Source: http://www.ndcourts.gov/Court/Briefs/20080249.atb.htm
Timestamp: 2018-01-16 11:39:58
Document Index: 735457603

Matched Legal Cases: ['§ 27', '§ 27', '§ 28', '§ 28', '§ 8', '§ 4', '§ 8', '§ 27', '§ 2', '§ 27', '§ 28', '§ 4']

Hoff v. Krebs - Appellant Brief
Supreme Court No. 20080249
Neal Hoff, Brock Hoff, Michael Hoff, Robert Messmer, Clare Messmer, Rosemary V. Baer, Jeffrey A. Baer, Renee R. Baer, Bradley J. Baer, and Audrey J. Hawkins,
Blaine Fred Krebs, Loren L. Sayler, Heart River Ranch, L.L.L.P., and Sayler Farms,.L.L.P.,
Loren L. Sayler,
Heart River Ranch, L.L.L.P.,
Appeal from the June 19, 2008 Order and the Second Amended Judgment
of Stark County District Court, Southwest Judicial District
Case No. 45-05-C-565
Honorable William A. Herauf, presiding
Paul R. Sanderson (ID# 05830)
316 North Fifth Street, 6th Floor
Bismarck, North Dakota 58502-1695
Telephone: 701-223-2711
LAW AND ARGUMENT 9
I. Whether the implied co-insured doctrine bars landlord Heart River Ranch's insurer's subrogation claim against tenant Loren Sayler when there was no express agreement 9
B. The implied co-insured doctrine bars State Auto's subrogation claim against Sayler because there was no express agreement between the landlord Heart River and tenant Sayl 11
D. The implied co-insured doctrine bars State Auto's subrogation action against Sayler for recovery of attorney's fees in defending Heart River against third-party claims. 14
II. State Auto is not entitled to indemnification because no obligation exists which should have been discharged by Sayler rather than State Auto 17
III. State Auto's indemnification claim is barred because Heart River defended against independent allegations of negligence against it. 18
2003 ND 43, ¶ 8, 658 N.W.2d 330 15, 16
537 N.W.2d 653 (N.D. 1995) 20
Bramelea California, Inc. v. Reliable Interiors, Inc.
119 Cal.App.4th 468 (2004) 17, 18
Community Credit Union of New Rockford v. Homelvig
487 N.W.2d 602, 605 (N.D. 1992) 9, 10, 11, 12, 14, 16
Conrad v. Suhr
274 N.W.2d 571, 572 (N.D. 1979) 19, 20, 21
200 F. Supp.2d 1305, 1312 (N.D.Okla. 2002) 13, 15
Livinggood v Balsdon
2006 ND 215, ¶ 8, 722 N.W.2d 716 9
Morris Zeligson Prop v. South East Auto Trim, Inc.
99 P.3d 744, 747 (Okla. Civ. App. 2004) 15
Robar v. Ellingston
301 N.W.2d 653, 663 (N.D. 1981) 20
Safeco Ins. Co. v. Capri
705 P2d 659, 661 (1985) 11, 16
Tri-Par Inv., L.L.C. v. Sousa
680 N.W.2d 190, 199-200 (Neb. 2004) 15
Tri-State Ins. Co. of Minnesota v. Commercial Group West, LLC
2005 ND 114, ¶ 10, 698 N.W.2d 483 15
Uren v. Dakota Dust-Tex, Inc.
2002 ND 81, ¶¶ 6 -7, 643 N.W.2d 678 12, 13, 16
U.S. Fid. & Guar. Co. v. North Dakota Workman's Comp. Bureau
275 N.W.2d 618 (N.D. 1979) 17, 18
2000 ND 89, ¶ 7, 609 N.W.2d 733 9
N.D.R.App.P 4(a) 4
§ 27-02-04 1
§ 27-05-06 1
§ 28-27-01 1
§ 28-27-02 1
N.D. Const. art. VI, § 8 1
Keeton & Widiss, Insurance Law § 4.4(b) (1988) 10
The district court had jurisdiction under N.D. Const. art. VI, § 8, and N.D.C.C. § 27-05-06. The appeal was timely under N.D.R.App.P 4(a). This Court has jurisdiction under N.D. Const. art. VI, §§ 2, 6, and N.D.C.C. § 27-02-04 and §§ 28-27-01 through 28-27-02.
I. Whether the implied co-insured doctrine bars State Auto Insurance Company's subrogation claim against tenant Loren Sayler when there was no express agreement between landlord Heart River Ranch and Sayler indicating Sayler would not be a co-insured under the policy.
II. Whether State Auto's indemnification is barred when no obligation exists which should have been discharged by Sayler rather than State Auto.
III. Whether State Auto's indemnification claim is barred because Heart River defended against independent allegations of negligence against it.
This case involves a subrogation action commenced by State Auto Insurance Company ("State Auto") in the name of its insured Heart River Ranch, L.L.L.P. ("Heart River") against Loren Sayler ("Sayler") to recover attorney fees State Auto incurred in defending Heart River in the underlying action commenced by the Plaintiffs. Sayler appeals from the District Court's Second Amended Judgment granting Heart River's cross-claim for indemnification against Sayler.
Plaintiffs Neal Hoff, Brock Hoff, Michael Hoff, Robert Messmer, Clare Messmer, Rosemary V. Baer, Jeffrey A. Baer, Renee R. Baer, Bradley J. Baer, and Audrey J. Hawkins ("Plaintiffs") commenced an action against Blaine Fred Krebs ("Krebs"), Sayler, Heart River, and Sayler Farms, L.L.L.P., for damages resulting from a fire which occurred on September 1, 2004. State Auto assumed the defense of Heart River pursuant to their insurance policy. Heart River moved for summary judgment with respect to the Plaintiffs' claims against it. The district court granted Heart River's Motion for Summary Judgment and dismissed Plaintiffs' claims against Heart River. Sayler and Krebs then settled with Plaintiffs on their remaining claims.
State Auto, in the name of its insured Heart River, served a cross-claim against Sayler and Krebs seeking indemnification of the attorney fees State Auto incurred in defending Heart River in the action commenced by the Plaintiffs. Following summary judgment and settlement, the only remaining claim in dispute was State Auto's subrogation claim against Sayler and Krebs for indemnification of attorney fees incurred in defending Heart River in the underlying action. Sayler and Krebs moved the district court for an order dismissing State Auto's cross-claim on the basis of the implied co-insured doctrine, or in the alternative, summary judgment based upon the facts of the case. The district court denied Sayler's and Krebs' motions.
On April 1 and 2, 2008, a bench trial on the issue of State Auto's subrogation claim was held before the district court. On September 17, 2008, the district court entered its Second Amended Judgment dismissing the cross-claim against Krebs and entering a judgment in favor of Heart River on its cross-claim against Sayler in the amount of $67,624.00.
On September 26, 2008, Sayler served his Notice of Appeal. The Notice of Appeal was entered by the district court on September 30, 2008.
Heart River Ranch, L.L.L.P., owns real property south of Richardton, ND. See (Transcript ("Tr.") 28). Mike Armstrong is the managing partner of Heart River Ranch. (Tr. 29). Heart River's property contains approximately 1,700 acres and is used by its partners mainly as a hunting preserve. (Tr. 28-29).
Sayler was employed as a comptroller by one of Mike Armstrong's companies from August 1989 until March 2005. (Tr. 32.) In addition to his employment with Armstrong, Sayler also farmed, including farming property which Armstrong had an ownership interest. (Tr. 46.)
In early 2001, Armstrong approached Sayler about farming a portion of Heart River's property. (Tr. 335). As a result of Armstrong and Sayler's negotiations, Heart River agreed to lease the approximately seventy acres of tillable land on its property to Sayler in exchange for annual rental payments of $1,400. See DE 126 (App. 46). Pursuant to their lease agreement, Heart River was the Landlord and Sayler was the Tenant. Id. The district court found the lease agreement between Heart River and Sayler contained a hold harmless provision, which provided:
Hold Harmless. Tenant shall hold landlord harmless from any and all damages, costs and expenses by reason of claims, demands, or suits by third persons arising from the operating of the leased premises.
See DE 157 (App. 120). The lease agreement did not contain any provisions regarding insurance. See DE 126 (App. 46-47).
Armstrong procured insurance coverage for Heart River's property with State Auto Insurance Company. See DE 141 (App. 47). Armstrong paid premiums to State Auto for Heart River's insurance coverage. (Tr. 158). Armstrong understood that part of the reason for paying premiums to State Auto was that State Auto would defend Heart River if it was sued. (Tr. 158-159).
Armstrong and Sayler did not discuss insurance during their negotiation of the lease agreement for Heart River's property. (Tr. 383). Armstrong never told Sayler he was not covered under Heart River's insurance policy. (Tr. 383). In addition, there was no express agreement between Armstrong and Sayler indicating Sayler would not be considered an insured under Heart River's insurance policy. (Tr. 383). Heart River's insurance policy with State Auto does not specifically exclude Sayler as an insured under the policy. See DE 141 (App. 47-116). The lease agreement between Heart River and Sayler also did not indicate Sayler would not be considered an insured under Heart River's policy. See DE 126 (App. 46).
Armstrong owned a tractor and sickle mower that he left at Heart River's property. (Tr. 133). Armstrong testified Sayler had permission to use the equipment he kept out at Heart River. (Tr. 133). One of Sayler's employees, Robert Chruszch, testified that he used Armstrong's farm equipment while working on Heart River's property. (Tr. 176-77). Krebs also testified he had used Armstrong's tractor and sickle mower while working on Heart River's property. (Tr. 201).
On September 1, 2004, a fire started on Heart River's property. See DE 44 (App. 09). On that date, Krebs was operating a haybine owned by Sayler, mowing a trail on Heart River's property. (Tr. 189). None of Armstrong's equipment was being used at the time the fire started. (Tr. 189-90). The fire spread beyond the boundaries of Heart River's property and damaged neighboring property. See DE 44 (App. 09-11). No determination was made as to the cause of the fire, nor was there any finding that any person was negligent in causing the fire.
Plaintiffs commenced the underlying action against Defendants Sayler, Krebs, Heart River, and Sayler Farms, L.L.L.P., as a result of the fire which occurred on September 1, 2004. See DE 44 (App. 08). Plaintiffs' Complaint contained specific allegations of negligence and wrongful conduct against Heart River based upon its conduct in ordering the work to be done on its property. Id. Plaintiffs First Count against the Defendants specifically provided:
26. It was negligence per se for each and all Defendants to operate any mechanized farm equipment on said day, in said conditions of extreme fire risk.
See id. (App. 13). Plaintiffs made another direct allegation against Heart River:
38. Any negligence of Krebs and Sayler is imputed to the land lessee Sayler Farms, L.L.L.P. and the land owner lessor Heart River Ranch, L.L.L.P. that allowed or ordered the work to be done on a day in which mechanized farm machinery should not have been operated.
See id. (App. 14). Plaintiffs served Heart River with interrogatories and requests for production seeking information regarding the allegedly defective tractor and farm implement which Krebs was using on the date of the fire. See DE 13 (App. 28-37). Plaintiffs also served Heart River with interrogatories and requests for production seeking information regarding all repair and maintenance records for the equipment which was being used on the date of the fire. Id.
Heart River submitted the claim against it to its insurer State Auto. (Tr. 159). Heart River was insured at the time of the fire by State Auto. See DE 141 (App. 49). Heart River's policy with State Auto specifically provided that if a lawsuit is brought against Heart River for property damage, State Auto will "provide a defense at our expense by counsel of our choice, even if the suit is groundless, false or fraudulent." See (App. 74). All of Heart River's attorney fees and costs were paid by State Auto. (Tr. 132).
The district court granted Heart River's Motion for Summary Judgment dismissing all of Plaintiffs' claims against it. See DE 75 (App. 38). Heart River was dismissed from the action and did not pay any damages to the Plaintiffs. Id. Sayler and Krebs settled with the Plaintiffs on their remaining claims and the action against them was dismissed. See DE 86 (App. 45).
Following summary judgment and settlement, the only remaining claim in dispute was State Auto's subrogation claim against Sayler and Krebs. State Auto, in the name of its insured Heart River, served a cross-claim against Sayler and Krebs seeking indemnification of the attorney fees State Auto incurred in defending Heart River in the action commenced by the Plaintiffs. See DE 47 (App. 16). Following a bench trial on this issue, the district court entered a judgment in favor of Heart River on its cross-claim. See DE 173 (App. 123). Sayler appeals from this judgment. See DE 177 (App. 125).
I. Whether the implied co-insured doctrine bars landlord Heart River Ranch's insurer's subrogation claim against tenant Loren Sayler when there was no express agreement between Heart River Ranch and Loren Sayler precluding the implied co-insured doctrine.
The issues raised in this appeal involve questions of law. This Court applies a de novo standard of review to a district court's conclusions of law. Livinggood v. Balsdon, 2006 ND 215, ¶ 8, 722 N.W.2d 716. A trial court's conclusions of law are fully reviewable on appeal. Webster v. Regan, 2000 ND 89, ¶ 7, 609 N.W.2d 733.
B. The implied co-insured doctrine bars State Auto's subrogation claim against Sayler because there was no express agreement between the landlord Heart River and tenant Sayler indicating Sayler was not insured under Heart River's policy.
Sayler is an implied co-insured under Heart River's policy with State Auto based upon the landlord/tenant relationship between Heart River and Sayler. In the present action, Heart River, as the "landlord", leased its property to Sayler, the "tenant". At all relevant times, Heart River was insured under a policy issued by State Auto. Due to the landlord/tenant relationship between the Heart River and Sayler, State Auto is precluded from bringing a subrogation action against Sayler because he is considered an implied co-insureds under Heart River's insurance policy with State Auto.
This Court adopted the implied co-insured doctrine in Community Credit Union of New Rockford v. Homelvig, 487 N.W.2d 602, 605 (N.D. 1992). In Homelvig, Community Credit Union, the landlord, leased a house to the Homelvigs, the tenants. Id. at 603. Community Credit Union was insured by Cumis Insurance Society. Id. A fire caused significant damage to the home and Cumis paid $38,307 to the Credit Union for damages. Id. Cumis then brought a subrogation action against the Homelvigs in Community Credit Union's name seeking to recover the money paid to Community Credit Union. Id. The Homelvigs moved for summary judgment asserting they were co-insureds under the Cumis policy with Community Credit Union and, therefore, subrogation was barred as a matter of law. Id. The district court concluded that the Homelvigs were co-insureds under the policy and granted summary judgment. Id.
On appeal, the Homelvig Court was asked to determine whether a tenant is an implied co-insured on a landlord's insurance policy as a matter of law. Homelvig, 487 N.W.2d at 603. The Homelvig Court found that the "great majority of courts which have addressed this issue have held that, absent an express agreement to the contrary, a tenant is an implied co-insured under the landlord's fire policy and subrogation is barred." Id. The rationale for concluding a landlord and tenant are implied co-insureds is the reasonable expectations they derive from their privity under the lease, their insurable interest in the property, and the commercial reality under which the landlord insures the leased premises and passes on the premium cost in rent. Id. at 603-04. The Court quoted a leading commentator explaining the rationale for preventing an insurer from seeking subrogation against a co-insured:
The possibility that a lessor's insurer may proceed against a lessee almost certainly is not within the expectations of most landlords and tenants unless they have been forewarned by expert counseling. When lease provisions are either silent or ambiguous in this regard ­ and especially when a lessor's insurance policy is also silent or ambiguous ­ courts should adopt a rule against allowing the lessor's insurer to proceed against the tenant.
Id. at 604 (emphasis added) (quoting Keeton & Widiss, Insurance Law § 4.4(b) at 340-41 (1988)). The Homelvig Court explained that an insurer should not be allowed to treat a tenant, who is in privity with the landlord, as a negligent third-party when it could not have collected against its own insured had its insured negligently caused the fire. Id. at 605 (citing Safeco Ins. Co. v. Capri, 705 P.2d 659, 661 (1985)). The Homelvig Court affirmed summary judgment dismissing Cumis' subrogation claim holding that, absent an express agreement to the contrary, a tenant is an implied co-insured under the landlord's insurance policy and the insurer may not seek subrogation against the tenant. Id.
The present action is factually analogous to Homelvig. Here, State Auto commenced this subrogation action against the tenant, Sayler, in the name of the landlord, Heart River. There was no agreement between Heart River and Sayler which expressly indicated Sayler would not be considered a co-insured under Heart River's insurance policy with State Auto. The lease agreement between Heart River and Sayler is silent on the issue of insurance and whether the tenant is considered a co-insured under any insurance policy. The insurance policy between Heart River and State Auto is also silent as to whether a tenant would be considered an implied co-insured under the terms of the policy. Absent any express agreement between Heart River and Sayler regarding whether Sayler was a co-insured under Heart River's insurance policy, Sayler is an implied co-insured under Heart River's policy with State Auto and State Auto may not seek subrogation against Sayler. See Homelvig, 487 N.W.2d at 605.
C. The hold harmless provision in the lease agreement between Heart River and Sayler is not an express agreement indicating Sayler would not be a co-insured under Heart River's insurance policy with State Auto.
The next issue to be addressed on appeal is whether the hold harmless language in the lease agreement between Sayler and Heart River was an express agreement indicating Sayler was not considered a co-insured under Heart River's insurance policy. The district court found that the lease agreement between Heart River and Sayler contained a hold harmless agreement. The district court then concluded the language of the hold harmless provision "notes that the tenant will not be treated as a coinsured." See DE 157 (App. 120). Sayler contends the language of the hold harmless provision is not an express agreement that Sayler would not be considered a co-insured under Heart River's insurance policy with State Auto.
Ten years after Homelvig decision, this Court addressed the issue of whether a hold harmless provision in the lease agreement constitutes an express agreement indicating the tenant is not a co-insured under the landlord's insurance policy, thus making the Homelvig rule inapplicable. See Uren v. Dakota Dust-Tex, Inc., 2002 ND 81, ¶¶ 6 - 7, 643 N.W.2d 678. In Uren, the landlord's insurer brought a subrogation action against the tenant alleging the tenant's employee negligently caused a fire. Id. ¶ 4. Landlord had property insurance from Heritage Mutual Insurance Company and had received $160,000 from Heritage for its property loss. Id. ¶ 3. Heritage then brought a subrogation action against the tenant to recover the damages paid to the landlord as a result of the tenant's alleged negligence. Id. ¶ 4. The district court granted the tenant's motion for summary judgment because it was an implied co-insured under the landlord's policy and, therefore, Heritage's subrogation claim was barred. Id.
On appeal, Heritage argued the hold harmless provision in the lease between the landlord and tenant was "an express agreement to the contrary" indicating the tenant was not considered a co-insured making the Homelvig rule inapplicable to the case. Uren, 2002 ND 81, at ¶ 7. The Uren Court found the hold harmless provision in the lease did not express a clear, unambiguous intent that the tenant would not be considered a co-insured under the landlord's insurance policy with Heritage. Id. ¶ 8. The Court held the standard language in a hold harmless agreement is not a clear, express agreement that a tenant would not be considered a co-insured under the landlord's policy. Id. The Uren Court concluded that because the hold harmless provision was not an express agreement indicating the tenant was not a co-insured, Hertitage may not seek subrogation against the tenant. Id. ¶ 13.
In the present action, the language of the hold harmless provision in the lease agreement was not an express agreement indicating Sayler was not a co-insured under Heart River's policy with State Auto. The district court found the lease agreement between Heart River and Sayler contained a hold harmless provision which provided:
See DE 157 (App. 120). This hold harmless provision is silent as to insurance and whether a tenant is considered a co-insured. Id. The hold harmless provision in the lease agreement between Heart River and Sayler is similar to the hold harmless provision in Uren, which this Court concluded was not a clear, express agreement that the tenant would not be considered a co-insured under the landlord's property insurance. See 2002 ND 81, at ¶ 8. The hold harmless provision in the present action is not a clear express agreement that Sayler would not be considered a co-insured under the Heart River's insurance policy and, therefore, the district court erred in concluding the implied co-insured doctrine was inapplicable. See id.; see also Hanover Ins. Co. v. Honeywell, Inc., 200 F.Supp.2d 1305, 1312 (N.D.Okla. 2002) (concluding a hold harmless provision was not an express provision indicating tenant would not be considered a co-insured under the commercial lease agreement).
D. The implied co-insured doctrine bars State Auto's subrogation action against Sayler for recovery of attorney's fees in defending Heart River against third-party claims.
The next issue raised on appeal is whether the implied co-insured doctrine is limited exclusively to cases involving damage to the landlord's property. The district court concluded the implied co-insured doctrine was inapplicable in the present action because the subrogation claim was not seeking damage to Heart River's property, but rather defense costs under Heart River's policy. Sayler contends this position is contrary to the express language of the implied co-insured rule, there is no legal authority for this position, and such a position is contrary to the legal rationale supporting the rule.
The district court's conclusion that the implied co-insured doctrine is inapplicable in the present action ignores the plain language of the rule. This Court set forth the rule that "a tenant is an implied co-insured under the landlord's insurance policy and the insurer may not seek subrogation against the tenant", absent an express agreement to the contrary. Homelvig, 487 N.W.2d at 605 (emphasis added). The express language of the rule prohibits any subrogation action by the insurer against the tenant. Id. There is no limitation as to the type of subrogation claim or the nature of damages or losses sought to be recovered by the insurer. See id. The rule provides there can be no subrogation claim, regardless of the type or amount of loss. See id.
There is no legal authority to support the conclusion that the implied co-insured doctrine applies exclusively to subrogation claims for damage to the landlord's property. This district court did not cite any legal authority to support its conclusion that the implied co-insured doctrine applies only to subrogation claims for damage to the landlord's property. See DE 157 (App. 120). Heart River also failed to cite a single case which supports its theory that the implied co-insured doctrine is limited to damages to the landlord's property.
Contrary to the district court's conclusion that the implied co-insured doctrine is limited to property damage claims, other courts analyzing the doctrine have held that it precludes an insurer's subrogation claim for insurable losses besides damage to the landlord's property. See, e.g., Tri-Par Inv., L.L.C. v. Sousa, 680 N.W.2d 190, 199-200 (Neb. 2004) (barring an insurers subrogation claim for loss of rent under implied co-insured doctrine); Morris Zeligson Prop. v. South East Auto Trim, Inc., 99 P.3d 744, 747 (Okla. Civ. App. 2004) (concluding implied co-insured doctrine bars insurer's subrogation claim for lost income); Hanover Ins. Co. v. Honeywell, Inc., 200 F.Supp.2d 1305, 1313 (N.D. Okla. 2002) (stating insurer's subrogation claim for lost business income barred under implied co-insured doctrine). These cases evidence that the implied co-insured doctrine is not specifically limited to claims for damage to the landlord's property.
The implied co-insured doctrine is a form of the anti-subrogation rule, which provides that an insurance company is not entitled to subrogation from its own insured for a claim arising from the very risk for which the insured was covered. See Tri-State Ins. Co. of Minnesota v. Commercial Group West, LLC, 2005 ND 114, ¶ 10, 698 N.W.2d 483; see also American Nat'l Fire Ins. Co. v. Hughes, 2003 ND 43, ¶ 8, 658 N.W.2d 330. The Hughes Court explained an insurance company is not entitled to subrogation from a named insured or those persons deemed additional insured or co-insured under the policy. Id. A person not named as an insured under the policy is considered a co-insured when the insurer is attempting to recover from the insured on the risk the insurer agreed to take upon payment of premiums. Id.
The fallacy in the argument that the implied co-insured doctrine is limited to damages to the landlord's property is evidenced by the following hypothetical. If the Court were to assume that Heart River's principal Mike Armstrong had been driving the tractor mowing the trail when the fire started, State Auto would be barred from bringing a subrogation action against him to recover attorney fees for defending the lawsuit commenced by the Plaintiffs because he is a named insured under the policy and paid premiums for coverage. See Hughes, 2003 ND 43, ¶ 8 (explaining an insurance company is not entitled to subrogation from its own insured for a claim arising from the very risk for which the insured was covered). Under the implied co-insured doctrine, as a result of the relationship between the landlord, tenant, and insured property, a tenant sits in the same position as the landlord with respect to the landlord's rights under the landlord's insurance policy. See id. The Homelvig Court has explained that "an insurer should not be allowed to treat a tenant, who is in privity with the insured landlord, as a negligent third party when it could not collect against its own insured had the insured negligently caused the fire." Homelvig, 487 N.W.2d at 605 (citing Safeco Ins. Co. v. Capri, 705 P.2d at 661). Under the law as established by this Court, because State Auto is prevented from bringing a subrogation claim against Heart River for the attorney fees to defend against the Plaintiffs' lawsuit, it is also precluded under the implied co-insured doctrine from bringing a subrogation claim against Sayler, Heart River's tenant. See Homelvig, 487 N.W.2d at 605; Uren, 2002 ND 81, ¶ 13; Hughes, 2003 ND 43, ¶ 19.
II. State Auto is not entitled to indemnification because no obligation exists which should have been discharged by Sayler rather than State Auto.
Sayler asserts State Auto's subrogation claim should be barred in this equitable action because no obligation exists which should have been discharged by Sayler rather than State Auto. Though this argument was raised both prior to trial in Sayler's Motion to Dismiss and in his post-trial brief, the district court never addressed this issue.
State Auto is not entitled to equitable indemnification because no obligation exists which should have been discharged by Sayler rather than State Auto. See e.g., U.S. Fid. & Guar. Co. v. North Dakota Workmen's Comp. Bureau, 275 N.W.2d 618 (N.D. 1979); Bramelea California, Inc., v. Reliable Interiors, Inc., 119 Cal.App.4th 468 (2004). In USF&G, an insurance company paid worker's compensation benefits to a claimant and then sought equitable indemnification for the benefits paid from the North Dakota Workmen's Compensation Bureau. Id. at 619. The USF&G Court explained that equitable indemnification is a remedy which enables a person to recover reimbursement from another for the discharge of liability which, as between them, should have been discharged by the other. Id. at 623. The Court held that because USF&G and the Bureau have separate and distinct obligations regarding the payment of benefits, USF&G is not entitled to indemnification because no obligation exists which should have been discharged by the North Dakota Workmen's Compensation Bureau rather than USF&G. Id.
In the present action, State Auto was contractually bound to provide a defense to Heart River pursuant to the express terms of the insurance policy. State Auto accepted premiums from Heart River to defend against occurrences, such as fire and third-party claims. The attorney fees State Auto incurred to defend Heart River were paid pursuant to the express provisions in the policy and were proximately caused by the Plaintiffs filing of a lawsuit against Heart River. Because State Auto was contractually bound to provide a defense and it paid attorney fees pursuant to the contract does not place it in a superior equitable position entitling it to indemnification from Sayler. USF&G, 275 N.W.2d at 623.
State Auto's obligation to defend Heart River pursuant to their insurance policy is separate and distinct from any obligation owed by Sayler to Heart River. Even with the district court concluding that a lease existed between Sayler and Heart River containing a "hold harmless" provision which provided that Sayler was to indemnify Heart River, the payment by State Auto pursuant to its separate and distinct contractual obligations does not create in it equity superior to a non-paying indemnitor (Sayler), justifying subrogation, when the latter did not cause or participate in causing the loss. See Bramelea, 119 Cal.App.4th at 474. The fact that State Auto defended Heart River pursuant to the contractual obligation it accepted premiums for does not place it in a superior equitable position to recover indemnification from Sayler because no obligation existed which should have been discharged by Sayler rather than State Auto. See USF&G, 275 N.W.2d at 623.
III. State Auto's indemnification claim is barred because Heart River defended against independent allegations of negligence against it.
Sayler contends he is entitled to a judgment as a matter of law dismissing State Auto's indemnification claim seeking recovery of attorney fees for defending itself in the action brought by the Plaintiffs because Heart River was defending against allegations of its own negligence. The district court erroneously concluded that Heart River was not defending a direct negligence claim.
The issue of whether a party is entitled to indemnification of attorneys fees when the party defends against allegations of its own negligence was addressed in Conrad v. Suhr, 274 N.W.2d 571, 572 (N.D. 1979). In that case, Conrad brought an action against Defendants Versatile and Suhr on various theories of liability, including negligence, arising out of injuries he sustained while operating a grain auger manufactured by Versatile and sold by Suhr. Id. Both Versatile and Suhr cross-claimed against each other for indemnification. Id. The case went to trial and the jury found Versatile 50% at fault and the plaintiff 50% at fault, and found no fault on the part Suhr. Id. Suhr subsequently sought indemnification from Versatile for the attorney fees it incurred in its defense of the action. Id.
This Court rejected Suhr's claim for indemnification of attorney fees holding that a party that defends against any allegations of its own negligence may not recover attorneys' fees in an indemnification case. Conrad, 274 N.W.2d at 578. The Conrad Court concluded that because Suhr's defense was being conducted for his own benefit and not that of Versatile, Suhr was not entitled to attorney fees. Id. Even though Suhr argued he did not defend exclusively against allegations of his own negligence, the Court held he was precluded from indemnification of attorney fees because he actually defended against some allegations of his own misconduct. Id.
Of particular importance in the Conrad opinion was the Court's guidance with respect to the effect of the pleadings when determining whether a party is defending against its own negligence. Id. at 572-73. The Conrad Court expressed the view that the pleadings are an integral part in determining whether or not a party may be indemnified for attorneys' fees. Id. at 578. Conrad instructs trial courts to examine the pleadings to determine whether or not the party seeking indemnification from another was exclusively or partially defending against allegations of his own negligence. Id. In cases where a party has defended against any allegations of its own negligence, indemnification claims should be rejected. Id.
The Conrad holding was affirmed in Beavers v. Walters, 537 N.W.2d 653 (N.D. 1995). In Beavers, the North Dakota Supreme Court overturned a trial court's award of indemnification for attorney's fees. Id. at 658. The Court found that the party seeking indemnification of attorney's fees had committed wrongdoing which caused them to incur attorney fees. Id. Because the party's own wrongdoing contributed to the need to incur attorney fees, it was not entitled to indemnification pursuant to the third-party exception. Id.; see also Robar v. Ellingson, 301 N.W.2d 653, 663 (N.D. 1981) (applying the "clean hands doctrine" holding that a party that comes into equity with unclean hands is not entitled to relief).
In examining the pleadings in the present action, the Plaintiffs' Complaint made a specific allegation that Heart River was negligent in operating mechanized farm equipment on a day which posed an extreme fire risk. See DE 44 (App. 13). Plaintiffs also alleged that the equipment being used on the day of the fire was defective. Id. In addition, Plaintiffs' Complaint alleged Heart River ordered the trails be mowed on its property on the date of the fire. Id.; see also DE 75 (App. 40) (finding an inference that Armstrong ordered the trail be mowed). In support of their allegations against Heart River, Plaintiffs served discovery on Heart River requesting identification of the owner of the tractor and farm implement which Krebs was using on the date of the fire and all repair and maintenance records for the same equipment. See DE 13 (App. 34-36).
Initially, facts existed which formed the basis for Plaintiffs' claims against Heart River in their Complaint. Armstrong testified he owned a tractor and sickle mower that was kept on Heart River's property. Armstrong had given Sayler permission to use the tractor and mower. Sayler's employees testified at trial they had used Armstrong's equipment on Heart River's property on previous occasions. The facts also suggest that Armstrong ordered the trails to be mowed on the date of the fire. Through the course of discovery, it was ultimately determined that the machinery being operated on the date of the fire was not that owned by Armstrong; however, that finding does not discount the fact that independent allegations of negligence and wrongful conduct were asserted by the Plaintiffs against Heart River and Heart River defended against such allegations.
In the present action, the Plaintiffs' Complaint alleges independent allegations of negligence against Heart River. Even though Heart River did not defend exclusively against allegations of its own negligence and it was ultimately vindicated on those independent allegations on summary judgment, it is precluded from indemnification of attorney fees because it actually defended against allegations of its own misconduct. See Conrad, 274 N.W.2d at 578. Because it defended against allegations of its own negligence in Plaintiffs' Complaint, Heart River is not entitled to indemnification of attorneys fees. Id.
For the foregoing reasons, Appellant Loren Sayler respectfully requests this Court reverse the district court's judgment against Loren Sayler and remand with instructions to the district court to enter a judgment dismissing Heart River's cross-claim in its entirety.
Dated this day of December, 2008.
Attorneys for Loren Sayler