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Schwickert, Inc. v. Winnebago Seniors

May 27, 2004

SCHWICKERT, INC., RESPONDENT/CROSS-APPELLANT,
v.
WINNEBAGO SENIORS, LTD., A MINNESOTA LIMITED PARTNERSHIP, MINNESOTA HOUSING FINANCE AGENCY, AND THIES & TALLE ENTERPRISES, INC., RESPONDENTS/CROSS-APPELLANTS,
v.
11,111, INC., D/B/A/ ENERGY CONSERVATION CONSULTANTS, INC., RESPONDENT/CROSS-APPELLANT,
v.
AMCO INSURANCE COMPANY, INC., APPELLANT/CROSS-RESPONDENT.



SYLLABUS BY THE COURT

1. The principles of Schmidt v. Clothier, 338 N.W.2d 256 (Minn. 1983), do not apply to first-party property insurance disputes.

2. By erroneously denying coverage, a property insurer waives its right to enforce the policy requirement that the insured do nothing after loss to impair the insurer's subrogation rights.

3. A property insurer who erroneously denies coverage has no subrogation claim against a tortfeasor who has settled with the insured and has obtained a full release of liability.

4. A lump sum amount paid pursuant to a Rule 68 offer of judgment to resolve all claims for breach of contract includes any claim for contract-based attorney fees, but does not include any claim for prejudgment interest recoverable under Minn. Stat. § 549.09 (2002).

The opinion of the court was delivered by: Hanson, Justice.

Affirmed in part, reversed in part and remanded.

Heard, considered and decided by the court en banc.

OPINION

By a certified question contained in an order denying a property insurer's motion for summary judgment, we are asked whether "the principles of Schmidt v. Clothier, 338 N.W.2d 256 (Minn. 1983) apply in a first-party property dispute outside of the personal injury context." [Schmidt provides a mechanism for an uninsured/underinsured motorist carrier to preserve its subrogation rights where the tortfeasor makes a settlement offer to the insured]. Because Schmidt was fundamentally grounded on policies of Minnesota's No-Fault Act that are not present in first-party property insurance disputes, and issues concerning the preservation of subrogation rights in first-party property insurance can be determined on the basis of recognized contract principles, we decline to extend Schmidt to first-party property insurance. We reverse the decision of the court of appeals that Schmidt does apply, affirm on other grounds the district court's order denying the insurer's motion for summary judgment, and reinstate the district court's Rule 68 judgment determining the claims of the insured against the tortfeasor.

The Garden Court Apartments in Winnebago, Minnesota, were damaged during heavy rainfall when the roof, which was being repaired, was left uncovered. The owners of the building, respondents Winnebago Seniors, Ltd., the Minnesota Housing and Finance Agency (MHFA) and Thies & Talle Enterprises, Inc. (collectively, "Owner") withheld payment to the roofing contractor, respondent Schwickert, Inc., and the roofing consultant, respondent 11,111 Inc., d/b/a/ Energy Conservation Consultants (ECC). The Owner also filed a claim for water damage and business interruption with its property insurer, appellant AMCO Insurance Company, Inc. (AMCO). Eight months later, AMCO informed Owner that it had completed its investigation and it denied coverage.

When Schwickert brought a mechanic's lien action for payment, Owner counterclaimed for negligence and breach of contract and warranties; brought a third-party action against ECC for breach of contract, negligent supervision and negligent design; and also brought a third-party action against AMCO for the insured loss.*fn1 AMCO brought two motions for summary judgment against Owner on coverage defenses, the first on the grounds that Owner's claims were subject to policy exclusions, and the district court denied both motions, in whole or in part, but did not certify the questions for immediate appeal. See Minn. R. Civ. App. P. 103.03, subd. (i). Those orders are not before us on this appeal.

Schwickert and ECC made a Rule 68 offer of judgment to Owner for $800,000, an amount less than the liability limits of their respective policies. Owner gave AMCO oral notice of its intent to accept the offer and demanded that AMCO substitute its payment of $800,000 if it wished to preserve its subrogation rights. Owner apparently was attempting to follow the procedures outlined in Schmidt v. Clothier, 338 N.W.2d 256 (Minn. 1983), for resolving the subrogation rights of an uninsured/underinsured motorist insurer when the insured has received a settlement offer from the tortfeasor. AMCO responded in writing, objecting to the settlement and refusing to substitute its payment of $800,000. AMCO argued that the procedures outlined in Schmidt did not apply; that if Schmidt did apply, Owner had not given adequate notice; and that acceptance of the settlement by Owner would impair AMCO's subrogation rights and "AMCO will be entitled to a dismissal with prejudice." Owner accepted the Rule 68 offer of judgment and judgment was entered for Owner against Schwickert and ECC for $800,000.

AMCO then moved for summary judgment against Owner on grounds that Owner had breached its obligation to protect AMCO's subrogation rights. The district court denied AMCO's motion for summary judgment against Owner, concluding that (1) the principles in Schmidt do apply; (2) AMCO had sufficient notice of the offer of judgment; (3) AMCO was given the opportunity to substitute its draft for $800,000, but it chose not to do so and did not request additional time to consider the offer; (4) AMCO waived its subrogation rights against ECC and Schwickert by failing to substitute its draft; and (5) Owner's acceptance of the offer of judgment did not release AMCO from its contractual obligations to Owner. The district court certified as important and doubtful the question of whether the principles of Schmidt apply in a first-party property insurance dispute.

The district court also (1) granted motions by Schwickert and ECC to dismiss AMCO's subrogation claims against them; (2) awarded Owner costs and disbursements in the amount of $34,910.44 against Schwickert and ECC on the $800,000 judgment; (3) denied Owner's claims for attorney fees and prejudgment interest against Schwickert and ECC; and (4) ordered entry of final partial judgment under Minn. R. Civ. P. 54.02 to facilitate an immediate appeal.

AMCO appealed from the denial of its summary judgment motion against Owner, the grant of summary judgment dismissing its claims against Schwickert and ECC and the resulting partial judgments. Owner sought review of the denial of its motion for attorney fees and prejudgment interest. The court of appeals affirmed in part, reversed in part and remanded, holding that the principles of Schmidt do apply to first-party property insurance disputes but that Owner had failed to demonstrate that it gave adequate notice of intent to settle under Schmidt. The court set aside the Rule 68 judgment and the dismissal of AMCO's subrogation claims against Schwickert and ECC and remanded all claims for trial. While acknowledging that it need not reach the ...


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