Certified question answered in the affirmative, affirmed in part, reversed in part, and remanded Faribault County District Court File No. C5990455
Considered and decided by Toussaint, Chief Judge, Minge, Judge, and
The practice and principles set forth in Schmidt v. Clothier apply to first-party property-insurance disputes.
Under Schmidt v. Clothier, an insurer must be given 30 days' notice to determine whether it will substitute its draft and preserve its subrogation claims.
If a Rule 68 settlement agreement does not expressly include attorney fees and if the governing statutes do not allow for such fees, a district court may decline to award attorney fees in excess of the settlement amount.
The opinion of the court was delivered by: Toussaint, Chief Judge
These consolidated cases originated as a contractor's mechanic's-lien action regarding services for re-roofing an apartment building. The owners of the property then counterclaimed for water damage while the building was being re-roofed and brought a third-party action against both their roofing consultant and their insurer. Shortly before the scheduled trial, the owners accepted, over the insurer's objections, a Rule 68 settlement offer from the contractor and the consultant, and the district court administrator entered judgment. The remaining parties moved for summary judgment. The court denied the insurer's motion, granted the other parties' motions, and certified to this court the question of whether Schmidt v. Clothier applies to a first-party-property insurance dispute outside of the personal-injury context. In addition, the court ruled that the owners were not entitled to attorney fees or prejudgment interest on the Rule 68 settlement offer. We answer the district court's certified question regarding the applicability of Schmidt in the affirmative, but we reverse and remand with regard to the court's determination that the Schmidt notice requirements were satisfied.
This case arises out of damage to the Garden Court Apartments, which are jointly owned by appellants Winnebago Seniors, Ltd.; the Minnesota Housing Finance Agency; and Thies & Talle Enterprises, Inc. (collectively "the owners"). The property, a three-story apartment building, had a history of roof leakage and was insured through respondent AMCO Insurance Company, Inc. (AMCO).
In 1998, the owners retained respondent 11,111, Inc. d/b/a Energy Conservation Consultants, Inc. (ECC) to evaluate the building's roof and to prepare plans for a new roof design. ECC determined that the plywood decking was badly deteriorated, and it developed a design to repair the roof. Owners then hired respondent Schwickert, Inc. (Schwickert) for the re-roofing project using ECC's design. In two separate incidents in October 1998, rainstorms occurred after Schwickert had removed large portions of the roof covering the building's atrium. Despite Schwickert's efforts to cover the roof, water entered the atrium and caused damage to the building. The owners declined to make full payment to Schwickert and ECC, citing their failure to adequately protect the building from water incursions.
On November 2, 1998, the owners reported the damage from the two rainstorms to AMCO. In February and March of 1999, AMCO investigated the claim and notified ECC and Schwickert of its intent to subrogate against them for the cost to repair the damage from the October 1998 water intrusions. But in July of 1999, AMCO denied coverage for the October 1998 claims, stating that the roof was not damaged by a covered cause of loss and that the damage was caused by negligent workmanship. Consequently, the owners hired another contractor and completed the repairs to the property at their own expense, which they claim totaled almost $1.5 million.
In October 1999, Schwickert commenced an action against the owners to enforce its mechanic's lien for unpaid services. The owners answered and counterclaimed, alleging negligence, breach of contract, and breach of warranty. The owners also brought a third-party action against AMCO for its denial of insurance benefits and against ECC for breach of contract, negligent supervision, and negligent design. AMCO answered the third-party complaint, claiming that the loss was excluded from coverage, and initiated a cross-claim against ECC and a Rule 14.01 subrogation claim against Schwickert. ECC answered the third-party complaint denying liability, counterclaimed for nonpayment of services rendered, and cross-claimed against Schwickert and AMCO for indemnification.
In early 2002, AMCO moved for summary judgment, arguing that the water damage is excluded from its policy. The owners also moved for summary judgment against EEC and Schwickert. In March, the district court denied AMCO's motion. The district court later granted to the owners partial summary judgment against ECC and Schwickert, concluding that ECC was negligent in its roof design and that Schwickert's failure to provide site protection constituted a breach of contract.
On April 30, 2002, ECC and Schwickert submitted to the owners a Rule 68 joint offer of judgment in the amount of $650,000, including "costs disbursements, interest, and attorneys fees to date" in exchange for dismissal of ECC's and Schwickert's claims against owners. The owners did not accept this offer. On May 3, 2002, twelve days before the scheduled trial, Schwickert and ECC made a second Rule 68 settlement offer to the owners, increasing the amount to $800,000. Unlike the first offer, the second offer was silent regarding costs, disbursements, interest, and attorney fees, and it expressly expired ten days after service. On May 6, the owners, interested in the offer, orally invited AMCO to substitute its draft for $800,000 to preserve the subrogation rights recognized by Schmidt v. Clothier, 338 N.W.2d 256 (Minn. 1983). The next day, AMCO faxed a letter to the owners contending, among other things, that Schmidt applies only to no-fault cases, not to property-damage disputes; even if Schmidt were applicable, AMCO argued that it was entitled to 30 days' notice to consider whether it would substitute its draft.
The same day as AMCO's fax, May 7, the owners accepted the second offer over AMCO's objection, and the district court administrator entered the $800,000 judgment against Schwickert and ECC. Responding to AMCO's objection of lack of sufficient notice, the district court found that AMCO did not request additional time to consider the joint offer.
AMCO subsequently moved for summary judgment, arguing that despite the judgment against ECC and Schwickert, it still retained a viable cross-claim against ECC and a viable Rule 14.01 claim against Schwickert. ECC and Schwickert made cross-motions for summary judgment, contending that any claims against them were resolved by the Rule 68 offer and judgment. In addition, the owners moved for costs, disbursements, prejudgment interest, and attorney fees against ECC and Schwickert.
On November 4, 2002, the district court denied AMCO's motion for summary judgment, concluding that (1)áthe principles in Schmidt apply to this action; (2)áAMCO had sufficient notice of the offer of judgment; (3)áAMCO was given the opportunity to substitute its draft for $800,000, but it chose not to do so; (4)áAMCO waived its subrogation rights against ECC and Schwickert by failing to substitute its draft; and (5)áthe owners' acceptance of the offer of judgment did not release AMCO from its contractual obligations to the owners. The district court certified as important and doubtful the question of whether the principles of Schmidt v. Clothier apply in a first-party property-insurance dispute outside of the personal-injury context.
The district court also (1)ágranted ECC's and Schwickert's motions to dismiss AMCO's claims against them, (2)áawarded the owners' costs and disbursements against Schwickert and ECC but denied them prejudgment interest and attorney fees on the $800,000 judgment, and ...