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: WorkerstCompensation Court Honorable Timothy Reardon, Judge presiding.

COUNSEL OF RECORD: For Appellant: Frank C. Richter, Richter & Torkelson, Billings, Montana

I-- C3 : For Respondent: C'd ,:
-. -t Terry G. Spear, Billings, Montana \-4

Submitted on Briefs: April 5, 1990

--Y

.

## - -- a Decided: June 7, 1990 Fded:' '

r- .- ,3 c; -- 

### -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 (AssociatedPool). Associated Pool carriedworkerstcompensation 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 .onthat 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 submittedhis workerstcompensation claim to American which paid benefits to him. SubsequentlyMr. ZachersuedCoutts forhispersonal 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. Theparties settledprior to trial,with

### a payment ofpolicy limits of $300,000toMr. Zacherby Commercial, the Couttsrinsurer. American asserted its statutory lien against the $300,000 settlementwith Mr. Zacher. American, theworkersr compensation carrier,had not participated in the negotiation and settlement of the claim. The WorkersrCompensation Court granted summary judgmenttoAmerican, and awarded $129,889.01 plus accrued interest toAmerican. Mr. Zacher appeals. The sole issue is whether American is entitled to a subrogation interest inMr. Zacherlssettlementof his third-party tort claimwith Coutts and American, its insurance carrier. The crux of 

### Mr. Zacherrscontention 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 thatMr. Zacher doesnot 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. Basedupon thedate of injury,the 1983 statutecontrols. 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 theWorkers1compensationAct.

(5) If the amount of compensation and other benefits payable under theWorkers1compensationAct havenotbeen fully determined at the time the employee, 

# . .

# . or the insurerhave settled inanymanner theactionasprovided 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 workerstcompensation 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 Workers1Compensation 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 Workers1Compensation Court pointed out that in Hall, this Court relied on Article 11, Section 16 of theMontana Constitutionand 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 interpretationof 1 39-71-414,MCA, asmodified by the 1987 Legislature. This amendmentcontained substantial changes in the rights of the carrier to claim subrogation. It is true that under Hall, themajority referred to Article 11, Section 16 of the Montana Constitution and White v. State (1983),203 Mont. 363, 661P.2d 1272,and the fundamental right of full legal redress and indicated that it would be an unconstitutional application of the statute to allow subrogationrights when the claimant had not achieved full legal redress. However, that is not theprimary 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 claimantstrented 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.) (Citationomitted.)

Hall 708 P.2d at 236. The majority opinion then reached the I 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 settlementproceeds as claimant has not been made whole. Hall, 708 P.2d at 236. Thebasic principle of Skause as reaffirmed in Hall is that an insurer is not entitled to subrogationuntil a claimant has been made whole for his entire loss and any costs of recovery,including attorney fees. From thebriefs, 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, subroqationbeqins. (Emphasisadded). Hall 708 P.2d at 237. I Considering Hall in the light of subsequent determinations by this Court,we conclude that theprimary conclusion of theholding is contained in the last sentence which held that when a claimant is made whole, subrogationbegins. Wehave also consideredGetten

### v. LibertyMut. 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 thebasis for the Skause rulewhich

was applied inHall. That theory of equitable limitation on legal subrogationwas stated in Skause as follows: Again we note, the doctrine of legal subrogation is applied to subserve the ends of justiceand to do equity in the particular case under consideration

# . . . This theory isnot dependentupon a right of recovery of full legal redress under the Montana Constitution. It is based upon an equitablebalancing of the rights of the insureras compared to the

### claimant. As previously quoted, thebasic conclusion is thatwhen 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 bornby the insurerwhichhadbeenpaid 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 insurancepolicy and a claimant in connection with workerstcompensation. 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 workers1compensation 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 workerstcompensation claim shall be added to the amounts otherwise received or to be received from third party claims,and also added tothecostsofrecovery, includingattorney fees; and when that total equals claimant's entire loss, then the insurer shallbe 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 redressunder the Constitution is involved and therewill be

no need toprove reasonably clear liability. We do emphasize that this opiniondoesnotmodify theactual decisions made inboth 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 towhether Mr. Zacherhas been made whole forhis 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 subrogationin accordance with the principles stated in

We Concur: this opinion.

Chief Justice

# we. Justices