This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (1996).

STATE OF MINNESOTA

IN COURT OF APPEALS

C9-96-2425

Carly J. Winscher,

Plaintiff,

vs.

Kathleen Harren, et al., defendants, third-party

plaintiffs and third-party interpleaders,

Appellants,

and

Kevin Christy, et al.,

Third-Party Defendants,

and

Grinnell Mutual Reinsurance Company,

third-party interpleadee,

Respondent.

Filed May 21, 1997

Affirmed

Peterson, Judge

Benton County District Court

File No. C395620

Gregory S. Walz, Walz Law Offices, P.O. Box 1794, St. Cloud, MN 56302 (for Appellants)

Corrine L. Evenson, Quinlivan, Sherwood, Spellacy & Tarvestad, P.A., P.O. Box 1008, St. Cloud, MN 56302 (for Respondent)

Considered and decided by Crippen, Presiding Judge, Lansing, Judge, and Peterson, Judge.

U N P U B L I S H E D O P I N I O N

PETERSON, Judge

In this appeal from a judgment denying insured's motion to amend a pleading by adding a cross-claim against insurer for attorney fees, insureds argue that they are entitled to recover attorney fees because insurer breached its duty to provide a defense. We affirm.

FACTS

Appellants Kathleen and Timothy Harren bought three cows at an auction for $2,900. The Harrens issued a check to auctioneer Carly J. Winscher to pay for the cows. The payment was to be divided between Winscher and Kevin and Vonda Christy, the owners of the cows.

Milk from the cows was contaminated by drug residues. American Milk Producers, Inc. (AMPI), a creamery that buys milk from the Harrens, received some of the contaminated milk and poured it into a bulk tank with other milk. As a result, the milk in the tank was contaminated, which caused the creamery about $5,000 in damages. AMPI sought payment for its damages from the Harrens but did not commence any legal action. Respondent Grinnell Mutual Reinsurance Company, the Harrens' liability insurer, agreed to defend and indemnify the Harrens if AMPI began a legal action.

After learning about the contamination and AMPI's claim, the Harrens stopped payment on the check issued to Winscher. Winscher agreed that the Harrens could return the cows and not be charged anything for them. Before returning the cows, Kathleen Harren contacted Grinnell. Grinnell told her not to return the cows because they were evidence. Because the Harrens were concerned about breaching the duty to cooperate clause in their insurance policy and potentially losing liability coverage, they decided not to return the cows.

Winscher then filed a conciliation court action, alleging that the Harrens owed him $2,900. Judgment was entered in favor of Winscher, and the Harrens removed the case to district court. In district court, the Harrens filed a counterclaim against Winscher and a third-party complaint against the Christys seeking $6,000 in total damages, including about $1,000 for their own milk losses plus the damages claimed by AMPI.

The Harrens' attorney wrote a letter tendering defense of the lawsuit to Grinnell. Grinnell denied any obligation to defend. The Harrens' attorney also wrote Grinnell a letter addressing the possibility of the Harrens settling their claims against Winscher and the Christys. Grinnell responded that it would not agree to any settlement that waived its contribution or indemnification rights. Because the Harrens believed that any settlement would affect Grinnell's rights, they filed a motion to interplead Grinnell. The Harrens also moved to interplead AMPI. The interpleader motion later was withdrawn because Grinnell and AMPI were participating in settlement negotiations.

Grinnell and AMPI settled AMPI's claim against the Harrens in the amount requested by AMPI. The parties agree that Grinnell also settled with Christys for $1,680.

After Grinnell settled with the Christys, the Harrens brought a motion to amend the pleadings by adding a cross-claim against Grinnell. The Harrens alleged that Grinnell had been unjustly enriched by the $1,680 settlement it received from the Christys. The Harrens also alleged that they were entitled to $25,000 in damages and $4,000 for attorney fees because Grinnell had breached its fiduciary duty to act in good faith and its contractual duty to defend and indemnify the Harrens in the lawsuit brought by Winscher. The district court concluded Grinnell did not have a duty to defend the Harrens and denied their motion to amend the pleadings. Judgment was entered pursuant to the order. The Harrens appeal from the judgment.

D E C I S I O N

A party may amend a pleading "by leave of court * * * and leave shall be freely given when justice so requires." Minn. R. Civ. P. 15.01. This court will not reverse the district court's denial of a motion to amend a pleading absent an abuse of discretion. Copeland v. Hubbard Broadcasting, Inc., 526 N.W.2d 402, 405 (Minn. App. 1995), review denied (Minn. Mar. 29, 1995). It is proper "to deny a motion to amend a complaint to assert a claim that is not legally recognized." Id. It is also proper to deny a motion to amend when the moving party fails to present evidence to support its claims. Bib Audio-Video Prods. v. Herold Mktg. Assocs., Inc., 517 N.W.2d 68, 73 (Minn. App. 1994).

I.

Interpretation of an insurance policy, including the existence of a duty to defend, is a question of law subject to de novo review. Auto-Owners Ins. Co. v. Todd, 547 N.W.2d 696, 698 (Minn. 1996).

An insurer's duty to defend its insured arises when any part of the claim against the insured is arguably within the scope [of coverage] afforded by the policy. The duty to defend is broader in scope than the duty to indemnify. An insurer seeking to escape its duty to defend has the burden of establishing that all parts of the cause of action fall clearly outside the scope of coverage.

Id. (citations omitted). Generally, the existence of a duty to defend is "determined by the allegations of the complaint against the insured," but the complaint "does not control when actual facts clearly establish the existence or nonexistence of the duty to defend." Fluoroware, Inc. v. Chubb Group of Ins. Cos., 545 N.W.2d 678, 681 (Minn. App. 1996).

Grinnell argues that it did not owe a duty to defend the Harrens against Winscher's claims because the claims did not involve property damage or bodily injury, and, alternatively, that the Harrens' act of stopping payment on the check was an intentional act. The Grinnell policy provided coverage for liability arising out of a

loss which an insured person becomes legally obligated to pay as damages because of bodily injury or property damage covered by this policy.

The definitions section of the policy provided:

"Bodily injury" means bodily injury, sickness or disease, and includes care, loss of services and resulting death.

* * * *

"Property damage" means physical injury to or destruction of tangible property, including loss of its use.

The policy excluded coverage for

bodily injury or property damage arising out of any act intended by any insured person whether or not the bodily injury or property damage was intended.[1]

Winscher brought the lawsuit to enforce the Harrens' contractual agreement to buy three cows. Winscher did not allege that the Harrens caused any property damage or bodily injury. The Grinnell policy provided no coverage for Winscher's claims. Therefore, Grinnell had no duty to defend the Harrens against Winscher's claims. See Inland Constr. Corp. v. Continental Cas. Co., 258 N.W.2d 881, 884-85 (Minn. 1977) (liability insurer not obligated to defend insured against conversion action when complaint did not allege conversion caused physical damage or destruction to property).

The Harrens argue that Grinnell was obligated to defend them because, at Grinnell's request, they took steps that were adverse to their interests in order to comply with the duty to cooperate clause in the Grinnell policy. The Harrens contend that they took steps adverse to their interests when they did not settle with Winscher by returning the cows and when they did not settle with Winscher and Christys by compromising Grinnell's contribution or indemnification rights. The Harrens contend that they acted against their interests in order to protect Grinnell's subrogation rights and to ensure that they had coverage for the AMPI damages. As a result, the Harrens argue, they were unable to settle the case and were forced to implead Grinnell and AMPI, and they incurred attorney fees in doing so. The Harrens conclude that because Grinnell did not defend and indemnify the consequences of their efforts to abide by their duty to cooperate, Grinnell breached the insuring agreement and, therefore, is responsible for their attorney fees and costs at trial and on appeal.

The Harrens' argument fails to recognize basic elements of the equitable right of subrogation.

Subrogation is a normal incident of a contract of insurance. Its existence does not necessarily depend on the terms of the contract but on the nature of the contract of insurance and on general principles of equity.

Whether or not the insurance policy expressly reserves subrogation rights, it is the universal rule that upon payment of a loss, an insurer is entitled to pursue those rights which the insured may have against a third party whose negligence or wrongful act caused the loss. However, the insurer, as the subrogee, is entitled to no greater rights than those which the insured-subrogor possesses at the time the subrogee asserts the claim, as the subrogee merely "steps into the shoes" of the subrogor. As an application of this rule, it is thus well established that an insured may defeat the insurance company's rights of subrogation by * * * settling with the wrongdoer after loss but before payment of the insurance * * *.

Great N. Oil Co. v. St. Paul Fire & Marine Ins. Co., 291 Minn. 97, 99-100, 189 N.W.2d 404, 406-07 (1971) (citations omitted) (emphasis added) (quoting Employers Liab. Assurance Corp. v. Morse, 261 Minn. 259, 263, 111 N.W.2d 620, 624 (1961)).

When the Harrens refrained from settling the case, Grinnell had not paid any loss under the policy, and the Harrens could have defeated Grinnell's rights of subrogation by settling with Winscher and the Christys. Because Grinnell had not made any payment, it had no subrogation rights to assert to prevent the Harrens from settling, and the record does not indicate that Grinnell put either Winscher or the Christys on notice of any subrogation rights it claimed. Grinnell could not have prevented the Harrens from settling the case had they chosen to do so. See Travelers Indem. Co. v. Vaccari, 310 Minn. 97, 98, 103, 245 N.W.2d 844, 845, 848 (1976) (when insurer paid benefits contractually owed to insured and gave notice to tortfeasor and his liability insurer, subsequent release obtained by tortfeasor and his insurer did not defeat subrogation rights).

Reioux v. State Farm Mutual Automobile Insurance Co., 298 Minn. 550, 214 N.W.2d 340 (1974), the one case the Harrens cite in support of their argument that an insurer is obligated to reimburse an insured for attorney fees incurred to protect the insured's subrogation right against a third party, does not support their claim. In Reioux, the plaintiffs sought to recover from their insurer attorney fees incurred in an action against a third party for collision damage to the plaintiffs' automobile. Id. at 550, 214 N.W.2d at 340. The supreme court held:

As there was no subrogation of plaintiffs' rights against the tortfeasor, and since the evidence presented by plaintiffs to establish a settlement contract with [the insurer] is legally insufficient to support a reasonable conclusion that such a contract in fact existed, [the insurer] was under no duty to reimburse plaintiffs for attorneys' fees expended in their election to sue the third-party tortfeasor.

Id., 214 N.W.2d at 340.

As in Reioux, the Harrens brought claims against third-party tortfeasors when there had been no subrogation of their rights against the tortfeasors. The Harrens then sought to recover from their insurer the attorney fees expended in bringing these claims. But, as in Reioux, because there had been no subrogation of the Harrens' rights to Grinnell, Grinnell was under no obligation to reimburse the Harrens for attorney fees expended in the Harrens' election to sue the third-party tortfeasors.

The Harrens also argue that they were compelled to assert their claims against Winscher and the Christys because failing to do so would have been a breach of their duty to cooperate with Grinnell. This is so, the Harrens contend, because any right of subrogation Grinnell could ever assert upon paying AMPI's claim was derivative of their claims against Winscher and the Christys. The Harrens further contend that their claims were compulsory counterclaims, and if the counterclaims were not asserted in the Winscher action, they could not be asserted in a separate subrogation action. Therefore, the Harrens conclude, their counterclaims were necessary to preserve Grinnell's subrogation rights, and Grinnell should pay the costs of asserting claims made to preserve its rights.

Grinnell admits it was obligated to defend the Harrens against AMPI's claim, but argues that AMPI did not assert its claim in the lawsuit for which the Harrens seek defense. Grinnell argues further that because the Harrens' counterclaim against Winscher for the damages claimed by AMPI was not compulsory, the Harrens did not acquire a right to a defense by asserting the counterclaim.

The Harrens' argument rests upon their assertion that their claims are compulsory counterclaims. Minn. R. Civ. P. 13.01 provides:

A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties over whom the court cannot acquire jurisdiction, except that such a claim need not be so stated if, at the time the action was commenced, the claim was the subject of another pending action.

A compulsory counterclaim must be mature when the cause of action is served. 1 David F. Herr & Roger S. Haydock, Minnesota Practice § 13.3 (1985). A mature claim is a claim that exists and on which suit properly may be brought, not a claim that is subject to dismissal for prematurity. Id.

"Issues which have no existence other than in the realm of future possibility are purely hypothetical and are not justiciable."

Federated Mut. Ins. Co. v. Litchfield Precision Components, Inc., 456 N.W.2d 434, 439 (Minn. 1990) (quoting Lee v. Delmont, 228 Minn. 101, 110, 36 N.W.2d 530, 537 (1949)).

When the Harrens filed their claims against Winscher and the Christys, they had not paid any part of AMPI's claim, and AMPI had not filed suit against them. The Harrens had not suffered any actual harm as a result of the contamination of AMPI's milk. Absent any actual harm, the Harrens' claim for damages suffered by AMPI was in the realm of future possibility and was not justiciable. Therefore, their claims were not compulsory counterclaims, the Harrens were under no compulsion to file the claims to protect Grinnell's subrogation rights, and Grinnell was not obligated to provide a defense.

The Harrens filed a motion to strike the copy of their insurance policy that Grinnell included in the appendix to its brief. Grinnell concedes that the policy was not part of the district court record. The motion to strike is granted. See Minn. R. Civ. App. P. 110.01 (documents filed in district court, exhibits, and transcript shall constitute record on appeal).

Affirmed.

[ ]1The quoted sections from the Harrens' policy were copied in a letter from Grinnell to the Harrens' attorney. The record does not contain any other sections of the policy.