A new Minnesota Court of Appeals decision makes clear that timing is everything when it comes to UIM subrogation. The court’s decision in Russell v. Haji-Ali, 826 N.W.2d 216 (Minn. App. 2013) means that a claims professional settling a uninsured/underinsured motorist (UM/UIM) claim must now understand that UM/UIM benefits received by an insured before a verdict in the lawsuit against the tortfeasor constitutes a “collateral source” that must be applied to reduce any future judgment against the tortfeasor while benefits paid after the verdict do not. If the UM/UIM carrier retains subrogation rights, any UM/UIM payments are excluded from the Collateral Source Statute because subrogation is involved. M.S.A. § 548.251, subd. 2(1) (excluding from collateral source reduction any UM/UIM payments for which a subrogation right has been asserted). If no subrogation rights are reserved, the Collateral Source Statute applies and UM/UIM benefits are deducted from the judgment.
In Russell v. Haji-Ali, Sharif Haji-Ali ran a red light in downtown Minneapolis in March of 2010, colliding with a vehicle driven by and causing injuries to Sheelagh Russell. In January of 2011, Russell sued Haji-Ali, seeking damages in excess of $50,000. Haji-Ali’s liability carrier defended, denying that respondent’s damages were equal to or greater than their $50,000 liability limit. Russell incurred $43,000 in medical benefits and his own UIM carrier intervened into the suit. During mediation, Russell reached a settlement with her insurer and was paid $50,000 in exchange for a release of her potential UIM claims. The insurer did not retain any subrogation rights. The tort action was tried to a jury in February 2012. By special verdict, the jury found that Haji-Ali was negligent and found damages totaling $102,974.
Haji-Ali filed a post-trial motion to reduce the award pursuant to § 548.251, seeking a reduction by reason of two separate and prior payments made to respondent: (1) the no-fault benefits respondent received in the amount of $40,097, and (2) respondent’s UIM settlement with her insurer in the amount of $50,000. The trial court granted the motion with regard to the no-fault payments and reduced the judgment accordingly. That determination is not at issue. The district court also concluded that the UIM settlement did not constitute a collateral source payment under § 548.251 and declined to reduce the judgment by the amount of the UIM settlement. Haji-Ali appealed.
A UM carrier in the Gopher State has subrogation rights against an UM tortfeasor to recover the value of the UM benefits it has paid, provided the insured has been fully compensated. Preferred Risk Mut. Ins. Co. v. Pagel, 439 N.W.2d 755 (Minn. App. 1989). The subrogation rights of an UM/UIM carrier are based on common law principles and are not specifically addressed in the Minnesota statutes. Principal Financial Group v. Allstate Ins. Co., 472 N.W.2d 338 (Minn. App. 1991).
To protect and preserve its UIM subrogation rights, the UIM insurer may elect to make what is known as a Schmidt-Clothier substitution of its draft in lieu of allowing the insured to settle with the UIM, thereby destroying the UIM carrier’s subrogation rights. Schmidt v. Clothier, 338 N.W.2d 256 (Minn. 1983); Gusk v. Farm Bureau Mut. Ins. Co., 559 N.W.2d 421 (Minn. 1997). When an injured party gives her UIM carrier a Schmidt-Clothier notice of her intent to settle a negligence claim for a specific amount, the UIM carrier elects to substitute its check for that of the tortfeasor, and the injured party accepts the substituted check, the substitution of checks operates as a settlement of the negligence claim and the liability of the tortfeasor is limited to any subrogation claim that may be made by the UIM carrier. Isaac v. Vy Thanh Ho, 825 N.W.2d 379 (Minn. 2013).
The Schmidt-Clothier notice procedure contemplates the UIM carrier being given written notice of the tentative settlement agreement and a period of 30 days for it to evaluate such factors as the amount of the settlement, the amount of liability insurance remaining, if any, and the extent of the tortfeasor’s assets and to assess the comparative fault of the parties, the total of the insured’s damages, the likelihood of the successful assertion of a subrogation claim, and the risks and expenses of litigation. Liberty Mut. Ins. Co. v. Am. Family Mut. Ins. Co., 463 N.W.2d 750 (Minn. 1990). The injured party may not continue to pursue a negligence claim against the tortfeasor after he has agreed to settle the negligence action under the Schmidt–Clothier procedure and has accepted the substituted check from the UIM carrier. Isaac, supra.
Notwithstanding the above, the timing of payment of UM/UIM benefits becomes important. An insured can obtain UM benefits (subject to subrogation rights) without first suing the uninsured tortfeasor. UM/UIM benefits received by an insured before a verdict in the lawsuit against the tortfeasor constitutes a “collateral source” that must be applied to reduce the judgment against the tortfeasor upon tortfeasor’s motion. Russell v. Haji-Ali, 826 N.W.2d 216 (Minn. App. 2013). By electing to settle the UIM claims before liability or damages had been determined in the underlying tort case, the UM/UIM payments fall within the scope of the Collateral Source Statute, essentially converting what would in the typical case have been excess coverage into a collateral source payment. M.S.A. § 548.251.
As a result of the effect of the Collateral Source Statute, when settling a UM/UIM claim, the insurer should affirmatively preserve its right of subrogation in any release or settlement agreement. Russell, supra. If the UM/UIM carrier retains subrogation rights, any UM/UIM payments are excluded from the Collateral Source Statute because subrogation is involved. M.S.A. § 548.251, subd. 2(1) (excluding from collateral source reduction any UM/UIM payments for which a subrogation right has been asserted). If no subrogation rights are reserved, the Collateral Source Statute applies and UM/UIM benefits are deducted from the judgment.
In Minnesota, there are two formulations of the Collateral Source Rule: common law and statutory. The common law Collateral-Source Rule is as follows:
[I]f the plaintiff’s special damages … such as hospital or medical expenses or loss of wages, are paid for by some third person, either as a gift or on the basis of some contractual obligation, this circumstance does not bar the plaintiff from recovering this item from the defendant, even though it may in effect accord to the plaintiff a double benefit or a double recovery. Smith v. American States Ins. Co., 586 N.W.2d 784, 786 (Minn. App. 1998) (quotation omitted), rev. denied (Minn., Feb. 18, 1999).
This common law rule applies in cases that are not covered by the current Collateral Source Statute. The Collateral Source Rule set forth in § 548.251 reads as follows:
Subd. 2. Motion. In a civil action, whether based on contract or tort, when liability is admitted or is determined by the trier of fact, and when damages include an award to compensate the plaintiff for losses available to the date of the verdict by collateral sources, a party may file a motion within ten days of the date of entry of the verdict requesting determination of collateral sources. If the motion is filed, the parties shall submit written evidence of, and the court shall determine: (1) amounts of collateral sources that have been paid for the benefit of the plaintiff or are otherwise available to the plaintiff as a result of losses except those for which a subrogation right has been asserted. M.S.A. § 548.251(2).
This statute “prevents double recovery by requiring the deduction of certain benefits received by a civil plaintiff” and thus “abrogates the common law right to be overcompensated for injuries.” Johnson v. Farmers Union Cent. Exch., Inc., 414 N.W.2d 425, 432 (Minn. App. 1987), rev. denied, (Minn. Nov. 24, 1987); see also M.S.A. § 548.251(3). It enumerates specific sources that, on motion made within 10 days of the verdict, operate to reduce the judgment. Russell v. Haji-Ali, 826 N.W.2d 216 (Minn. App. 2013). For all other collateral sources, the common law rule continues to apply, and those sources do not result in a reduction of the judgment. Smith v. Am. States Ins. Co., 586 N.W.2d 784 (Minn. App.1998), review denied (Minn. 1999). “Collateral sources” is defined to include “automobile accident insurance or liability insurance that provides health benefits or income disability coverage.” M.S.A. § 548.251, subd. 1. The purpose of the Collateral Source Statute is to prevent windfalls by plaintiffs at the expense of defendants. Buck v. Schneider, 413 N.W.2d 569, 572 (Minn. App. 1987).A party found liable for damages incurred prior to the verdict may move for a determination of collateral sources and the district court is required to adjust the award to reflect collateral sources as provided in the statute. M.S.A. § 548.251; Graff v. Robert M. Swendra Agency, Inc., 800 N.W.2d 112, 120 (Minn. 2011). However, this Collateral Source Statute does not allow deducting from a jury award collateral sources “for which a subrogation right has been asserted.” M.S.A. § 548.251(2)(3). In order to avoid the collateral source deduction, subrogation rights must have already been asserted in the past. Kahnke v. Green, 695 N.W.2d 148 (Minn. App. 2005) (holding subrogation rights were asserted in a timely fashion when the plaintiff raised the subrogation rights at the collateral source hearing); Buck v. Schneider, 413 N.W.2d 569 (Minn. App. 1987) (finding the plaintiff asserted subrogation rights “by stating, in response to the court’s order requiring the parties to submit evidence of collateral sources, and in responses to discovery requests, that he had been assigned those rights”). In Russell v. Haji-Ali, the Minnesota Court of Appeals held that this definition includes UM/UIM benefits. Russell, supra. However, because UIM benefits are generally not paid until after the tort action has been tried, UIM benefits are usually not treated as a collateral source. This is because the statute defines “collateral source” as including only payments made prior to verdict. As the amount of UIM benefits properly payable is based on the verdict or other recovery from the tortfeasor, a claimant in such situations usually recovers only the damages sustained in excess of the tortfeasor’s liability insurance (and up to the contractual UIM limit) with no resulting possibility of any double recovery.
In Russell v. Haji-Ali, if Russell had waited to present or settle her UIM claim until after the verdict, the UIM benefits would not have been considered a “collateral source.” Timing is everything. If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].