State of Minnesota, Respondent, vs. Pedro Charles Flores, Jr., Appellant.

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (1996).

STATE OF MINNESOTA

IN COURT OF APPEALS

C0-97-1982

Jeffrey Edward Mattila,

Respondent,

vs.

American Family Mutual

Insurance Company,

Appellant.

Filed April 14, 1998

Reversed and remanded

Klaphake, Judge

Hennepin County District Court

File No. 97-2061

James S. Ballentine, David J. Moskal, Schwebel, Goetz, Sieben & Moskal, P.A., 5120 IDS Center, Minneapolis, MN 55402 (for respondent)

David Oskie, Walter G. Bauch, Oskie & Bauch, P.A., 970 Raymond Avenue, #202, St. Paul, MN 55114 (for appellant)

Considered and decided by Klaphake, Presiding Judge, Willis, Judge, and Mulally, Judge.*

*Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, § 10.

U N P U B L I S H E D O P I N I O N

KLAPHAKE, Judge

In an underlying negligence action, respondent Jeffrey Mattila settled with the defendants by means of a binding high/low arbitration agreement. The arbitrator awarded Mattila an amount exceeding the defendants' policy limits, and Mattila commenced the present action against appellant American Family Mutual Insurance Company (American Family) for underinsured motorist (UIM) benefits. The district court granted Mattila's motion for summary judgment, concluding that American Family was bound by the amount of the arbitrator's award. Although we conclude that arbitration is an appropriate method of arriving at a "best settlement" pursuant to Schmidt v. Clothier, we reverse and remand for the introduction of extrinsic evidence whether the parties in this case may have intended their settlement to be a complete settlement, rather than a Schmidt-type settlement.

FACTS

Mattila was involved in an accident with an automobile driven by Laura Pierson and owned by her father, Jeffrey Pierson. The automobile was insured under a policy providing $100,000 in coverage and an umbrella policy providing $1 million in coverage. Mattila had an underinsured motorist policy with American Family providing $50,000 in coverage.

Mattila brought a negligence action against the Piersons, and the parties agreed to settle the action by means of binding high/low arbitration, with a high of $1.1 million.[1] The arbitrator found that Laura Pierson was 100 percent liable for the accident and awarded Mattila over $1.7 million. The Piersons' insurer tendered its policy limits of $1.1 million.

Mattila sent American Family a copy of the award, the high/low agreement, and a Schmidt-Clothier notice, inviting American Family to substitute its draft in the amount of $1.1 million to preserve its subrogation rights. See Schmidt, 338 N.W.2d 256 (Minn. 1983). American Family declined to substitute its draft, contending that Mattila had been fully compensated by the $1.1 million settlement.

Mattila commenced the present action against American Family for UIM benefits, and both parties moved for summary judgment. The district court granted Mattila's motion, concluding that the agreement to binding arbitration constituted the "best settlement" of Mattila's negligence action, within the meaning of Schmidt. The court concluded that American Family had waived its right to trial of the UIM action by failing to intervene in the negligence action and by failing to substitute its draft for $1.1 million. D E C I S I O N

On appeal from summary judgment, we determine whether there is a genuine issue of material fact and whether the district court erred in applying the law. See Fairview Hosp. & Health Care Servs. v. St. Paul Fire & Marine Ins. Co., 535 N.W.2d 337 (Minn. 1995). We are not bound by the district court's legal conclusions and may independently review questions of law. See Hammer v. Investors Life Ins. Co., 511 N.W.2d 6, 8 (Minn. 1994).

The supreme court recently explained the procedures that an insured must follow when pursuing a UIM claim. See generally Washington v. Milbank Ins. Co., 562 N.W.2d 801 (Minn. 1997). The Washington court explained:

The procedure for resolving a UIM claim was first announced by this court in Schmidt v. Clothier. 338 N.W.2d [256, 261 (Minn. 1983)] (stating that a UIM claimant may either pursue a tort claim to conclusion in district court, and then, if the judgment exceeds the liability limits of the tortfeasor's policy, pursue UIM benefits; or settle the tort action for the "best settlement," give notice to the underinsurer, and then maintain a claim for UIM benefits).

Id. at 805.[2]

Mattila and American Family agree that the high/low arbitration agreement constituted a "settlement" of the underlying action. But they dispute whether the settlement was intended to bar Mattila's present UIM claim.

The district court concluded that the agreed-upon high of $1.1 million constituted a "best settlement" pursuant to Schmidt, and that Mattila's actual damages were $1.7 million. The court concluded that American Family is bound by the arbitrator's determination of damages because American Family failed to intervene in the arbitration proceedings or substitute its draft to protect its subrogation rights.

We disagree with the district court's analysis. First, we point out that arbitration is an appropriate way to arrive at a Schmidt settlement. We also note, however, that the arbitrator's award could not bind the parties, absent judicial confirmation of the award. See Minn. Stat. §§ 572.18; 572.21 (1996) (suggesting that arbitration award is not the equivalent of tort judgment and cannot be entered as judgment unless confirmed by the court). Had the parties sought confirmation of the award, the district court would have been required to decide whether to confirm the amount of $1.1 million or the amount of $1.7 million. This, we believe, would have required the court to receive extrinsic evidence on the intent of the parties' high/low settlement agreement because, on its face, the agreement is ambiguous.

The agreement establishes $1.1 million as the "highest money damages" that Mattila could be awarded, "following the [arbitration] hearing." This language suggests that the parties intended to limit Mattila's total damages to a high of $1.1 million. In other words, rather than limiting the total damages that Mattila could claim under the Piersons' policies, this language suggests that Mattila would be completely satisfied with the Piersons' policy limits. In such case, the settlement would not be the type of arrangement contemplated by Schmidt, and a claim for UIM benefits would not be proper.

In another section, however, the agreement refers to procedures for pursuing a UIM claim, should the arbitrator's award exceed the Piersons' liability limits. We therefore conclude that the settlement agreement in this particular instance is ambiguous, the entry of summary judgment was premature, and this case must be remanded to allow the parties to present extrinsic evidence regarding the intent of the settlement agreement. See Blattner v. Forster 322 N.W.2d 319, 321 (Minn. 1982) (stating general rule that if contract is ambiguous, "courts may resort to extrinsic evidence of intent to construe the contract").

Reversed and remanded.

[1] Ordinarily, in high/low arbitration, the decision-maker chooses the figure submitted by one party or the other. See Montgomery Ward v. County of Hennepin, 482 N.W.2d 785, 791 (Minn. 1982). Here, however, the parties agreed not to disclose their figures to the arbitrator.

[2] In a footnote, the Washington court explained:

Technically, no settlement is reached when the UIM carrier follows the Schmidt-Clothier procedure and substitutes its draft for that of the tortfeasor's insurance company. However, the UIM carrier's substitution operates as the equivalent of a settlement between the party claiming damages and the tortfeasor because the tortfeasor is released from further liability to the party claiming damages, but, at the same time, the UIM insurer retains a subrogation right against the tortfeasor's insurance company.

Washington, 562 N.W.2d at 806 n. 3.