This opinion will be unpublished and

may not be cited except as provided by

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




United States Automobile Association,



Karen Morgan, Personal Representative of the

Estate of John R. Morgan,


Filed July 1, 1997


Schumacher, Judge

Concurring specially, Davies, Judge

Hennepin County District Court

File No. 9517825

Robert W. Kettering, Jr., Michael M. Lafeber, Arthur, Chapman, Kettering, Smetak & Pikala, P.A., 500 Young Quinlan Building, 81 South Ninth Street, Minneapolis, MN 55402-3214 (for Appellant)

Joel W. Brodd, Doar, Drill & Skow, S.C., Office Park, Post Office Box 546, Baldwin, WI 54002 (for Respondent)

Considered and decided by Schumacher, Presiding Judge, Davies, Judge, and Schultz, Judge.[*]



United Services Automobile Association appeals from the dismissal of its declaratory judgment action to determine whether it was responsible for the underinsured motorist (UIM) benefits for respondent Karen Morgan, Personal Representative of the Estate of John R. Morgan, arguing Morgan's settlement with the liability carrier, Allied Insurance Company, was not the "best possible settlement" necessary to trigger its UIM coverage. We affirm.


Morgan's husband was killed in an accident with a truck owned by MKT Corporation d/b/a ABC Seamless Siding and insured by Allied. The MKT truck was insured with limits of $500,000 per person/$1,000,000 per accident. The Morgans were insured by United Services' policy, which provided underinsured motorist coverage of $500,000 per person/$1,000,000 per accident.

United Services asserts MKT was 100% liable for the accident. Allied denied liability, but settled with Morgan for $250,000. Morgan gave United Services notice of settlement pursuant to Schmidt v. Clothier, 338 N.W.2d 256 (Minn. 1983). Morgan also notified United Services that she intended to pursue UIM benefits. United Services refused to substitute its draft for Allied's, and Morgan thereafter requested arbitration of the UIM claim.

United Services commenced this declaratory judgment action, arguing Morgan's settlement with Allied for half the liability limits was not the "best possible settlement" required to trigger its UIM obligation.[1] The district court denied United Services' motion, concluding that the claimant determines what he or she considers the "best possible settlement" and that the UIM carrier can protect its interests in only one way---by substituting its draft for that of the liability carrier. United Services appeals.


On appeal from summary judgment, this court must determine whether there are any issues of material fact and whether the district court correctly applied the law. Offerdahl v. University of Minn. Hosps. & Clinics, 426 N.W.2d 425, 427 (Minn. 1988). In the present case, whether Morgan's settlement with Allied was the "best possible settlement" to trigger UIM coverage, is a question of law which this court reviews de novo. Hibbing Educ. Ass'n v. Public Employment Relations Bd., 369 N.W.2d 527, 529 (Minn. 1985).

United Services argues that Allied's insured was 100% liable for the accident, and therefore Morgan's settlement for half the liability limits was not the "best possible settlement" as a matter of law. We note that Allied denied liability for the accident, and the denial was memorialized in the settlement documents.[2] In view of the denial of liability, we cannot say that the settlement with Allied was not the "best possible settlement." In any event, we believe the procedures for handling UIM claims adequately protect United Services' interests.

To make a UIM claim, the claimant must show that the vehicle causing the injury was underinsured. Broton v. Western Nat'l Mut. Ins. Co., 428 N.W.2d 85, 89 (Minn. 1988). A vehicle is underinsured if the liability insurer's policy applies, but its limit "is less than the amount needed to compensate the insured for actual damages." Minn. Stat. § 65B.43, subd. 17 (1996). The underinsurer's maximum liability is limited, however, to

the amount of damages sustained but not recovered from the insurance policy of the driver or owner of any underinsured at fault vehicle.

Minn. Stat. § 65B.49, subd. 4a (1996).

The claimant may settle with the liability carrier for less than the liability limits and still maintain an UIM claim. Schmidt v. Clothier, 338 N.W.2d 256, 261 (Minn. 1983). Schmidt encouraged settlements to mitigate litigation expenses, delays in claim payments, and the burden on the court system. Id. at 260. Schmidt noted that

[w]here the best settlement available is less than the defendant's liability limits, the insured should not be forced to forego settlement and go to trial in order to determine the issue of damages. The insured has the right to accept what he or she considers the best settlement available and to proceed to arbitrate the underinsurance claim for the determination of whether the damages do indeed exceed the tortfeasor's liability limits.

Id. at 260-61.

In approving settlements of liability claims, Schmidt constructed a notice procedure:

[T]he underinsurer is entitled to notice of the tentative settlement and an opportunity to protect those potential [subrogation] rights by paying underinsurance benefits before release. * * * If the underinsurer were to determine after assessment that recovery of underinsurance benefits it paid was unlikely * * * it could simply let the "grace period" expire and permit the settlement and release. It must, of course, thereafter, process the underinsurance claim but would not be able to recover those payments through subrogation.

* * * *

If, on the other hand, damages were substantially more than the liability limits and the tortfeasor has substantial assets, the underinsurer could substitute its payment to the insured in an amount equal to the tentative settlement * * * [which] would protect its subrogation rights * * *. The underinsurer would then have to arbitrate the underinsured claim and could, thereafter, attempt to negotiate a better settlement or could proceed to trial in the insured's name.

Id. at 263 (citation omitted). Thus, there are two ways to make a UIM claim:

(1) pursue a tort claim to a conclusion in a district court action, and then, if the judgment exceeds the liability limits, pursue underinsured benefits; or

2) settle the tort claim for "the best settlement," give a Schmidt-Clothier notice to the underinsurer, and then maintain a claim for underinsured benefits.

Employers Mut. Cos. v. Nordstrom, 495 N.W.2d 855, 857 (Minn. 1993) (footnote omitted).

Here, Morgan settled with Allied and gave United Services the proper Schmidt v. Clothier notice for an UIM claim. It was incumbent upon United Services at that point to choose whether to substitute its draft for the amount of Allied's settlement. United Services declined.

If United Services determined that the settlement was not representative of Morgan's damages, it should have substituted its payment to preserve its subrogation rights. We believe the procedures and limits for UIM claims, as currently set out in the statutes, Schmidt, Nordstrom, and other cases, provide adequate protection for United Services' interests in underinsurance claims.


DAVIES, Judge (concurring specially).

I respectfully concur. The supreme court has made it clear, most recently in Washington v. Milbank Ins., 562 N.W.2d 801 (Minn. May 15, 1997), that arbitration is the proper procedure for determining UIM entitlement.

I write separately, however, because precedent cases may suggest that appellant should, in the UIM proceeding that lies ahead in this case, be precluded from challenging the reasonableness of respondent's tort settlement. I do not believe that to be the case, for such a result is wholly impractical and substantively wrong.

Washington affirmed again that those who claim UIM coverage after a Schmidt v. Clothier[3] agreement must have made "the best settlement." 562 N.W.2d at 805-06. Respondent's claim for UIM benefits, thus, continues to implicate the best-settlement issue, notwithstanding that appellants have argued to us (somewhat desperately) that the declaratory judgment action we here reject is the only way for that issue to be addressed. I believe it to be implicit in our rejection of this declaratory judgment proceeding--and implicit, too, in the supreme court decision in Washington--that an insurer must be able to challenge a UIM claimant's improvident Schmidt v. Clothier tort settlement by some means other than by declaratory judgment.

Basic insurance law imposes on an insured the requirement to cooperate with the insurer to minimize insured losses. That a UIM obligation arises from an insurance contract--thus implicating the rule of cooperation--has thus far been largely overlooked in discussions of the best-settlement issue within the context of Schmidt v. Clothier settlements. But the best-settlement obligation arises directly from the requirement of cooperation. An insured's improvident Schmidt v. Clothier settlement--if it has the effect of increasing the UIM insurer's liability--violates the cooperation requirement.

Previous discussions of best settlement have focused on the "gap" issue. Gaps initially were viewed as any difference between a UIM insured's tort settlement and the tortfeasor's liability insurance policy limits. Schmidt v. Clothier, 338 N.W.2d 256, 261 (Minn. 1983). This did not take into account situations that made policy limits irrelevant, such as liability insurer insolvency or when multiple claimants exhausted the tortfeasor's coverage.

The legislature responded in 1985 to the problems of multiple claimants and insurer insolvency, stating that UIM insurance covered the difference between the loss and the amount the claimant actually realized from the tort claim.[4]

The 1985 amendment, providing for a "maximum" recovery, in no way suggests that it was intended to remove the UIM insured's contractual obligation to make the best settlement so as to protect the UIM insurer from excess liability. The obligation to make the best settlement--or to avoid improvident settlement--remains as part of the insurance contract.

The UIM insurer's contractual obligation is to cover a portion of the tortfeasor's liability that is otherwise uncollectible. The UIM insured's conduct cannot expand that obligation. The insured cannot make UIM insurance also cover the insured's losses for which tortfeasor liability is compromised away because of comparative fault or uncertain liability.

The point I make can be made clear by categorizing gaps--settlements below the tortfeasor's policy limits--as either "coverage gaps" or "liability-based gaps." Gaps created because of exhausted coverage or insurer insolvency are legitimate "coverage gaps" resulting from a best settlement. But gaps created by settlements founded on uncertain liability or comparative fault are "liability-based gaps" and represent settlements that do not meet the best-settlement standard. A UIM insurer must compensate its insured for a "coverage gap"--one that falls within its contractual obligation. But the insurer has no contractual obligation to cover a "liability-based gap"; those gaps are outside the insurance contract.

Failing to give UIM insurers the ability to question Schmidt v. Clothier settlements puts into the hands of UIM claimants an intolerable weapon; claimants are permitted to settle tort claims at a discount (small or substantial) and, by doing so, impose a dilemma on the claimant's UIM carrier. The carrier may decline to substitute its own payment, pursuant to Schmidt v. Clothier, but by doing so it exposes itself to a claim for underinsured benefits that includes a "liability-based gap." Or, choosing the other form of the dilemma, the insurer may substitute its own payment, thus defeating the Schmidt v. Clothier settlement and preserving its subrogation claim against the at-fault driver. The subsequent subrogation judgment may, however, be less than the settlement figure, in which case the UIM carrier fails to recapture in the subrogation action the amount it has advanced. The UIM insurer then will again have paid an amount outside its UIM obligation.

To avoid this dilemma, the carrier must (when it believes the insured has made a liability-based compromise settlement) be able to allow the settlement to proceed and then, in the subsequent UIM action, be able to challenge that settlement as creating a liability-based gap. Cf. Royal-Milbank Ins. Co. v. Busse, 474 N.W.2d 441, 443 (Minn. App. 1991) (concluding in declaratory judgment action that insured could not recover UIM benefits after settling below liability policy limits); Employers Mut. Cos. v. Nordstrom, 495 N.W.2d 855, 857 n.3 (Minn. 1993) (citing Busse for proposition that insured had not made best settlement with tortfeasor, as required by Schmidt v. Clothier).

The appellant insurer's dilemma can thus be avoided here by allowing it to defend against the UIM claim by challenging the settlement as reflecting an improper "liability-based gap." In my view, this is both consistent with the purpose of the 1985 legislative act and not barred by precedent.

[ ]* 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 The phrase "best possible settlement" comes from the requirement that "[t]he injured party should negotiate the best possible settlement" with the liability carrier before proceeding with a claim for underinsurance benefits. Schmidt v. Clothier, 338 N.W.2d 256, 264 (Minn. 1983) (Todd, J., concurring and dissenting).

[ ]2 United Services also proposes a "bright-line" rule that any settlement for half the liability limits is not the "best possible settlement." This court has noted that

[i]f there is to be a procedure for measuring the best settlement as a prelude to arbitration, it is not one this court has the liberty to inject into this body of law.

Washington v. Milbank Ins. Co., 551 N.W.2d 513, 516 (Minn. App. 1996), aff'd 562 N.W.2d 801 (Minn. 1997).

[ ] 3 Schmidt v. Clothier, 338 N.W.2d 256 (Minn. 1983).

[ ]4 1985 Minn. Laws ch. 168, § 12 (repeated in 1985 Minn. Laws ch. 309, § 6) (codified at Minn. Stat. § 65B.49, subd. 4a (1986)), reads:

With respect to underinsured motor vehicles, the maximum liability of an insurer is the lesser of the difference between the limit of underinsured motorist coverage and the amount paid to the insured by or for any person or organization who may be held legally liable for the bodily injury; or the amount of damages sustained but not recovered.

(Emphasis added.) This statute has been amended since the supreme court discussed it in Broton v. Western Nat'l Mut. Ins. Co., 428 N.W.2d 85 (Minn. 1988), but the amendment does not affect the analysis I suggest here. See Minn. Stat. § 65B.49, subd. 4a (1996) (current version of statute).