National Union Fire Ins. Co. v. Smaistrala

2018 UT App 170THE UTAH COURT OF APPEALS
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
Appellee,
v.
MICHAEL W. SMAISTRALA,
Appellant.
Opinion
No. 20160401-CA
Filed August 30, 2018
Second District Court, Ogden Department
The Honorable W. Brent West
No. 130902158
Paul M. Belnap and Chet W. Neilson, Attorneys
for Appellant
Randall R. Smart and Jeffrey A. Callister, Attorneys
for Appellee
JUDGE DAVID N. MORTENSEN authored this Opinion, in which
JUDGES MICHELE M. CHRISTIANSEN FORSTER and RYAN M. HARRIS
concurred.
MORTENSEN, Judge:
¶1 Michael W. Smaistrala found himself sucked into the
vortex of Utah insurance subrogation law when his insurer,
National Union Fire Insurance Company of Pittsburgh, PA
(National Union), demanded that he return $127,000 that the
company had paid out on his behalf. When the district court
ruled as a matter of law that Smaistrala was indeed required to
return the money because he had settled a lawsuit with a group
of potential tortfeasors, Smaistrala filed an appeal in this court.
Specifically, Smaistrala claims that the district court erred in
concluding that he breached the insurance contract as a matter of
National Union v. Smaistrala
law. Further, Smaistrala claims that the district court erred by
ruling that National Union did not need to show the liability of
the parties with whom Smaistrala had settled. We agree and
reverse.
BACKGROUND
¶2 Smaistrala’s injuries occurred while he was resting in the
sleeper unit of his uncle’s semi-truck. Uncle, who employed
Smaistrala, was driving the truck at the time; Uncle lost control
of the semi-truck on an icy overpass and rolled the vehicle.
National Union, as Smaistrala’s insurer, paid Smaistrala roughly
$127,000 for medical services and disability benefits as a result of
the accident.
¶3 Smaistrala sued Uncle, SRF LLC, KB Trucking, and Fleet
Car Lease, 1 alleging negligence by Uncle and negligent
supervision and entrustment by SRF, KB, and Fleet Car. The case
proceeded, and the parties made preparations for mediation.
Counsel for Smaistrala informed National Union of the pending
mediation and offered to “represent and protect [National
Union’s] interests regarding the subrogation.” 2 National Union
1. The four original defendants in this action were: (1) Uncle—
driver of semi-truck; (2) SRF LLC—Uncle’s limited liability
company; (3) KB Trucking—entity that sold tractor unit to Uncle;
and (4) Fleet Car Lease—entity that contracted with Uncle to pull
a trailer for transporting vehicles for the purpose of training new
drivers.
2. “The doctrine of subrogation allows an insurer, having paid a
loss resulting from a peril insured against, to step into the shoes
of its insured and recoup its losses from a tort-feasor whose
(continued…)
20160401-CA 2 2018 UT App 170National Union v. Smaistrala
declined that offer. At no time did National Union provide
Smaistrala with any forms to complete, nor did National Union
request that Smaistrala sign any subrogation forms.
¶4 The case subsequently settled. In the settlement
agreement, the defendants agreed to pay Smaistrala $300,000.
The settlement included a release of all claims Smaistrala may
have had against the defendants and stated that the parties
“acknowledge and agree that the settlement of the Lawsuit is the
compromise of disputed claims and no terms of the Agreement
are to be taken as any admission of liability or damages.” After
the settlement was finished, the court granted a stipulated order
of dismissal of the action with prejudice.
¶5 National Union learned of the settlement and eventually
filed this lawsuit against Smaistrala, alleging that he breached
the insurance contract by failing to preserve National Union’s
right of subrogation against SRF and KB and by refusing to
reimburse the $127,000 that National Union had paid to
Smaistrala as a result of the accident. 3 The subrogation provision
in the insurance policy states,
(…continued)
negligence caused the loss.” Birch v. Fire Ins. Exch., 2005 UT App
395, ¶ 7, 122 P.3d 696 (cleaned up).
3. Uncle and Fleet Car were insured under the same policy as
Smaistrala. Accordingly, the district court ruled that National
Union had no right of subrogation against them. See Fashion Place
Inv., Ltd. v. Salt Lake County, 776 P.2d 941, 944 (Utah Ct. App.
1989) (“[I]t is a well-established rule that an insurer cannot
recover by means of subrogation against its own insured or a
coinsured under the policy.”). No party has appealed this
determination.
20160401-CA 3 2018 UT App 170National Union v. Smaistrala
To the total extent the Company pays for losses
incurred, the Company may assume the rights and
remedies of the Insured Person relating to such
loss. The Insured Person agrees to assist the
Company in preserving its rights against those
responsible for such loss, including but not limited
to, signing subrogation forms supplied by the
Company.
Additionally, the “Conditional Claim Payment” (CCP) provision
in the policy, which National Union believes requires Smaistrala
to reimburse the $127,000, states as follows:
If an Insured Person suffers a Covered Loss(es) as
the result of Injuries for which, in the opinion of
the Company, a third party may be liable, the
Company will pay the amount of benefits
otherwise payable under this Policy. However, if
the Insured Person receives payment from the
third party, the Insured Person agrees to refund to
the Company the lesser of: (1) the amount actually
paid by the Company for such Covered Loss(es); or
(2) an amount equal to the sum actually received
from the third party for such Covered Loss(es). If
the Insured Person does not receive payment from
the third party for such Covered Loss(es), the
Company reserves the right to subrogate under the
Subrogation clause of this Policy.
At the time such third party liability is determined
and satisfied, this amount shall be paid whether
determined by settlement, judgment, arbitration or
otherwise. This provision shall not apply where
prohibited by law.
¶6 National Union eventually filed a motion for summary
judgment, which the district court granted. First, the district
20160401-CA 4 2018 UT App 170National Union v. Smaistrala
court found that “[National Union’s] action is a breach of
contract and therefore [National Union] does not need to show
liability of the underlying tortfeasors.” In so concluding, the
district court maintained that the Utah Supreme Court held “that
if a person is not ‘made whole’ by a settlement, then that
person’s insurer has the burden to show that it could have
successfully subrogated against the underlying tortfeasors to
recover the settlement award.” (Quoting Hill v. State Farm
Mutual Auto Ins. Co., 765 P.2d 864 (Utah 1988), overruled on other
grounds by Sharon Steel Corp. v. Aetna Cas. & Surety Co., 931 P.2d
127 (Utah 1997).) However, the court further elaborated that
subrogation is an “equitable doctrine” and that “Hill specifically
states that the subrogation doctrine ‘can be modified by
contract.’” (Quoting Hill, 765 P.2d at 866.) The court then cited
the CCP provision, and concluded that this provision modified
the made whole doctrine by addressing the insurer’s
subrogation rights and requiring that Smaistrala reimburse the
funds. Finally, the court concluded that the existence of the
insurance contract “render[ed] the equitable subrogation
analysis of Hill inapplicable.”
¶7 The district court concluded that “[National Union]
performed under the contract by paying for covered losses
[Smaistrala] suffered as a result of the accident. [Smaistrala]
breached the contract by settling with [KB] and [SRF] and
agreeing to dismiss his lawsuit against them with prejudice. This
breach interfered with [National Union’s] contractual
subrogation right.” Accordingly, the district court ordered
Smaistrala to reimburse National Union for all payments it made
as a result of the accident. Smaistrala appeals.
ISSUE AND STANDARD OF REVIEW
¶8 Smaistrala contends that the district court erred in
granting National Union’s motion for summary judgment. “An
20160401-CA 5 2018 UT App 170National Union v. Smaistrala
appellate court reviews a trial court’s legal conclusions and
ultimate grant or denial of summary judgment for correctness
and views the facts and all reasonable inferences drawn
therefrom in the light most favorable to the nonmoving party.”
Orvis v. Johnson, 2008 UT 2, ¶ 6, 177 P.3d 600 (cleaned up).
ANALYSIS
I. The Subrogation Provision
¶9 The district court concluded that Smaistrala breached the
contract by settling with SRF and KB and “agreeing to dismiss
his lawsuit against them with prejudice,” thereby “interfer[ing]
with [National Union’s] contractual subrogation right.”
Smaistrala argues that “the evidence in the record . . . creates an
issue of material fact,” precluding summary judgment on this
point. We agree.
¶10 Smaistrala contracted to “assist [National Union] in
preserving its rights against those responsible” for his injuries.
That assistance is defined in the subrogation provision as aiding
the “Company in preserving its rights against those responsible
for such loss, including but not limited to, signing subrogation
forms supplied by the Company.” Only where the subrogation
right has not been preserved can a breach be found. Here, there
are no possible subrogation rights against Uncle and Fleet Car, 4
and it remains a disputed issue of fact whether SRF and KB have
any fault at all. Under Utah law, in a tort action, a fact-finder is
to “allocate the percentage or proportion of fault attributable” to
4. Indeed, the policy itself states: “This provision shall not apply
where prohibited by law.” And Utah law prohibits subrogation
against co-insureds such as Uncle and Fleet Car. See Fashion
Place, 776 P.2d at 944; see also supra note 3.
20160401-CA 6 2018 UT App 170National Union v. Smaistrala
the plaintiff and all defendants, whether the defendants are
immune or not. Utah Code Ann. § 78B-5-818(4)(a) (LexisNexis
2012); see also Graves v. North E. Services, Inc., 2015 UT 28, ¶ 47,
345 P.3d 619.
¶11 In this case, the determination of relative liability never
occurred. Were it determined in a future proceeding that SRF
and KB bore no fault, there would be no subrogation claim to
preserve. For this reason alone, summary judgment should not
have been granted. Further, even if SRF and KB were found to be
minimally at fault, a disputed issue of fact precluding summary
judgment would still exist as to the amount of the subrogation
right that had not been preserved. National Union was thus not
entitled to judgment as a matter of law, and the district court
erred in granting summary judgment as to the full amount of the
claim.
¶12 In addition, Smaistrala argues that he took action to assist
National Union in preserving its subrogation rights. Specifically,
Smaistrala argues that his attorney contacted National Union
and offered to represent its subrogation right at the mediation,
but National Union refused. Additionally, Smaistrala argues that
he never received the forms indicated in the subrogation
provision, so he never had an opportunity to assist National
Union by signing anything. These facts, at least at this stage of
the proceedings, show a dispute as to whether Smaistrala
assisted National Union in preserving its rights against
potentially liable parties. Because issues of material fact exist on
the issue of breach, summary judgment was not appropriate. 5
5. Although not raised by the parties, we note the following case
law. A settlement may not necessarily extinguish an insurer’s
ability to subrogate. See Sharon Steel Corp. v. Aetna Cas. & Surety
Co., 931 P.2d 127, 138 (Utah 1997) (“In third-party insurance
(continued…)
20160401-CA 7 2018 UT App 170National Union v. Smaistrala
II. The CCP Provision
¶13 National Union also claimed that Smaistrala breached the
CCP provision. In relevant part, the CCP provision states:
[I]f the Insured Person receives payment from the
third party, the Insured Person agrees to refund to
the Company the lesser of: (1) the amount actually
paid by the Company for such Covered Loss(es); or
(2) an amount equal to the sum actually received
from the third party for such Covered Loss(es).
However, this provision also specifies:
At the time such third party liability is determined
and satisfied, this amount shall be paid whether
determined by settlement, judgment, arbitration or
otherwise.
¶14 The parties differ in their interpretations of this provision.
Smaistrala plausibly argues that the provision is triggered only
when “liability is determined,” and points out that liability has
never been determined in this case. On the other hand, National
Union argues that the separate paragraphs of the provision
apply to two distinct situations, and that the second paragraph
(…continued)
contexts, this court has held that where the insured settles with a
tortfeasor, and the tortfeasor and/or its insurer was on notice of
the other insurer’s subrogation right, then the settlement and
release will not affect the insurer’s right of subrogation.”);
Educators Mutual Ins. Ass’n v. Allied Prop. & Cas. Ins. Co., 890 P.2d
1029, 1031 (Utah 1995) (“[A] settlement between an injured party
and a tort-feasor who has knowledge of the subrogation rights of
the injured party’s insurer does not destroy the subrogation
claim of the injured party’s insurer.”).
20160401-CA 8 2018 UT App 170National Union v. Smaistrala
should not be applied to the situation in this case. Assuming,
without deciding, that National Union’s reading of the provision
is also plausible, it would mean that the provision is ambiguous.
See S.W. Energy Corp. v. Continental Ins. Co., 1999 UT 23, ¶ 14, 974
P.2d 1239 (“A policy may be ambiguous if it is unclear, omits
terms, or is capable of two or more plausible meanings.”). In that
event, we liberally construe the policy in favor of Smaistrala and
arrive at the same result—the district court should not have
applied the CCP provision on summary judgment. See Farmers
Ins. Exch. v. Versaw, 2004 UT 73, ¶ 24, 99 P.3d 796 (“Although we
construe insurance contracts using the same interpretive tools
we use to review contracts generally, we have frequently
declared that because insurance policies are adhesion contracts,
they are to be construed liberally in favor of the insured and
their beneficiaries so as to promote and not defeat the purposes
of insurance.” (cleaned up)). 6
¶15 In the present case, the settlement expressly stated that
liability was not being determined. No party admitted fault as
part of the settlement agreement, and the settlement agreement
in no way apportioned fault between the various tortfeasors. The
record reflects that there was no judgment entered nor any
arbitration conducted. National Union was the insurer and the
moving party in the summary judgment proceeding. Construing
the provision against National Union, the provision requires that
6. Ordinarily, where a contract’s language is ambiguous we look
to extrinsic evidence before applying the rule to construe the
relevant language against the drafter. Hillcrest Inv. v. Sandy City,
2010 UT App 201, ¶ 19, 238 P.3d 1067. While there may exist
insurance contracts that are negotiated in arm’s length
transactions, typically insurance contracts are true adhesion
contracts, offered only on a take-it-or-leave-it basis. There is no
evidence in the record that the insurance contract here is
anything other than an adhesion contract.
20160401-CA 9 2018 UT App 170National Union v. Smaistrala
liability be determined before the payment obligation is
triggered. The provision itself states that the amount shall be
paid only when third party liability is otherwise “determined
and satisfied.” Therefore, summary judgment should not have
been granted in National Union’s favor based on this provision.
III. Additional Guidance
¶16 While we recognize that the analysis to this point resolves
the issue presented on appeal, because the issues discussed in
the district court’s ruling are likely to arise again, we address
additional issues that may be pertinent and helpful on remand.
State v. Cloud, 722 P.2d 750, 755 (Utah 1986) (“When a new trial
or further proceeding is ordered, it is our duty to pass upon
questions of law which may be pertinent and helpful in arriving
at a final determination of the case.” (cleaned up)).
¶17 In its ruling, the district court concluded that National
Union’s action is for “breach of contract and therefore [National
Union] does not need to show liability of the underlying
tortfeasors.” The district court then explained that the CCP
provision of the parties’ insurance contract modified the made
whole doctrine, as articulated in Hill v. State Farm Mutual
Automobile Insurance Co., 765 P.2d 864 (Utah 1988), overruled on
other grounds by Sharon Steel Corp. v. Aetna Casualty & Surety Co.,
931 P.2d 127 (Utah 1997), which rendered the analysis in Hill
“inapplicable” to this case. 7 This analysis is incorrect.
7. Under the made whole doctrine, an insured must be made
whole (i.e., fully compensated) before an insurer is entitled to be
reimbursed from a recovery obtained from a third-party
tortfeasor or the tortfeasor’s insurer. Hill v. State Farm Mutual
Auto. Ins. Co., 765 P.2d 864, 866 (Utah 1988), overruled on other
grounds by Sharon Steel Corp. v. Aetna Cas. & Surety Co., 931 P.2d
(continued…)
20160401-CA 10 2018 UT App 170National Union v. Smaistrala
¶18 The contractual obligation to show liability of the
underlying tortfeasor does not necessarily have anything to do
with the made whole doctrine. Assuming that the insurance
contract modified the made whole doctrine, 8 the particular
modification in this case—at least when construed in favor of
Smaistrala, as we have construed it here—would not relieve
National Union of needing to prove liability of, and the
proportion of liability amongst, the released parties. The district
court’s reading of Hill focuses needlessly on whether the made
whole doctrine has been expressly modified, and ignores the Hill
court’s statement that an insurer can recover for breach of a
contractual subrogation provision only “if [the insurer] shows it
could have recovered” from the tortfeasor. See id. at 869.
(…continued)
127 (Utah 1997). The doctrine applies in the absence of express
contractual terms to the contrary. Id. In this case, the district
court ruled that the contractual terms quoted constituted an
express repudiation of the made whole doctrine, and Smaistrala
does not actually challenge this determination on appeal. And
we express no opinion whether the quoted contract language
meets this standard. Cf. Kramer v. State Ret. Board, 2008 UT App
351, ¶ 30, 195 P.3d 925 (examining an insurance policy that
stated the insurer “shall be and is hereby subrogated . . .
regardless of whether the Insured has been made whole”)
(cleaned up).
8. The issue of whether Smaistrala’s damages actually exceeded
the combined settlement proceeds and the $127,000 National
Union had already paid out—in other words, whether
Smaistrala has been made whole—was not addressed by the
parties below and does not appear to have been a focus of the
proceedings before the district court, nor is it mentioned in the
briefs on appeal. Thus, the discussion of the made whole
doctrine before the district court and on appeal is a red herring.
20160401-CA 11 2018 UT App 170National Union v. Smaistrala
¶19 In Hill, the Utah Supreme Court examined State Farm’s
subrogation rights, as an insurer, where an insured, Hill, settled
with the underlying tortfeasor. Id. at 865. Because the record did
not contain a “complete copy of the [parties’] insurance policy”
and therefore the court was unaware of the “extent of the
subrogation terms,” the court analyzed subrogation under
principles of equity. Id. at 867. The court held that State Farm’s
only avenues to recovery were to show either (a) “that plaintiffs
were fully compensated and thus State Farm is entitled to be
reimbursed from [the tortfeasor’s] insurance policy proceeds,” or
(b) “that [Hill’s] action in releasing [the tortfeasor] breached the
insurance policy, and if State Farm shows it could have recovered
from [the tortfeasor], it will be entitled to the proceeds as a matter
of equity.” Id. at 869 (emphasis added). Thus, the questions of
whether an insured was made whole and whether the insurer
could have recovered from a tortfeasor are separate inquiries.
Simply put, Hill does not establish the distinction upon which
the district court’s decision rested.
¶20 The district court here further erroneously concluded that
“the equitable subrogation analysis of Hill [is] inapplicable” to
this case because the parties’ subrogation rights are governed by
contract. The district court again misreads Hill and its progeny.
It seemed to conclude that subrogation is a completely equitable
doctrine and that because this case involved a contract, the
“equitable” subrogation doctrine in Hill did not apply at all. Lost
in such reasoning is the fact that Hill and every other Utah case
addressing the made whole doctrine involved an insurance
policy—a contract. 9
9. The following are some examples of cases addressing the
made whole doctrine that involved an insurance policy: Wilson v.
Educators Mutual Ins. Ass’n, 2017 UT 69, ¶ 19, 416 P.3d 355;
Anderson v. United Parcel Service, 2004 UT 57, ¶ 10, 96 P.3d 903;
(continued…)
20160401-CA 12 2018 UT App 170National Union v. Smaistrala
¶21 This analysis fails first because Hill in no way holds that
an insurance contract generally displaces equitable subrogation.
Hill instead holds that an insurance contract can modify
equitable subrogation principles to the extent the contract does
so expressly. Id. at 866. Second, the contract here not only fails to
modify the requirement that liability of potential tortfeasors be
shown, but the contract—as we have construed it—expressly
embraces the concept. As referenced above, the contract’s
subrogation provision states that National Union “may assume
the rights and remedies of the Insured Person relating to such
loss.” And in turn, Smaistrala agreed “to assist [National Union]
in preserving its rights against those responsible for such loss[.]”
(Emphasis added.) Further, the CCP provision provides that the
obligation to reimburse National Union is triggered when “third
party liability is determined.” Taken together, these provisions
delineate that National Union’s subrogation rights are limited to
the rights and remedies Smaistrala had and that Smaistrala’s
duties only extended to rights against “those responsible,” or in
other words, those liable. Therefore, to determine the amount of
the subrogation claim and whether rights have been preserved,
National Union must first establish the rights and remedies
Smaistrala had against “those responsible”—the liability of the
alleged tortfeasor or tortfeasors.
¶22 Finally, even if the distinction the district court
misapprehended did exist, that difference alone fails to explain
why a showing by National Union of liability against settling
parties does not apply under principles of contract. One of the
(…continued)
State Farm Mutual Auto. Ins. Co. v. Green, 2003 UT 48, ¶ 35, 89
P.3d 97; Transamerica Ins. Co. v. Barnes, 505 P.2d 783, 785–86
(Utah 1972); Kramer v. State Ret. Board, 2008 UT App 351, ¶ 30,
195 P.3d 925; Birch v. Fire Ins. Exch., 2005 UT App 395, ¶ 9, 122
P.3d 696.
20160401-CA 13 2018 UT App 170National Union v. Smaistrala
most basic tenets of contract law is that a party must prove
damages to recover under a breach of contract claim. See America
West Bank Members, LC v. State, 2014 UT 49, ¶ 15, 342 P.3d 224;
Nuttall v. Berntson, 30 P.2d 738, 741 (Utah 1934).
¶23 The record demonstrates that questions of fact remain on
what level of liability SRF, KB, and the other entities released by
the settlement had, if any. The liability of those entities is
material to the question of damages. See Hill, 765 P.2d at 869
(explaining that “if [the insurance company] shows it could have
recovered from [the tortfeasor], it will be entitled to the
[insurance] proceeds”). That the potentially liable parties paid
money to Smaistrala is of no consequence because the settlement
expressly says that “no terms of the Agreement are to be taken
as any admission of liability or damages.” And, as stated, the
settlement included other parties likely to be found more
comparatively liable than SRF or KB, but for which subrogation
is not allowed because those parties are insured under the same
policy.
¶24 This is not a case where an insured has settled with the
only potentially liable party. The need to prove liability is
especially acute here because National Union is legally barred
from seeking subrogation against some of the at-fault parties—
indeed perhaps even the most at-fault party, Uncle—because
they are a co-insured under the policy.
CONCLUSION
¶25 The district court erred by entering summary judgment in
favor of National Union. Questions of fact remain that preclude
summary judgment. Further, the district court should not have
applied the CCP provision because liability had not yet been
established. We therefore reverse the district court’s grant of
20160401-CA 14 2018 UT App 170National Union v. Smaistrala
summary judgment in favor of National Union, and we remand
this case for further proceedings consistent with this opinion.
20160401-CA 15 2018 UT App 170