August 20, 1990

Keith R. Lightfield, Director
Petroleum Release Compensation Fund
330 South Poplar Avenue
Pierre, South Dakota 57501

OFFICIAL OPINION NO. 90-36

Subrogation of fund to insurers and others pursuant to SDCL 34A-13-9.2

Dear Mr. Lightfield:

You have requested an official opinion of this office regarding the following factual situation:

FACTS:

The Petroleum Release Compensation Fund reimburses eligible responsible persons for releases of petroleum products as defined in SDCL ch. 34A-13. These costs of corrective action and reimbursement are made, as a matter of policy, when it is determined that insurance coverage is not readily available for responsible persons. Reimbursement under the Act occurs after the responsible party has advanced the first $10,000 of cleanup expenses.

After the fund was established, and prior to passage of House Bill 1266 (1990 Legislature), which became effective on February 20, 1990, third-party insurers, who had issued insurance covering the same cleanup expenses as the fund, began to include as part of their insurance contracts, endorsements voiding coverage if the insured did not make application for reimbursement from the fund. The insurance contracts in question also included endorsements voiding coverage if the insured was eligible to receive payments from fund. The following was a typical endorsement:

As a condition for this insurance to apply, it is agreed that the insured shall:

a. pay all fees, taxes, or premiums; and
b. complete all required applications and registration forms; and
c. comply with all laws, regulations or statutes in order to secure available funds from any governmental funding programs. Any failure or inability to secure funds from any program shall void this insurance to the extent that such funds would have applied to any loss covered under this insurance. If the inability to secure funds is directly attributable to the existence of this insurance, coverage shall also be void so as to permit contribution from any such governmental funding program.

It is further agreed that any sum payable by a governmental funding program to the insured or on behalf of the insured shall reduce the Limits of Insurance shown in the Declarations by a corresponding amount if such payment would otherwise have been made under this insurance.

We reserve the right to recover all or part of any payment made to the insured by a governmental funding program as reimbursement for losses incurred under this insurance.

House Bill 1266, 5, codified as SDCL 34A-13-9.2, provides as follows:

'The fund shall be subrogated to any insurer, risk retention group or third party payer. The fund has the right to recover from insurance or any third party payer and that right may not be waived by contract.'

Questions have been posed by third-party insurers regarding whether this section precludes the marketing of policies in South Dakota containing endorsements voiding coverage if the insured fails to apply to the fund or if fund reimbursement is available.

Based upon the foregoing facts, you have asked the following questions:

QUESTIONS:

1. Does SDCL 34A-13-9.2 adequately provide subrogation rights to the Petroleum Release Compensation Fund permitting civil actions against third-party insurers or other responsible parties where reimbursement from the fund has been made?

2. Do insurance policies sold after February 20, 1990, containing clauses voiding the policy on payment from the fund create a condition contrary to law, where SDCL 34A-13-9.2 provides that the right to recover from an insurance carrier third-party payer may not be waived by contract?

3. Are clauses or provisions in contracts of insurance, mandating that the insured make application to the fund, and voiding coverage under the insurance policy, as well as provisions reserving to the insurer the right to recover payments from governmental entities, contrary to public policy and thus void?

"Subrogation" is a doctrine of equity having for its purpose the equitable adjustment between parties by securing the ultimate discharge of a debt by the person who in equity and good conscience ought to pay it. American Surety Co. v. Western Surety Co., 71 S.D. 126, 22 N.W.2d 429 (1946). Ordinarily, the right to subrogation is not dependent upon an agreement but rests upon principles of natural justice and equity. Application of Mach, 71 S.D. 460, 25 N.W.2d 881 (1947). Historically, the South Dakota Supreme Court limited the rights of sureties to recover on theories of subrogation. American Surety Co. v. Western Surety Co., supra; City of Lemmon v. United States Fidelity and Guaranty Co., 293 N.W.2d 433 (S.D. 1980). In response to the City of Lemmon case, the Legislature passed SDCL 56-2-17, providing limited subrogation rights to sureties where third parties had caused payment on the sureties' bonds by their negligence, willful conduct, or breach of contract. This right of subrogation was acknowledged in Western Surety Co. v. First Bank of South Dakota, 427 N.W.2d 840, 842 (S.D. 1988), although it was not found to be applicable in that particular case.

These cases show that although subrogation is an equitable doctrine, the parameters of it can and frequently are altered by the Legislature in the exercise of its law-making authority.

The question thus becomes what the Legislature intended by passing the statute in question. It is my opinion that the Legislature could only have intended to grant the fund the right to recover from any third-party payer, including risk retention groups and insurers. As defined above, the term "subrogation" means the right of one payer of a liability to cast ultimate responsibility for payment on another. Ordinary equitable subrogation makes a judgment regarding the ultimate responsibility for payment. This judgment is, however, subject to alteration by legislative mandate.

In SDCL 34A-13-9.2, the Legislature plainly stated a policy that as between the publicly funded entity, PRCF, and private insurers who have been paid premiums for accepting the environmental pollution risk, the loss should fall upon the private insurer who has been paid for accepting the risk. Since you do not ask whether contracts preceding February 20, 1990, might be voided under the statute, no question of a taking for a public purpose arises. If any insurer is unwilling to accept the risk of environmental cleanup without looking to the State fund for reimbursement of its expenses, it can simply stop issuing this type of insurance after the effective date of the legislation. Since the statute is clear, all insurance contracts issued after its effective date are subject to it.

IN RE QUESTION NO. 1:

Your first question inquires whether the cited statute adequately provides subrogation rights to PRCF permitting civil actions against third-party insurers and other responsible parties. It is my opinion that it does, based upon the foregoing discussion. When the Legislature granted the subrogation right, it clearly also granted, by implication, the power to enforce the subrogation right. A question would arise as to the ability of the fund to recover from "responsible persons." The fund obviously may not recover from tank owners, property owners, or others who are benefited by the legislation, since the statute is clear that "eligible responsible persons" are entitled to recover from the fund. SDCL 34A-13-27, -28, -29, -31, -32. Such a "responsible person" is any person who is an owner or operator of a tank at any time during or after a release. SDCL 34A-13-1(12). Therefore, it is my opinion that the fund may recover from persons who are not responsible persons within this definition, and it may also recover from insurers, risk retention groups, or other third-party payers who are not "responsible persons." An ordinary civil action should suffice for this purpose.

IN RE QUESTION NO. 2:

You inquire whether clauses voiding coverage in insurance policies entered into after February 20, 1990, are void as against public policy. It is my opinion that they are. Nothing apparently prohibits an insurer from incorporating such a provision in its policies, but, in my opinion, faced with the clear mandate of SDCL 34A-13-9.2, the courts would not enforce such a policy provision.

IN RE QUESTION NO. 3:

Your Question No. 3 appears to restate Question No. 2 in another manner. My answer to it would, therefore, be the same as that given to Question No. 2.

Respectfully submitted,

ROGER A. TELLINGHUISEN
ATTORNEY GENERAL

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