Indemnity vs. Subrogation - A Practical Guide
Consider this typical scenario. Your insured is operating his vehicle hauler and attached trailer and is involved in an accident in Minnesota when a passenger vehicle collides with his trailer. Your insured is not injured but there is a small amount of property damage. Your company opens a vehicle damage file, adjusts and pays the claim. The other driver has no vehicle damage, but turns to his own auto policy for no-fault benefits. Then, about a year after the accident, the other driver’s auto insurer brings an action against your insured in district court, asserting a subrogation claim for the no-fault benefits paid. Given Minnesota’s general prohibition against no-fault subrogation, can the other driver’s auto insurer sustain its claim? Yes and no.
The No-Fault Act provides for specified and limited rights of indemnity and subrogation for the recovery of no-fault benefits paid. Indemnity is a distinct and separate remedy as compared to subrogation. Namely, an insurer’s right to indemnity for no-fault benefits applies in certain situations to compel another insurer to indemnify, or compensate, the first insurer for the no-benefits it has paid. Subrogation, on the other hand, is an insurer’s right of recovery against its insured to prevent the insured from receiving a double recovery (from both the no-fault carrier and the tortfeasor for economic losses). No-Fault subrogation, therefore, is different from common law subrogation where the insurer steps into the shoes of its insured and asserts a direct action against the tortfeasor.
INDEMNITY
When Does Indemnity Apply?
Indemnity for no-fault benefits will apply when a heavy commercial vehicle is responsible for the accident giving rise to the payment of no-fault benefits. Minn. Stat.§65B.53. When evaluating whether an insurer has a right to assert an indemnity claim against the insurer of a commercial vehicle that is responsible for an accident, consider the following outline:
Step 1: Does the adverse vehicle (and any attached trailer) weigh more than 5,500 pounds?
If not, then there simply is no indemnity no matter what “business” or “commercial use” of the vehicle at the time.
If so, then evaluate whether the adverse vehicle is an exempt vehicle under Minn. Stat. §65B.47, subd 1(a). Such exempt vehicles include commuter vans, any vehicle used to transport children to school or a school sponsored activity or as part of a day care operation, or a bus.
If the adverse vehicle is an exempt vehicle, then there is no indemnity.
If the adverse vehicle is not exempt, then go to step 2.
Step 2: Did the accident occur in Minnesota?
If not, then there is no indemnity claim.
If so then indemnity is allowed.
Put simply, if the adverse vehicle is a commercial vehicle, over 5,500 pounds (including the weight of the attached trailer) and is not an exempt vehicle, (bus, child transport vehicle, commuter van, etc.) then no-fault indemnity will apply.
Mandatory Arbitration Means Mandatory
Procedurally, no-fault indemnity claims must name the insurer of the commercial vehicle as the defendant. Minn. Stat. §65B.53 subd. 1. Further, the proper venue is not district court, but mandatory arbitration. Although the general rule is that insurers need not go through Arbitration Forums, Inc. for dispute resolution unless the insurer is a signatory, there is an important exception for no-fault indemnity claims. Indeed, regardless of whether a particular insurer is a signatory, Arbitration Forums, Inc. is the proper forum for such cases. Minn. Stat. §65B.53 subd. 4, and Minnesota Arbitration Rules found at 2770.3100-2770.5200 of the Minnesota Rules.
SUBROGATION
When Does Subrogation Apply?
The first issue in addressing whether there exists a right of subrogation for no-fault benefits is to identify whether the lawsuit was begun in Minnesota, or out of state, since other states have other rules. Subrogation claims for no-fault benefits are creatures of statute and in Minnesota are enforceable only to the extent of preventing a double recovery by the insured. Minn. Stat. §65B.53 subds. 2 and 3. Again, no-fault subrogation is not where the insurer steps into the shoes of its insured and asserts a direct action against the tortfeasor. Instead, the primary purpose of subrogation under the No-Fault Act is to prevent the double recovery of the economic loss by the insured where there is not a statutory set-off for economic loss benefits applied to the tort recovery. Milbrandt v. American Legion Post of Mora, 372 N.W.2d 702 (Minn. 1985).
Minnesota Accidents
For Minnesota accidents, an insurer is generally not entitled to present a subrogation claim against the insured for no-fault benefits received because the insured usually receives a set-off from any tort recovery for no-fault benefits paid, and therefore does not receive a double recovery. Minn. Stat. §65B.51 subd. 1. However, Minn. Stat. §65B. 53, subd. 3 expressly allows no-fault subrogation claims based on intentional torts, strict or statutory liability, or negligence other than negligence in the maintenance, use or operation of a motor vehicle. The rationale is that such a tortfeasor’s insurer will not likely be an automobile insurer so the No-Fault Act set-off provision in Minn. Stat. §65B.51 subd. 1, which adjusts liability for payment of economic loss between auto carriers, would not apply to these non-auto carriers. Since these non-auto carriers are not afforded the benefit of a set-off, there is the potential for a double recovery. Of course, if the injured insured does not make a double recovery, then there is no right to no-fault subrogation recovery. Additionally, dram shops, for policy reasons, are immune to no-fault subrogation claims.
Out-State Accidents
For accidents outside of Minnesota, Minn. Stat. §65B. 53, subd. 2 allows for possible no-fault subrogation. The distinction here is that if the action was brought in Minnesota, the set-off provision of Minn. Stat. S65B.51, subd. 1 would often prevent the insured from receiving a double recovery. However, in many states, the injured individual is allowed to collect for all losses even though they have been paid no-fault economic loss benefits. Subrogation is therefore necessary in those states and is completely proper when applied to those out-of-state recoveries. For example, in Nodak Mut. Ins. Co. v. American Family Ins. Co., 604 N.W.2d 91 (Minn. 2000), the Minnesota Supreme Court applied North Dakota law which would permit a no-fault subrogation claim, even where the application of Minnesota law would preclude it.
Therefore, where the no-fault insured is involved in an accident in another state, the no-fault insurer may be entitled to greater subrogation rights than ordinarily available under Minnesota law, if a choice of law analysis is proper and the choice-influencing factors favor the application of a broader subrogation law. However, individual state’s laws regarding subrogation will vary, and do not always provide greater subrogation rights.
INDEMNITY OR SUBROGATION?
The situation will dictate whether an insurer is entitled to present an indemnity or subrogation claim, or neither. You will need to review the facts of your particular case and go through each analysis listed above to see whether a claim can be brought. If indemnity applies, the proper defendant is another insurer and the proper venue is arbitration. If subrogation applies, the proper defendant is the insured and the proper venue is the court system. Applying these rules to our fact scenario above, it is clear that the other driver’s insurer is entitled to present an indemnity claim against your company (not your insured) in arbitration (not in district court). Therefore, the district court case against your insured should be dismissed and the matter should be presented to mandatory arbitration.
Many attorneys improperly bring indemnity claims as subrogation claims in district or conciliation (small claims) court. Since these are typically smaller claims, many of them are likely to be sued out and processed without much consideration as to whether they are properly venued. However, an insurance professional who correctly distinguishes whether a particular claim is one of indemnity or subrogation early on succeeds in two important ways. First and foremost, it enables the insurance professional to get claims against its insured dismissed. Second, it places the matter out of district court and into mandatory arbitration, a much more economical forum for dispute resolution.
If you have any questions please feel free to contact any of the attorneys at Arthur, Chapman, Kettering, Smetak & Pikala and we will be happy to go over your particular circumstances and provide you with our thoughts.
About the Author:
Randy is an aggressive litigator who has successfully represented clients in the courtroom at both the trial and appellate court levels. His experience in insurance law also allows him to economically resolve disputes when the resolution is in the client's best interest. He focuses his practice in the areas of construction law, products liability, insurance coverage, fire litigation, fraud, automobile, no-fault and subrogation.