-motorist insurer or an underinsured-motorist insurer.  See Fryer v. Nat’l Union Fire Ins. Co., 365 N.W.2d 249, 254 (Minn. 1985) (refusing to allow workers’-compensation carrier to subrogate against an arbitrator’s award of uninsured-motorist benefits); Cooper, 339 N.W.2d at 553 (workers’-compensation carrier not entitled to subrogation against proceeds received by employee in settlement of uninsured-motorist-coverage claim); Janzen v. Land O’Lakes, Inc. 278 N.W.2d 67, 69 (Minn. 1979) (holding that workers’-compensation carrier’s subrogation right does not extend to benefits received from settlement under employee’s uninsured-motorist policy because right to receive compensation from uninsured-motorist liability carrier is contractual); Hewitt, 490 N.W.2d at 902 (Minn. App. 1992) (extending prohibition against subrogation of uninsured-motorist benefits to include underinsured-motorist benefits); Austin v. State Farm Mut. Auto. Ins. Co., 486 N.W.2d 457, 460 (Minn. App. 1992) (“[T]he workers’ compensation carrier had no subrogation right against the proceeds of any underinsured benefits paid by [the UIM insurer] to [the insured employee].”), review denied (Minn. Aug. 4, 1992).  State Fund has provided no authority or good reasons for its claim that Minn. Stat. § 176.061, subd. 10 (2000), supersedes the common law and creates a right to subrogation against underinsured-motorist benefits.  Accordingly, we reject State Fund’s claim that it has a subrogation right against the $500,000 in UIM benefits American Casualty paid Freitag or against the unpaid portion of Wilcon’s $1,000,000 UIM policy.

            Affirmed.



*Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art VI, § 10.

[1]We note that the substituted draft is also not a payment out of the UIM coverage.  SeeTheodore J. Smetak, Underinsured Motorist Coverage in Minnesota: Old Precedents in a New Era, 24 Wm. Mitch. L. Rev. 837, 924 (1998) (stating that after a UIM insurer issues a substituted draft, “[t]he full UIM coverage remains intact to respond to the UIM claim.”)