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Malmin and Schmidt Notices Within the Context of Binding Arbitration Agreements: The Court of Appeals Weighs in on Timing and Prejudice Issues

The Court of Appeals in Kluball v. American Family Mutual Ins. Co.(December 20, 2005), again was presented with Malmin and Schmidt notice issues in the context of a bodily injury binding arbitration agreement and their effect on a plaintiff/insured’s UIM claim. The court held that when an insured fails to give its UIM carrier timely notice of the commencement of the bodily injury suit as required by Malmin , the insured has the burden of proving that the UIM carrier was not prejudiced. Further, the court held that when an insured fails to give the Schmidt 30-day settlement notice, the insured must put forth specific evidence of the tortfeasor’s limited financial worth in order to rebut the presumption that the UIM carrier has been prejudiced by the untimely notice. While the burden of rebutting the presumption of prejudice based on an untimely Schmidt notice has been addressed previously, the Court of Appeals did provide some guidance on the insured/plaintiff’s obligations to provide a timely Malmin notice pursuant to the UIM policy.

Kluball’s accident occurred on December 29, 1994. Apparently, Kluball commenced her lawsuit against tortfeasor Craven shortly before the statute of limitations ran. Kluball’s counsel did not notify American Family (the UIM carrier) of the claim against Craven for a number of years. The parties entered into an agreement for voluntary binding arbitration. Just five days before an arbitration was to be held, Kluball’s counsel sent a Malmin notice to American Family. The purported Malmin notice did not provide any specific information about the location of the arbitration, the identity of the arbitrator or Craven’s liability limits.

The binding arbitration occurred, and an arbitrator found the damages to be $120,000, which was $70,000 more than Craven’s BI policy. Following the arbitration hearing Kluball’s counsel, referring back to his “Malmin ” notice, sent a copy of the arbitration award to American Family and demanded payment of the award exceeding the liability coverage.

Interestingly, pursuant to the arbitration agreement and award, Kluball executed a Complete Release and Satisfaction of Award shortly after the arbitration hearing. After the Release was executed, Kluball’s counsel wrote another letter to American Family characterizing the $50,000 payment from Craven as a “settlement” and telling American Family that he was providing a Schmidt notice, and American Family had 30 days to substitute its draft. In that same letter, Kluball’s attorney said that if American Family did not substitute its draft, appropriate releases would be executed and they would pursue collection of the arbitration award pursuant to the UIM coverage.

American Family denied Kluball’s request for UIM benefits. Kluball then brought suit against American Family for the balance of the arbitration award, and American Family moved for summary judgment. The district court granted American Family summary judgment saying that Kluball failed to provide sufficient notice regardless if the arbitration award was characterized as a settlement or a tort action in lieu of a jury verdict.

The Court of Appeals noted that an insured must characterize an arbitration award as either a settlement or a conclusion of a tort action and may not rely on both characterizations when pursuing UIM benefits. The court went on to conclude that Kluball’s UIM claim failed under either analysis. The court found that American Family’s notice provision was not the same as “consent to sue” clause which was invalidated in Malmin . The court acknowledged that notification clauses in a UIM contract are  permissible so that the UIM carrier can consider the nature of the tort claim and determine whether it should attempt to intervene in the litigation to protect its own financial interest.

The Court of Appeals then went on to address the burden of demonstrating prejudice after an untimely Malmin notice. The court held that the insured plaintiff has to demonstrate by a preponderance of the evidence that the UIM carrier either had sufficient opportunity to intervene despite the untimely notice or the carrier’s financial interests were not prejudiced by the resulting judgment. Kluball presented no such evidence and thus failed to rebut the presumption of prejudice and forfeited her UIM benefits.

In addressing the Schmidt notice issue, the court noted that it was undisputed that Kluball provided a Schmidt notice after she had executed the Release. Although Kluball’s counsel had submitted an affidavit with her summary judgment motion indicating that he had investigated and found no meaningful assets for the tortfeasor, there was no other evidence of the tortfeasor’s financial worth. The court citing other previous cases on the issue, found that Kluball had failed to introduce any specific evidence of the tortfeasor’s financial worth to rebut the presumption. Therefore, the district court did not err in granting American Family’s motion for summary judgment on the Schmidt notice issue.

Kluball gives practitioners and insurers guidance on the timing of Malmin notices. The court cited a footnote in Malmin where the Minnesota Supreme Court suggested that the UIM contract notice provision (requiring an insured to notify his or her carrier of the commencement of a lawsuit against a tortfeasor within a limited period of time “(i.e. 60 days)”) comports with due process principles and does not violate the No-Fault Act. Although there does not appear to be any bright line for the timing of the Malmin notice, Kluball tells us that a Malmin notice given five days before an arbitration prejudices a UIM carrier. We expect that insurers will now see Malmin notices much earlier in the BI litigation process.

When presented with a Malmin notice, an insurer should investigate the claim and contact both insured/plaintiff’s counsel and the defendant’s counsel to obtain information regarding the underlying lawsuit. This early investigation of the claim will also assist UIM carriers in addressing and responding to Schmidt notices.

The issue of arbitration agreements and their effect on UIM claims continues to present many variables. As always, we welcome any questions you have regarding these and other legal issues.