John Wilbur v. State Farm Mutual Automobile Insurance Company

STATE OF MINNESOTA
IN COURT OF APPEALS
A15-1438

John Wilbur,
Appellant,

vs.

State Farm Mutual Automobile Insurance Company,
Respondent.

Filed June 20, 2016
Affirmed
Hooten, Judge

Hennepin County District Court
File No. 27-CV-10-17956

Wilbur W. Fluegel, Fluegel Law Office, Minneapolis, Minnesota; and

Charles D. Slane, TSR Injury Law, Bloomington, Minnesota (for appellant)

William L. Moran, Julie N. Nagorski, HKM, P.A., St. Paul, Minnesota (for respondent)

Considered and decided by Hooten, Presiding Judge; Larkin, Judge; and Rodenberg,

Judge.

SYLLABUS

In calculating the amount of a discretionary taxable costs award under Minnesota

Statutes section 604.18 (2014) for an insurer’s unreasonable denial of underinsured

motorist benefits to an insured, the term “proceeds awarded,” as used in subdivision 3(a)(1)

of the statute, means the amount of the judgment entered by the district court as

underinsured motorist benefits.

OPINION

HOOTEN, Judge

Following a bench trial on appellant-insured’s claim of unreasonable denial of

underinsured motorist (UIM) benefits pursuant to Minn. Stat. § 604.18, appellant

challenges the district court’s taxable costs award, arguing that the district court

misinterpreted the phrase “proceeds awarded” in Minn. Stat. § 604.18, subd. 3(a)(1). We

affirm.

FACTS

After sustaining injuries in an automobile accident and obtaining $100,000 in

damages from the at-fault driver’s insurance company, appellant John Wilbur sued his

insurer, respondent State Farm Mutual Automobile Insurance Company, for UIM benefits.

Prior to trial, State Farm made an initial settlement offer and payment of $1,200 as UIM

benefits and later offered an additional $26,800 to settle Wilbur’s UIM claim. Wilbur

declined both of these offers and submitted a settlement offer of $100,000, the full amount

of UIM benefits available under the insurance policy. State Farm declined the offer, and

the matter ultimately proceeded to a jury trial in April 2011. The jury returned a verdict in

Wilbur’s favor in the amount of $412,764.63 as personal injury damages. After trial, State

Farm moved to reduce the verdict for collateral source payments pursuant to Minn. Stat. §

548.251 (2014). After reducing the verdict for the $100,000 payment from the at-fault

driver’s insurer and other collateral source payments, the district court determined that

Wilbur’s underinsured loss was $255,956.59. Because Wilbur’s policy with State Farm

provided only $100,000 of UIM coverage and State Farm had previously paid $1,200 to

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Wilbur as UIM benefits, the district court ordered that judgment in the amount of $98,800

be entered in Wilbur’s favor.

After the jury verdict, but prior to entry of judgment, Wilbur successfully moved to

amend his complaint to add a claim against State Farm pursuant to Minn. Stat. § 604.18,

which provides that after an insured receives an award for benefits under an insurance

policy, a district court may also award the insured taxable costs. The statute provides that

if an insurer unreasonably denies benefits to an insured, the district court may award

taxable costs of “an amount equal to one-half of the proceeds awarded that are in excess

of an amount offered by the insurer at least ten days before the trial begins or $250,000,

whichever is less.” Minn. Stat. § 604.18, subds. 2, 3(a)(1) (emphasis added). In addition

to taxable costs, the statute provides that the district court may award reasonable attorney

fees up to $100,000 against an insurer who unreasonably denies benefits to an insured. Id.,

subd. 3. The district court may also award prejudgment and postjudgment interest and

costs and disbursements allowed under other law in connection with the unreasonable

denial of an insurance benefits claim. Id.

A bench trial was held on the section 604.18 claim in July 2014. In briefing before

this trial, State Farm argued that section 604.18, subdivision 3(a)(1), was ambiguous and

that the term “proceeds awarded” in the statute should be construed to be capped by the

policy limit. Wilbur did not argue that the statute was ambiguous, but in his proposed order

construed “proceeds awarded” to mean the net jury verdict, namely, the jury’s verdict for

personal injury damages adjusted for collateral source payments.

3

In its November 2014 order, the district court found State Farm liable for

unreasonably denying Wilbur UIM benefits. The district court determined that Wilbur was

entitled to recover $36,000 pursuant to subdivision 3(a)(1) of the statute, consistent with

State Farm’s interpretation of “proceeds awarded.” According to the district court’s

calculations, because “State Farm was ultimately ordered to pay $98,800 in insurance

policy proceeds, which is $72,000 more than the amount of State Farm’s offer” of $26,800,

Wilbur was entitled to taxable costs of one-half of $72,000, or $36,000. The district court

also determined that Wilbur could move to recover reasonable attorney fees under

subdivision 3(a)(2) and costs and disbursements allowed under other law.

In March 2015, Wilbur filed a motion to enter judgment and a memorandum in

support of his motion. In his memorandum, Wilbur argued that the district court incorrectly

construed the statute because the term “proceeds awarded” in section

604.18, subdivision 3(a)(1), referred to the net jury verdict of $255,956.59 and that he was

entitled to taxable costs of $113,978.29, one-half of the net verdict in excess of State Farm’s

last offer.1 In its June 2015 order, the district court determined that Wilbur’s argument

regarding the meaning of “proceeds awarded” constituted an improperly brought motion

to reconsider. Because Wilbur failed to follow the proper procedure for bringing a motion

to reconsider, the district court did not address his argument and entered judgment in his

1
Presumably, Wilbur used the $28,000 combined offer, instead of State Farm’s final offer
of $26,800, in calculating his damages in accordance with his construction of “proceeds
awarded.”

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favor in the amount of $36,000 for taxable costs, $100,000 for attorney fees, and

$35,832.90 for reasonable disbursements. This appeal followed.

ISSUE

Did the district court err as a matter of law in construing the term “proceeds

awarded” in Minn. Stat. § 604.18, subd. 3(a)(1)?

ANALYSIS

The parties dispute the proper construction of Minn. Stat. § 604.18, which provides

a discretionary penalty for the unreasonable denial of first-party insurance claims. This

statute provides that a court may award certain taxable costs to an insured who can show

that there was an “absence of a reasonable basis for denying the benefits of the insurance

policy” and “the insurer knew of the lack of a reasonable basis for denying the benefits of

the insurance policy or acted in reckless disregard of the lack of a reasonable basis for

denying the benefits of the insurance policy.” Minn. Stat. § 604.18, subd. 2(a). If the

insured can establish that the insurer is liable for a violation of subdivision 2, “the [district]

court may award an insured . . . an amount equal to one-half of the proceeds awarded that

are in excess of an amount offered by the insurer at least ten days before the trial begins or

$250,000, whichever is less.” Id., subd. 3(a)(1) (emphasis added). The parties do not

dispute the district court’s determinations that State Farm violated the statute by

unreasonably denying Wilbur his UIM benefits and that Wilbur is entitled to a taxable costs

award under subdivision 3(a)(1) of the statute. But, Wilbur argues that the district court

erred as a matter of law in construing the term “proceeds awarded” and therefore erred in

calculating the taxable costs awarded to him for State Farm’s violation of subdivision 2(a).

5

As a threshold matter, State Farm argues that Wilbur forfeited his argument that the

district court improperly calculated the taxable costs award because he did not raise the

argument to the district court. “A reviewing court must generally consider only those

issues that the record shows were presented and considered by the [district] court in

deciding the matter before it.” Thiele v. Stich, 425 N.W.2d 580, 582 (Minn. 1988)

(quotation omitted). While Wilbur did not specifically present this issue to the district

court, State Farm raised the issue by arguing in its briefing prior to the bench trial on

Wilbur’s section 604.18 claim that subdivision 3(a)(1) was ambiguous and that “proceeds

awarded” should be construed to be capped by the policy limit. Wilbur did not directly

respond to this argument, but stated in his proposed order that “proceeds awarded” means

“the net verdict.”2 Therefore, the disputed issue was presented to the district court.

Implicitly rejecting the proposed order submitted by Wilbur and adopting State Farm’s

construction of the statute, the district court used the $98,800 judgment entered by the

district court in the underlying UIM action, rather than the net jury verdict of $255,956.59,

as the “proceeds awarded” in awarding taxable costs to Wilbur. Given these circumstances,

the issue of the construction of “proceeds awarded” is properly before us.

2
Wilbur briefed this issue at length in his memorandum to the district court in connection
with his motion to enter judgment. However, because the district court determined that
Wilbur’s arguments regarding the proper construction of “proceeds awarded” constituted
an improperly brought motion to reconsider, Wilbur’s submissions at that point do not
factor into our analysis of whether this issue was raised to the district court. See Minn. R.
Gen. Pract. 115.11 1997 advisory comm. cmt. (“Motions for reconsideration are not
opportunities for presentation of facts or arguments available when the prior motion was
considered. Motions for reconsideration will not be allowed to ‘expand’ or ‘supplement’
the record on appeal.”).

6

The construction of Minn. Stat. § 604.18, subd. 3(a)(1), is a matter of first

impression. The interpretation of a statute is a legal question, which we review de novo.

Frandsen v. Ford Motor Co., 801 N.W.2d 177, 181 (Minn. 2011). When interpreting a

statute, our “paramount goal” is to effectuate the intent of the legislature. Auto Owners

Ins. Co. v. Perry, 749 N.W.2d 324, 326 (Minn. 2008); see Minn. Stat. § 645.16 (2014)

(“The object of all interpretation and construction of laws is to ascertain and effectuate the

intention of the legislature.”). The first step in statutory interpretation is determining

“whether the statute’s language, on its face, is ambiguous.” Am. Tower, L.P. v. City of

Grant, 636 N.W.2d 309, 312 (Minn. 2001). “A statute is only ambiguous when the

language therein is subject to more than one reasonable interpretation.” Id. (quotation

omitted). If a statute is unambiguous, this court must “enforce the language of the statute

and not explore the spirit or purpose of the law.” Christianson v. Henke, 831 N.W.2d 532,

537 (Minn. 2013) (quotation omitted). If a statute is ambiguous, however, this court “may

consider the factors set forth by the [l]egislature for interpreting a statute.” Id. (quotation

omitted).

On appeal, State Farm argues that the statute is unambiguous and that “proceeds

awarded” means the jury verdict, adjusted for collateral source payments and capped by

the policy limit, i.e., the amount of the judgment entered by the district court as UIM

benefits. State Farm contends that other uses of “proceeds” in section 604.18, as well as

the statute’s provision regarding the timing of the proceeding for seeking a taxable costs

award under the statute, demonstrate that its interpretation is the only reasonable

interpretation.

7

Wilbur agrees that State Farm’s interpretation of “proceeds awarded” is reasonable,

but argues that there is a second reasonable interpretation: “proceeds awarded” means the

jury verdict, adjusted for collateral source payments. Wilbur thus argues that “proceeds

awarded” is ambiguous because it has more than one reasonable interpretation and that

legislative history supports his position that “proceeds awarded” means the jury verdict,

adjusted for collateral source payments.

Section 604.18 does not define “proceeds awarded.” Minnesota law provides that

“words and phrases are construed according to rules of grammar and according to their

common and approved usage; but technical words and phrases and such others as have

acquired a special meaning . . . are construed according to such special meaning or their

definition.” Minn. Stat. § 645.08(1) (2014).

The term “proceeds” is defined by Merriam-Webster’s Collegiate Dictionary as “the

total amount brought in” or “the net amount received (as for a check or from an insurance

settlement) after deduction of any discount or charges.” Merriam-Webster’s Collegiate

Dictionary 990 (11th ed. 2003). A note regarding the usage of “proceeds” in Black’s Law

Dictionary states that “[t]he term proceeds includes the account arising when the right to

payment is earned under a contract right.” Black’s Law Dictionary 1399 (10th ed. 2014). The

American Heritage Dictionary of the English Language defines the term “award” as “[t]o

grant an amount or other benefit legally due.” The American Heritage Dictionary of the

English Language 125 (5th ed. 2011). Black’s defines “award” as “[t]o grant by formal

process or by judicial decree.” Black’s Law Dictionary at 164.

8

The definitions of “proceeds” do not clarify whether “proceeds awarded” refers to the

net jury verdict or the UIM award. The Merriam-Webster’s definition of “proceeds” as “the

total amount brought in” arguably supports Wilbur’s construction because the net jury verdict

is the jury’s findings of Wilbur’s total personal injury damages, adjusted for collateral source

payments. However, this definition also arguably supports State Farm’s construction because

the total amount that was actually awarded by the district court was limited contractually by

the insurance policy. The Merriam-Webster’s definition of “proceeds” as “the net amount

received (as for a check or from an insurance settlement) after deduction of any discount or

charges” does not address the situation where, as here, the net amount that can be received by

the insured is limited contractually by the insurance policy. Because the heart of the parties’

dispute is whether “proceeds awarded” is capped by the policy limit, this definition does not

resolve the ambiguity of the term. Finally, while the comment in Black’s that “the term

proceeds includes the account arising when the right to payment is earned under a contract

right” supports State Farm’s construction, it is a note regarding the use of the term, rather than

its definition. And, neither of the two definitions of “proceeds” in Black’s provides any

guidance regarding the use of “proceeds” in subdivision 3(a)(1).

Likewise, neither the common definition nor the technical definition of “award”

resolves the question of whether Wilbur’s or State Farm’s interpretation of subdivision 3(a)(1)

is correct. The American Heritage definition of “award” as “[t]o grant an amount or other

benefit legally due” does not resolve the ambiguity because, while the jury made findings as

to Wilbur’s personal injury damages, the district court awarded Wilbur UIM benefits in

accordance with the jury’s findings. Likewise, the Black’s definition of “award” as “[t]o grant

9

by formal process or by judicial decree” does not resolve the ambiguity of the term “proceeds

awarded.” While the jury made findings regarding Wilbur’s damages by formal process, the

district court entered judgment in Wilbur’s favor. We also note that Black’s defines the noun

form of “award” as “[a] final judgment or decision, esp[ecially] one by an arbitrator or by a

jury assessing damages,” further demonstrating the ambiguity of the term. Black’s Law

Dictionary at 164.

A court may ascertain the meaning of doubtful words in a statute “by reference to

their association with other associated words and phrases.” Wong v. Am. Family Mut. Ins.

Co., 576 N.W.2d 742, 745 (Minn. 1998) (quotation omitted). The term “proceeds” is used

several other times in section 604.18. First, it is used in the definition of the term

“insurance policy”:

“Insurance policy” means a written agreement between
an insured and an insurer that obligates an insurer to pay
proceeds directly to an insured. Insurance policy does not
include provisions of a written agreement obligating an insurer
to defend an insured, reimburse an insured’s defense expenses,
provide for any other type of defense obligation, or provide
indemnification for judgments or settlements.

Minn. Stat. § 604.18, subd. 1(a) (emphasis added). The statute also provides that

“[a]ttorney fees may be awarded only if the fees sought . . . are not duplicative of the fees

for the insured’s attorney otherwise expended in pursuit of proceeds for the insured under

the insurance policy.” Id., subd. 3(a) (emphasis added). These two other uses of

“proceeds” are explicitly connected with “insurance policy,” unlike its use in subdivision

3(a)(1). Because the legislature did not include an explanatory clause in subdivision

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3(a)(1), it is unclear whether “proceeds” in this subpart of subdivision 3 means the net jury

verdict or the UIM award.

With regard to the timing of bringing a claim, the statute provides that “[a]n award

of taxable costs under this section shall be determined by the [district] court in a proceeding

subsequent to any determination by a fact finder of the amount an insured is entitled to

under the insurance policy.” Id., subd. 4(b). It is not clear, however, that “proceeds

awarded” means the UIM award, rather than the net jury verdict, simply because a claim

under section 604.18 can only be heard after the district court determines the benefits to be

paid under the insurance policy. Because section 604.18 provides a penalty for

unreasonably denying an insured the benefits of an insurance policy, not a determination

of what benefits the insured is entitled to under the insurance policy, it is not clear that

“proceeds awarded” in section 604.18 means the UIM award. We conclude that “proceeds

awarded” is ambiguous because it is subject to more than one reasonable interpretation and

its association with other words and phrases in the statute does not clarify its meaning.

Because we have determined that “proceeds awarded,” as it is used in

section 604.18, subdivision 3(a)(1), is ambiguous, we may consider the factors set forth by

the legislature in order to ascertain legislative intent. Christianson, 831 N.W.2d at 537.

When construing statutory language, we ascertain legislative intent by considering, among

other things, “the legislative history of the act under consideration, the subject matter as a

whole, the purpose of the legislation, and [the] objects intended to be secured thereby.”

Staab v. Diocese of St. Cloud, 853 N.W.2d 713, 718 (Minn. 2014) (quotation omitted); see

11

Minn. Stat. § 645.16 (2014) (providing factors to be considered in ascertaining legislative

intent).

In order to understand the purpose of section 604.18, it is important to understand

the history of bad faith claims in the insurance context. Minnesota historically

distinguished between first-party coverage claims and third-party coverage claims in

allowing recovery of punitive damages against an insurer for bad faith failure to settle. See

Pillsbury Co. v. Nat’l. Union Fire Ins. Co., 425 N.W.2d 244, 249–50 (Minn. App. 1988),

review granted (Minn. July 28, 1988) and appeal dismissed (Minn. Mar. 13, 1989). First-

party coverage entitles the insured to receive benefits directly from the insurer, while third-

party coverage satisfies tort claims of third parties against the insured by way of

indemnification. Latterell v. Progressive N. Ins. Co., 801 N.W.2d 917, 923 (Minn. 2011).

While allowing claims of bad faith in a third-party coverage context, Minnesota courts

historically did not allow such claims in a first-party coverage context. Compare Morris

v. Am. Family Mut. Ins. Co., 386 N.W.2d 233, 237 (Minn. 1986) (“If an insurer fails to

settle in good faith with a third-party claimant, the insured can bring a bad faith action

against the insurer . . . .”), with Haagenson v. Nat’l Farmers Union Prop. & Cas. Co., 277

N.W.2d 648, 650, 652–53 (Minn. 1979) (reversing jury’s award of punitive damages for

bad faith denial of insurance benefits in first-party coverage context, reasoning that first-

party claim focused on breach of contract theories and that “extra-contract” damages were

not recoverable except in “exceptional cases” where breach was accompanied by

independent tort).

12

By enacting section 604.18, the Minnesota Legislature provided a means for

insureds to pursue claims of bad faith denial of first-party insurance benefits. In explaining

the purpose of the bill that became section 604.18, the author of the bill, Senator Tarryl

Clark, explained that the bill “gives a bit of a deterrent to those who may be making low

settlement offers with no intention of making good on what the consumer’s actual damages

are under the policy.” S. Floor Deb. on S.F. 2822 (Apr. 14, 2008) (statement of Sen. Clark).

Therefore, section 604.18 was intended to deter insurers from making settlement offers far

below the insured’s actual damages by penalizing them when they make such offers.

Both parties argue that legislative history supports their interpretation of “proceeds

awarded.” Wilbur argues that the testimony of William Moran, an insurance defense

attorney, at a committee hearing on a related bill demonstrates that the legislature intended

“proceeds awarded” to mean the net jury verdict. Moran testified that if “the amount

offered by the insurer was $10,000, the award was $80,000, the difference between those

two numbers is $70,000 and . . . the award for taxable costs would be $35,000, because

that is half of the difference between what was offered and what was ultimately awarded.”

Hearing on S.F. No. 3116 Before the S. Comm. on Commerce & Consumer Protection

(March 6, 2008) (statement of Mr. Moran). Moran’s testimony, however, does not support

Wilbur’s construction of “proceeds awarded” because it does not contemplate the

calculation of taxable costs under subdivision 3(a)(1) if the jury verdict exceeds the policy

limit, as is the case here. Additionally, Moran was testifying in connection with a related,

but separate, senate bill that had language that was substantially different than the language

that was eventually promulgated into law through the passage of the bill that became

13

section 604.18. See id. We conclude that Moran’s testimony as a witness before a

legislative committee hearing provides little insight into the legislature’s intent regarding

the meaning of “proceeds awarded” under subdivision 3(a)(1). See Handle With Care, Inc.

v. Dep’t. of Human Servs., 406 N.W.2d 518, 522 (Minn. 1987) (stating that in determining

legislative intent, “statements made in committee discussion or floor debate are to be

treated with caution”).

Both parties argue that the statements of Senator Clark at the final senate floor

debate support their respective arguments about the meaning of “proceeds awarded.”

“Statements made . . . by the sponsor of a bill or an amendment on the purpose or effect of

the legislation are generally entitled to some weight.” Id. In the final senate floor debate,

Senator Clark described the manner in which a court would calculate the proceeds awarded

as follows:

This bill in many ways looked similar to the way it left
except for clarifying language . . . . But I do want to give you
a quick example to illustrate what is different, because when
the bill left the body, we had caps in place that we have raised
and modified.

So for example, the highest amount of awards over what
the insurer’s costs were would be up to $250,000. There is also
a cap on attorneys’ fees up to $100,000. Both of those are at
the discretion of the court, and the example that I would give
is that, let’s say that the last offer by an insurer is $50,000, but
the amount determined due under the insurance policy after the
trial is $250,000. One-half of the difference would be
$100,000, which would be the amount the insured could
recover in additional costs. That’s the maximum they could
do, so there’s a cap of a half up to $250,000.

14

S. Floor Deb. on S.F. 2822 (Apr. 14, 2008) (statement of Sen. Clark) (emphasis added).

Contrary to Wilbur’s argument that Senator Clark’s statement supports his position, her

statement suggests that the legislature intended “proceeds awarded” to mean the UIM

award because, in her example, she indicated that the term “proceeds awarded” means “the

amount determined due under the insurance policy after trial.” Id. (emphasis added).

Wilbur argues that State Farm’s construction of “proceeds awarded” would frustrate

the legislature’s goal of deterring insurance companies from making low settlement offers

by providing only a modest penalty for a violation of section 604.18. Specifically, Wilbur

notes that the potential penalty under State Farm’s construction of “proceeds awarded”

could be quite small if the insurer offered only slightly less than the policy limit, even when

the insured’s actual damages clearly exceeded the policy limit. Wilbur contends that State

Farm’s construction would frustrate the purpose of the statute by making “‘low balling’

the insured an economically sound choice” because the insurer would be liable under

section 604.18 only for taxable costs of half of the difference between its offer and the

policy limit. Wilbur points out that such a construction would force the insured to choose

between accepting a low offer or incurring the time and expense of going to trial to enforce

payment of the full limit of the policy and then receiving a minimal taxable costs award

under section 604.18 in the event that bad faith was proven. For example, under State

Farm’s construction, if the insured’s actual damages clearly exceeded the applicable

$100,000 policy limit, but the insurer offered only $95,000, the insured would be forced to

choose between accepting the $95,000 or incurring the time and expense of trial to recover

15

the full $100,000, plus potentially $2,500 in taxable costs under section 604.18 if it was

determined that the insurer unreasonably denied the insured the benefits of the policy.

Wilbur is correct that defining “proceeds awarded” as the UIM award significantly

limits the taxable costs that the district court can award under section 604.18. Wilbur’s

contention that State Farm’s construction would create a scenario where it would be

economically sound for an insurer to offer less than the policy limit even where the

insured’s damages clearly exceeded the policy limit is incorrect, however, as a district court

may also award to the insured up to $100,000 in “reasonable attorney fees actually incurred

to establish the insurer’s [unreasonable denial of benefits],” along with costs and

disbursements incurred in pursuing the 604.18 claim as allowed by other law. Minn. Stat.

§ 604.18, subd. 3. Therefore, while the insured who receives an offer close to the policy

limit has a minimal financial incentive to go to trial and eventually amend its pleadings to

seek taxable costs under section 604.18, the insurer still has an incentive to offer the full

policy benefits if the insured’s damages exceed the policy limit because the insurer may be

liable, if the insured chooses to go to trial, for taxable costs as calculated by the formula in

subdivision 3(a)(1), plus up to $100,000 of the insured’s attorney fees that were incurred

in establishing a violation of section 604.18.

Moreover, even under State Farm’s construction, the statute provides a strong

disincentive for an insurer to offer an amount substantially lower than the insured’s

damages falling within the policy limit, as the insurer could be liable for half of the amount

that is “in excess of an amount offered by the insurer,” up to $250,000. Therefore, contrary

to Wilbur’s assertion, State Farm’s construction of “proceeds awarded” does not frustrate

16

the purpose of the statute, but rather provides an incentive, albeit a significantly more

modest incentive than that which would result under Wilbur’s construction, for the insurer

to minimize its potential liability by making a reasonable offer of UIM benefits, up to the

policy limit.

Wilbur argues that State Farm’s construction of the statute would render the statute

a nullity because the insurance company would never have to pay more in damages than

its limits, even in the presence of bad faith. But, under State Farm’s construction of the

statute, assuming that the jury returned a verdict that was in excess of the policy limit even

after adjustment for collateral source payments, the insurer would have to pay full benefits

under the policy, plus, at the district court’s discretion, the taxable costs awarded under

section 604.18, subdivision 3(a)(1), and the insured’s reasonable attorney fees incurred in

connection with the section 604.18 claim, up to $100,000. Thus, under State Farm’s

construction, the insurer could still have to pay far more than the policy limit to the insured

if the insurer was found to have violated section 604.18.

Illustrative of this construction, under the facts of this case Wilbur was awarded a

total of $171,832.90 in connection with his section 604.18 claim, consisting of $36,000 in

taxable costs, $100,000 in attorney fees, and $35,832.90 in costs and disbursements.

Therefore, due to State Farm’s unreasonable denial of insurance benefits, Wilbur was

awarded $171,832.90 in addition to the UIM policy limit of $100,000 that he was awarded

in the underlying trial. While this amount is approximately $78,000 less than the amount

that Wilbur would have received had the district court adopted his construction of

“proceeds awarded,” the amount awarded clearly penalizes State Farm for its failure to

17

make a reasonable settlement offer. Even if State Farm had made a more reasonable

settlement offer in this case, thereby reducing the taxable costs awarded under subdivision

3(a)(1), having to pay even these lesser taxable costs, as well as attorney fees, costs, and

disbursements, in excess of its $100,000 policy limit, would effectively encourage State

Farm to make reasonable settlement offers of first-party benefits to its insureds in the

future.

Furthermore, the statute imposes a penalty for an insurer’s unreasonable denial of

insurance benefits, and the Minnesota Supreme Court has stated that “statutes that are penal

in nature are construed narrowly against the penalty.” Hans Hagen Homes, Inc. v. City of

Minnetrista, 728 N.W.2d 536, 543 (Minn. 2007). The fact that subdivision 3(a) prescribes

a penalty is evidenced by subdivision 3(b), which provides that “[a]n insured may not also

recover punitive or exemplary damages or attorney fees under section 8.31 for a violation

of this section.” The statute’s prohibition on further recovery of punitive or exemplary

damages demonstrates that the taxable costs award allowed by the statute is a penalty

against insurers that unreasonably deny insurance benefits. Moreover, Senator Clark

described section 604.18 as providing a “penalty” during the senate floor debate. S. Floor

Deb. on S.F. 2822 (Apr. 14, 2008) (statement of Sen. Clark).

We note that “proceeds” is typically used in caselaw in disputes involving damages

arising from an insurance policy or another contractual agreement. See, e.g., Star

Windshield Repair, Inc. v. W. Nat’l Ins. Co., 768 N.W.2d 346 (Minn. 2009) (referring to

proceeds of insurance policy); Kliniski v. Southdale Manor, Inc., 518 N.W.2d 7 (Minn.

1994) (referring to proceeds of settlement agreement); Henning v. Wineman, 306 N.W.2d

18

550 (Minn. 1981) (referring to proceeds of settlement agreement); Unborn Child v. Evans,

310 Minn. 197, 245 N.W.2d 600 (1976) (referring to proceeds of insurance policy). This

frequent use of “proceeds” in caselaw to refer to damages arising from a contractual

relationship between the parties provides further support for our conclusion that the legislature

intended “proceeds awarded” to mean the UIM award.

Finally, while the use of “proceeds” in other parts of section 604.18 does not

persuade us that the term “proceeds awarded” in subdivision 3(a)(1) is unambiguous, we

recognize that the other two times “proceeds” is mentioned in the statute, the term is used

to refer to proceeds of an insurance policy. See Minn. Stat § 604.18, subd. 1(a) (“‘Insurance

policy’ means a written agreement between an insured and an insurer that obligates an

insurer to pay proceeds directly to an insured” (emphasis added)), subd. 3 (“Attorney fees

may be awarded only if the fees sought . . . are not duplicative of the fees for the insured’s

attorney otherwise expended in pursuit of proceeds for the insured under the insurance

policy.” (emphasis added)). This consistent use of “proceeds” indicates that the legislature

intended “proceeds awarded” to mean the UIM award.

In summary, given the ambiguity of the term “proceeds awarded,” the legislative

history, the principle of law that statutory provisions that provide for a penalty are

construed narrowly against the penalty, the use of the term “proceeds” in caselaw, and the

consistent use of the term “proceeds” in section 604.18, we conclude that “proceeds

awarded” means the amount of the judgment entered by the district court as UIM benefits.

DECISION

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Because the term “proceeds awarded” means the amount of the judgment entered

by the district court as UIM benefits, the district court properly calculated its discretionary

award of taxable costs to Wilbur under Minn. Stat. § 604.18, subd. 3(a)(1).

Affirmed.

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