Opinion ID: 1133441
Heading Depth: 2
Heading Rank: 2

Heading: The Circuit Court Erred in Dismissing Appellants State Farm Fire, HBIF, and Hebert's Claims.

Text: Appellants contend that genuine issues of material fact preclude the entry of summary judgment against them, because: (1) there was no evidence of an express agreement authorizing Marn to act on behalf of HBIF and Hebert; (2) there was no evidence of representations by HBIF, Hebert, or Marn that Marn had any authority to settle on HBIF and Hebert's behalf; and (3) the mere fact that Marn was an officer of HBIF was insufficient to establish apparent authority. Appellants also contend that there are genuine issues of material fact regarding the viability of State Farm Fire's subrogation claims. We agree and further hold that partial summary judgment should be entered in favor of HBIF, Hebert, and State Farm Fire, with respect to Marn's authority to settle on behalf of HBIF and Hebert.
It is well established that [a]n agency relationship may be created through actual or apparent authority. Cho Mark Oriental Food, Ltd. v. K & K Int'l, 73 Haw. 509, 515, 836 P.2d 1057, 1061 (1992) (citations omitted). Actual authority exists only if there has been a manifestation by the principal to the agent that the agent may act on his account and consent by the agent so to act, and may be created by express agreement or implied from the conduct of the parties or surrounding circumstances. Id. at 515-16, 836 P.2d at 1061-62 (internal quotation marks, citations, and brackets omitted) (emphases added). When reviewing an alleged agency relationship premised upon implied authority, the [court's] focus is on the agent's understanding of his authority inasmuch as the relevant inquiry is whether the agent reasonably believes, because of the conduct of the principal (including acquiescence) communicated directly or indirectly to him, that the principal desired him so to act. Id. at 516, 836 P.2d at 1062 (internal quotation marks and citations omitted) (brackets added). Here, there is no evidence in the record of an express agreement authorizing Marn to do anything on behalf of HBIF or Hebert, let alone to prosecute claims, to enter into negotiations, or to settle on behalf of HBIF or Hebert those claims arising out of the January 19, 1992 fire. Similarly, there is no evidence of implied authority. The record is completely silent on Marn's alleged authority to act on behalf of Hebert, who was a resident of the HBIF building and president of HBIF, and yet the circuit court concluded that Hebert's claims arose through [5] Marn and that Marn had the authority to settle on his behalf. Our review of this limited record shows that there is simply no evidence that Marn possessed any authority to act on Hebert's behalf. Nevertheless, Appellees argue that Marn's authority with respect to Hebert is irrelevant because Hebert's claimpersonal to himself for property damage, as asserted in Count Two of the complaintwas disposed of through a stipulated dismissal. From what we can glean from the record, Appellees, however, ignore the fact that Hebert was a co-insured on the State Farm renter's insurance policy issued to both Hebert and Marn. Insofar as Hebert might have suffered property damage from the January 19, 1992 fire, aside from the property damage enumerated in Count Two, the circuit court erred in dismissing Hebert's claim. Regarding Marn's implied authority to act on behalf of HBIF, the record is likewise devoid of any representations, either by word or conduct, by HBIF or Marn to Pacific or Grimmer-Schmidt that Marn was HBIF's agent in any regard. In fact, Marn stated in his affidavit (attached to Plaintiffs' memorandum in opposition to the motions to dismiss) that he filed the original lawsuit in his individual capacity and that at no time did he represent that he was authorized to act on HBIF or Hebert's behalf. Defendants-appellees ground their entire argument in the lone fact that Marn was a corporate officer of HBIF and, therefore, that he must have executed the Agreement on HBIF's behalf. [6] However, absent any evidence of the conduct of the parties or the surrounding circumstances, there is simply insufficient support for a conclusion that Marn possessed the implied authority to execute the Agreement on HBIF's behalf. Insofar as the circuit court might have based its ruling on the principle of implied authority, the circuit court erred. The final possible basis of support for the circuit court's holding that Marn was authorized to settle HBIF and Hebert's claims is apparent authority, which arises when the principal does something or permits the agent to do something which reasonably leads another to believe that the agent had the authority he was purported to have. ... The critical focus is not on the principal and agent's intention to enter into an agency relationship, but on whether a third party relies on the principal's conduct based on a reasonable belief in the existence of such a relationship. Cho Mark Oriental Food, Ltd., 73 Haw. at 516-17, 836 P.2d at 1062 (citations omitted); see also Harris v. Waikane, 484 F.Supp. 372, 384-85 (D.Haw.1980). The fundamental and well-settled rule is that when, in the usual course of the business of a corporation, an officer or other agent is held out by the corporation or has been permitted to act for its or manage its affairs in such a way as to justify third persons who deal with him in inferring or assuming that he is doing an act or making a contract within the scope of his authority, the corporation is bound thereby, even though such officer or agent has not the actual authority from the corporation to do such an act or make such a contract. This authority is known as apparent or ostensible authority.... Cosmopolitan Fin. Corp., 2 Haw.App. at 36, 625 P.2d at 394 (citation and footnotes omitted). Again, there is no evidence showing that Marn was Hebert's agent in any regard; therefore, Hebert's claims were incorrectly dismissed. With respect to HBIF, the only evidence is Marn's position as an officer of HBIF and the fact that he rented the compressor. However, there is no evidence in the record that HBIF made any representations about Marn to Pacific or Grimmer-Schmidt or to any other party. Therefore, there is no reasonable basis for defendants-appellees to conclude that Marn possessed the authority to prosecute claims, to enter into negotiations, or to settle such claims on HBIF's behalf. Furthermore, despite defense counsel's unsubstantiated representations at the hearing on the motions that all the elements of agency are present, the circuit court should not have ignored the conflicting evidence adduced by Marn in his affidavit, i.e., that he was never authorized to act on HBIF's behalf. It is well settled that, [w]here the facts pertaining to the existence or nonexistence of an agency are conflicting or conflicting inferences may be drawn from the evidence, those are questions of fact for the determination of the jury.... McDonnell v. Pennington, 40 Haw. 265, 268, reh'g denied, 40 Haw. 311 (1953) (citation omitted); see also DiTullio v. Hawaiian Ins. & Guar. Co., 1 Haw.App. 149, 153, 616 P.2d 221, 225 (1980) (holding that extent of corporate chairman's authority constituted a genuine issue of material fact precluding summary judgment). Based upon the record, we hold that the circuit court erred in granting summary judgment with respect to Hebert, HBIF, and State Farm Fire's claims contained within Counts One, Three, and Four. Further, insofar as the record is completely devoid of any support for a conclusion that Marn had the authority to prosecute claims, to enter into negotiations, or to execute the Agreement on behalf of Hebert or HBIF, or on behalf of State Farm Fire with respect to its subrogation claims arising through Hebert and HBIF, we vacate the circuit court's judgment and remand the matter to the circuit court with instructions to enter partial summary judgment in favor of HBIF, Hebert, and State Farm Fire on the limited issue of authority.
The circuit court concluded that all of State Farm's subrogation claims, with the exception of those contained within Count Two, were extinguished by Marn's settlement. Insofar as Marn lacked the authority to settle claims on behalf of HBIF and Hebert, as discussed above, it therefore follows that State Farm Fire's subrogation claims with respect to HBIF and Hebert survived. State Farm Fire's subrogation claim arising out of its renter's insurance policy with respect to Marn, however, presents an altogether different question. [7]
As one might guess, subrogation plays an important role in insurance law.. . . When subrogation[] runs its course, the legally responsible third party reimburses the insurer for having paid the debt which the party owed the insured. Robert H. Jerry, II, Understanding Insurance Law §§ 96[a] and 96[b], at 600 (2nd ed.1996). Subrogation is used to refer to both a legal right and a legal action. The word itself comes from the Latin `subrogare,' which means `to put in the place of another or to substitute.' 4 R. Long, The Law of Liability Insurance § 23.01, at 23-2 (1998); see also Taylor v. Government Employees Ins. Co., 90 Hawai`i 302, 310, 978 P.2d 740, 748 (Haw.1999) (citing Shimabuku v. Montgomery Elevator Co., 79 Hawai`i 352, 358, 903 P.2d 48, 54 (1995)). In the insurance field, subrogation is needed in order to preserve the principle of indemnity. The Law of Liability Insurance, supra, § 23.01, at 23-3. Basically, two different kinds of subrogation exist. `Equitable subrogation' (sometimes called, curiously enough, `legal subrogation') is a principle of equity; it is effected by operation of law and arises out of a relationship that need not be contractually based.[ [8] ] `Conventional subrogation' arises out of the contractual relationship of the parties .... [9] Understanding Insurance Law, supra, §§ 96[a] and 96[b], at 602-04 (footnotes and brackets added); see also 3 Alan I. Widiss, Uninsured and Underinsured Motorist Insurance § 44.4, at 364 (2d ed.1995 and Cum.Supp.1998); The Law of Liability Insurance, supra, § 23.02, at 23-5. Accordingly, [a]n insurer which pays a claim against an insured for damages caused by the default or wrongdoing of a third party is entitled to be subrogated to the insured's rights against such third party, irrespective of the nature of the contract ... even though the policy contains no stipulations to that effect.  8B John A. Appleman and Jean Appleman, Insurance Law and Practice § 4941, at 31-38 (1981) ( Appleman on Insurance ) (emphases added); see also Taylor, at 310, 978 P.2d at 748. Because subrogation involves stepping into the shoes of another, when an insurer brings an action against a tortfeasor based upon its subrogation rights, the insurer's rights flow from the insured's rights. The subrogated insurer, known as the subrogee, can be subrogated to and enforce only such rights as the insured, known as the subrogor, has against the party whose wrong caused the loss. In a subrogation suit, a tortfeasor may assert against the insurer any defense which the tortfeasor could have asserted against the insured. The Law of Liability Insurance, supra, § 23.03[2], at 23-13 to 23-14. Therefore, the general rule provides that an insured may affect its insurer's subrogation rights because they are derivative, i.e., the insurer's subrogation rights rest upon the viability of the insured's claim against the tortfeasor. Id. § 23.04[1], at 23-40. One of the possible defenses is a waiver or release by the insured. If the insured waives its right to bring an action against the tortfeasor, then the insurer is barred from bringing a subrogation action. Id. [10] Most insurance policies, however, contain a provision prohibiting an insured from prejudicing the insurer's subrogation right. A violation of this provision will, in most cases, enable the insurer to deny the insured's claim if it has not already paid it or to recover its money back from the insured if it has already paid. The Law of Liability Insurance, supra, § 23.04, at 23-40; cf. Taylor, at 309-10, 978 P.2d at 747-48 (upholding consent-to-settle clauses in underinsured motorist context while recognizing insurers' duty to act in good faith). Thus, one avenue of reimbursement for the insurance company lies with its insured. A second avenue of reimbursement for the insurer, however, may lie with the tortfeasor. Generally speaking, if an insured settles with and releases the tortfeasor from liability before the insurer pays the loss under the terms of the policy, the insurer cannot enforce its right to subrogation against the tortfeasor when it does pay the claim, unless it can prove that the tortfeasor knew of the insurer's right of reimbursement or can prove collusion between the insured and the tortfeasor in an attempt to defeat the insurer's right. The insurer will, however, have the right to deny the insured's claim on the basis that it violated the contract of insurance since it did prejudice the insurer's subrogation right. If the insured settles with and releases the tortfeasor after payment is made by the insurer, the insurer is entitled to seek reimbursement from the insured. The general rule applies when the tortfeasor does not know of the existence of the subrogation claim. If the tortfeasor or its liability insurer knows of the subrogation claim and settles with the insured, without protecting the insurer's subrogation claim, the release given by the insured does not bar the subrogation claim. The subrogated insurer can still recover from the tortfeasor. .... The basis of the right the subrogated insurer has to reimbursement if the insured settles and destroys its subrogation right appears to be that the insurer is prejudiced when it had no knowledge of the settlement. Surprisingly, there is relatively little law concerning whether the insurer must prove that it was prejudiced, that is, that it could have recovered on the claim, had the insured not settled with the tortfeasor. If the insurer could not have recovered, it is not prejudiced[ [11] ] and has no claim or defense against its insured. Id. § 23.04[1], at 23-41 to 23-42 (emphasis added) (some footnotes omitted and some added). See also 6A Appleman on Insurance, supra, § 4092, at 244 (Another line of authority ... supports the view that a release by the insured to a wrongdoer whose negligence caused the loss does not destroy the insurer's subrogation rights where the tortfeasor has knowledge of the insurer's subrogation right.); Gibbs v. Hawaiian Eugenia Corp., 966 F.2d 101, 107 (2d Cir. 1992) (Where a third party obtains a release from an insured with knowledge that the latter has already received payment from the insurer or with information that, reasonably pursued, should give him knowledge of the existence of the insurer's subrogation rights, such a release does not bar the right of subrogation of the insurer.); National Ins. Underwriters v. Piper Aircraft Corp., 595 F.2d 546, 551 (10th Cir.1979) (noting that the typical solution is that a release executed with knowledge of the insurer's subrogation rights does not necessarily bar the insurer from asserting those rights); Miller v. Auto-Owners Ins. Co., 392 So.2d 1201, 1203 (Ala. Ct.App.1981) (holding that litigation to enforce insurer's subrogation claim was sufficient notice to render tortfeasor's settlement ineffective against insurer); Vigilant Ins. Co. v. Bowman, 128 Ga.App. 872, 198 S.E.2d 346, 347-48 (1973) (holding that release did not defeat insurer's subrogation rights where wrongdoer had actual notice); Employers Mut. Cas. Co. v. Meggs, 229 So.2d 823, 824 (Miss.1969) (holding dismissal improper where circumstantial evidence shows tortfeasor had knowledge of insurer's subrogation rights prior to settlement); Aetna Ins. Co. v. Gilchrist Bros., 85 N.J. 550, 428 A.2d 1254, 1259 (1981) (holding that general release with insured's estate did not affect insurer's subrogation rights when tortfeasor had knowledge through correspondence with insurer), superseded by statute N.J.S.A. 39:6A-9.1 (conferring primary right of reimbursement to the no-fault insurance carrier regardless of tortfeasor's knowledge); Scavone v. Kings Craft Corp., 55 A.D.2d 807, 390 N.Y.S.2d 20, 20 (1976) (holding that insurer's subrogation rights were not extinguished by release that failed to include subrogated economic loss); Southern Pac. Transp. Co. v. State Farm Mut. Ins. Co., 480 S.W.2d 59, 63-64 (Tex.Ct. App.1972) (holding insurer not barred from recovery under either doctrine of res judicata or of splitting causes of action where tortfeasor had knowledge of insurer's subrogation claim). Therefore, we hold that, in the context of fire and casualty insurance, if the insurer proves (1) that the tortfeasor had actual or constructive knowledge of the insurer's subrogation right of reimbursement or that the tortfeasor and insured colluded to destroy the insurer's subrogation right and (2) that the insurer's subrogation right of reimbursement is actually prejudiced by the insured's release of the tortfeasor, then the insurer may maintain a subrogation action against the tortfeasor. In other words, the insured's release of the tortfeasor will not affect the insurer's subrogation right of reimbursement when the tortfeasor acts inequitably and causes actual prejudice to the insurer. Our decision today finds further support in this court's decisions that have preserved subrogation rights from third-party settlement in a number of analogous cases addressing statutorily-protected subrogation rights. For example, in Peters v. Weatherwax, 69 Haw. 21, 27, 731 P.2d 157, 161-62 (1987), this court interpreted a statutory provision that stated that [t]he department shall as to this right be subrogated to any right or claim [that] a claimant ... has against [the] third person[.] Id. at 26, 731 P.2d at 161 (brackets added). The statute did not define the term subrogated, and, therefore, the Peters court turned to the common law for guidance regarding its definition. In so doing, the Peters court stated: Subrogation is a venerable creature of equity jurisprudence, so administered as to secure real and essential justice without regard to form[.] H. Sheldon, The Law of Subrogation § 1, at 2 (1882) (footnote omitted). It is broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which, equity and good conscience, should have been discharged by the latter[.] Id. (footnote omitted). It is defined by Sheldon to be `the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt.' Kapena v. Kaleleonalani, 6 Haw. 579, 583 (1885). When subrogation occurs, [t]he substitute is put in all respects in the place of the party to whose rights he is subrogated. Id. In effect, he steps into the shoes of the party. See Putnam v. Commissioner, 352 U.S. 82, 85, 77 S.Ct. 175, 176, 1 L.Ed.2d 144 (1956); A. Windt, Insurance Claims and Disputes § 10.05, at 409 (1982); Black's Law Dictionary 1279 (5th ed.1979). .... ... Furthermore, [a]lthough, as between debtor and creditor, the debt may be extinguished, yet, as between the person who has paid the debt and the other parties, the debt is kept alive [by the doctrine of subrogation], so far as may be necessary to preserve the securities. H. Sheldon, supra, § 11, at 10 (footnote omitted). When the legislature enacts into statute law a common law concept, . . . that is a clue that the courts are to interpret [and apply] the statute with the freedom with which they would construe and apply a common law principle[.] Posner, Statutory Interpretationin the Classroom and in the Courtroom, 50 U.Chi.L.Rev. 800, 818 (1983). Under the concept borrowed from the common law here, a court may give restitution . . . and prevent the unjust enrichment[ [12] ] of the defendant, where the plaintiff's property has been used in discharging an obligation owed by the defendant[.] Restatement of Restitution § 162 comment a (1937). Unjust enrichment in this instance could only be prevented if the State is allowed to assert its claim for special damages. Otherwise, the defendants may have discharged their tort liability for less than what was just in the circumstances at the expense of the State; and it would then be unjust for them to retain the benefit of the State's assumption of the obligation to pay the accident victim's medical bills. Id. at 27, 29, 731 P.2d at 161, 162 (emphases and footnote added) (some brackets added and some in original). Applying principles of common law and equity, [13] the Peters court weighed the State's statutory subrogation rights against the tortfeasor's contractual release rights and held that a recipient of state medical assistance lacked the capacity to waive the State's subrogation rights through a settlement or release agreement with the tortfeasor. Similarly, in Grain Dealers Mutual Insurance Company v. Pacific Insurance Company Ltd., 70 Haw. 211, 217, 768 P.2d 226, 229-30 (1989), this court addressed subrogation rights created by a no-fault insurance policy and enforced through statute. The Grain Dealers court explained that neither the legislative history nor the scheme of the no-fault statute suggests that the legislature, in using the term `subrogation' in [HRS] § 294-7, did not intend to encompass the common law concept of subrogation wherein the party who paid the debt pursues its subrogated claims against the tortfeasor/debtor. Id. at 216, 768 P.2d at 229 (brackets added). Once again, applying principles of equity, this court held that Grain Dealers is subrogated to any rights or claims which [the insured] has against the tortfeasors ..., and as to these rights, [the insured] was without authority to effectuate a waiver. Id. (brackets added). In Pacific Insurance Company, Ltd. v. Esperanza, 73 Haw. 403, 833 P.2d 890 (1992), a case involving temporary disability insurance, this court reaffirmed its distaste for a tortfeasor's unjust enrichment. In Pacific, 73 Haw. at 404, 833 P.2d at 891, the insurer attempted to recover its disability payments from Esperanza, the insured, who had settled with the tortfeasor's insurer for general damages of $52,500.00. This court held that Pacific could recover from the insured the amount of lost wages, if any, included in the settlement and distinguished Peters v. Weatherwax on the basis that the unjust enrichment that the Peters court referred to was that of the [tortfeasor], not [the insured]. Id. at 408, 833 P.2d at 893 (brackets added). The Pacific court, however, did not disavow the Peters principle that the assistance recipient or the insured lacked the authority to compromise the insurer's subrogation rights. Furthermore, in Shimabuku, 79 Hawai`i at 354-55, 903 P.2d at 50-51, this court addressed subrogation in the statutory context of worker's compensation. Shimabuku stipulated to dismiss his claims against Montgomery, in essence releasing Montgomery for injuries incurred during the scope of Shimabuku's employment, without his employer's permission or acquiescence. Relying upon Peters v. Weatherwax, supra , and Kapena v. Kaleleonalani, supra , the Shimabuku court determined that an employer's subrogation rights under Hawai`i Revised Statutes (HRS) § 386-8 (1985) [14] outweighed the insured and the tortfeasor's interests in the finality of their settlement. Id. at 358, 903 P.2d at 54. The court held that the stipulation contravened the employer's statutory subrogation interest. Finally, in dictum, the Shimabuku court focused upon the fact that the tortfeasor knew or reasonably should have known of the insurer's subrogation interests. Id. at 359, 903 P.2d at 55. Weighing the policy considerations underlying an insurer's right of subrogation against those considerations supporting the finality of settlement, as discussed infra, we hold, in the context of fire and casualty insurance, that the insurer may have a second avenue of reimbursement (in addition to contractual remedies against the insured for a breach of the insurance contract), in order to recover a total amount limited to the benefits actually paid to its insured. We hold that, if the insurer proves (1) that the tortfeasor had actual or constructive knowledge of the insurer's subrogation right of reimbursement or that the tortfeasor and insured colluded to destroy the insurer's subrogation right and (2) that the insurer's subrogation right of reimbursement is actually prejudiced by the insured's release of the tortfeasor, then the release, settlement, and/or indemnification agreement executed by the insured and the tortfeasor will not bar a subrogation action by the insurer against the tortfeasor. Equity simply does not support the conclusion that the insurer, which has performed its contractual obligations under the policy in good faith, should be forced to unjustly enrich a tortfeasor who attempted to settle a claim with knowledge of the insurer's subrogation claim. Where the insurer's subrogation right clashes with the tortfeasor's contractual release right, the insurer's subrogation right will prevail if the tortfeasor acted inequitably. [15] Therefore, based upon the foregoing, the circuit court erred in dismissing State Farm Fire's subrogation claim arising through its payment to Marn on the renter's insurance policy because there remain genuine issues of material fact precluding summary judgment, e.g., whether Marn's renter's policy with State Farm contained a provision prohibiting compromise of its subrogation rights or whether defendants-appellees Pacific and Grimmer-Schmidt knew that State Farm Fire already made payments to Marn under the renter's insurance policy.
In addition to the actions of an insured, [a]n insurer may relinquish its subrogation rights, either knowingly or unknowingly. It may do this expressly by waiving its right to subrogation or by engaging in conduct inconsistent with its exercise of its subrogation right. Thus, an insurer's failure to assert its subrogation right may be construed as a waiver. The Law of Liability Insurance, supra, § 23.04[2], at 23-45 to 23-46. In this context, we deem the Grain Dealers court's discussion regarding the insurer's responsibility to exercise reasonable diligence in protecting its subrogation rights apposite and persuasive. The Grain Dealers court stated: This right of subrogation ... is not absolute.... Equitable principles dictate that the subrogee exercise reasonable diligence to protect its subrogation interest. Consolidation Coal Co., Inc. v. Liberty Mutual Ins. Co., 406 F.Supp. 1292, 1301 (W.D.Pa.1976); Travelers Insurance Co. v. Hartford Accident & Indemnity Co., 222 Pa.Super. 546, 550, 294 A.2d 913, 915 (1972); Baker v. Fargo Building & Loan Ass'n., 64 N.D. 317, 252 N.W. 42 (1934). In a case falling within the ambit of HRS § 294-7, we hold that reasonable diligence requires at least that the no-fault insurer which claims subrogation rights give timely and reasonable notice of its claim to the tortfeasor and the tortfeasor's insurer. In the instant case, the record clearly indicates that Grain Dealers gave timely and reasonable notice to Pacific Insurance of its subrogation claim for fifty percent of no-fault benefits paid to [the insured]. Id. at 217-18, 768 P.2d at 230 (brackets and emphasis added); see also Taylor, at 311, 978 P.2d at 749 (citing Grain Dealers ). HRS § 663-10 (1993) [16] provides further support for an equitable requirement of diligence, insofar as it provides protection for an insurer that exercises due diligence by filing a timely notice of its claim. Therefore, we hold that an insurer may waive its subrogation right either expressly or impliedly. [17] Applying the above mentioned to the instant case, we also hold that a genuine issue of material fact remains as to whether State Farm Fire exercised due diligence in asserting its subrogation rights.