Mikles v. Sears, Roebuck & Co., 2004 WL 405795 (Ohio App., March 5, 2004)
Ray and Dionna Mikles contracted for the installation of an air conditioner. Immediately after installation, the Mikles' house caught fire where the work had been performed. The Mikles submitted a claim to their own insurance company, which partially covered the loss. The carrier then filed a subrogation action against the installers, seeking to recover the payment it had made to the Mikles.
Shortly after suit was filed, the installer defendants attempted by motion to force the Mikles to be named as necessary parties, but the court rejected the request. The carrier eventually settled with the installers, and the court dismissed the subrogation action with prejudice, noting that the matter had been "fully compromised and settled between the parties."
The Mikles filed their own lawsuit against the same installer defendants after the settlement. The installers raised the legal defense of “res judicata” and moved for dismissal on that basis. The trial court granted such motion and dismissed the insured’s personal lawsuit.
Under “res judicata” (Latin for “the thing has been decided”), a valid, final judgment bars all subsequent actions based on any claim arising out of the transaction or occurrence that was the subject matter of the prior action. Grava v. Parkman Twp., 73 Ohio St.3d 379 (Ohio 1995). Its purpose is to support the finality of legal determinations and to avoid duplicate or multiple lawsuits arising from one loss or occurrence. “Res judicata” and the legal defense of “collateral estoppel” act to preclude both assertions of claims that were decided in earlier litigation, as well as claims that could have been asserted in the prior litigation. In this case, the trial court determined that based upon “res judicata” the Mikles could not assert their own personal claim, which could have (and in the court’s eyes, should have) been asserted in the earlier subrogation lawsuit.
On appeal, the Mikles argued that the installers were obligated to ensure that they were joined as parties to the carrier’s subrogation action, or they should not be able to use the “res judicata” defense against them. Given that the defendants settled the subrogation action without ensuring joinder of the Mikles as parties, the Mikles argued that the defendants waived their ability to assert res judicata in the present case.
After reviewing case law, the appellate court noted that res judicata applies not only to parties to a prior action but also to those with whom they were “in privity” (i.e., with whom they were “similarly situated,” arising from a contractual or other legal relationship). Brown v. Dayton, 89 Ohio St.3d 245, 247, (Ohio 2000). In turn, based upon the valid final judgment in the subrogation action; the fact that the claims arose out of the same transaction or occurrence that was the subject matter of the subrogation action; and the fact that the Mikles were in privity with their carrier, the appellate court was very comfortable upholding the dismissal based upon the “res judicata” defense.
The only issue that the appellate court struggled with was whether the defendants waived their res judicata defense by failing to ensure that the Mikles were joined in the earlier subrogation action. As noted above, the defendants had in fact attempted to join the Mikles into the subrogation action, but the trial court refused to do so. Because they had raised the issue to the trial court (albeit unsuccessfully), the appellate court determined that defendants had not waived the defense of res judicata for use in this case.
The unfairness of the result was not lost on the court, as it noted that the Mikles could not have protected themselves from the application of res judicata given their lack of actual knowledge of the subrogation action and the trial court's failure to join them to the subrogation action. The court unnecessarily commented as to certain alternate directions the Mikles should have looked (or could now look) for their relief.
The court noted that Ohio’s Rules of Civil Procedure required that the subrogation complaint, as with all pleadings asserting a claim for relief, “state the names, if known …, of any [necessary persons] who are not joined, and the reasons why they are not joined." Civ.R. 19(C). Although the carrier’s subrogation complaint referred to Ray Mikles as the insured subrogor, it did not specifically identify either of the Mikles as necessary parties or state why they were not joined in the subrogation action. The court noted that this “oversight” on the part of the carrier’s subrogation counsel had no bearing on whether the defendants properly raised the res judicata issue, but implied that the Mikles may want to look to their own insurance carrier for relief from the effects of the earlier subrogation settlement: “Although we express no opinion on the merits of the issue, [the Mikles’ insurance carrier] also conceivably may have had some obligation to ensure that the Mikles, as subrogors, were joined as parties to its subrogation action.” The court may have limited its opinion, but the message was clear.
The court also noted that the Mikles still might be able to file a post-judgment motion to intervene in the subrogation action and then move for relief from the judgment. Post-judgment intervention, although rarely allowed, may be permitted when it is "the only way to protect the intervenor's rights." Likover v. City of Cleveland, 60 Ohio App.2d 154, 159 (1978). Both this method to obtain relief, as well as the implied claim against the subrogating carrier, demonstrate a desire on the part of the court that any relief come from the subrogation settlement, and not the defendants themselves.
Practice Tips:
1. Although this review does not allow for a full-blown discussion on the best practices for dealing with an insured’s personal claim, recovery efforts must always at least take into consideration the status of any underinsured or uninsured claim of the underlying insured (whether a real and valid claim or simply a claim perceived by the insured). Ignoring the issue can leave the carrier vulnerable to many negative consequences, such as a claim for payment of a portion of a settlement, as was the case here, or worse - a bad faith claim under its insurance policy. Even if these claims may eventually be defeated, the cost of litigation and the effect they would have on detracting from otherwise gainful recovery efforts should be avoided.
2. When settling any claim, a recovery professional should always consider what effect it may have on the insured. In certain jurisdictions and certain specific contexts (such as where the defendant has agreed that the settlement will have no bearing on the insured’s personal claims), there may have no effect at all, but the issue should be raised and considered before any settlement is finalized.
3. Although this decision, and the above discussion, center on a situation where the insured and the carrier have similar types of losses (property damage), the same issues arise when the insured suffers personal injuries in the events underlying the loss that generated the carrier’s subrogation claim. Therefore, a recovery professional should consult with their insured as to any types of injuries or damages incurred at the time of the loss before completing a settlement.
4. Legal jurisdictions around the country deal with these issues in different ways. If there is any uncertainty about the effect of a jurisdiction’s laws on an anticipated settlement, competent subrogation counsel should be consulted.
