Gabe’s Construction Co Inc v. Holly Pipe Corporation: A pause in the march of subrogation law

Gabe’s Constr. Co. v. Holly Pipe Corp., 2015 U.S. Dist. LEXIS 28472 (E.D. Wis. Mar. 9, 2015) is a recent case which illustrates tensions in the development of Wisconsin subrogation law in with regard to the ability of an insured to use hold harmless agreements to potentially wipe out an insurer’s subrogation interest..

Gabe’s Construction Co. is in the business of installing utilities underground.  It rented drill pipe from Holly Pipe Corporation for a project in Florida.  During the project, some drill pipe broke.  Gabe’s alleged that the pipe belonged to Holly Pipe Corporation.  Gabe’s turned to its insurer, National Fire Insurance Co. of Hartford, to reimburse it for the damages it experienced due to the failure.  National Fire paid out $692,928.00.  Gabe’s alleged that it had an additional $714,383.00 in uninsured losses.  Holly Pipe’s insurer had a $1,000,000.00 policy limit.

Gabe’s sued Holly Pipe in the United States District Court for the Eastern District of Wisconsin and included its insurer, National Fire, as an involuntary plaintiff.  During the course of the suit, Gabe’s settled with Holly Pipe and its insured for $250,000.00.  The settlement agreement included a hold harmless agreement.  But for the hold harmless provision, there would have been $750,000.00 left on Holly Pipe’s policy limits to potentially compensate National Fire for its $692,928.00 claim.

After the settlement agreement, Gabe’s moved to dismiss National Fire’s subrogation claim based on the hold harmless and Rimes v. State Farm Mut. Auto. Ins. Co., 106 Wis. 2d 263, 272, 316 N.W.2d 348, 353 (1982).  The district court, the Hon. Lynn Adelman, presiding, ruled on the motion.  Judge Adelman applied Schulte v. Frazin, 176 Wis. 2d 622, 500 N.W.2d 305 (1993) and held that the hold harmless agreement was enough to create a limited pool of funds.  He then ruled that the made whole determination was a question of fact and scheduled the case for a Rimes hearing.  On the day of the hearing, the case settled.

Gabe’s represents a pause in the evolution of Wisconsin subrogation law.  In 2008 a majority of the Wisconsin Supreme Court signaled that it may be ready to pull back from permitting plaintiffs to extinguish subrogated claims by entering into indemnification agreements:

“To date this court has set no conditions on an insured’s agreement to a settlement that effectively extinguishes the rights of the subrogee insurer. This means that to date we have not explicitly addressed a situation where an insured has voluntarily signed an indemnification agreement with the tortfeasor without being made whole, even though there were ample funds available to satisfy the claim. This contingency is disturbing because it could permit the tortfeasor to escape full liability while it extinguished the contractual rights of the subrogee without the subrogee’s consent, or, possibly, even the subrogee’s knowledge.” Muller v. Soc’y Ins., 2008 WI 50, ¶75, 309 Wis. 2d 410, 750 N.W.2d 1.

The Muller Court also considered the role psychology played in settlement.  It. pointed out “Psychology does play a part in settlement negotiations.  A party cannot go into settlement negotiations waving a white flag and expect to emerge a victor.”  Id. at ¶82.

In Gabe’s Construction, there were certainly enough funds to satisfy Gabe’s claims.  The million dollar policy would have more than covered Gabe’s $714,000.00 in claimed losses, even had there been no contest as to their legitimacy.  After the settlement there were more than enough funds to satisfy National Fire’s claimed losses at 100%.

And as Muller points out, Gabe’s Construction had no incentive to settle its claims for anything more than $714,000.00.  It had no claim beyond that.  Because of Rimes, it lost nothing to include the hold harmless in the settlement agreement.  It was easy for it to enter the negotiations waiving at least a small white flag.  Holly Pipe’s insurer certainly had every incentive to settle with Gabe’s construction for a sum less than $714,000.00.  At any settlement figure less than that, Gabe’s Construction would not be me made whole and a hold harmless would wipe out National Fire’s subrogation claim.  So the plaintiff and the defendant insurer settled a contested claim for less than claim’s whole value and postured the case to wipe out the subrogation interest.

Of course, Judge Adelman was bound to respect prior Wisconsin precedent.  see Erie R.R. v. Tompkins, 304 U.S. 64 (1938).  As a federal district court judge, he was poorly positioned to accept the Muller court’s invitation to explore whether hold harmless agreements should be permitted to extinguish subrogation claims.  The resolution of this issue will have to await further review by the Wisconsin Supreme Court.  In that respect, Gabe’s Construction was a pause in the development of Wisconsin subrogation law, which will hopefully continue to move in the direction that Muller indicated.

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