James v. State Farm

#28547-a-JMK
2019 S.D. 31

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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LEROY L. JAMES, JR., Plaintiff and Appellee,

v.

STATE FARM MUTUAL
AUTOMOBILE INSURANCE
COMPANY, Defendant and Appellant.

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APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
****
THE HONORABLE ROBERT A. MANDEL
Judge

****

JOHN STANTON DORSEY
KIMBERLY PEHRSON of
Whiting, Hagg, Hagg, Dorsey
& Hagg, LLP
Rapid City, South Dakota Attorneys for plaintiff and
appellee.

HILARY L. WILLIAMSON of
Fuller & Williamson, LLP
Sioux Falls, South Dakota Attorneys for defendant and
appellant.

****
CONSIDERED ON BRIEFS
ON OCTOBER 1, 2018
OPINION FILED 05/29/19
#28547

KERN, Justice

[¶1.] Melissa Rivers rear-ended LeRoy James Jr., causing him personal

injury. State Farm insured both parties. Immediately following the accident, State

Farm paid a portion of James’s medical expenses under the medical payment

provisions of his policy. Acting on behalf of Rivers, State Farm then settled with

James. Once James released Rivers from liability, State Farm demanded James

use his settlement proceeds to reimburse it for paying his medical expenses under

his policy. James sued for declaratory relief, arguing State Farm had no right to

reimbursement or subrogation. The circuit court denied State Farm’s motion for

summary judgment and entered a judgment in favor of James. State Farm appeals.

We affirm.

Facts and Procedural History

[¶2.] The automobile accident occurred on July 22, 2016, on Highway 16

near Rapid City. At the time, State Farm insured both Rivers and James under

separate auto insurance policies. Rivers’s policy provided $100,000 in liability

coverage. James’s policy contained a $5,000 benefit for medical payments

coverage. 1 State Farm immediately paid $5,000 on James’ behalf to medical

services providers for treatment of James’s injuries.

1. James’s medical payment coverage provision provides: “The Medical Payment
Coverage limit is shown on the Declarations Page under ‘Medical Payments
Cover – Limit – Each person.’ This limit is the most we will pay for the
medical expenses and funeral expenses combined, incurred by or on behalf
of any one insured as a result of any one accident . . . .” (Emphasis in
original.)
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[¶3.] Ultimately, James settled his claim against Rivers. Rivers did not

personally fund any of the settlement proceeds. Instead, State Farm paid James

$43,000 on Rivers’s behalf in exchange for a full and complete release from liability.

After paying his attorney a one-third contingency fee plus costs and sales tax,

James’s net settlement was $19,927.54.

[¶4.] James’s policy contained both a reimbursement clause and a

subrogation clause. Following the settlement, State Farm demanded

reimbursement from James for the $5,000 payment it made on James’s behalf to

cover medical expenses under the reimbursement clause. State Farm did not

reduce its request to account for the attorney fees and costs James incurred to

obtain his recovery from Rivers. James refused to reimburse State Farm for any

amount; instead, he sued State Farm, seeking a declaratory judgment to determine

his contractual rights under the policy. The parties filed cross-motions for summary

judgment based on stipulated facts.

[¶5.] The circuit court concluded that State Farm could not subrogate

against its own insured. It further held that the reimbursement clause was

ambiguous. As a consequence, the court construed the policy against State Farm,

the drafter, granting summary judgment to James. State Farm appeals, raising one

issue and several sub-issues restated as follows:

1. Whether the language of the reimbursement clause is
ambiguous.

2. Whether requiring James to reimburse State Farm
implicates the anti-subrogation rule or offends public policy.

3. If State Farm is entitled to reimbursement, whether James
is entitled to a portion of his attorney fees.

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Analysis and Decision

[¶6.] “We review a circuit court’s entry of summary judgment under the de

novo standard of review.” Harvieux v. Progressive N. Ins. Co., 2018 S.D. 52, ¶ 9,

915 N.W.2d 697, 700. When conducting this review, “[w]e give no deference to the

circuit court’s decision[.]” Oxton v. Rudland, 2017 S.D. 35, ¶ 12, 897 N.W.2d 356,

360. “When reviewing a circuit court’s grant of summary judgment, this Court only

decides whether genuine issues of material fact exist and whether the law was

correctly applied.” Ass Kickin Ranch, LLC v. N. Star Mut. Ins. Co., 2012 S.D. 73,

¶ 6, 822 N.W.2d 724, 726. Here, there are no disputed facts, so our task is to

determine whether the circuit court correctly applied the law.

[¶7.] Each party filed briefs advising the circuit court of their interpretation

of the policy. James alleged that the reimbursement provision was ambiguous and

should therefore be construed against its drafter, State Farm. In response, State

Farm argued the policy provided it with an unambiguous contractual right to

reimbursement. In addition to the question of ambiguity, the parties also disputed

whether the anti-subrogation rule applied to the reimbursement provision in the

policy.

[¶8.] A brief explanation of these concepts is helpful to understand the

arguments advanced by the parties both before the circuit court and in this appeal.

“[S]ubrogation is a time-honored theory [in which] insurers who pay a loss [for

insureds] are entitled, within the limits of [the] subrogation doctrine, to pursue the

actual wrongdoer.” 16 Steven Plitt et al., Couch on Insurance § 222:4 (3d ed. Supp.

2018); see also Am. Family Mut. Ins. Co. v. Auto-Owners Ins. Co., 2008 S.D. 106, ¶

13, 757 N.W.2d 584, 588. By subrogating a claim, the insurer is allowed to stand in
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the shoes of the insured to sue the tortfeasor to recover the payments it made. One

limitation to the doctrine of subrogation, however, is the anti-subrogation rule, a

defense that prohibits insurers from suing their own insureds to recover a loss. See

Plitt, supra § 224:3. Even though the anti-subrogation rule is widely recognized,

courts take varying approaches when applying the rule. 2

[¶9.] Reimbursement, on the other hand, often differs factually from

subrogation because rather than seeking recovery from a third party, it allows “the

insurer to recover policy payments directly from its own insured or beneficiary upon

that party’s recovery of the same loss from a third party . . . .” Id. at § 222:81.

Therefore, although the mechanisms of recovery are different, “the effect of

subrogation and reimbursement are essentially the same.” Id.

[¶10.] James relied upon subrogation principles to argue State Farm was not

entitled to recovery under either the reimbursement or subrogation provisions

based on the anti-subrogation rule. Even though the rule is generally applicable

only to subrogation claims, James contended the language and effect of the

provisions were similar enough to apply the principal of anti-subrogation to the

2. Some courts have held that the rule applies only when co-insureds share
insurance coverage under a single policy. See, e.g., Benge v. State Farm Mut.
Auto. Ins. Co., 697 N.E.2d 914, 918 (Ill. App. Ct. 1998). Other jurisdictions
expand the rule’s application to any situation when the same insurance
company covers both insureds, even if the parties have separate, unrelated
policies. See, e.g., Control Specialists Co. v. State Farm. Mut. Auto. Ins. Co.,
423 N.W.2d 775, 776–77 (Neb. 1988).

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reimbursement clause. This is because permitting reimbursement, according to

James, would allow State Farm to recover against James, its own insured. 3

[¶11.] In response, State Farm argued that: (1) it was exercising an

unambiguous contractual right of reimbursement completely distinct from

instituting a subrogation action; (2) even if subrogation principles applied to its

request for reimbursement, the anti-subrogation rule did not preclude State Farm’s

rights because the rule applied only to co-insureds under a single insurance policy;

and (3) enforcing the reimbursement clause did not offend public policy.

[¶12.] Because it is dispositive of the issues in this case, we address only the

question of whether the language of the reimbursement clause was ambiguous.

“Insurance contract interpretation is a question of law reviewed de novo.” W. Nat’l

Mut. Ins. Co. v. Decker, 2010 S.D. 93, ¶ 10, 791 N.W.2d 799, 802. We construe the

language of an insurance contract “according to its plain and ordinary

meaning . . . .” St. Paul Fire & Marine Ins. Co. v. Schilling, 520 N.W.2d 884, 887

(S.D. 1994). Ambiguity exists “when application of rules of interpretation leave a

3. Our survey of the case law reveals an emerging trend concerning the
parameters of an insurer’s right to reimbursement from an insured. The vast
majority of jurisdictions, including the Eighth Circuit Court of Appeals, have
recognized reimbursement as a separate right from subrogation. See, e.g.,
McIntosh v. Pac. Holding Co., 992 F.2d 882, 884 (8th Cir. 1993). But at least
three states—Nebraska, New York, and Texas—have directly rejected
attempts by insurance companies to disguise subrogation as reimbursement
in order to overcome the effects of a waiver or the anti-subrogation rule. See
Wausau Underwriters Ins. Co. v. Wedel, 518 S.W.3d 615, 622 (Tex. App. 2017)
(analyzing a statutory rather than a common-law right); Cont’l W. Ins. Co. v.
Swartzendruber, 570 N.W.2d 708, 711 (Neb. 1997); N.Y.C. Dep’t of Transp. v.
Petric & Assocs., 19 N.Y.S.3d 48, 48 (N.Y. App. Div. 2015). Because our
resolution of this case hinges on the question of ambiguity we express no
opinion on this issue.
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genuine uncertainty as to which of two or more meanings is correct.” Alverson v.

Nw. Nat’l Cas. Co., 1997 S.D. 9, ¶ 8, 559 N.W.2d 234, 235.

[¶13.] But mere disagreement as to which interpretation is correct is not

sufficient to create ambiguity. “Rather, a contract is ambiguous only when it is

capable of more than one meaning when viewed objectively by a reasonably

intelligent person who has examined the context of the entire integrated

agreement.” Coffey v. Coffey, 2016 S.D. 96, ¶ 9, 888 N.W.2d 805, 809. “[A]ny

uncertainty or ambiguity in a contract of insurance [is to] be construed most

strongly against the insurer and in favor of the insured.” Wilson v. Allstate Ins. Co.,

85 S.D. 553, 557, 186 N.W.2d 879, 881 (S.D. 1971).

[¶14.] State Farm claims that the circuit court erred by finding the provisions

of the reimbursement clause ambiguous. The relevant portion of James’s insurance

policy provides:

12. Our Right to Recover Our Payments
*****
b. Reimbursement
If we make payment under this policy and the person or
organization to or for whom we make payment recovers or
has recovered from another person or organization, then:
(1) we are entitled, upon payment, to an assignment of
any cause of action, or judgment obtained against
such other person or organization and
(2) the person or organization to or for whom we make
payment must:
(a) Hold in trust for us the proceeds of any
recovery; and
(b) Reimburse us to the extent of our payment;
with no reduction taken for attorney fees
incurred in obtaining a settlement from a
judgment against such other person or
organization.

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(Emphasis in original.) In analyzing the terms of the reimbursement clause, person

is defined within the policy as “a human being,” but organization is left without a

definition.

[¶15.] The parties dispute focuses on the meaning of “recovers or has

recovered from another person or organization.” State Farm’s highlighted

reference to itself using the first-person pronouns “we,” “us” and “our” establishes it

cannot be considered to be “another . . . organization.” Therefore, we must next

determine whether the phrase “recovers or has recovered from another person” is

ambiguous.

[¶16.] State Farm argues the phrase recovery from “another person” includes

any other person, even other individuals who also hold State Farm insurance

policies. In its view, this language unambiguously includes Rivers, who is “another

person” from James, even if State Farm funded the settlement on Rivers’s behalf.

In response, James argues the policy is ambiguous because it could also be

interpreted to require reimbursement only when the insured recovers from another

person or organization, but not another insured by State Farm. He contends that,

here, there is no other “person or organization”—there is only State Farm.

[¶17.] From our review, there are two equally reasonable interpretations of

the reimbursement provision when viewed objectively in the context of the entire

agreement. See Alverson, 1997 S.D. 9, ¶ 8, 559 N.W.2d at 235. James had a legal

claim against Rivers, but his actual recovery came from settlement proceeds State

Farm paid pursuant to its policy with Rivers. Therefore, the language could be

interpreted to mean State Farm has a right to reimbursement because James

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recovered from Rivers, who is “another person.” But James recouped his financial

loss following the accident from State Farm’s pocket, not “another person or

organization.” Therefore, the language could also be interpreted to mean James

recovered from State Farm, the party who paid James. Based on the uncertainty

regarding the term ‘recovery,’ we conclude the text of the reimbursement provision

is ambiguous. 4

[¶18.] Because ambiguity “is to be construed most strongly against the

insurer and in favor of the insured,” see Wilson, 85 S.D. at 558, 186 N.W.2d at 881

(emphasis added), we conclude that the language “another person or organization”

in the reimbursement provision does not include State Farm or any of its insureds.

Thus, State Farm has no contractual right to reimbursement for the $5,000 paid to

James for medical expenses under the policy. We affirm.

[¶19.] GILBERTSON, Chief Justice, and JENSEN and SALTER, Justices,

concur.

4. Indeed, to avoid this ambiguity State Farm could have specified that “another
person or organization” could include both another person that State Farm
insured or State Farm, itself, or simply allowed reimbursement where an
insured recovers from another person or his insurer.
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