NO. 9 3 - 2 2 5
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
ALFRED YOUNGBLOOD and
MARY ANN YOUNGBLOOD,
Plaintiffs and Appellants,
AMERICAN STATES INSURANCE
COMPANY, an Indiana Corporation,
Defendant and Respondent.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Thomas C. Honsel, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
John M. Morrison (argued), Morrison Law Office,
Helena, Montana
For Respondent:
Stuart L. Kellner & Stephen M. Frankino (argued),
Hughes, Kellner, Sullivan & Alke, Helena, Montana
Submitted: November 4, 1993
Decided: December 14, 1993
Filed:
Justice James C. Nelson delivered the Opinion of the Court.
Plaintiffs Alfred Youngblood (Alfred) and Mary Ann Youngblood
(Mary Ann) appeal an order of the First Judicial District Court,
Lewis and Clark County, denying their motion for summary judgment
and granting Defendant's (American States) motion for summary
judgment. We reverse.
The issues on appeal are as follows:
1. Is the choice of law provision in Alfred's insurance
policy, which allows American States to subrogate pursuant to
Oregon law, enforceable?
2. Does the subrogation clause at issue violate Montana's
public policy?
American States issued an automobile liability insurance
policy to Alfred in Oregon. The policy contained a personal injury
protection (PIP) endorsement issued in Oregon, and required
subrogation of medical pay benefits pursuant to Oregon law. Alfred
is a resident of Oregon and Mary Ann is a resident of Washington.
On June 24, 1990, Mary Ann and her parents, Alfred and
Vivienne Youngblood, were traveling in Montana. They were rear-
ended by a Montana truck which was insured by National Farmers
Union Standard Insurance Company (National). Mary Ann was injured
and American States paid approximately $10,000 in PIP benefits to
her health care providers to cover some of her medical expenses.
Thereafter, Mary Ann settled her claims with National for
$85,229.50. Mary Ann paid one-third of that amount in attorney's
fees, $1,000 in costs, and $5,437.50 to Union Life Insurance
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Company (Mary Ann's health insurance company) in a compromise
settlement of that company's subrogation claim. American States
sought to recover, via subrogation, from Mary Ann the payments it
made on her behalf under the PIP endorsement of the policy issued
to Alfred. Mary Ann refused to remit these funds and, on May 4,
1992, Alfred and Mary Ann filed their complaint for declaratory
relief, seeking a ruling that the place of performance of the
American States' insurance policy was Montana, the state in which
the accident occurred. Alfred and Mary Ann further requested a
ruling that the medical payment subrogation provisions of Alfred's
insurance policy were void as against public policy so that
American States had no valid subrogation interest for the amounts
paid under that insurance policy to Mary Ann.
All parties filed motions for summary judgment and, on March
25, 1993, the District Court issued its order denying Alfred's and
Mary Ann's motion and granting American States' motion. In
essence, the District Court held that a choice of law provision in
the PIP endorsement was enforceable against Mary Ann and required
application of Qregon law, which permitted medical pay subrogation.
Prom that order, Alfred and Mary Ann appeal.
Our standard in reviewing a grant of summary judgment is the
same as that initially utilized by the district court. McCracken
v. City of Chinook (1990), 242 Mont. 21, 24, 788 P.2d 892, 894.
Summary judgment is proper when there is no genuine issue as to any
material fact and the moving party is entitled to a judgment as a
matter of law. Rule 56(c), M.R.Civ.P.
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I - CHOICE OF LAW PROVISION
The interpretation of an insurance contract in Montana is a
question of law. Wellcome v. Rome Ins. Co. (1993), _ Mont. -,
-, 849 P.2d 190, 192. In general, unless the terms of the
insurance contract provide otherwise, the law of the place of
performance controls its legal construction and effect, while the
law of the place where the contract is made governs on questions of
execution and validity. Kemp v. Allstate Ins. Co. (1979), 183
Mont. 526, 533, 601 P.2d 20, 24; Section 28-3-102, MCA. Here, the
general policy language in the insurance contract requires American
States to pay whatever damages are required in Montana; that is,
the contract is to be performed in Montana. Therefore, unless a
contract term provides otherwise, &~K)R and 5 28-3-102, MCA, require
the application of Montana law because the contract was to be
**performed*' in Montana. In this case, however, the insurance
contract contains a choice of law provision which requires the
application of Oregon subrogation law. In pertinent part, that
provision provides as follows:
Reimbursement and Trust Agreement. In the event of
payment to any person of any benefits under this
endorsement:
(a) the Company shall be entitled to reimbursement or
subrogation in accordance with the provisions of ORS
743.825, OR.9 743.830, or Section 8 of Chapter 784 Laws,
1975; . . .
We have previously held that, if a contract's terms are clear
and unambiguous, the contract language will be enforced. Keller v.
Dooling (1991), 248 Mont. 535, 539, 813 P.2d 437, 440; Section 28-
3-401, MCA. The only exception to enforcing an unambiguous
4
contract term is if that term violates public policy or is against
good morals. Steinke v. Boeing Co. (D. Mont. 1981), 525 F.Supp.
234, 236. Here, the insurance contract clearly provides for
subrogation pursuant to Oregon law, and expresses the intention of
the parties to apply Oregon law no matter where the accident
occurred or where the contract is to be performed. Therefore, the
choice of law provision will be enforced unless enforcement of the
contract provision requiring application of Oregon law as regards
subrogation of medical payments violates Montana's public policy or
is against good morals. We must, therefore, analyze whether the
Oregon law subrogation provision violates Montanars public policy
or is against good morals.
II - VIOLATION OF PUBLIC POLICY
Mary Ann contends that the subrogation clause at issue is not
enforceable in Montana because it violates public policy -- a rule
which has been adopted and discussed in prior case law. We agree,
although some further discussion and clarification of that case law
is necessary.
Subrogation is an equitable doctrine which is not dependent on
any contractual relationship between the parties and is not
dependent on privity. Bower v. Tebbs (1957), 132 Mont. 146, 155,
314 P.2d 731, 736. The purpose of subrogation is to prevent
injustice by "compel[ling] the ultimate payment of a debt by one
who, in justice, equity, and good conscience, should pay it. It is
an appropriate means of preventing unjust enrichment.11 Bower, 314
P.2d at 736.
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Our past decisions have, on occasion, confused subrogation
with assignment: however, there is an important legal distinction
between the two concepts.
Subrogation is the substitution of another person in the
place of the creditor, so that the person substituted
will succeed to the rights of the creditor in relation to
the debt or claim, and is an act of the law growing out
of the relation of the parties to the original contract
of insurance, and the natural justice or equities arising
from the fact that the insurer has paid the insured,
rather than a right depending upon the contract. On the
other hand, an assignment of a right or claim is the act
of the parties to the assignment, dependent upon actual
intention, and necessarily contemplating the continued
existence of the debt or claim, the whole of which is
assigned.
. . .
When there is an assignment of an entire claim there is
a complete divestment of all rights from the assignor and
a vesting of those same rights in the assignee. In the
case of subrogation, however, only an equitable right
passes to the subrogee and the legal title to the claim
is never removed from the subrogor, but remains with him
throughout.
Skauge v. Mountain States Tel. & Tel. Co. (1977), 172 Mont. 521,
526, 565 P.2d 628, 630-31.
Montana law has long held that a property damage claim is
assignable, while a cause of action growing out of a personal
right, such as a tort, is not assignable. Caledonia Ins. Co. v.
Northern Pac. Ry. Co. (1905), 32 Mont. 46, 49, 79 P. 544, 545.
Notwithstanding, and because we have, on occasion, blurred the
distinction between subrogation and assignment, there has been some
confusion between the assionment of a personal injury claim and
subrosation of a personal injury claim. See Allstate Ins. Co. v.
Reitler (1981), 192 Mont. 351, 628 P.2d 667.
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With some exceptions, subrogation against an insured is
allowed if that insured has been made whole and has been fully
compensated, which compensation includes costs and attorney's fees.
Skauae, 565 P.2d at 632. However, an insurance company is only
allowed to subrogate to the amount it actually paid. Farmers Ins.
Exchange v. Christenson (1984), 211Mont. 250, 254, 683 P.2d 1319,
1321.
At issue here is one of the exceptions under Montana law to
the general rule allowing subrogation. We have previously refused
to allow subrogation of medical payment benefits. In Reitler,
Welton sustained personal injuries and incurred medical expenses
after she was hit from behind by a vehicle driven by Reitler.
Welton was insured by Allstate Insurance Company (Allstate), which
paid her $2,000 in medical benefits. Allstate sent a notice of
subrogation to Reitler's insurer, Farmers Insurance Exchange
(Farmers). Thereafter, Welton settled her claim with Farmers for
$9,500, and Farmers obtained a release from Welton. Allstate then
filed an action against Farmers for the amount of its subrogated
interest against Welton. Reitler, 628 P.2d at 668. We held that
medical payment subrogation clauses are invalid, due in part to
public policy considerations. Those public policy considerations
included the following: (1) the insured has paid a premium for
medical payment coverage; (2) the insured person is the one likely
to suffer most if medical payments received must be repaid out of
a third-party recovery; and (3) the tortfeasor's carrier may
consider that the injured person has already been paid medical
expenses and can make a smaller offer which allows that such
payment has already been made. Reitler, 628 P.2d at 670.
Unfortunately, we also reasoned that a subrogation clause has
the effect of assisninq a part of the insured's right to recover
against a third party tortfeasor and, the assignment of a personal
injury claim being prohibited, we held that medical payment
subrogation clauses in insurance contracts were invalid. Reitler,
628 P.2d at 670. The result reached in Reitler was correct, not
because there was a prohibited assignment of a personal injury
claim, but because of the public policy reasons expressed therein
as outlined above, and because Allstate's right to reimbursement
via subrogation was dependent upon the ability of the indemnified
party to sue the tortfeasor. Welton, however, had already settled,
thus precluding suit by Allstate.
The latter conclusion is clear from our holding in St. Paul
Fire & Marine Ins. Co. v. Allstate Ins. Co. (1993), - Mont. -,
847 P.2d 705. In St. Paul, Lynn, insured by St. Paul Fire and
Marine Insurance Company (St. Paul), and Glassing, insured by
Allstate Insurance Company (Allstate), were involved in a motor
vehicle accident. Allstate refused to settle Lynn's complaint, and
Lynn succeeded in obtaining a jury verdict in her favor against
Glassing. St. Paul, 847 P.2d at 705-06. Lynn also filed an action
in federal court against Allstate for unreasonable refusal to
settle her claim. That claim was resolved by stipulation between
the parties and Lynn's claim against Allstate was dismissed with
prejudice. St. Paul, 847 P.2d at 709. During these legal
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proceedings between Lynn and Allstate, St. Paul filed a complaint
against Allstate and Glassing to recover amounts paid to Lynn
pursuant to an underinsured coverage policy. St. Paul, 847 P.2d at
707. st. Paul's complaint against Allstate was eventually
dismissed because of its failure to state an actionable claim.
Because Lynn's claim against Allstate had been dismissed with
prejudice, Lynn had no further claim against Allstate, and, thus,
there was no claim against which St. Paul could subrogate. Under
the doctrine of subrogation, St. Paul "stepped into the shoes" of
Lynn. St. Paul had no independent right to sue Allstate under a
subrogation theory once Lynn settled. St. Paul, 847 P.2d at 709.
We further held that St. Paul did have a cause of action against
Glassing, as Lynn had not stipulated or settled with him. St.
-I 847 P.2d at 709.
Paul
The holding of Reitler was further developed and discussed in
Christenson. In that case, Christenson, an uninsured motorist,
caused an accident and his passenger, Hinckley, was injured.
Farmers Insurance Exchange (Farmers) insured Hinckley and paid
$7,000 on her claim under an uninsured motorist provision. As
required by the policy, Hinckley assianed her personal injury
action to Farmers as part of a subrogation clause. Farmers then
filed an action against Christenson for $7,000. Christenson, 683
P.2d at 1320. In that case, we addressed whether Farmers could
subrogate against Hinckley's personal injury action after it paid
her claim pursuant to an uninsured motorist policy. We held that
Farmers, the uninsured motorist carrier, could make payment to
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Hinckley, and when she settled her claim or obtained a judgment
against a third party, Farmers could subrogate and collect back the
amount paid to Hinckley. Christenson, 683 P.2d at 1322. Again,
while Farmers was entitled to subrogate against its insured's
tortfeasor, by upholding the assianment of Hinckley's claim to
Farmers, we allowed the indemnifying carrier to sue the tortfeasor
in its own name and, thus, potentially and improperly split
Hinckley's cause of action against the tortfeasor. Farmers should
have been allowed to sue, but only in the non-settling indemnified
party's name under a subrogation theory.
American States argues that, because of our reasoning and
holding in Christenson, which as indicated above, was flawed,
Reitler should not be applied to invalidate the subrogation clause
at issue here. However, while Christenson limited our holding in
Reitler to medical payments paid by an insurance company,
Christenson did not overrule Reitler, contrary to American States'
argument. If the principles of assignment and subrogation had been
properly applied in those two cases, there is no conflict.
The *lblurringl' of the distinction between an assignment and
subrogation, in our decisions in Reitler and Christenson, and the
misapplication of those concepts in those cases, was unfortunate.
There is a definite, legal distinction between the two doctrines,
and, in Reitler and Christenson, we erred in reasoning otherwise.
Despite that, the public policy considerations underlying our
decision in Reitler were correct then and are equally valid here.
As stated above, the public policy considerations underpinning
10
Reitler were three-fold: (1) the insured paid a premium for medical
payment coverage; (2) the insured is the one likely to suffer most
if medical payments received must be repaid out of a third-party
recovery; and (3) the tortfeasor's carrier may consider that the
injured person has already been paid medical expenses and can make
a smaller offer which allows that such payment has already been
made. Reitler, 628 P.2d at 670. In this case, all of those
considerations are present. Here, Alfred paid a premium to
American States to obtain the PIP endorsement. Clearly, Mary Ann,
as one of the insured parties under the policy, would suffer a
financial hardship if the PIP benefits she received had to be paid
out of her settlement. This is especially true given Mary Ann's
assertion that, when she settled with National, the medical
expenses paid by American States were specifically excluded from
the settlement, and National's claims representative made a smaller
offer based on the fact that Mary Ann would not, presumably, have
to repay those medical benefits to American States.
American States, nevertheless, argues that 9 33-23-203, MCA,
specifically allows the subrogation that is attempted here. This
statute provides, in pertinent part:
(2) A motor vehicle liability policy may also provide for
other reasonable limitations, exclusions, or reductions
of coverage which are designed to prevent duplicate
payments for the same element of loss.
American States has provided no legal authority or legislative
history which would lead to the conclusion that subrogation is
intended to work as a limitation, exclusion or reduction of
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coverage. Subrogation is a term of art and, had the legislature
intended to include subrogation in this statute, it could have
easily provided for the same. For example, see § 33-22-1601, MCA.
Upon a plain reading of the statute, we are not persuaded that
subrogation was intended to be or should be "read into" this
statutory provision.
American States also argues that 5 33-22-1601, MCA, allows
subrogation in this case. That statute provides, in pertinent
part:
A disability insurance policy subject to this chapter may
contain a provision providing that . . . the insurer is
entitled to subrogation. . . .
However, § 33-l-206(2), MCA, defines medical benefits issued
incidentalto and part of vehicle insurance as "casualtyl' insurance
and specifically excludes such benefits from the statutory
requirements governing disability insurance. In addition, 5 33-22-
101(l), MCA, specifically states that Chapter 22, which governs
disability insurance, does not apply to any policy of liability
insurance. In this case, we are dealing with a PIP endorsement in
an automobile liability insurance policy. Clearly, 5 33-22-1601,
MCA, does not apply to the insurance policy at hand.
We reaffirm our decision in Reitler and hold that subrogation
of medical payment benefits in Montana is void as against public
policy. Here, the choice of law provision in the insurance
contract would result in medical payment subrogation under Oregon
law. Because such subrogation violates Montana's public policy,
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that term of the insurance contract at issue here is not
enforceable. See Steinke, 525 F.Supp. at 236.
Reversed.
We Concur: /
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