Case Name: CINCINNATI INSURANCE COMPANY, Appellant, v. Francine FRANCK, et al., Respondents, John Penniston, et al., Respondents
Court: Minnesota Court of Appeals
Jurisdiction: Minnesota
Decision Date: 2002-05-14
Citations: 644 N.W.2d 471
Docket Number: No. C4-01-1666
Parties: CINCINNATI INSURANCE COMPANY, Appellant, v. Francine FRANCK, et al., Respondents, John Penniston, et al., Respondents.
Judges: Considered and decided by GORDON W. SHUMAKER, Presiding Judge, PARKER, Judge*, and, HUSPENI, Judge .
Reporter: North Western Reporter 2d
Volume: 644
Pages: 471–478

Head Matter:
CINCINNATI INSURANCE COMPANY, Appellant, v. Francine FRANCK, et al., Respondents, John Penniston, et al., Respondents.
No. C4-01-1666.
Court of Appeals of Minnesota.
May 14, 2002.
Peter C. Sandberg, Kari C. Stonelake-Hopkins, Dunlap & Seeger, P.A., Rochester, for appellant.
Paul R. Dahlberg, Meshbesher & Spence, Ltd., Rochester, for respondents Franck.
Scott R. Suter, Sawicki & Phelps, P.A., Woodbury, for respondents Penniston and AMICA Mutual Insurance Co.
Considered and decided by GORDON W. SHUMAKER, Presiding Judge, PARKER, Judge*, and, HUSPENI, Judge .
Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.

Opinion:
OPINION
HUSPENI, Judge.
Appellant challenges the determination of the district court that an insured under both a primary and an umbrella liability insurance policy could reach the umbrella coverage even though he settled for less than the limits of the primary policy. Because the district court's decision is consistent with public policy considerations expressed in Minnesota caselaw, we affirm.
FACTS
Respondent Joyce Penniston was driving a car owned by her husband, respondent Dr. John Penniston, when she struck and seriously injured respondent Francine Franck.
AMICA Mutual Insurance Company provided primary liability insurance for the Pennistons, with a bodily injury limit of $500,000. Dr. Penniston also carried additional insurance under a "personal umbrella liability policy" written by appellant Cincinnati Insurance Company. This policy had bodily injury limits of $3 million, but payments would be made only "over and above the amounts provided for in the basic policies."
Franck and her husband entered a settlement agreement and release with the Pennistons and AMICA for $425,000. The agreement provided that the payment was in partial satisfaction of any claim the Francks may have against the Pennistons to the extent of the first $500,000, but that the Pennistons would have no personal liability in excess of $425,000. The Francks also released AMICA, agreeing that $500,000 would be credited against any judgment in the Francks' favor, and reserved claims against the Pennistons up to Cincinnati's limits. The agreement also provided that the settlement would be governed by Drake v. Ryan, 514 N.W.2d 785 (Minn.1994).
The Francks then sued the Pennistons. AMICA accepted Cincinnati's tender of the defense of the action. Later, Cincinnati exercised its option to assume the defense of the lawsuit, and then brought this declaratory judgment action seeking the district court's declaration that there was no coverage under the umbrella policy because AMICA had not paid the limit of its primary policy.
After hearing cross-motions for summary judgment, the district court granted summary judgment to the Francks, ruling that Cincinnati's umbrella insurance policy provided bodily injury coverage. The court found it significant that the Cincinnati policy does not contain any language that requires the primary policy limits to be exhausted before coverage under the umbrella policy is available. The court rejected Cincinnati's argument that the primary policy had to be exhausted, and concluded that, in any event, the settlement reached by the parties exhausted the primary policy limit.
Contending that the district court erred in its interpretation of the umbrella insurance policy, Cincinnati appeals.
ISSUE
Did the district court err by ruling that a settlement for less than the limits of a primary liability insurance policy nevertheless triggered excess coverage under an umbrella policy that stated that it would provide coverage only over and above that provided in the primary policy?
ANALYSIS
On review of summary judgment, this court must determine whether there exists any genuine issue of material fact for trial and whether the district court erred in applying the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn.1990). There are no facts in dispute; thus we must independently review the district court's interpretation of the insurance contract and application of the law. Nat'l City Bank v. St. Paul Fire & Marine Ins. Co., 447 N.W.2d 171, 175 (Minn.1989). The interpretation and construction of an insurance policy is a question of law that this court reviews de novo. State Farm Ins. Cos. v. Seefeld, 481 N.W.2d 62, 64 (Minn.1992).
Cincinnati agreed, through its insurance policy, to provide "[ejxcess insurance over and above the amounts provided for in basic policies It is undisputed that the "basic policy" applicable here is AMICA's primary liability policy with a $500,000 bodily injury limit.
Cincinnati's policy requires the insured to maintain basic coverage of $500,000, and provides: "We will pay only the amount which is more than the required basic policy limits and more than any other collectible insurance." If there is other insurance in addition to the basic policy, Cincinnati provides that "the other insurance will pay first and this policy will be in excess of the other insurance."
In deciding insurance coverage questions, we must begin with a review of the insurance policy at issue because insurance policies, like other contracts, "are matters of agreement by the parties and the function of a court is to determine what the agreement was and enforce it." Fillmore v. Iowa Nat'l Mut. Ins. Co., 344 N.W.2d 875, 877 (Minn.App.1984). In ascertaining what the agreement was, we must construe the policy according to the terms the parties have used, and we must give the policy language its ordinary and usual meaning so as to give effect to the parties' intent as it appears from the contract. Dairyland Ins. Co. v. Implement Dealers Ins. Co., 294 Minn. 236, 244-45, 199 N.W.2d 806, 811 (1972). Where there is no ambiguity in an insurance policy, there is no room for construction. Id. at 244,199 N.W.2d at 811.
It is not disputed that Cincinnati's policy is an "umbrella" policy that provides "excess" insurance coverage. The nature and the legal and practical significance of an umbrella excess insurance policy are well-known, as the Minnesota Supreme Court has explained:
An umbrella policy, typically, requires the insured to carry underlying liability insurance up to a certain limit with a different insurance company. The umbrella insurer then provides an "umbrella" over this underlying coverage by agreeing to pay that part of any claim against the insured that exceeds the limits of the underlying coverage up to the limits of the umbrella. This arrangement enables the umbrella insurer to offer high limits at a relatively modest premium. The umbrella policy is attractive to the prudent person who wants protection for the infrequent but always possible and much-to-be-dreaded catastrophic loss. The policy can be issued for a relatively modest premium because most claims are absorbed by the underlying insurer, and also because the umbrella insurer's defense costs are ordinarily less than those of other insurers. The cost of defense is no small item. Indeed, in this case defense costs far exceeded the amount paid to settle the claim.
Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161, 165 (Minn.1986) (citation omitted).
Umbrella insurers are generally liable only for the amount of loss or damage in excess of coverage provided by the primary policy. Seaway Port Auth. v. Midland Ins. Co., 430 N.W.2d 242, 247 (Minn. App.1988) (citing 16 George J. Couch et al., Couch on Insurance § 62.48 (2d ed. 1983)).
The plain and ordinary meaning of "excess" is that it is over and above some other quantity. See The American Heritage Dictionary of the English Language 638 (3d ed. 1992) (stating excess is "[t]he amount or degree by which one quantity exceeds another"). Applying the language of Cincinnati's policy in its ordinary sense, the excess coverage is "over and above the amounts provided" in the AMICA policy. Although respondents argue that the absence of an exhaustion clause in the Cincinnati policy is relevant, we need not address that issue. We conclude, instead, that respondents raise a stronger, and ultimately determinative issue.
The district court noted in its thorough and lucid memorandum that to hold that Cincinnati had no duty to defend or indemnify would "nullify the intent of the settlement" or would void the settlement and "deprive the Pennistons of the protection from personal exposure that they bargained for in the agreement." Thus, the critical question on appeal is: Did the district court correctly assess the effect of the settlement agreement on the availability of umbrella coverage? We conclude that the answer to that question is "Yes."
We note initially that there is little merit to Cincinnati's argument that the settlement requires Cincinnati to "drop down" and provide coverage at lower limits, thus forcing an increase in premiums for umbrella policies. Cincinnati's duty to indemnify will be only for amounts over and above the primary policy limit. The duty to defend has already been assumed, and Cincinnati is not seeking to recover the costs of defense.
Caselaw is informative in deciding how a settlement agreement affects the question of when umbrella coverage is available. In Drake v. Ryan, 514 N.W.2d 785 (Minn. 1994), the Minnesota Supreme Court adopted the rationale of the Wisconsin Supreme Court in Loy v. Bunderson, 107 Wis.2d 400, 320 N.W.2d 175 (1982), and approved a settlement under which the plaintiff could reserve a claim against defendant's excess liability carrier for dam ages exceeding the limits of the primary policy. The Drake court addressed the concerns raised by such a settlement as follows:
[Appellant] also asserts that if a primary insurer is permitted to settle for less than its policy limits, plaintiffs and the primary insurer will make "token settlements." This concern is not well-founded. When, as in this case, plaintiffs agree to "swallow the gap" between the amount of settlement and the primary policy limits, their own self-interest generally will prevent them from reaching a token settlement.
Drake, 514 N.W.2d at 789.
After a thorough discussion of public policy considerations, the Drake court concluded that "[o]n balance, public policy considerations favor the enforcement of modified Loy releases in Minnesota." Id. at 790.
The Drake court left for [a]nother day [the] argument regarding "umbrella insurers" and the rising cost of excess insurance if primary carriers can so easily shift the cost of defense to excess insurers.
Id. at 789.
"Another day" has come in this case. Just as the Drake court found Loy to be persuasive, we find persuasive a later Wisconsin case construing Loy. Teigen v. Jelco of Wisconsin, Inc., 124 Wis.2d 1, 367 N.W.2d 806 (1985), involved an umbrella policy. Rejecting the argument that an umbrella policy must be treated differently from the primary policy in Loy, the Teigen court stated:
If the issue of the existence of a true primary/excess insurance situation had been fundamental to our reasoning behind the Loy principle, then our holding in Loy would not control in the present suit. However, that is not the case. The rationale behind our affirmance of the "Loy Release/Covenant Not To Sue" is not anchored to the issue of whether a true primary/excess insurance situation exists. The desirability of Loy-type agreements lies in the encouragement of partial settlements in future cases, thereby fostering effective and expeditious resolution of lawsuits. Partial settlements not only benefit the parties involved, but the justice system as a whole.
Id. at 7, 367 N.W.2d at 809-10.
We conclude that the Teigen rationale mirrors that of Drake, and that the public policy considerations of Drake and Teigen are identical. Certainly, the effective and expeditious resolution of lawsuits is a commendable goal; one fully consistent with the public policy of Minnesota. Indeed, as noted by the district court in this case, Minnesota has a history of approving and encouraging partial settlements of claims. See Frey v. Snelgrove, 269 N.W.2d 918, 921-22 (Minn.1978); Kellen v. Mathias, 519 N.W.2d 218, 223 (Minn.App.1994); Klimek v. State Farm Mut. Auto. Ins. Agency, 348 N.W.2d 103, 106 (Minn.App.1984).
We agree with the observation of the district court that
the strong public policy expressed in Schmidt v. Clothier and in Teigen, takes precedence over the speculative argument that Drake settlements will increase the cost of umbrella coverage. It is unlikely that plaintiffs will settle claims against primary carriers for deep discounts simply to take a chance against the excess coverage. To conclude otherwise requires the assumption that plaintiffs and their attorneys will frequently make decisions against their own best interests. It is more in keeping with the expressed policy of this state to encourage partial settlement of claims and prompt payment to injured parties.
The Drake court adopted the rationale of Loy. The Teigen court declared the public policy considerations of Loy to be equally applicable in cases involving umbrella policies. We conclude that the public policy considerations of Drake also should be equally applicable in cases involving umbrella policies.
DECISION
The district court correctly determined that coverage under an umbrella policy becomes available when the injured party, the insured, and the primary insurer reach a settlement for less than the primary policy limits and the injured party agrees to absorb the gap between the settlement amount and the primary policy limits.
Affirmed.
. In Drake, both policies actually paid claims from "dollar-one." The policy covering the owner of the involved vehicle was deemed to be "primary," and the policy covering the driver of the involved vehicle was deemed to be "excess." 514 N.W.2d at 786.