No. 13371
I N THE SUPREME COURT O THE STATE O MONTANA
F F
1977
J O H N A. SKAUGE and LINDA SKAUGE,
P l a i n t i f f s and A p p e l l a n t s ,
MOUNTAIN STATES TELEPHONE AND TELEGRAPH
C M A Y a n d MONTANA-DAKOTA UTILITIES
O P N
COMPANY,
D e f e n d a n t s and R e s p o n d e n t s ,
MONTANA-DAKOTA UTILITIES COMPANY,
Third-Party P l a i n t i f f ,
J O H N A. SKAUGE and LINDA SKAUGE, and
UNIGARD INSURANCE GROUP,
Third-Party Defendants.
Appeal from: D i s t r i c t Court of t h e T h i r t e e n t h J u d i c i a l D i s t r i c t ,
H o n o r a b l e C h a r l e s Luedke, J u d g e p r e s i d i n g .
C o u n s e l o f Record:
For Appellants:
C a t e , Lynaugh, F i t z g e r a l d & H u s s , B i l l i n g s , Montana
W i l l i a m F i t z g e r a l d a r g u e d , B i l l i n g s , Montana
For Respondents :
Hooks and S h e r l o c k , Townsend, Montana
J e f f r e y S h e r l o c k a r g u e d , Townsend, Montana
Hughes, B e n n e t t a n d C a i n , H e l e n a , Montana
Crowley, Haughey, Hanson, G a l l a g h e r and T o o l e , B i l l i n g s ,
Montana
Submitted: March 1 8 , 1977
Decided :
'y
Filed: - z m -
M r . Chief J u s t i c e P a u l G. H a t f i e l d d e l i v e r e d t h e Opinion o f t h e
Court.
On September 1 0 , 1973 t h e r e n t e d home of John and Linda
Skauge i n B i l l i n g s , Montana was d e s t r o y e d by a n e x p l o s i o n and
f i r e which consumed a l l of t h e i r p e r s o n a l p o s s e s s i o n s . The
Skauges had a f i r e i n s u r a n c e p o l i c y w i t h Uniguard I n s u r a n c e
Group ( U n i g u a r d ) , which i n s u r e d t h e Skauges' p e r s o n a l p r o p e r t y
t o t h e e x t e n t o f $4,000 p l u s $400 f o r i n c i d e n t a l l i v i n g e x p e n s e s
i n case of l o s s . This policy contained t h e following provision:
" S u b r o g a t i o n : T h i s Company may r e q u i r e from
t h e i n s u r e d a n a s s i g n m e n t o f a l l r i g h t of
r e c o v e r y a g a i n s t any p a r t y f o r l o s s t o t h e
e x t e n t t h a t payment t h e r e f o r e i s made by t h i s
Company. "
A f t e r d e t e r m i n i n g t h a t t h e l o s s exceeded t h e p o l i c y l i m i t s ,
J o s e p h Tobin, a c t i n g a s a d j u s t e r f o r Uniguard, d e l i v e r e d a d r a f t
f o r $4,328.98 t o p l a i n t i f f s ' a t t o r n e y , t o g e t h e r w i t h a proof of
l o s s form t o be s i g n e d by Skauges. Plaintiffs' attorney sent the
d r a f t and t h e proof o f l o s s t o t h e Skauges. The Skauges t h e n
r e t u r n e d t h e proof o f l o s s t o t h e i r a t t o r n e y w i t h a r e q u e s t t h a t
he r e s e r v e s u b r o g a t i o n r i g h t s i n t h e Skauges. The proof of l o s s
was s u b s e q u e n t l y r e t u r n e d t o t h e Skauges w i t h t h e l a n g u a g e g r a n t -
i n g s u b r o g a t i o n t o Uniguard s t r u c k o u t , and i n s e r t e d t h e words:
"The r i g h t t o s u e t o r t - f e a s o r s i s r e s e r v e d t o t h e i n s u r e d . " The
Skauges s u b s e q u e n t l y s i g n e d t h e proof o f l o s s and c a s h e d t h e
draft. The proof o f l o s s was n e v e r d e l i v e r e d t o Uniguard.
On F e b r u a r y 1 4 , 1974, t h e Skauges f i l e d a c o m p l a i n t
a l l e g i n g t h a t Mountain B e l l Telephone and T e l e g r a p h Company
(Mountain B e l l ) and Montana Dakota U t i l i t i e s Company (MDU) neg-
l i g e n t l y caused t h e e x p l o s i o n and f i r e which d e s t r o y e d t h e i r
p e r s o n a l p o s s e s s i o n s and s o u g h t $11,267.32 a s t h e t o t a l amount
of t h e i r l o s s . W e n o t e t h a t t h i s a c t i o n was commenced by t h e
Skauges t h r o u g h r e t a i n e d c o u n s e l , and a t t h i s s t a g e Uniguard was
i n no way i n v o l v e d i n t h i s l i t i g a t i o n . Mr. Tobin t e s t i f i e d t h a t
he l e a r n e d o f t h i s l i t i g a t i o n on J u n e 6 , 1974, and t h e r e a f t e r
informed Uniguard. Then on September 27, 1974 MDU f i l e d a
t h i r d p a r t y c o m p l a i n t a g a i n s t Skauges and Uniguard, a l l e g i n g
U n i g u a r d ' s r i g h t of s u b r o g a t i o n , and r e q u e s t i n g t h e d i s t r i c t
c o u r t t o a s c e r t a i n who was e n t i t l e d t o any damages f o r which
MDU m i g h t e v e n t u a l l y be h e l d l i a b l e . T h e r e a f t e r , Uniguard
f i r s t a p p e a r e d i n t h i s l i t i g a t i o n on December 2 4 , 1974 by f i l i n g
a motion t o d i s m i s s i n r e s p o n s e t o M D U ' s t h i r d p a r t y c o m p l a i n t .
The s u b r o g a t i o n i s s u e w a s e v e n t u a l l y s e v e r e d from t h e Skauges'
o r i g i n a l t o r t a c t i o n and t r i e d s e p a r a t e l y . The o r i g i n a l t o r t
a c t i o n w a s c o n t i n u e d , pending t h e outcome of t h e s u b r o g a t i o n
issue.
The d i s t r i c t c o u r t , s i t t i n g w i t h o u t a j u r y , made a
f i n d i n g of f a c t t h a t J o s e p h Tobin and p l a i n t i f f s ' a t t o r n e y had
n o t come t o a n a c t u a l meeting of t h e minds a s t o t h e r i g h t o f
subrogation. Consequently, t h e d i s t r i c t c o u r t concluded t h a t
Uniguard was e n t i t l e d t o be s u b r o g a t e d t o t h e e x t e n t of i t s
payment t o Skauges, t h a t s u c h r i g h t was n o t waived by Uniguard,
n o r w a s it s u b j e c t t o any l i m i t a t i o n i n amount. Neither party
c o n t e s t s t h e d i s t r i c t c o u r t ' s f i n d i n g s o f f a c t , however t h e
Skauges o b j e c t t o t h e above mentioned c o n c l u s i o n of law. The
Skauges have r a i s e d t h r e e i s s u e s , and have p l e d them i n t h e
alternative:
1) Whether o r n o t Uniguard i s e n t i t l e d t o s u b r o g a t i o n
a b s e n t a w r i t t e n a s s i g n m e n t by t h e Skauges?
2) I f s o , i s U n i g u a r d ' s s u b r o g a t i o n l i m i t e d t o t h e
p o r t i o n of t h e Skauges' r e c o v e r y from MDU and Mountain B e l l
which e x c e e d s t h e sum of t h e Skauges' t o t a l l o s s and t h e i r
c o s t s o f r e c o v e r y , i n c l u d i n g a t t o r n e y ' s f e e s ? and
3 ) Did Uniguard waive any r i g h t of s u b r o g a t i o n it
may have had by r e m a i n i n g i n a c t i v e i n t h e S k a u g e ' s l a w s u i t ?
S u b r o g a t i o n i s a d e v i c e o f e q u i t y which i s d e s i g n e d t o
compel t h e u l t i m a t e payment o f a d e b t by t h e one who i n j u s t i c e ,
e q u i t y and good c o n s c i e n c e should pay i t . Bower v. Tebbs, 132
Mont. 1 4 6 , 314 P.2d 731. A p r o p e r t y i n s u r e r who h a s i n d e m n i f i e d
t h e i n s u r e d i s u s u a l l y s u b r o g a t e d t o any r i g h t s t h e i n s u r e d may
have a g a i n s t t h e t h i r d p a r t y who i s r e s p o n s i b l e f o r t h e l o s s .
The t h e o r y behind t h i s p r i n c i p l e i s t h a t a b s e n t repayment of t h e
i n s u r e r t h e i n s u r e d would be u n j u s t l y e n r i c h e d by v i r t u e of re-
c o v e r y from b o t h t h e i n s u r e r and t h e wrongdoer, o r i n a b s e n c e o f
s u c h d o u b l e r e c o v e r y by t h e i n s u r e d , t h e t h i r d p a r t y would go
f r e e d e s p i t e h i s l e g a l obligation i n connection with l o s s . 16
Couch on I n s u r a n c e 2d, S u b r o g a t i o n S61.18; Standard A c c . I n s . Co.
v. P e l l e c c h i a , 1 5 N . J . 162, 1 0 4 A.2d 288; F i d e l i t y & C a s . Co. of
N.Y. v. F i r s t Nat. Bank i n F t . L e e , 397 F.Supp. 587. Subrogation
i s c l a s s i f i e d a s l e g a l o r conventional; l e g a l subrogation a r i s e s
by o p e r a t i o n of law, upon t h e f a c t o f payment made by t h e i n s u r e r ;
whereas c o n v e n t i o n a l s u b r o g a t i o n a r i s e s by t h e c o n t r a c t of t h e
parties. 16 Couch on I n s u r a n c e 2d, S u b r o g a t i o n S61.2; Kroeker
v . S t a t e Farm Mutual Automobile I n s . Co., (Mo.App. 1971) 466 S.W.2d
105. F u r t h e r m o r e , t h e p a r t i e s may by agreement waive o r l i m i t
subrogation. F i r e A s s ' n o f P h i l a d e l p h i a v. S c h e l l e n g e r , 84 N . J . E .
464, 94 A. 615; Home I n s u r a n c e Co. v. H a r t s h o r n , 128 M i s s . 282,
91 So. 1; Merchants F i r e A s s u r . C o r p o r a t i o n of New York v . H a m i l -
t o n Co., 76 R.I. 294, 69 A.2d 551; Hardware Mut. I n s . Co. v .
Dunwoody, 194 F.2d 666.
The Skauges have c i t e d t h e s e l a t t e r f o u r c a s e s and have
contended t h a t t h e i n s u r a n c e p o l i c y made U n i g u a r d ' s r i g h t o f
s u b r o g a t i o n c o n d i t i o n a l upon a w r i t t e n a s s i g n m e n t from t h e Skauges.
However, t h e cases c i t e d by t h e Skauges a r e e a s i l y d i s t i n g u i s h e d
by a comparison of t h e p o l i c y p r o v i s i o n s i n v o l v e d . I n e a c h of
t h e f o u r c a s e s c i t e d above t h e p o l i c y p r o v i s i o n i n q u e s t i o n
stated:
"Subrogation. I f t h i s company s h a l l c l a i m t h a t
t h e f i r e w a s c a u s e d by t h e a c t o r n e g l e c t o f
any p e r s o n o r c o r p o r a t i o n , t h i s company s h a l l ,
on payment o f t h e l o s s be s u b r o g a t e d t o t h e
e x t e n t of s u c h payment t o a l l r i g h t of r e c o v e r y
by t h e i n s u r e d f o r t h e l o s s r e s u l t i n g t h e r e f r o m ,
and such r i g h t s h a l l be a s s i g n e d t o t h i s company
by t h e i n s u r e d on r e c e i v i n g such payment."
(Emphasis s u p p l i e d . )
On t h e o t h e r hand, t h e p o l i c y p r o v i s i o n i n t h e p r e s e n t c a s e
states:
" T h i s Company may r e q u i r e from t h e i n s u r e d a n
assignment of r i g h t of recovery a g a i n s t a n y
p a r t y f o r l o s s t o t h e e x t e n t t h a t payment t h e r e f o r e
- -
i s made by t h i s Company." (Emphasis s u p p l i e d . )
T h i s p r o v i s i o n c o n t a i n s no c o n d i t i o n a l l a n g u a g e , n o r d o e s it
s p e c i f i c a l l y r e f e r t o "subrogation" a s does t h e p o l i c y language
i n t h e other cases. In addition t o t h i s there exists the legal
d i s t i n c t i o n between a n " a s s i g n m e n t " and " s u b r o g a t i o n " . As stated
i n 16 Couch on I n s u r a n c e 2d, S u b r o g a t i o n , S61.92, supra:
"Subrogation i s t h e s u b s t i t u t i o n of another person
i n t h e p l a c e of t h e c r e d i t o r , s o t h a t t h e p e r s o n
s u b s t i t u t e d w i l l succeed t o t h e r i g h t s of t h e
c r e d i t o r i n r e l a t i o n t o t h e d e b t o r c l a i m , and i s
a n a c t of t h e l a w growing o u t o f t h e r e l a t i o n o f
t h e p a r t i e s t o t h e o r i g i n a l c o n t r a c t of i n s u r a n c e ,
and t h e n a t u r a l j u s t i c e o r e q u i t i e s a r i s i n g from
t h e f a c t t h a t t h e i n s u r e r has paid t h e insured,
r a t h e r t h a n a r i g h t depending upon t h e c o n t r a c t .
On t h e o t h e r hand, a n a s s i g n m e n t o f a r i g h t o r
c l a i m i s t h e a c t of t h e p a r t i e s t o t h e assignment,
dependent upon a c t u a l i n t e n t i o n , and n e c e s s a r i l y
contemplating t h e continued e x i s t e n c e of t h e d e b t
o r c l a i m , t h e whole o f which i s a s s i g n e d .
" S u b r o g a t i o n p r e s u p p o s e s a n a c t u a l payment and
s a t i s f a c t i o n o f a d e b t o r c l a i m t o which t h e p a r t y
p a y i n g i s s u b r o g a t e d , a l t h o u g h t h e remedy i s k e p t
a l i v e i n e q u i t y f o r t h e b e n e f i t of t h e payor, while
t h e assignment n e c e s s a r i l y contemplates continued
e x i s t e n c e of t h e d e b t o r claim assigned."
A f u r t h e r d i s t i n c t i o n i s found i n Kroeker v . S t a t e Farm
Mutual Automobile I n s . Co., s u p r a , p. 110:
"When t h e r e i s a n a s s i g n m e n t o f a n e n t i r e c l a i m
t h e r e i s a complete divestment of a l l r i g h t s
from t h e a s s i g n o r and a v e s t i n g of t h o s e same
r i g h t s i n t h e assignee. I n t h e case o f s u b r o g a t i o n ,
however, o n l y a n e q u i t a b l e r i g h t p a s s e s t o t h e
s u b r o g e e and t h e l e g a l t i t l e t o t h e c l a i m i s
n e v e r removed from t h e s u b r o g o r , b u t remains w i t h
him t h r o u g h o u t . "
Therefore, we conclude t h a t an express assignment of
t h e c l a i m t o Uniguard was u n n e c e s s a r y , s i n c e l e g a l s u b r o g a t i o n
a r o s e from t h e f a c t o f payment, and t h i s w a s n o t waived o r
made c o n d i t i o n a l by agreement of t h e p a r t i e s .
A s f o r t h e second i s s u e , t h e Skauges c o n t e n d t h a t when
t h e payment o f p o l i c y l i m i t s i s l e s s t h a n t h e a c t u a l l o s s , t h e
i n s u r e r cannot a s s e r t a r i g h t of subrogation u n t i l t h e insured
has f u l l y recovered h i s l o s s , p l u s t h e c o s t s of recovery, in-
cluding attorney's fees. Uniguard a r g u e s t h a t s u c h a r u l e i s
a p p l i c a b l e , i f a t a l l , when t h e i n s u r e r i s s e e k i n g r e i m b u r s e -
ment from a n i n s u r e d , who h a s r e c o v e r e d h i s l o s s from t h e t o r t -
f e a s o r , and n o t when t h e i n s u r e r s e e k s t o r e c o v e r from t h e
tortfeasor.
T h e r e i s a u t h o r i t y f o r t h e r u l e r e l i e d upon by t h e Skauges,
w i t h some j u r i s d i c t i o n s u p h o l d i n g U n i g u a r d ' s p o s i t i o n t h a t t h e
r u l e o n l y a p p l i e s when t h e i n s u r e d i s s o l e l y r e s p o n s i b l e f o r
t h e r e c o v e r y from t h e t o r t f e a s o r , w h e r e a s o t h e r j u r i s d i c t i o n s
d o n o t make t h i s d i s t i n c t i o n . An example o f t h e f i r s t form o f
t h e r u l e i s found i n U n i t e d S e r v i c e s Automobile A s s o c i a t i o n v .
Hills, 172 Neb. 1 2 8 , 109 N.W.2d 1 7 4 , 2 ALR3d 1422, 1428:
" ' * * * Where t h e a s s u r e d , a s i n case of
p a r t i a l insurance, s u s t a i n s a l o s s , i n excess
o f t h e reimbursement o r c o m p e n s a t i o n by t h e
u n d e r w r i t e r , he h a s a n undoubted r i g h t t o have
it s a t i s f i e d by a c t i o n a g a i n s t t h e wrong-doer.
But i f , by s u c h a c t i o n , t h e r e comes i n t o h i s
h a n d s , a n y sum f o r which, i n e q u i t y and good
c o n s c i e n c e , h e o u g h t t o a c c o u n t t o t h e under-
w r i t e r , reimbursement w i l l , t o t h a t e x t e n t , be
compelled i n a n a c t i o n by t h e l a t t e r , b a s e d o n
h i s r i g h t i n e q u i t y t o s u b r o g a t i o n . But t h e
a s s u r e d w i l l n o t , i n t h e forum o f c o n s c i e n c e ,
b e r e q u i r e d t o a c c o u n t f o r more t h a n t h e s u r p l u s ,
which may r e m a i n i n h i s h a n d s , a f t e r s a t i s f y i n g
h i s own e x c e s s o f l o s s i n f u l l , and h i s r e a s o n a b l e
expenses i n c u r r e d i n i t s recovery; u n l e s s t h e
u n d e r w r i t e r s h a l l , on n o t i c e and o p p o r t u n i t y
g i v e n , have c o n t r i b u t e d t o , and made common
c a u s e w i t h him, i n t h e p r o s e c u t i o n . ' "
S e e a l s o Krause v . S t a t e Farm Mutual Automobile I n s . Co., 184
Neb. 588, 169 N.W.2d 601; S t . P a u l F i r e & Marine I n s . Co. v .
W. P. Rose Supply Co., 19 N.C.App. 3 0 2 , 198 S.E.2d 482. How-
e v e r , o t h e r j u r i s d i c t i o n s have n o t l i m i t e d t h i s r u l e t o re-
c o v e r y by t h e i n s u r e r a g a i n s t t h e i n s u r e d , a s e v i d e n c e d by
67 N.J.Super. 475,
P r o v i d e n c e Washington I n s . Co. v . Hogges,/l71 A.2d 1 2 0 , 124:
" * * * I n t h e a b s e n c e of e x p r e s s t e r m s i n t h e
c o n t r a c t t o t h e c o n t r a r y , he ( i n s u r e d ) must be
made o r k e p t whole b e f o r e t h e i n s u r e r may r e c o v e r
a n y t h i n g from him o r from a t h i r d p a r t y under i t s
r i g h t of s u b r o g a t i o n . " (Emphasis s u p p l i e d . )
Utah a l s o a g r e e s w i t h t h i s view. Lyon v. H a r t f o r d A c c i d e n t and
Indemnity Company, 25 Utah28 31(, 480 P.2d 739; Transamerica
I n s u r a n c e Company v. Barnes, 29 Utah2d 1 0 1 , 505 P.2d 783.
The b a s i c r a t i o n a l e f o r t h i s r u l e , i n e i t h e r of t h e two
c a t e g o r i e s , i s b e s t s t a t e d i n S t . Paul F i r e & Marine I n s . Co. v.
W. P. Rose Supply Co., s u p r a a t 484:
" * * * When t h e sum r e c o v e r e d by t h e I n s u r e d from
t h e T o r t - f e a s o r i s less t h a n t h e t o t a l l o s s and
t h u s e i t h e r t h e I n s u r e d o r t h e I n s u r e r must t o some
e x t e n t go u n p a i d , t h e l o s s s h o u l d be b o r n e by t h e
i n s u r e r f o r t h a t i s a r i s k t h e i n s u r e d h a s p a i d it
t o assume." (Emphasis s u p p l i e d . )
Again w e n o t e , t h e d o c t r i n e o f l e g a l s u b r o g a t i o n i s a p p l i e d t o
s u b s e r v e t h e ends o f j u s t i c e and t o d o e q u i t y i n t h e p a r t i c u l a r
c a s e under c o n s i d e r a t i o n . Bower v. Tebbs, s u p r a .
For t h e s e r e a s o n s w e a d o p t t h e view t h a t when t h e i n s u r e d
h a s s u s t a i n e d a l o s s i n e x c e s s of t h e reimbursement by t h e i n s u r e r ,
t h e i n s u r e d i s e n t i t l e d t o b e made whole f o r h i s e n t i r e l o s s and
any c o s t s o f r e c o v e r y , i n c l u d i n g a t t o r n e y ' s f e e s , b e f o r e t h e
i n s u r e r c a n a s s e r t i t s r i g h t of l e g a l s u b r o g a t i o n a g a i n s t t h e
insured o r the t o r t f e a s o r .
Examining t h e f a c t s of t h i s c a s e , we f i n d t h i s r u l e s h o u l d
be a p p l i e d t o t h e c l a i m of t h e Skauges. Uniguard d i d n o t volun-
t a r i l y s e e k t o a s s i s t t h e Skauges i n t h e i r s u i t , a s a l l e g e d by
Uniguard. The d i s t r i c t c o u r t f i l e r e v e a l s t h a t t h e Skauges f i l e d
t h e c o m p l a i n t a g a i n s t MDU and Mountain B e l l on F e b r u a r y 1 4 , 1974.
Mr. Tobin t e s t i f i e d t h a t he knew of t h i s l i t i g a t i o n a s e a r l y a s
J u n e 6 , 1974, and t h e r e a f t e r informed Uniguard. However, Uni-
guard d i d n o t a p p e a r i n t h e l i t i g a t i o n u n t i l December 2 4 , 1974,
and t h i s w a s done i n v o l u n t a r i l y i n r e s p o n s e t o M D U ' s t h i r d p a r t y
complaint. A t t h i s s t a g e , d i s c o v e r y and i n v e s t i g a t i o n w a s
s u b s t a n t i a l l y completed by t h e Skauges t h r o u g h r e t a i n e d c o u n s e l .
Although Uniguard a l l e g e d a t o r a l argument t h a t Skauges w e r e
r e l u c t a n t t o a l l o w them t o j o i n i n t h e s u i t , Uniguard made no
a t t e m p t t o i n t e r v e n e p u r s u a n t t o Rule 2 4 , M.R.Civ.P. It appears
t h a t Uniguard would have c o n t e n t e d l y remained on t h e s i d e l i n e s
u n t i l t h e c o n c l u s i o n of t h i s l i t i g a t i o n i f n o t f o r c e d i n t o t h e
s u i t by MDU.
W e n o t e , a l s o , t h a t i n a p p l y i n g t h i s r u l e t h e Skauges
w i l l n o t b e u n j u s t l y e n r i c h e d by v i r t u e o f r e c o v e r y from Uniguard
and t h e t o r t f e a s o r s , n o r would t h e t o r t f e a s o r s be r e l i e v e d of
t h e i r l e g a l o b l i g a t i o n f o r t h e l o s s , i f found l i a b l e i n t h e d i s -
t r i c t court.
S i n c e t h e t h i r d i s s u e of w a i v e r by Uniguard h a s been @re-
s e n t e d i n t h e a l t e r n a t i v e , it was n o t f u l l y l i t i g a t e d i n t h e
d i s t r i c t court. W e have h e l d t h a t t h e Skauges be made whole be-
f o r e Uniguard may a s s e r t i t s l e g a l s u b r o g a t i o n and we d e c l i n e t o
address t h a t issue.
T h i s c a u s e i s r e v e r s e d and remanded t o t h e d i s t r i c t c o u r t
with i n s t r u c t i o n s t o enter
Chief J u s t i c e
W concur:
e
Justices
- 8 -