NO. 89-564 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1990 

IN THE MATTER OF KENNETH ZACHER, 

Claimant and Appellant, 

AMERICAN INSURANCE COMPANY, 

Insurer, petitioner and Respondent. 

APPEAL FROM: Workerst Compensation Court 

Honorable Timothy Reardon, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Frank C. Richter, Richter & Torkelson, Billings, 

Montana I - - 

C 3 : For Respondent: 

C'd ,: 

-. -t Terry G. Spear, Billings, Montana 

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Submitted on Briefs: April 5, 1990 

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. - -- a Decided: June 7, 1990 

Fded:' ' 

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Justice Fred J. Weber delivered the Opinion of the Court. 

The Workerst Compensation Court held that the insurer, 

American Insurance Company, was entitled to assert a subrogation 

claim against the third party recovery of the claimant, Kenneth 

Zacher. Zacher appeals. We reverse and remand. 

Mr. Zacher was an employee of Associated Pool Builders 

(Associated Pool). Associated Pool carried workerst compensation 

insurance through American Insurance Company (American). In May 

of 1984, Associated Pool was engaged in the construction of a 

swimming pool in Red Lodge, Montana. Mr. Zacher worked .on that 

project . Associated Pool hired a subcontractor, Coutts 

Construction Company (Coutts), to excavate a trench leading to the 

pool. Coutts was insured by Commercial Union Insurance Company. 

(Commercial). 

Coutts completed the trench excavation. Mr. Zacher and 

another Associated Pool employee then climbed into the trench in 

order to connect pipes running to the pool. The trench caved-in 

resulting in the burial of both men. As a result Mr. Zacher 

suffered complete paraplegia as well as other related physical 

problems. Mr. Zacher submitted his workerst compensation claim to 

American which paid benefits to him. 

Subsequently Mr. Zacher sued Coutts for his personal injuries, 

alleging that the trench was negligently constructed because of a 

failure to properly shore-up or reinforce the ditch, or to 

properly slope the sides. The parties settled prior to trial, with 
a payment of policy limits of $300,000 to Mr. Zacher by Commercial, 

the Couttsr insurer. American asserted its statutory lien against 

the $300,000 settlement with Mr. Zacher. American, the workersr 

compensation carrier, had not participated in the negotiation and 

settlement of the claim. The Workersr Compensation Court granted 

summary judgment to American, and awarded $129,889.01 plus accrued 

interest to American. Mr. Zacher appeals. 

The sole issue is whether American is entitled to a 

subrogation interest in Mr. Zacherls settlement of his third-party 

tort claim with Coutts and American, its insurance carrier. 

The crux of Mr. Zacherrs contention is that the law does not 

support subrogation in this case because he has not yet received 

full legal redressrr. While there has been no factual 

determination of the extent of his damages, Mr. Zacher estimates 

that his damages are in excess of $3.5 million. He therefore 

contends that his $300,000 settlement is not sufficient to amount 

to full legal redress. American contends that Mr. Zacher does not 

have such a right to full legal redress and urges that it is 

entitled to subrogation under 5 39-71-414, MCA. We point out that 

the full legal redress argument is not controlling in this case. 

The key statute is 5 39-71-414, MCA (1983). It is important 

to note that the current 1989 statute differs substantially from 

the 1983 statute with regard to the subrogation rights of 

insurer. Based upon the date of injury, the 1983 statute controls. 

Section 39-71-414, MCA (1983) provides in pertinent part: 

(1) [Tlhe insurer is entitled to subrogation for all 

compensation and benefits paid or to be paid under the 
Workers1 compensation Act. 

(5) If the amount of compensation and other benefits 

payable under the Workers1 compensation Act have not been 

fully determined at the time the employee, . . . or the 

insurer have settled in any manner the action as provided 

for in this section, the division shall determine what 

proportion of the settlement shall be allocated under 

subrogation. The divisionls determination may be 

appealed to the workerst compensation judge. 

The Workerst Compensation Court, in its application of the 

above statute, concluded that the insurer, American, was entitled 

to assert its subrogation claim. The Workers1 Compensation Court 

concluded that the rule in Hall v. State Compensation Ins. Fund 

(1985), 218 Mont. 180, 708 P.2d 234. had been modified and 

essentially overruled by Meech v. Hillhaven West, Inc. (Mont. 

1989), 776 P.2d 488, 46 St.Rep. 1058. The Workers1 Compensation 

Court pointed out that in Hall, this Court relied on Article 11, 

Section 16 of the Montana Constitution and the requirement of full 

legal redress as a basis for the decision. The Workerst 

Compensation Court concluded that the effect of Meech, was to 

overrule the full legal redress theory. We point out that Meech 

involved an interpretation of 1 39-71-414, MCA, as modified by the 

1987 Legislature. This amendment contained substantial changes in 

the rights of the carrier to claim subrogation. 

It is true that under Hall, the majority referred to Article 

11, Section 16 of the Montana Constitution and White v. State 

(1983), 203 Mont. 363, 661 P.2d 1272, and the fundamental right of 

full legal redress and indicated that it would be an 

unconstitutional application of the statute to allow subrogation 
rights when the claimant had not achieved full legal redress. 

However, that is not the primary basis for the opinion in Hall. 

The primary theory of Hall was the conclusion that our 

decision in Skauge v. Mountain State Tel. & Tel. Co. (1977), 172 

Mont. 521, 565 P.2d 628, was relevant. Hall pointed out that in 

Skause, the claimantst rented home was destroyed by an explosion. 

The actual value of the property was over $11,000.00, but the 

insurance was only slightly over $4,000.00. In addressing the 

issue regarding the subrogation rights of the insurer, Hall quoted 

the following from Skause: 

'I. . . when the insured has sustained a loss in excess 

of the reimbursement by the insurer, the insured is 

entitled to be made whole for his entire loss and any 

costs of recovery, includinq attorney's fees, before the 

insurer can assert its right of legal subrogation against 

the insured or the tort-feasor." (Emphasis supplied.) 

(Citation omitted.) 

I Hall 708 P.2d at 236. The majority opinion then reached the 

following conclusion in Hall: 

Applying this principle to the facts now before us, the 

State Fund is not entitled to any subrogation interest 

in the $25,000 settlement proceeds as claimant has not 

been made whole. 

Hall, 708 P.2d at 236. The basic principle of Skause as reaffirmed 

in Hall is that an insurer is not entitled to subrogation until a 

claimant has been made whole for his entire loss and any costs of 

recovery, including attorney fees. From the briefs, it is apparent 

that counsel have some significant problems in interpreting our 

decision in Hall. In part that arises from the holding in Hall 

where this Court stated: 
We hold that, in a case of reasonably clear 

liability, where a claimant is forced to 

settle for the limits of an insurance policy 

which, together with claimant's workers1 

compensation award, do not grant full legal 

redress to claimant, the insurer is not 

entitled to subrogation rights under 3 39-71- 

414, MCA. When claimant is made whole, 

subroqation beqins. (Emphasis added). 

I Hall 708 P.2d at 237. 

Considering Hall in the light of subsequent determinations by 

this Court, we conclude that the primary conclusion of the holding 

is contained in the last sentence which held that when a claimant 

is made whole, subrogation begins. 

We have also considered Getten v. Liberty Mut. Ins. Co. (Mont. 

1989), 782 P.2d 1267, 46 St.Rep. 1967. A key statement and holding 

of Getten is the following: 

The instant case presents a voluntary settlement 

(approximately 1.5 million dollars) for less than the 

upper limits of the applicable insurance policy (six 

million dollars). We hold that amellant received full 

lesal redress. (Emphasis added.) 

We conclude that the references to full legal redress have 

been confusing and we will attempt to rectify that confusion. A 

reference to Skause emphasizes the basis for the Skause rule which 

was applied in Hall. That theory of equitable limitation on legal 

subrogation was stated in Skause as follows: 

Again we note, the doctrine of legal subrogation is 

applied to subserve the ends of justice and to do equity 

in the particular case under consideration . . . 

This theory is not dependent upon a right of recovery of full legal 

redress under the Montana Constitution. It is based upon an 

equitable balancing of the rights of the insurer as compared to the 
claimant. As previously quoted, the basic conclusion is that when 

the amount recovered by a claimant is less than the claimant's 

total loss, with a result that either the claimant or the insurer 

must to some extent go unpaid, then it is equitable that the loss 

be born by the insurer which had been paid an insurance premium for 

the assumption of its liability. While it is true that in a 

workers1 compensation case such as the present case, the premium 

has been paid by the employer, there is no rational distinction 

between an insured under a house insurance policy and a claimant 

in connection with workerst compensation. The key aspect is that 

the insurer has been paid for the assumption of the liability for 

the claim, and that where the claimant has not been made whole, 

equity concludes that it is the insurer which should stand the 

loss, rather than the claimant. With the aim of eliminating 

confusion, we restate our holding in this subrogation case. 

We hold that where a workers1 compensation claimant recovers 

against a third party, an insurer has no subrogation rights until 

a claimant has been made whole for his entire loss and any costs 

of recovery, including attorney fees. In determining whether a 

claimant has been made whole, the amounts received and to be 

received under the workerst compensation claim shall be added to 

the amounts otherwise received or to be received from third party 

claims, and also added to the costs of recovery, including attorney 

fees; and when that total equals claimant's entire loss, then the 

insurer shall be entitled to subrogation from all amounts received 

by the claimant in excess of his entire loss, pursuant to S 39- 
71-414, MCA (1983) . To the extent that Hall and Getten contain 

requirements which may be interpreted as adding to the foregoing 

holding, Hall and Getten are expressly overruled. As a result, 

there will be no need for parties to consider whether or not full 

legal redress under the Constitution is involved and there will be 

no need to prove reasonably clear liability. We do emphasize that 

this opinion does not modify the actual decisions made in both Hall 

and Getten. The author points out that the foregoing in some 

measure contradicts his dissent in Hall. However, it is 

appropriate that under the rule of stare decisis, the holding in 

Hall on the equitable subrogation theory should be upheld. 

The record before the Workers1 Compensation Court does not 

establish as a matter of fact the extent of the loss, costs of 

recovery, and attorney fees so far as Mr. Zacher is concerned. We 

therefore hold that the matter is remanded to the Workers1 

Compensation Court in order that the court may make a factual 

determination as to whether Mr. Zacher has been made whole for his 

entire loss and any costs of recovery, including attorney fees. 

At that point the Workers1 Compensation Court can make its 

appropriate order with regard to subrogation in accordance with the 

principles stated in 

We Concur: 

this opinion. 

Chief Justice 
we. 

Justices