Great Northern Oil Co. v. St. Paul Fire & Marine Insurance
189 N.W.2d 404, 1971 Minn. LEXIS 998, 291 Minn. 97 (1971)
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Rule of Law:
An insured who enters into an exculpatory agreement with a potential third-party tortfeasor before a loss occurs does not forfeit coverage by destroying the insurer's subrogation rights, unless the insurance policy expressly prohibits such agreements.
Facts:
- On August 12, 1964, Great Northern Oil Company procured a three-year 'all-risk' insurance policy from several defendant insurance companies, covering losses from business interruption.
- The policy contained a subrogation clause stating the insurer would be subrogated to the insured's rights of recovery and that the insured 'shall do nothing after loss to prejudice such rights.'
- On February 7, 1967, Great Northern entered into a construction contract with the Litwin Corporation, Inc., for the expansion of its refinery.
- This contract included an exculpatory clause providing that Litwin would not be liable for any business interruption losses, 'however the same may be caused.'
- On June 16, 1967, a crane accident during construction caused damage and a substantial business-interruption loss for Great Northern.
Procedural Posture:
- Plaintiff, Great Northern Oil Company, brought an action in the trial court against its defendant-insurers to recover for a business-interruption loss.
- Defendants' joint answer raised the defense that the insured had defeated the insurers' subrogation rights by entering a pre-loss exculpatory agreement with the contractor, Litwin.
- The parties filed cross-motions for summary judgment on this specific defense.
- The trial court granted plaintiff's motion, striking the defense from the defendants' answer.
- Defendants, as appellants, appealed the trial court's order to the Supreme Court of Minnesota.
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Issue:
Does an insured's pre-loss agreement to release a potential third-party tortfeasor from liability for future negligence defeat the insured's right to recover from its own insurer for that loss, when the insurance policy does not expressly prohibit such agreements?
Opinions:
Majority - Rogosheske, Justice
No, an insured's pre-loss release of a third party does not preclude recovery from its insurer if the policy does not expressly prohibit it. The court reasoned that while an insured can defeat an insurer's subrogation rights, the equities in a pre-loss release scenario favor the insured. The insured paid a premium for all-risk coverage, which contemplates losses caused by third-party negligence. The insurer, as the sophisticated party and drafter of the contract, had the opportunity to expressly prohibit the insured from entering into such exculpatory agreements but failed to do so. Therefore, to deny coverage would be to deny the insured the very protection it paid for, whereas the insurer could have protected its subrogation rights through clearer policy language.
Analysis:
This decision places the burden on insurers to explicitly draft policy provisions that prohibit insureds from waiving subrogation rights against third parties before a loss occurs. By distinguishing pre-loss releases from post-loss settlements, the court protects insureds who enter into common commercial agreements, like construction contracts with exculpatory clauses, from inadvertently voiding their coverage. The ruling reinforces the principle that insurance policies are contracts of adhesion and any ambiguity or omission will be construed in favor of the insured, forcing insurers to be more specific about the duties of their policyholders.
