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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Dearlove v. Campbell (7/13/2012) sp-6689
Notice: This opinion is subject to correction before publication in the PACIFIC REPORTER .
Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts,
303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email
corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
KAREN DEARLOVE, )
) Supreme Court Nos. S-13772/13792
Appellant and )
Cross-Appellee, ) Superior Court No. 3AN-08-08623 CI
)
v. ) O P I N I O N
)
PATRICIA CAMPBELL, ) No. 6689 - July 13, 2012
)
Appellee and )
Cross-Appellant. )
)
Appeal from the Superior Court of the State of Alaska, Third
Judicial District, Anchorage, Eric A. Aarseth, Judge.
Appearances: Gregory R. Henrikson, Walker & Eakes,
Anchorage, for Appellant and Cross-Appellee. Michael W.
Flanigan, Walther & Flanigan, Anchorage, for Appellee and
Cross-Appellant.
Before: Carpeneti, Chief Justice, Fabe, Winfree, and
Stowers, Justices. [Christen, Justice, not participating.]
WINFREE, Justice.
I. INTRODUCTION
The passenger of a car was injured in a two-car accident. The passenger
brought suit against the other car's driver; the passenger's requested recovery included
her insurer's subrogation claim for medical expenses. The driver made an early offer of
judgment, which the passenger rejected. The driver then paid the subrogation claim,
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thereby removing it from the passenger's expected recovery. The driver made a second
offer of judgment, which the passenger rejected, and the case proceeded to trial. After
trial the jury awarded the passenger damages and both parties claimed prevailing party
status; the driver sought attorney's fees under Alaska Civil Rule 68. The superior court
ruled the first offer of judgment did not entitle the driver to Rule 68 fees, but the second
offer did. Both parties appeal, arguing the superior court improperly considered the
subrogation claim in its Rule 68 rulings. We conclude the subrogation payment had to
be taken into account when evaluating the first offer of judgment, but not the second
offer of judgment; we therefore affirm the superior court's rulings.
II. FACTS AND PROCEEDINGS
Patricia Campbell and Karen Dearlove were in a car accident. Campbell
sued Dearlove, alleging the accident was caused by Dearlove's negligence; Dearlove
denied liability and suggested the accident might be due to malfunctioning brakes. Both
parties were insured by a State Farm company: Campbell by a company licensed in
Minnesota and Dearlove by a company licensed in Alaska. Campbell's insurer paid the
first $20,000 of her medical expenses under her policy's Personal Injury Protection (PIP)
coverage. Campbell's insurer therefore had a subrogation claim against Dearlove.1
Campbell's insurer never sent her a "Ruggles letter."2 To the contrary,
Campbell's insurer repeatedly called Campbell's attorney for progress reports.
1 Subrogation in this context is "[t]he principle under which an insurer that
has paid a loss under an insurance policy is entitled to all the rights and remedies
belonging to the insured against a third party with respect to any loss covered by the
policy." BLACK 'S LAW DICTIONARY 1563-64 (9th ed. 2009); see also LEE R. RUSS &
THOMAS F. SEGALLA , 16 COUCH ON INSURANCE § 222:2 (3d ed. 1995).
2 A Ruggles letter is one from the insurer "direct[ing] its insured not to
pursue its medical subrogation claim as part of the insured's lawsuit against the
tortfeasor." O'Donnell v. Johnson, 209 P.3d 128, 132 (Alaska 2009) (citing Ruggles ex
rel. Estate of Mayer v. Grow, 984 P.2d 509, 512 (Alaska 1999)).
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Campbell's counsel stated that the insurer "expected [him] to protect [its] subrogation
interest in PIP benefits paid."
Dearlove's first Rule 68 offer of judgment was for $18,000, inclusive of
prejudgment interest, Rule 82(b)(1) attorney's fees, and Rule 79 costs; it also required
Campbell to satisfy her insurer's outstanding subrogation claim. Campbell did not
accept Dearlove's first offer of judgment.
Dearlove was deposed and testified there "weren't any problems with the
brakes" and the accident was caused by her own negligence. Dearlove later formally
stipulated to liability, leaving damages as the only issue for trial.
After Dearlove's deposition her insurer negotiated with Campbell's insurer
and settled the subrogation claim by direct payment of $20,000 to Campbell's insurer.
Dearlove then sought a ruling that Campbell could not seek recovery of the $20,000 in
medical expenses paid by her insurer. Campbell did not oppose the motion, except to
request recovery of her attorney's fees and costs on the $20,000 payment. The superior
court ruled Campbell could not include the medical expenses in her claim for damages
at trial, but reserved the question whether Campbell could recover fees and costs on the
$20,000 payment.
Dearlove's second Rule 68 offer of judgment was for $5,000 plus
prejudgment interest, Rule 82(b)(1) attorney's fees, and Rule 79 costs. The offer stated
Campbell would be "responsible for satisfying any and all accident-related liens and
expenses with the exception of the [PIP] Lien of $20,000.00 which [Dearlove had
already] satisfied." Campbell rejected this offer.
The case proceeded to trial and the jury was shown an exhibit itemizing
Campbell's medical expenses. The expenses covered by Dearlove's insurer's $20,000
payment to Campbell's insurer appeared in a separate column marked "PAID." The
court instructed the jury that "[a] portion of the expenses for [the] medical treatment is
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not at issue because it has been paid. You are not to make an economic award for those
expenses that have already been paid." The jury returned a verdict for $2,370 in
economic damages and $1,500 in non-economic damages for a total award of $3,870.
Both parties claimed prevailing party status and moved for fees.
The superior court reasoned Dearlove's first Rule 68 offer would have
resulted in a net $2,000 loss to Campbell because the offer was for $18,000 lump sum
and under the offer's terms, Campbell would have been responsible for her insurer's
$20,000 subrogation claim. From this, the superior court concluded that Dearlove was
not entitled to fees under the first Rule 68 offer.
The superior court then concluded Dearlove was entitled to Rule 68 fees
and costs from her second offer. To compare Campbell's $3,870 recovery at trial with
the $5,000 second offer of judgment, the court made several preliminary rulings. First,
because the second offer added fees, prejudgment interest, and costs to the offer amount
- as would the jury's verdict - the superior court concluded those "add-ons" did not
change the comparison's outcome.3 Second, the court did not include the $20,000
subrogation payment in Campbell's total recovery when it compared the second offer to
the verdict, because the subrogation claim had been satisfied before the second offer was
served. Third, because the $20,000 payment was not included in Campbell's verdict for
purposes of assessing the second offer, it was not included in the calculation of
prejudgment interest, Rule 82 attorney's fees, and costs that Dearlove owed Campbell
on the verdict. Finally, though the court concluded Campbell was entitled to recover a
proportional share of her own actual attorney's fees and costs incurred in the process of
recovering the subrogation claim on her insurer's behalf, the court also concluded this
3 See generally Andrus v. Lena, 975 P.2d 54, 57 n.3 (Alaska 1999) (citing
Farnsworth , 601 P.2d 266, 269 n.4 (Alaska 1979)) (explaining methodology for
comparing offer of judgment to ultimate recovery).
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obligation was owed by Campbell's insurer, not Dearlove. The court declined to order
Campbell's insurer to pay its share of Campbell's fees and costs because the insurer was
not a party to the litigation.
Based on these legal rulings, the superior court calculated that Campbell's
recovery at trial ($3,870 plus "add-ons") was at least five percent less favorable than the
second offer of judgment ($5,000 plus "add-ons"). Accordingly, the court ruled that
Dearlove was entitled to recover Rule 68 attorney's fees and costs incurred after
Campbell's second offer of judgment.
Campbell appeals the superior court's decision regarding Dearlove's second
offer of judgment. Dearlove cross-appeals the superior court's decision regarding her
first offer of judgment.
III. STANDARD OF REVIEW
We review de novo whether the superior court correctly applied the law in
awarding attorney's fees.4 We also exercise our independent judgment in reviewing the
superior court's interpretation of Civil Rule 68,5 as well as in calculating a judgment's
value to determine whether it exceeded an offer of judgment.6
IV. DISCUSSION
A. Subrogation Claims
A subrogation claim arises when an insurer compensates its insured for an
injury caused by a third party and obtains the "right to proceed against [the] third party
responsible for [the] loss which the insurer has compensated pursuant to its contractual
4 Glamann v. Kirk, 29 P.3d 255, 259 (Alaska 2001).
5 Progressive Corp. v. Peter ex rel. Peter , 195 P.3d 1083, 1087 n.7 (Alaska
2008) (citing Jackman v. Jewel Lake Villa One , 170 P.3d 173, 177 (Alaska 2007)).
6 Power Constructors, Inc. v. Taylor & Hintze , 960 P.2d 20, 34 (Alaska
1998).
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obligation under [the] policy."7 An insurer with a subrogation claim "may pursue a
direct action against the tortfeasor, discount and settle its claim, or determine that the
claim should not be pursued."8 The insured may include the subrogation claim in the
insured's own claim against a third-party tortfeasor, unless the insurer objects.9
Here, Campbell's insurer repeatedly indicated that it wanted Campbell to
pursue recovery of its subrogation claim. The subrogation claim was part of the damages
Campbell sought from Dearlove at the start of this litigation.
B. Alaska Civil Rule 68
When there is a single defendant, Rule 68(b) provides in relevant part:
If the judgment finally rendered by the court is at least 5
percent less favorable to the offeree than the offer, . . . the
offeree . . . shall pay all costs as allowed under the Civil
Rules and shall pay reasonable actual attorney's fees incurred
by the offeror from the date the offer was made[.]
Rule 68's purpose is to discourage expensive and protracted litigation by encouraging
settlements,10 with earlier settlement offers entitling the offeror to a greater percentage
of attorney's fees.11 In practice, the rule encourages parties to assess their litigation risks
carefully and penalizes rejection of reasonable settlement offers.
C. Dearlove's First Offer Of Judgment
Dearlove's first offer of judgment was for $18,000 (including add-ons) and
required Campbell to pay all outstanding medical liens. The superior court reasoned that
7 RUSS & SEGALLA , note 1 above, § 222:2.
8 Ruggles ex rel. Estate of Mayer v. Grow , 984 P.2d 509, 512 (Alaska 1999).
9 Id.
10 Mackie v. Chizmar , 965 P.2d 1202, 1206 (Alaska 1998) (citing Pratt &
Whitney Can., Inc. v. Sheehan, 852 P.2d 1173, 1182 (Alaska 1993)).
11 See Alaska R. Civ. P. 68(b).
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this offer would have resulted in a $2,000 net loss to Campbell due to her responsibility
to pay the $20,000 subrogation claim. Though Campbell received only a modest award
of $3,870 at trial, the court concluded that Campbell was better off with the jury award
than she would have been if she had accepted the first settlement offer.
Dearlove argues the court erred by considering the $20,000 subrogation
claim when it assessed the value of her first settlement offer. She maintains that the
correct comparison was between the $18,000 offer, standing alone, and the $3,870 award
(plus add-ons). Although we agree it was error to compare the hypothetical net recovery
to the jury award, we disagree with Dearlove that the $20,000 payment to Campbell's
insurer is irrelevant in the comparison. As we discuss below, the superior court should
have included Dearlove's payment of the subrogation claim in Campbell's recovery
before comparing it to the jury award (plus add-ons).
For the offeror to obtain attorney's fees under Rule 68 when there is a
single defendant, the value of the amount recovered must be at least five percent less
favorable than the offer's value.12 The offer of judgment must not be conditional or joint,
though it can acknowledge the existence of a lien and require the party accepting the
offer to pay the lien from the settlement.13 The critical comparison is between the offer
amount and the ultimate recovery. We have refused to label an offer as "worthless"
simply because it was for less than the value of a subrogated lien.14 This recognizes that
although a party may have incurred significant damages, other factors - such as strong
defenses to liability - may significantly reduce a claim's settlement value. Offers for
12 Id .
13 Jaso v. McCarthy , 923 P.2d 795, 801-02 (Alaska 1996) (citing Grow v.
Ruggles , 860 P.2d 1225, 1227-28 (Alaska 1993)).
14 Id.
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less than the value of subrogated liens can serve as the basis for Rule 68 offers of judgment.
But contrary to Dearlove's position, we have held that requiring courts to
consider only the final award is "an overly technical reading" of Rule 68.15 In
Progressive Corp. v. Peter ex rel. Peter , the defendant made the plaintiffs an offer of
judgment for $52,501 plus prejudgment interest, costs, and fees. 16 The plaintiffs rejected
the offer.17 The superior court subsequently ruled on a key liability issue against the
defendant.18 The defendant then voluntarily paid $75,681.27 - an amount representing
the underinsured motorist policy limits - into the court registry for the plaintiffs'
benefit.19 Because the plaintiffs did not recover additional damages and were awarded
only $8,555 in attorney's fees, the defendant sought Rule 68 fees, claiming "[v]oluntary
payments and partial settlements are not the benchmark by which offers of judgment
should be evaluated."20 The superior court disagreed, and we affirmed the superior
court's ruling.21 Our decision looked to the total "amount recovered" rather than just the
amount awarded at trial; we held that the superior court did not err by including the
insurer's voluntary payment in its calculation of the "judgment finally rendered."22
15 Progressive Corp. v. Peter ex rel. Peter , 195 P.3d 1083, 1090 (Alaska
2008).
16 The offer's total value was $70,312.44. Id . at 1089.
17 Id. at 1086.
18 Id.
19 Id.
20 Id. at 1088 (emphasis in original).
21 Id. at 1090.
22 Id. at 1089 ("Because the amount recovered exceeded the amount that
(continued...)
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Here the superior court should have included the amount of the subrogation
claim recovery along with the jury's verdict when determining the total amount
Campbell recovered. We reach this conclusion because Campbell's insurer specifically
requested that she include its subrogation claim in the damages she pursued in her
lawsuit, and - at the time of the first settlement offer - its subrogation claim was a part
of Campbell's claim and was included in the first offer as an "accident-related lien[]."
Under the facts of this case Dearlove's insurer's direct payment to Campbell's insurer
to satisfy its subrogation claim was a part of Campbell's total recovery, and it should
have been considered when the superior court compared Campbell's "judgment finally
rendered" against the first settlement offer.
The consequences of interpreting Rule 68 so strictly as to allow only
consideration of the amount reflected in a final verdict could thwart Rule 68's goals.
Under Dearlove's reading, voluntary pre-trial payments would not be included when
assessing a previous Rule 68 offer's success. But this would permit a party to make a
Rule 68 offer knowing the opposing party is unlikely to accept, make voluntary
payments to remove part of the opposing party's claim from the issues to be presented
at trial, and then seek Rule 68 attorney's fees and costs based on the amount awarded in
the final verdict.
Indeed, in Progressive we cautioned that abusive settlement tactics could
result if trial courts were unable to consider partial recoveries expressly included in the
court's judgment: "To hold otherwise would be to create a loophole allowing parties to
either escape or create the punitive measures of an offer of judgment by simply making
a gratuitous payment prior to the entry of a final judgment. Such a loophole would
22 (...continued)
would have been paid had the offer been accepted, the amount recovered was necessarily
not 'at least' five . . . percent 'less favorable' to the [plaintiffs] than the offer." (emphasis
added)).
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effectively avoid the rule."23 We further observed that if trial courts could not consider
voluntary pre-trial payments when determining whether to award Rule 68 fees, the
"unconditional acceptance of an eve-of-trial payment could trigger an unexpected and
ruinous penalty."24
Rule 68's purpose is served by awarding fees and costs when an offeree
incorrectly assesses a claim's value. It is not intended to benefit an offeror who
unilaterally satisfies a portion of the other party's claim in a way that is not reflected in
the final verdict.25 As to Dearlove's first offer of judgment, the correct comparison is
between her $18,000 all-inclusive offer and Campbell's $23,870 recovery - Dearlove's
$20,000 payment to Campbell's insurer plus the $3,870 Campbell recovered at trial (plus
add-ons). Dearlove's first offer was for an amount less than Campbell's recovery;
accordingly, Rule 68 fees were not available to Dearlove.
D. Dearlove's Second Offer Of Judgment
Dearlove's second offer of judgment was for $5,000 plus prejudgment
interest, Rule 79 costs, and Rule 82 attorney's fees. In concluding Dearlove was entitled
to Rule 68 fees from this offer, the superior court did not consider the $20,000 payment
because the subrogated claim had already been satisfied, was no longer part of
Campbell's claim against Dearlove when the second offer was served, and the second
offer expressly noted the subrogation claim had been resolved. The court also did not
consider the value of prejudgment interest, costs, or attorney's fees on the verdict
because both the $3,870 verdict and the second offer of judgment included these add-ons
23 Id. at 1091 (internal quotation marks omitted).
24 Id. at 1092.
25 See Mackie v. Chizmar, 965 P.2d 1202, 1205-06 (Alaska 1998) (discussing
Rule 68's goals, including discouraging expensive and protracted litigation due to parties
overvaluing their claims).
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separately; the court decided the add-ons would not make a significant difference in the
comparison.26 Campbell appeals the court's decision not to include: (1) the $20,000
payment; and (2) post-verdict Rule 82 fees and Rule 79 costs on the $20,000 payment
when it awarded Dearlove Rule 68 fees. We examine each argument in turn.
The superior court was correct not to include the $20,000 payment in
Campbell's total recovery when considering the second offer. As stated above, Rule
68's policy goals are to encourage settlement and avoid protracted litigation.27 By the
time the second offer of judgment was served, Campbell's claim had changed because
Dearlove had settled the insurer's subrogation claim. Campbell could no longer have
expected to recover the $20,000 in medical expenses at trial, which she conceded before
trial, and the question became whether her remaining damages were likely to exceed the
$5,000 offer of judgment. The superior court's review of the second offer of judgment
correctly focused on that assessment of Campbell's remaining claims; Campbell's
inaccurate assessment of litigation risks and the value of her remaining claims led to a
recovery less than the offer of judgment.
Campbell also argues the superior court erred in failing to include
attorney's fees and costs on the $20,000 payment when considering her "judgment
finally rendered." In essence, Campbell argues that because her insurer did not collect
costs and attorney's fees in addition to the $20,000, she was still pursuing that portion
of the subrogation claim. But because the subrogation claim against Dearlove belonged
to Campbell's insurer, so did the prejudgment interest, costs, and attorney's fees
26 See Andrus v. Lena, 975 P.2d 54, 57 n.3 (Alaska 1999) (stating it was not
necessary to include attorney's fees, costs, and prejudgment interest in Rule 68 analysis
because offer of judgment was for a base value plus fees, costs, and prejudgment
interest).
27 Id. (citing Pratt & Whitney Can., Inc. v. Sheehan , 852 P.2d 1173, 1182
(Alaska 1993)).
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associated with that claim against Dearlove. For its own reasons, Campbell's insurer
chose to settle its subrogation claim against Dearlove for $20,000. After that settlement,
Dearlove had no liability to the insurer, or to Campbell, for any portion of the $20,000
in medical expenses covered by the subrogation claim or for any associated prejudgment
interest, costs, or attorney's fees. Accordingly, the superior court did not err in declining
to consider hypothetical costs and attorney's fees on the $20,000 settlement payment as
a recovery by Campbell from Dearlove when comparing Campbell's recovery against
Dearlove's second offer of judgment.
We emphasize that (1) there is nothing in the record to suggest collusion
by the two insurers, and (2) the subrogation claim settlement ultimately did not prejudice
Campbell in connection with Dearlove's Rule 68 offers of judgment. Collusion in a
subrogation claim settlement prejudicing the plaintiff with respect to a previous Rule 68
offer of judgment likely would require a different analysis. And even in the absence of
collusion, a subrogation claim settlement prejudicing the plaintiff-insured with respect
to a previous Rule 68 offer of judgment may well implicate the first-party insurer's duty
of good faith and fair dealing towards its insured. We do not need to address these issues
here.
E. Common Fund Analysis
Campbell argues that she is entitled to additional attorney's fees and costs
under the common fund doctrine, contending that Dearlove should also have to pay part
of Campbell's counsel's contingency fee for the effort expended to recover the
subrogated claim. We find no support for this argument.
The common fund doctrine provides that "a litigant or lawyer who recovers
a common fund for the benefit of persons other than himself or his client is entitled to a
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reasonable attorney's fee from the fund as a whole."28 The doctrine's goal is to prevent
"persons who obtain the benefit of a lawsuit without contributing to its cost [from being]
unjustly enriched at the successful litigant's expense."29 In the subrogation context, this
rule is typically applied so that "[a]ny proceeds recovered [on behalf of the insurer] must
be paid to the insurer, less [proportional] costs and fees incurred by the insured in
prosecuting and collecting the claim."30 Otherwise, the insurer would take the benefit
of the insured's premium and the insured's litigation effort.31
The superior court recognized there was no question that Campbell's
insurer benefitted from Campbell's litigation efforts. But that does not mean Dearlove
should be responsible for part of Campbell's fee agreement with her attorney under the
common fund doctrine. As we held in Sidney v. Allstate, a litigating party is entitled to
recover a fair share of fees and costs from the beneficiaries of the party's litigation
efforts.32 In this case, the party who benefitted from Campbell's litigation efforts was
Campbell's insurer, not Dearlove. Campbell must look to her insurer, not Dearlove, for
the costs and attorney's fees attributable to her insurer's recovery of the $20,000.
V. CONCLUSION
We AFFIRM the superior court's rulings.
28 Sidney v. Allstate Ins. Co., 187 P.3d 443, 454 (Alaska 2008) (quoting
Edwards v. Alaska Pulp Corp. , 920 P.2d 751, 754 (Alaska 1996)).
29 Edwards , 920 P.2d at 754 (quoting Boeing Co. v. Van Gemert , 444 U.S.
472, 478 (1980)).
30 Sidney, 187 P.3d at 454 (emphasis omitted) (quoting Ruggles , 984 P.2d at
512).
31 Id. (quoting Cooper v. Argonaut Ins. Co., 556 P.2d 525, 527 (Alaska
1996)).
32 Id.
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