Court Opinion

ID: 9522849
Source: CourtListenerOpinion
Date Created: 2023-08-07 02:32:49.704565+00
Date Added: 2024-06-11T13:04:04.785762
License: Public Domain

Stephan, J.,
dissenting.
I respectfully dissent. In my view, the majority has made an unwarranted departure from the controlling legal rule clearly articulated in Shelter Ins. Cos. v. Frohlich, 243 Neb. 111, 498 N.W.2d 74 (1993), and Continental Western Ins. Co. v. Swartzendruber, 253 Neb. 365, 570 N.W.2d 708 (1997), that equitable principles of subrogation may be modified by a specific contractual provision.
The group health insurance policy at issue here gives Blue Cross a contractual subrogation interest in Dailey’s personal injury claim against Union Pacific and a contractual right to reimbursement from Dailey with respect to settlement proceeds he receives from Union Pacific. Both provisions of the policy, which are set forth in full in the majority opinion, provide that they shall apply “regardless of whether or not there has been full compensation.” Because we have noted that “a right to reimbursement is encompassed within the concept of subrogation,” Continental Western Ins. Co., 253 Neb. at 371, 570 N.W.2d at 712, I will focus my analysis on the issue of whether Blue Cross has an enforceable conventional subrogation right arising from the express provisions of its policy, notwithstanding the fact that Dailey has not been fully compensated for his injuries.
In Frohlich, this court recognized that there are two distinct types of subrogation: subrogation based on a contract, known as conventional subrogation, and subrogation arising by operation of law, known as legal subrogation. In comparing the two, we stated:
Generally, subrogation is unavailable until the debt owed to a subrogor has been paid in full. ... However, if a contract provides for subrogation on payment of less than the full amount of a debt or loss, partial payment of a debt or loss may be the basis for subrogation. . . . However, unless a contract specifically provides otherwise, equitable *747principles apply even when a subrogation right is based on contract. . . . Also, if a contractual right of subrogation is merely the usual equitable right which would have existed in any event in the absence of a contract, equitable principles control subrogation.
(Citations omitted.) (Emphasis supplied.) Frohlich, 243 Neb. at 117-18, 498 N.W.2d at 78-79. Applying these general principles in the context of insurance, we concluded that “an insurance policy reaffirms the rights of parties relative to subrogation but, in the absence of an express provision to the contrary, does not alter fundamental principles pertaining to subrogation.” Id. at 119, 498 N.W.2d at 79. After determining that the policy at issue in Frohlich did not define the precise nature or extent of the insurer’s subrogation interest and that the record did not disclose whether the insured had been fully compensated by the tort settlement, we reversed a judgment in favor of the insurer and remanded the cause for further proceedings.
In my view, Frohlich clearly recognized the right of an insurance company to specifically contract for a conventional subrogation right, regardless of whether its insured has been fully compensated by a tort settlement with a third party. Applying Nebraska law in McIlheran v. Lincoln Nat. Life Ins. Co., 31 F.3d 709 (8th Cir. 1994), the Eighth Circuit Court of Appeals reached the same conclusion. At issue in Mcllheran was a provision in a group health insurance policy which stated that the insurer’s subrogation right against the proceeds of a third party settlement “ ‘will apply whether or not payment has been made by the third party for all of the Insured Individual’s losses.’ ” (Emphasis omitted.) Id. at 711. Rejecting an argument that this provision was contrary to the law and public policy of Nebraska, the McIlheran majority relied upon this court’s pronouncement in Shelter Ins. Cos. v. Frohlich, 243 Neb. 111, 498 N.W.2d 74 (1993), that “ ‘if a contract provides for subrogation on payment of less than the full amount of a debt or loss, partial payment of a debt or loss may be the basis for subrogation.’ ” McIlheran, 31 F.3d at 711, quoting Frohlich, supra. The McIlheran majority reasoned that if the Frohlich court had believed that policy language providing for subrogation in the absence of full recovery would violate Nebraska law or policy, it “would have held that in no case may *748an insurer subrogate if the insured has not been fully compensated.” 31 F.3d at 711.
A further indication that we meant what we said in Frohlich is apparent from the structure of our analysis in Continental Western Ins. Co. v. Swartzendruber, 253 Neb. 365, 570 N.W.2d 708 (1997). In that case, an insurance carrier claimed a right of conventional subrogation with respect to a third-party tort settlement that did not result in full compensation to the injured insured. Citing the rule from Frohlich that “in the absence of an express provision to the contrary, an insurance policy reaffirms the rights of parties relative to subrogation but does not alter the fundamental principles pertaining to subrogation,” we first examined whether the subrogation provision of the policy described only rights which would have existed under equitable principles of subrogation, noting that if it did, then the subrogation clause could not be fairly characterized as a “distinct contractual undertaking” between the parties which would supersede the equitable “made whole” rule. Continental Western Ins. Co., 253 Neb. at 370, 570 N.W.2d at 711. We concluded that the policy did not create a contractual right that was different from the insurer’s equitable right to subrogation and that thus, there was no right of subrogation where the insured had not been fully compensated by her settlement with the tort-feasor. There would have been no reason to engage in this analysis if, as the majority holds today, an express policy provision creating a subrogation right in the absence of full compensation is unenforceable, and statements to the contrary in Frohlich are mere dicta.
In the instant case, the district court followed the analytical framework which we outlined in Continental Western Ins. Co. and correctly determined that the health insurance policy in question included a distinct contractual undertaking which gave Blue Cross subrogation rights regardless of whether its insured is fully compensated by a third-party tort settlement. The district court then concluded that the provision did not contravene public policy and was enforceable.
In holding to the contrary, the majority adopts the reasoning of Wisconsin courts that a subrogation clause of the type at issue here is unenforceable because “it is inequitable.” Ruckel v. Gassner, 253 Wis. 2d 280, 295, 646 N.W.2d 11, 19 (2002). See *749Rimes v. State Farm Mut. Auto. Ins. Co., 106 Wis. 2d 263, 316 N.W.2d 348 (1982). I disagree with this reasoning because, as another court has succinctly noted: “This is not a case based in equity, but rather on contractual terms.” In re Estate of Scott, 208 Ill. App. 3d 846, 849, 567 N.E.2d 605, 607, 153 Ill. Dec. 647, 649 (1991).
An insurance policy is a contract. Guerrier v. Mid-Century Ins. Co., 266 Neb. 150, 663 N.W.2d 131 (2003); Hall v. Auto-Owners Ins. Co., 265 Neb. 716, 658 N.W.2d 711 (2003). In reviewing an insurance policy, we construe the policy as any other contract to give effect to the parties’ intentions at the time the writing was made. Where the terms of a contract are clear, they are to be accorded their plain and ordinary meaning. Auto-Owners Ins. Co. v. Home Pride Cos., ante p. 528, 684 N.W.2d 571 (2004); Poulton v. State Farm Fire & Cas. Cos., 267 Neb. 569, 675 N.W.2d 665 (2004). The majority finds no ambiguity in the policy, noting that it “allowed subrogation and a right to recovery regardless of whether the insured was fully compensated for his or her loss.” Nevertheless, citing Shelter Ins. Cos. v. Frohlich, 243 Neb. 111, 498 N.W.2d 74 (1993), the majority construes the policy “to confirm, but not expand, the equitable subrogation rights of insurers.” By engaging in such construction of unambiguous policy language, the majority has ignored the established principle that when the terms of an insurance contract are clear, no judicial construction is required or permitted. See Boutilier v. Lincoln Benefit Life Ins. Co., ante p. 233, 681 N.W.2d 746 (2004). Moreover, I am unaware of any previous case in which this court has invalidated an unambiguous provision of an insurance policy based upon equitable considerations, as the majority has done here. Does this mean that insurance policies and other contracts will now be required to conform to all of the requirements of equity before the law will enforce them?
This court has now joined a minority of jurisdictions which imposes a bright-line rule that an insurance company may not utilize a conventional subrogation clause which expressly applies regardless of whether the injured insured has received full compensation from a tort-feasor. Only two jurisdictions appear to soundly adhere to this rule, as the Wisconsin cases cited above and Hare v. State, 733 So. 2d 277 (Miss. 1999), so hold. *750The relevant authority in two other jurisdictions is questionable, because both York v. Sevier County Ambulance Authority, 8 S.W.3d 616 (Tenn. 1999), and Davis v. Kaiser Foundation, 271 Ga. 508, 521 S.E.2d 815 (1999), rely heavily on the reasoning of Powell v. Blue Cross and Blue Shield of Alabama, 581 So. 2d 772 (Ala. 1990), overruled, Ex parte State Farm Fire and Casualty Co., 764 So. 2d 543 (Ala. 2000), based upon a determination by the Supreme Court of Alabama that Powell was wrongly decided. As the majority notes, Alabama law currently provides that an agreement of the parties may supersede the general rule that a subrogee is not entitled to recover unless the insured has had a full recovery. See Ex parte Cassidy, 772 So. 2d 445 (Ala. 2000). Given the subsequent overruling of Powell, the opinions from Tennessee and Georgia are not persuasive.
In Frohlich, we cited and relied upon Westendorf by Westendorf v. Stasson, 330 N.W.2d 699 (Minn. 1983), as well as other cases, for the rule that “unless a contract specifically provides otherwise, equitable principles apply even when a subrogation right is based on contract.” Frohlich, 243 Neb. at 118, 498 N.W.2d at 79. The actual language used by the Minnesota Supreme Court in Westendorf by Westendorf was “absent express contract terms to the contrary, subrogation will not be allowed where the insured’s total recovery is less than the insured’s actual loss.” 330 N.W.2d at 703. In Hershey v. Physicians Health Plan, 498 N.W.2d 519 (Minn. App. 1993), the Minnesota Court of Appeals considered the question of whether the phrase “absent express contract terms to the contrary” in Westendorf by Westendorf permitted an insurer to contract for subrogation regardless of whether the insured had been fully compensated, and concluded that it did. The court determined that the language in Westendorf by Westendorf recognizing a right to override the general equitable rule by contract was not dictum. The court concluded:
We are mindful that important equity and policy concerns support the full recovery rule and that the adhesive nature of insurance contracts generally compels courts to be vigilant in safeguarding the rights of insureds. Nonetheless, in Westendorf the supreme court flatly stated that the full *751recovery rule may be modified by contract; we are obliged to follow that unambiguous statement.
Hershey, 498 N.W.2d at 521.
Other courts have likewise concluded that an insurance policy or other contract may supersede the equitable rule by unambiguously providing for a subrogation right in a tort settlement even where the insured does not receive full compensation. Fields v. Farmers Ins. Co., Inc., 18 F.3d 831 (10th Cir. 1994) (applying Oklahoma law); Ex parte State Farm Fire and Casualty Co., 764 So. 2d 543 (Ala. 2000); Samura v. Kaiser Foundation Health Plan, 17 Cal. App. 4th 1284, 22 Cal. Rptr. 2d 20 (1993); In re Estate of Scott, 208 Ill. App. 3d 846, 567 N.E.2d 605, 153 Ill. Dec. 647 (1991); Culver v. Insurance Co. of North America, 115 N.J. 451, 559 A.2d 400 (1989); Peterson v. Ins. Co., 175 Ohio St. 34, 191 N.E.2d 157 (1963). See Hill v. State Farm Mut. Auto. Ins. Co., 765 P.2d 864 (Utah 1988) (recognizing equitable principles underlying subrogation can be modified by contract, but applying equitable principles because record did not include alleged contractual modification), disapproved on other grounds, Sharon Steel v. Aetna Cas. and Sun, 931 P.2d 127 (Utah 1997).
While I conclude that Nebraska law specifically permits a contractual override of the equitable “made whole” principle of subrogation, I acknowledge that this rule could lead to a harsh result. It is true that a subrogated health insurer having a policy which includes such an override provision could recover 100 percent of its claim from a third-party tort settlement, while the injured insured could recover a much smaller percentage of his or her provable claim from the remaining proceeds. Such a result can, of course, be anticipated and alleviated through negotiation, as was done in this case where Dailey secured an agreement from Union Pacific to satisfy and indemnify him against any subrogation lien which Blue Cross may have, in addition to the payments which Union Pacific has agreed to make directly to Dailey. However, I anticipate that the bright-line rule adopted by the majority, which precludes any recovery by a subrogated insurer unless the insured has been made completely whole by the tort-feasor, will also lead to harsh results. As I understand the reasoning of the majority, if an injured party settles for 99 *752percent of full compensation, a subrogated health insurance carrier could recover nothing from the settlement and its rights against the tort-feasor would be extinguished. A better solution to this dilemma would be a requirement that where a tort settlement yields less than full compensation, the injured party and the subrogated health insurer would share the proceeds of the settlement on a pro rata basis. The imposition of such a requirement, however, would require legislation. See Neb. Rev. Stat. § 44-3,128.01 (Reissue 1998) (permitting pro rata subrogation under medical payments coverage of automobile liability policies). In the absence of such legislation with respect to health insurance policies, it is my opinion that an insurer is free to include in its policy the type of subrogation clause before us in this case and that the courts are obligated to enforce them. The judgment of the district court was therefore correct in all respects, and I would affirm.
Connolly, J., joins in this dissent.