author: G. BARRY ANDERSON, Judge

text:
    Dianne L. SHEA, individually and as trustee for the Heirs of Patrick Joseph Shea, decedent, Appellant, v. Sidney ESENSTEN, et al., Respondent.
    No. C1-00-366.
    Court of Appeals of Minnesota.
    Feb. 6, 2001.

      Corey J. Ayling, McGrann Shea Franzen Carnival Straughn & Lamb, Minneapolis, and John R. Schulz, Collins Buckley Saun-try & Haugh, St. Paul, for appellant.
    J. Richard Bland, Cecilie Morris Loidolt, Meagher & Geer P.L.L.P., Minneapolis, for respondents.
    Considered and decided by HARTEN, Presiding Judge, KLAPHAKE, Judge, and ANDERSON, Judge.
   OPINION

G. BARRY ANDERSON, Judge

Following the death of her husband, appellant Dianne Shea brought an action against respondents, alleging medical malpractice. Appellant challenges the district court’s decision excluding (1) evidence of the managed-care structure in place at respondent clinic and (2) evidence of past professional misconduct by one of the respondent physicians. Appellant also claims the district court abused its discretion by submitting the question of comparative fault to the jury. Because appellant did not show that the offered evidence was relevant to the question of medical malpractice, and because the evidence was prejudicial, we hold that the district court acted within its broad discretion by excluding the evidence. We also hold that the district court properly instructed the jury. Accordingly, we affirm.

FACTS

Drs. Sidney Esensten and Jeffrey Aren-son, respondents, are family-practice physicians who treated the decedent, Patrick Shea, for more than a decade before his death in 1993. Shea had a family history of heart disease. Appellant Dianne Shea, Shea’s widow, testified that Shea had chest pain as early as 1991 but she did not know whether the chest pain was reported to his doctors. Dr. Arenson administered an exercise stress test in early 1992; Shea passed. In June 1992, Shea felt chest tightness while on business in Thailand and sought medical treatment. A cardiologist at Bangna General Hospital performed blood tests, an electrocardiogram test, and a stress test. Based on the results of these tests, the Thai cardiologist ruled out a cardiac cause for Shea’s symptoms.

After returning from Thailand, Shea sought treatment for continuing chest pain, abdominal pain, and dizziness. According to the medical records and Dr. Esensten’s testimony, on July 6, 1992, Shea did not complain of any chest pain or discomfort but reported abdominal problems. Dr. Esensten testified that he spoke to the Thai cardiologist and learned that Shea’s electrocardiogram and stress tests completed there were normal. Dr. Esen-sten saw Shea again on July 8, 1992 to review a stomach X-ray, and again on July 22 and August 10, 1992 to follow up on the effectiveness of medications prescribed to alleviate Shea’s stomach pain.

Shea saw Dr. Arenson in August 1992 and again on September 17, 1992. Dr. Arenson testified that during those visits Shea complained of abdominal pain and chest discomfort, and told of his medical treatment in Thailand. Although appellant testified that her husband asked to see a cardiologist, the medical records do not show that Shea asked for a specialist referral. Dr. Arenson testified that, had Shea insisted on seeing a cardiologist, he would have made the referral. Instead, based on his complaints, Shea’s doctors referred him to a gastroenterologist. The results of a September 1992 colonoscopy showed nothing out of the ordinary. Drs. Esensten and Arenson concluded that Shea’s symptoms were anxiety-related and prescribed sedatives. Dr. Arenson saw Shea again on October 6; Shea complained of the same symptoms but had not taken all the medication prescribed to him. Dr. Arenson diagnosed Shea as suffering from hyperventilation and prescribed a sedative.

Shea did not visit his doctors again until February 1, 1993, when he complained to Dr. Arenson of shortness of breath, dizziness, and heartburn. Dr. Arenson administered an electrocardiogram test; the results were normal. Dr. Arenson prescribed medication to lower Shea’s cholesterol. On March 5, 1993, Shea telephoned his wife and told her he was suffering from chest pain. On his way to the clinic, Shea drove past two hospitals. Shea was found dead, slumped over the wheel of his car several blocks from the clinic. The autopsy showed Shea’s left anterior descending coronary artery was 80-85% blocked and the right coronary artery was 50-60% blocked. Shea had ar-teriosclerotic heart disease and suffered sudden cardiac death.

In June 1994, appellant, individually and as trustee for her husband’s heirs, commenced a medical-malpractice action against doctors Esensten and Arenson; their employer, Family Medical Clinic (clinic); and Shea’s insurer, Medica. The case was removed to and returned from federal district court several times because appellants changed defendants and legal theories. The state medical-malpractice claim was tried to a jury in October 1999. Appellant moved for the admission of managed-care evidence to show Drs. Esensten and Arenson had financial motives that interfered with their treatment of Shea. Appellant sought to introduce evidence to show that managed-care incentives discouraged specialist referrals.

Appellant offered financial evidence to show why Shea had not been referred to a cardiologist. Distilled to its essence, Shea’s health-insurance plan included specialist treatment if a referral to the specialist was made by a primary-care doctor. The more specialty referrals made, the less income the referring clinic received. The less income the clinic received, appellant argued, the fewer doctors they could employ, and, thus appellant contended, this contractual arrangement discouraged specialist referrals. As support, appellant pointed to 1988 meeting minutes showing that Dr. Arenson expressed concern about the capitation contract between the clinic and Medica.

Appellant also sought to introduce Dr. Esensten’s professional-discipline history for impeachment purposes. Dr. Esensten was professionally disciplined in 1989 for prescribing medication to himself. Dr. Es-ensten and the Minnesota Board of Medical Examiners entered into a stipulated agreement restricting Dr. Esensten’s practice. In 1991, following a period of compliance, the Board removed all conditions on Dr. Esensten’s medical license. The district court excluded this proffered evidence on grounds of irrelevance, prejudice, and improper impeachment.

Medical experts who testified on behalf of appellant agreed that Shea should have been referred to a cardiologist. But when asked whether respondent’s diagnosis was a fatal mistake, one expert answered, “I don’t know. I really don’t know.” Respondents produced three medical experts who testified that Shea’s medical records did not show he suffered from a cardiac condition but rather gastrointestinal problems. Respondent’s experts did not think Shea’s symptoms should have resulted in a referral to a cardiologist. One expert testified that even had a referral been made, the outcome would not have been any different because a cardiologist would have treated the risk factors of smoking and high cholesterol just as Drs. Esensten and Arenson did. Another expert stated that Shea’s death was unpredictable and unpreventable.

The district court’s jury instructions included an instruction on comparative fault. The jury returned a unanimous special verdict attributing all fault to Shea and no fault to Drs. Esensten and Arenson. The district court denied appellant’s motion for new trial. This appeal followed.

ISSUES

I. Did the district court abuse its discretion by excluding, as irrelevant, prejudicial, and improper impeachment, evidence of managed-care contracts and prior professional discipline?
II. Did the district court abuse its discretion by instructing the jury on the legal theory of comparative fault?

ANALYSIS

I.

Appellant first argues that the district court abused its discretion by excluding evidence that, if admitted, would have (1) shown the managed-care agreement between Medica and the clinic discouraged Drs. Esensten and Arenson from providing proper care and (2) impeached the physicians’ testimony. When reviewing eviden-tiary rulings, we must determine whether the district court has based the decision on an erroneous view of the law or abused its discretion. Kroning v. State Farm Auto. Ins. Co., 567 N.W.2d 42, 45-46 (Minn.1997).

That a reviewing court disagrees with a district court’s ruling and would have reached a different result is not a sufficient basis for reversal. Williams v. Wadsworth, 503 N.W.2d 120, 123 (Minn.1993). To constitute reversible error, an evidentiary ruling must be prejudicial. Uselman v. Uselman, 464 N.W.2d 130, 138 (Minn.1990). Before an error in the exclusion of evidence may be grounds for new trial, it must appear that such evidence might reasonably have changed the result of the trial if it had been admitted. Poppenhagen v. Sornsin Const. Co., 300 Minn. 73, 79, 220 N.W.2d 281, 285 (1974).

A. Exclusion of Managed-Care Evidence

Appellant sought to admit evidence to prove managed-care contracts affected Shea’s medical care. The district court determined that the evidence concerning the contracts and other managed-care evidence was not relevant to the determination of the malpractice claim but was “potentially very prejudicial” and did not constitute proper impeachment evidence. The district court reasoned that the issue of malpractice turned on the medical evidence, not the managed-care contracts.

Relevant evidence is evidence having “any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.” Minn.R.Evid. 401. “Reduced to simple terms, any evidence is relevant which logically tends to prove or disprove a material fact in issue.” Boland v. Morrill, 270 Minn. 86, 98-99, 132 N.W.2d 711, 719 (1965).

To prove negligence in a malpractice action, a plaintiff must show (1) the applicable standard of care recognized by the medical community as applicable to the defendant’s conduct; (2) that the defendant in fact departed from the applicable standard; and (3) that the defendant’s departure from the applicable standard was a direct cause of the injury. Williams, 503 N.W.2d at 123. A plaintiff must offer expert medical testimony

both to state the standard of medical care and the treatment recognized by the medical community and to establish that the defendant physician in fact departed from that standard, it being settled that a physician is not responsible for the consequences of an honest mistake or error of judgment in his diagnosis or treatment.

Silver v. Redleaf, 292 Minn. 463, 465, 194 N.W.2d 271, 272 (1972) (citation omitted). The elements of malpractice do not require the plaintiff to show a physician’s reasons or motivations for departing from acceptable standards. Instead, it is the proof that the physician in fact departed from the standard of care that is critical.

Appellant points to D.A.B. v. Brown, 570 N.W.2d 168, 171 (Minn.App.1997), to illustrate that managed-care incentives go to the heart of a malpractice claim. But that case involved an illegal kickback scheme, and the doctor involved was required by statute to disclose his financial interests. Id. The act of malpractice was the negligent nondisclosure. Id. Although evidence of financial incentives may, as in D.A.B., be relevant to a “a doctor’s attitude toward treatment of his patients during the same period of time,” relevance “hinges on whether the plaintiff can plausibly link the two.” Strauss v. Biggs, 525 A.2d 992, 999 (Del.1987) (finding evidence of overbilling and overscheduling relevant); see also Madsen v. Park Nicollet Med. Ctr., 419 N.W.2d 511, 515 (Minn.App.1988), rev’d on other grounds, 431 N.W.2d 855 (Minn.1988) (patient’s status under managed-care structure excluded where evidence only “marginally relevant” to the question of negligent nondisclosure); Lancaster v. Kaiser Found. Health Plan of Mid Atlantic States, Inc., 958 F.Supp. 1137, 1146 (E.D.Va.1997) (observing, in dictum, the possible relevance of an incentive program that discouraged doctors from ordering diagnostic tests); Corrigan v. Methodist Hosp., 874 F.Supp. 657, 659 (E.D.Pa.1995) (holding evidence of doctor’s investment in surgical-screw manufacturing company relevant to negligence in informed-consent case where screws were used in plaintiff patient’s surgery).

Unlike cases that involve a duty to disclose an incentive, Minnesota law expressly provides that a physician has no duty to disclose capitation contracts to a patient. See Minn.Stat. § 147.091, subd. l(p)(4) (2000). Appellant did not offer evidence that Drs. Esensten and Arenson engaged in overbilling or overscheduling or that they had a financial interest in a company that manufactures a product used in Shea’s treatment. Appellant did not offer evidence that the clinic discouraged referrals, apart from the fact that referrals reduce the monies available to the clinic. Appellant did not offer to show that Drs. Esensten and Arenson failed to make necessary specialist referrals of other patients. Shea’s doctors did, in fact, refer him to a specialist, though not a cardiologist. Appellant argues that Dr. Arenson voiced his concern about the limitations of the capitation contract during a clinic office meeting in 1988, but appellant fails to connect that concern to Shea’s treatment years later.

The logical and inevitable conclusion here is that appellant has failed to plausibly link the managed-care contracts to Shea’s care. The contracts in this case have no meaningful bearing on the medical standard of care required in Shea’s case and do not shed any light on whether Drs. Esensten or Arenson departed from that standard of care. Accordingly, the district court did not abuse its discretion by excluding the evidence as irrelevant.

Even had the threshold requirement of “relevance” been met, relevant evidence may nonetheless be excluded if its probative value is

substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence.

Minn.R.Evid. 403. This rule requires courts to balance the probative worth of the evidence against its potential for harm.

We view the voluminous evidence on managed care and the respective financial risks born by Medica and the clinic to be the type of evidence that would confuse, mislead, and prejudice a jury. See Madsen, 419 N.W.2d at 515 (holding that district court did not abuse discretion by excluding very prejudicial evidence that patient’s insurance status meant her hospitalization could have adversely affected her physician’s profits); see also In re Commodore Hotel Fire & Explosion Cases 324 N.W.2d 245, 249 (Minn.1982) (affirming exclusion of restoration-cost evidence because relevance outweighed by its tendency to confuse the jury). A jury, faced with complex financial evidence, might very well have based its decision on cost-containment issues rather than deciding whether Drs. Esensten and Arenson, in fact, departed from the standard of medical care applicable in Shea’s case.

A party may, however, impeach a witness by introducing evidence of bias. Minn.R.Evid. 616. Appellant argues that the outcome of this case turned on the credibility of respondent doctors and appellant; therefore appellant should have been allowed to impeach the doctors with evidence of financial incentives. Evidence of bias, prejudice, or interest of the witness for or against any party is relevant and admissible. Minn.R.Evid. 616 cmt. (stating that a witness’s bias, prejudice, or interest is a fact of consequence). Cross-examination of an adverse witness is essential to ensure a fair trial and has been characterized as an “inviolate right.” Klingbeil v. Truesdell, 256 Minn. 360, 366, 98 N.W.2d 134, 140 (1959).

But a district court’s exclusion of particular evidence tending to show bias is not reversible error per se. To constitute error, an evidentiary ruling must be prejudicial. Uselman, 464 N.W.2d at 138. Where other evidence, even if presented in a “fragmented fashion,” shows an association giving rise to bias, there is no prejudice and no cause for reversal. Bigay v. Garvey, 562 N.W.2d 695, 702 (Minn.App.1997), rev’d on other grounds, 575 N.W.2d 107 (Minn.1998).

In this case, the jury knew that Drs. Esensten and Arenson worked for the clinic, and their own interest in the outcome of this malpractice action against them was self-evident. In addition, appellant’s claim that the doctors had an incentive to avoid referring Shea to a specialist was undercut by evidence that Shea was referred to a specialist-a gastroenterologist. Appellant has not shown that the exclusion of the managed-care evidence resulted in prejudice.

We do not conclude that evidence of the financial arrangements that are the basis of managed health care are never admissible; but in the absence of any plausible link between the financial evidence and the patient’s treatment, the district court in this case did not abuse its discretion in excluding the evidence.

B. Dr. Esensten’s Disciplinary Action

Appellant argues that the district court abused its discretion by excluding impeachment evidence that Dr. Esensten was professionally disciplined in 1989 for writing medication prescriptions to himself and asking other physicians to write prescriptions for him in 1986, 1987, and 1988.

Minn.R.Evid. 404(a), 608, and 609 provide that character evidence is not admissible for proving the witness acted in conformity therewith unless the evidence refers to character for truthfulness or untruthfulness. Specific instances of conduct may not be used unless the character of a person is an essential element of a charge, claim, or defense. Minn. R.Evid. 405. ■ There are a few notable exceptions where a prior bad act is admissible to show motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident. Minn.R.Evid. 404(b).

The district court excluded the discipline evidence, reasoning that the evidence did not fall within an exception to the general rule that character evidence is not admissible. The district court concluded that Dr. Esensten’s actions in 1986 88 were remote and had no bearing on character for truthfulness or untruthfulness.

Appellant argues that Dr. Esensten’s professional misconduct undercut his credibility and ability to remember, and ought to have been admitted. We disagree. The district court acted within its discretion by determining that Dr. Esensten’s misconduct was too remote, in time and in nature, from the alleged acts of malpractice to fall within the exceptions of Rule 404(b). Appellant’s offer of proof does not show how Dr. Esensten’s 1986-1988 misconduct affected his ability to remember his treatment of Shea in 1991-1993. Moreover, this court has observed that admission of prior bad acts involving drug use for impeachment purposes is not favored because the prior bad acts do not directly relate to a defendant’s truthfulness and honesty. State v. Norregaard, 380 N.W.2d 549, 554 (Minn.App.1986), aff'd as modified, 384 N.W.2d 449 (Minn.1986); see also Seelye v. State, 429 N.W.2d 669, 673 (Minn.App.1988) (testimony as to the truthfulness or. untruthfulness of a witness distinguished from evidence of drug or alcohol use that may affect a witness’s ability to perceive or to recall her perceptions). Finally, admitting evidence of Dr. Esensten’s professional discipline would have been very prejudicial. We hold the district court acted within its broad discretion by excluding the evidence.

II.

Appellant next claims that the district court abused its discretion by instructing the jury on the theory of comparative negligence. District courts are allowed considerable latitude in selecting the language of jury instructions, and we will not reverse a decision concerning instructions absent an abuse of discretion. Alholm v. Wilt, 394 N.W.2d 488, 490 (Minn.1986). Generally, a new trial is not warranted if the instructions fairly and correctly state the applicable law. Alevizos v. Metropolitan Airports Comm’n, 452 N.W.2d 492, 501 (Minn.App.1990), review denied (Minn. May 11, 1990). In addition, a party is entitled to a specific instruction on his or her theory of the case if there is evidence to support the instruction and it is in accordance with applicable law. Cornfeldt v. Tongen, 262 N.W.2d 684, 698 (Minn.1977).

The district court instructed the jury that “the law requires that negligence be apportioned among those parties found to be negligent in causing Patrick Shea’s death.” Special verdict question number five asked, ‘Was decedent Patrick Shea negligent in respect to his care and treatment.” Appellant argues that it is improper to instruct the jury on a theory of comparative negligence in a medical malpractice case because “it defies common sense to blame the patient for the alleged medical-malpractice.”

Minnesota courts have long applied principles of comparative fault in medical-malpractice cases. Sandhofer v. Abbott-Northwestern Hosp., 283 N.W.2d 362, 368 (Minn.1979); Martineau v. Nelson, 311 Minn. 92, 101-02, 247 N.W.2d 409, 415 (1976), Rosenthal v. Kolars, 304 Minn. 378, 381, 231 N.W.2d 285, 286-87 (1975). In comparing negligence, a jury may consider the fault of both the physician and patient. See Tomfohr v. Mayo Found., 450 N.W.2d 121, 123 (Minn.1990) (“Ordinarily, in a death by wrongful act negligence case, any fault attributable to a patient is compared with that attributable to the defendant medical provider .”).

In this case, respondents presented evidence that Shea did not follow his doctor’s advice to quit smoking, did not take all of his prescribed medication, and knew he was to go immediately to a hospital emergency room if he had radiating chest pains. We hold that the district court did not abuse its discretion by instructing the jury to apportion fault.

DECISION

Because appellant has not shown a plausible link between purported financial incentives to avoid specialist referrals and the care given the decedent by respondent doctors, the district court did not abuse its discretion by excluding, as irrelevant and prejudicial, evidence of the managed-care contracts between the clinic and health insurer. Nor did the district court abuse its broad discretion by excluding, as irrelevant and prejudicial, evidence of the 1988 disciplinary action concerning one physician. Finally, the district court did not abuse its discretion by submitting the question of comparative negligence to the jury-

Affirmed.

      . "[A] health care providing entity is 'capitat-ed' when its compensation arrangement with a network involves the provider’s acceptance of material financial risk for the delivery of a predetermined set of services for a specified period of time." Minn.Stat. § 62N.27, subd. 4(1) (2000).

      . We note that had the legislature believed that capitation contracts would unduly compromise standards of care, the nondisclosure of those contracts could have been included among the extensive list of wrongful acts and nondisclosures that may subject a physician to disciplinary proceedings. See Minn.Stat. § 147.091 (2000).


source: Caselaw Access Project

author: SHUMAKER, Judge

license: Public Domain

text:
    Edwin Wayne ERICKSON, Appellant, v. Charles Joseph CHRISTIE, et al., Defendants, Grinnell Mutual Reinsurance Company, et al., Respondents.
    No. C1-00-1548.
    Court of Appeals of Minnesota.
    Feb. 6, 2001.

      Ross Muir, Ross Muir Law Offices, Rochester, MN, (for appellant).
    Paul A. Banker, Arthur, Chapman, Kettering, Smetak & Pikala, P.A., Minneapolis, MN, (for respondents).
    Considered and decided by HANSON, Presiding Judge, SHUMAKER, Judge, and FOLEY, Judge.

       Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const, art. VI, § 10.

   OPINION

SHUMAKER, Judge

In this appeal from a declaratory judgment action, Appellant Edwin Wayne Erickson challenges the district court’s grant of summary judgment for respondents. Erickson had been injured when the motorcycle he was riding collided with a farm tractor operated by the insured’s 12 year old son. Erickson argues that the “business pursuits” exclusion in the insured’s homeowner’s policy did not apply because the driver of the tractor was not furthering his own business pursuits when the accident occurred. We affirm.

FACTS

Respondent Charles Christie operates a farm and a grain company. He and his family live on a portion of the land he farms.

On May 23, 1998, Christie and his 12-year-old son, Michael, were doing farm work when they were interrupted by rain. Christie told Michael to drive the tractor back home so that the oil could be changed before they resumed their fieldwork. Michael drove the tractor and an attached discovator along the highway. As he crossed the highway on his way home, he drove into the path of appellant Edwin Wayne Erickson’s oncoming motorcycle. The vehicles collided and Erickson was seriously injured.

At the time of the accident, Christie carried a comprehensive general liability insurance policy, known as Farm Guard, for his farming business, and a homeowner’s policy, known as Home Guard, for his home and personal effects.

Erickson received benefits under the Farm Guard policy through a settlement and then claimed benefits under the Home Guard policy. The insurer, respondent Grinnell Mutual Reinsurance Company, denied coverage on the ground that the policy excluded coverage for business pursuits.

Erickson brought a declaratory judgment action and both he and Grinnell moved for summary judgment. The district court granted Grinnell’s motion, ruling that the business pursuits exclusion in the Home Guard policy precluded coverage for Erickson because the accident arose out of a business activity. Erickson appeals.

ISSUE

Did the district court err in determining that the “business pursuits” exclusion of the homeowner’s policy applied where the liability-causing conduct arose while a son helped his father, a named insured, with his farming business?

ANALYSIS

On a review of a summary judgment we assess whether there are genuine issues of material fact and whether the district court erred as a matter of law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn.1990).

The Home-Guard policy contains a business pursuits exclusion: “We do not cover bodily injury or property damage arising out of the business pursuits of any insured person.” Erickson contends that the exclusion applies only if the person liable for an accident is engaging in his own business pursuit. Erickson contends that Michael Christie was merely helping in his father’s business and was not engaged in his own business pursuit.

There is no dispute that Charles Christie was conducting farm business activities on May 23, 1998; or that Michael Christie was driving a tractor as an incident of the conduct of his father’s business; or that Michael Christie is an insured under the Home Guard policy by virtue of his relationship to and residence with his father. Nor is there any dispute that farming was not 12 year old Michael’s business at the time of the accident. But we reject Erickson’s interpretation of the business pursuits exclusion.

The interpretation of insurance contract language is a question of law, which we review de novo. Meister v. Western Nat’l Mut. Ins. Co., 479 N.W.2d 372, 376 (Minn.1992). “General principles of contract interpretation apply to insurance policies.” Lobeck v. State Farm Mut. Auto. Ins. Co., 582 N.W.2d 246, 249 (Minn.1998). If the language is clear and unambiguous, it “must be given its usual and accepted meaning.” Id. (quotation omitted). We must also consider what the insured would have reasonably understood the purpose of the insurance to be:

An insurance policy provision is to be interpreted according to both its plain, ordinary meaning and what a reasonable person in the position of the insured would have understood it to mean.

Retail Sys., Inc. v. CNA Ins. Cos., 469 N.W.2d 735, 737 (Minn.App.1991), review denied (Minn. Aug. 2, 1991).

The focus of a business pursuits exclusion is on the liability-causing conduct. If the conduct, by whomever performed, is within a business activity of anyone insured under the policy, coverage is excluded. See Zimmerman v. Safeco Ins. Co. of Am., 605 N.W.2d 727, 731 (Minn.2000) (stating that “the appropriate focus must be on the liability-creating conduct * * ⅜ ” in interpreting a business pursuits insurance exclusion).

The function of a business pursuits exclusion is to confine the homeowner’s policy coverage to nonbusiness risks and to relegate business coverage to a commercial policy.

The purpose of business pursuits exclusions in homeowner’s policies is to delete coverage which is not essential to the purchasers of the policy and which would normally require specialized underwriting and rating, and thus keeps premium rates at a reasonable level.

Grossman v. American Family Mut. Ins. Co., 461 N.W.2d 489, 495 (Minn.App.1990), review denied (Minn. Dec. 20, 1990) (quotation omitted).

We have noted the danger of failing to recognize the distinction between commercial and homeowner’s noncommercial insurance: “Premiums for homeowner’s policies would be inflated unreasonably if the homeowner’s insurance pool were required to assume risks attendant upon commercial ventures ⅝ * Id. at 496.

Charles Christie had purchased two different insurance policies that allowed for this distinction. Farm Guard proceeds were applied to Erickson’s claim because Erickson was injured by conduct that was part of the Christies’ commercial venture and that policy covered commercial activities. It is also because Erickson was injured by commercial conduct that the noncommercial homeowner’s policy excludes coverage. The district court did not err in granting summary judgment in Grinnell’s favor.

DECISION

The district court properly granted the motion for summary judgment, determining that the “business pursuits” exclusion applied when the liability-causing conduct was a 12 year old boy working with his father in his father’s farming business.

Affirmed.


author: HANSON, Judge

text:
    Thomas J. POTTER, Appellant, v. ERNST & YOUNG, LLP, Respondent.
    No. CX-00-1435.
    Court of Appeals of Minnesota.
    Feb. 6, 2001.

      Michael B. Chase, Saint Paul, MN, (for appellant Thomas J. Potter).
    Shirley Lerner, Minneapolis, MN; J. Andrew Heaton, Ernst & Young LLP, Washington, DC, (for respondent Ernst & Young, LLP).
    Considered and decided by HANSON, Presiding Judge, SHUMAKER, Judge, and, FOLEY, Judge.

       Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const, art. VI, § 10.

   OPINION

HANSON, Judge

Appellant Thomas Potter challenges the district court’s grant of summary judgment in favor of respondent Ernst & Young on his reprisal claim. Although the district court also granted summary judgment against appellant on his claims of race and disability discrimination, appellant does not challenge the summary judgment on those claims. Appellant argues that the district court erred in concluding that he did not show a causal connection between his discrimination complaint and his termination. We reverse.

FACTS

The following description of the facts views the evidence in the light most favorable to appellant.

In 1989, appellant, who is Native American and dyslexic, began working for respondent’s management consulting group. Appellant had Bachelor of Electrical Engineering and Computer Science degrees from the University of Minnesota and ten years of work experience. While employed by respondent, appellant developed significant expertise in computers, telecommunications and networking. In October 1994, he was promoted to senior manager. Until late 1996, he continued to have a high “utilization” rate (the percentage of time a professional works for paying clients). His aspiration was to become a partner.

Appellant contends that in late 1996, when Bruce Shoger was assigned to be his counselor, his opportunities at respondent decreased. The role of a counselor at respondent is to advocate for and advance their counselees’ careers. Rather than giving appellant career advice and guidance, Shoger had little contact with appellant, seldom advocated for appellant’s placement on engagements and, in fact, recommended against his placement on one major engagement. In February 1997, appellant requested a new counselor but that request was denied.

On July 31, 1997, appellant received his annual performance evaluation, indicating that his overall performance “fully meets” respondent’s expectations, as did his Service Rating for utilization.

On October 27, 1997, appellant complained to Toni Cornelius, the head of respondent’s Chicago-area human resources department, that his career was not advancing. He expressed his belief that this was due to discrimination based on his dyslexia and the fact that he was Native American. Appellant first suggested his complaints be addressed informally, but, when told that the issue was too important not to make it official, he agreed to make it a formal complaint.

Respondent’s policies require that discrimination complaints receive appropriate investigation and remedial action. Yet the human resources department did not investigate appellant’s discrimination complaint, and neither human resources nor his counselor communicated further with appellant about it. In mid-January 1998, appellant had to contact Cornelius again to inquire about the status of his complaint.

Meanwhile, respondent had decided to cut 200 employees nationally, and approximately 20 from the Chicago region, which included Minneapolis. On January 15, 1998, Scott Henkel, the head partner of the Minneapolis office, added appellant to the list of those to be terminated, on the grounds that his utilization was low and his skills did not match the needs of the firm! However, the human resources department advised Henkel that appellant’s personnel files did not support the decision to terminate him. Particularly, Cornelius was concerned that the “paper trail” did not support respondent’s claim that appellant’s skills were not consistent with the needs of the firm. A meeting was held among Henkel, Shoger, the head of the Chicago area consulting group, and Cornelius to consider taking appellant’s name off of the termination list. Shoger objected and made negative comments about appellant’s “attitude and presentation.”

One day later, Henkel became aware that a new evaluation for a recent engagement described appellant’s performance as “excellent.” Henkel e-mailed Shoger that appellant’s recent “review does not in the least” support appellant’s termination. Henkel instructed Shoger that, in light of the plan to terminate appellant, Henkel would like to see all of appellant’s reviews before they were given to appellant. The decision to terminate appellant was finalized on January 29.

On February 20, 1998, appellant received a letter of termination, informing him that he was terminated because his utilization was low and his skills no longer matched those needed by respondent. Of the three people terminated from the management consulting group in the Minneapolis office, two were racial minorities.

Appellant filed this action against respondent, alleging discrimination based on disability and race, and reprisal. Respondent moved for summary judgment, which the district court granted in respondent’s favor on all three claims. Appellant challenges only the summary judgment on his reprisal claim.

ISSUE

Was appellant’s evidence of reprisal sufficient to avoid summary judgment?

ANALYSIS

On an appeal from summary judgment, we ask two questions: (1) whether there are any genuine issues of material fact, and (2) whether the lower courts erred in their application of the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn.1990).

A motion for summary judgment shall be granted when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that either party is entitled to a judgment as a matter of law. ⅜ ⅝ ⅜ On appeal, the reviewing court must view the evidence in the light most favorable to the party against whom judgment was granted.

Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn.1993) (citations omitted).

Appellant claims the district court erred when it granted summary judgment in favor of respondent on appellant’s reprisal claim. The Minnesota Human Rights Act (MHRA) prohibits intentional reprisal against an employee who has engaged in statutorily protected activity. Minn.Stat. § 363.03, subd. 7 (2000). To determine whether a violation of the MHRA has occurred, we use the three-part test established by the United States Supreme Court in McDonnell-Douglas Corp. v. Green, 411 U.S. 792, 93 S.Ct. 1817, 36 L.Ed.2d 668 (1973). Hubbard v. United Press Int’l, Inc., 330 N.W.2d 428, 444 (Minn.1983).

The employee-plaintiff has the initial burden of establishing a prima facie case of discrimination. McDonnell-Douglas Corp., 411 U.S. at 802, 93 S.Ct. at 1824. Once the employee has established a prima facie case of reprisal, the burden shifts to the employer to articulate a legitimate and non-discriminatory reason for the adverse employment action. Id. The burden then shifts back to the employee to show that the proffered reasons were not the true reason for the action, but were instead a pretext for discrimination. Id. at 804, 93 S.Ct. at 1825.

A. Did appellant’s evidence show that there are genuine issues of material facts concerning a prima facie case of reprisal?

On a claim of reprisal, a prima facie case may be established by showing: “(1) statutorily-protected conduct by the employee; (2) adverse employment action by the employer; and (3) a causal connection between the two.” Hubbard, 330 N.W.2d at 444 (citation omitted).

1.Statutorily protected conduct

The MHRA prohibits intentional reprisal against an employee who has engaged in statutorily protected activity, including filing a discrimination complaint. Minn.Stat. § 363.03, subd. 7 (2000). Respondent challenges the district court’s conclusion that .appellant participated in statutorily protected conduct, arguing that appellant did not make a formal complaint of race or disability discrimination. However, appellant’s testimony is that when Cornelius suggested that his concerns were too serious to treat informally, he agreed that his concerns should be treated as a formal complaint. This evidence raises genuine issues of material facts as to statutorily protected conduct. Moreover, respondent failed to file a separate notice of review challenging this conclusion.

2. Adverse action

To establish a prima facie ease of reprisal, appellant must also establish that there was an adverse action by respondent. Hubbard, 330 N.W.2d at 444. Respondent does not dispute the district court’s determination that appellant suffered an adverse employment action.

3. Causal connection

Finally, appellant must establish that there is a causal connection between his discrimination complaint and the termination of his employment. Id. The district court concluded as a matter of law that appellant was unable to show this causal connection. We disagree.

We are mindful that discriminatory intent or retaliatory motive are difficult to prove by direct evidence. Thus, an employee may demonstrate a causal connection “by evidence of circumstances that justify an inference of retaliatory motive.” Dietrich v. Canadian Pac. Ltd., 536 N.W.2d 319, 327 (Minn.1995) (quotation omitted). In this case, appellant set forth sufficient facts from which such an inference may be drawn.

First, the close proximity between appellant’s discrimination complaint and the termination decision supports the inference of reprisal. See Thompson v. Campbell, 845 F.Supp. 665, 675 (D.Minn.1994) (explaining that the plaintiffs termination four months after filing her complaint, together with other circumstantial evidence in the record, raised an issue of material fact concerning the causal connection between her protected conduct and her termination); Dietrich, 536 N.W.2d at 327 (stating that a causal connection may be established by the proximity in time between the statutorily protected act and the adverse action). Here, the decision to terminate was made within less than three months after appellant’s complaint.

Second, while respondent has a well-established policy of investigating complaints, the human resources department failed to follow the proper procedures for investigating appellant’s complaint of discrimination. This lack of investigation by respondent tacitly supports an inference of discrimination. See Gillson v. State Dep’t of Natural Res., 492 N.W.2d 835, 840 (Minn.App.1992) (stating that “failure to investigate gives tacit support to the discrimination because the absence of sanctions encourages abusive behavior”) (quotation omitted), review denied (Minn. Jan. 28, 1993). Such lack of investigation supports the inference that respondent decided to terminate appellant to avoid investigating his complaint. Further, this failure to investigate narrows the proximity between the complaint and the termination because the complaint was still pending, and appellant renewed it, at the precise time the decision to terminate was made.

In addition, the evidence shows that the very person about whom appellant complained was instrumental in the decision to terminate appellant. Further, appellant provided anecdotal evidence of negative conduct by respondent with respect to appellant’s Native American status and his dyslexia.

This evidence, taken together, creates an inference that appellant’s termination was sufficiently related to his discrimination complaint to raise genuine issues of material facts concerning the causal connection required to prove reprisal.

B. Did appellant provide sufficient evidence that respondent’s stated reason for firing him was pretextual?

The district court did not reach the issue of pretext. However, because respondent argues that summary judgment was also warranted because there are no genuine issues of material facts regarding pretext, we will address this issue. Respondent argues that Ernst & Young was trying to improve the quality of its workforce nationwide and appellant was selected for termination because (1) his utilization was low and (2) his skills no longer matched the needs of the practice. We conclude that respondent articulated a legitimate non-discriminatory reason for firing appellant.

Appellant must then present evidence that respondent’s non-discriminatory reason was pretextual, either by direct evidence that a discriminatory reason likely motivated respondent or indirect evidence “that [respondent’s] proffered explanation is unworthy of credence.” Sigurdson v. Isanti County, 386 N.W.2d 715, 720 (Minn.1986) (quotation omitted); Hoover v. Norwest Private Mortgage Banking, 605 N.W.2d 757, 762 (Minn.App.2000), review granted (Minn. April 25, 2000). In Hoover, the employer argued that a plaintiff must not only prove that the articulated reason is unworthy of belief, but also must provide evidence raising an inference of intentional discrimination. Id. at 765-6. We would observe that proof of pretext itself supports such an inference — why else would an employer give a false reason for termination? In any event, appellant’s evidence of intentional discrimination, discussed above, is sufficient even if there was this additional requirement. Cf. Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133, 120 S.Ct. 2097, 2108, 147 L.Ed.2d 105 (2000).

We believe appellant’s evidence is sufficient to present genuine issues of material fact regarding pretext. Respondent’s utilization rates are not completely objective measurements. In fact, an employee’s utilization is largely within the control of his or her superiors. Thus, the failure of appellant’s counselor to advocate for his placement on projects, which was at the very heart of his discrimination complaint, necessarily reduced appellant’s utilization rate. Similarly, the significant increase in appellant’s billing rate in mid 1997, from $380 per hour to $470 per hour, admittedly had an adverse impact on his utilization. Also, the assignment of appellant to non-billable work, though otherwise important to the firm, reduced his utilization rate.

Further, while respondent claims that appellant was chosen for termination because of his low utilization, employees with similar or lower utilization rates were not fired. Respondent explains that those employees were not terminated because they were assigned to non-billable work, but appellant was likewise assigned to non-billable work.

Appellant also challenges the accuracy of respondent’s calculation of his utilization rate because it did not reflect credit for non-billable work he was assigned by the firm to do on the Year 2000 Project or for the time he spent on a billable project that ultimately was not billed because of mistakes made by the partner on the engagement. According to appellant, credit for these projects would increase his utilization to a rate well in excess of the goal set for senior managers.

Finally, respondent’s human resources department did not believe there was a “paper trail” to support the articulated reasons for appellant’s termination. Specifically, it advised Henkel that appellant’s personnel file did not support respondent’s claim that appellant’s skills no longer matched those of the firm. Moreover, the personnel files did not reflect that appellant was specifically warned that his utilization rate might jeopardize his employment.

This evidence is sufficient to raise genuine issues of material fact regarding pretext.

C. Did appellant provide sufficient evidence of damages?

The district court did not reach the issue of damages. However, because respondent argues that summary judgment in its favor was also warranted for lack of any genuine issues of material facts regarding damages, we will address this issue.

Respondent argues that there was no evidence of damages because (1) appellant obtained new employment at higher pay and (2) appellant’s attempt to establish lost wages by comparing his current income to that of a partner at Ernst & Young is too conjectural to withstand summary judgment. The question whether appellant can provide adequate proof of lost wages is one we will leave for the district court to address at trial. For summary judgment purposes, it is enough that appellant has presented sufficient evidence of emotional distress damages. See Cooper v. Moiver County Soc. Servs., 434 N.W.2d 494, 500 (Minn.App.1989).

DECISION

Because there are genuine issues of material facts regarding (1) the causal connection between appellant’s discrimination complaint and his ultimate termination, (2) whether respondent’s non-discriminatory reason for termination was pretextual and (3) whether appellant suffered damages, we reverse.

Reversed.


author: KLAPHAKE, Judge

text:
    GENERAL MILLS, INC., a Delaware corporation, Respondent, v. GOLD MEDAL INSURANCE COMPANY, Appellant.
    No. C2-00-1428.
    Court of Appeals of Minnesota.
    Feb. 6, 2001.
    Review Denied April 17, 2001.

      Lawrence Zelle, Lawrence Hofmann, Zelle, Hofmann, Voebel & Gette, LLP, Minneapolis, MN, (for respondent).
    Richard P. Mahoney, Victor E. Lund, Mahoney, Dougherty and Mahoney, Minneapolis, MN; and Stephen A. Cozen, Richard M. Mackowsky, Cozen and O’Con-nor, Philadelphia, PA, (for appellant).
    Considered and decided by ANDERSON, Presiding Judge, KLAPHAKE, Judge, and HARTEN, Judge.
   OPINION

KLAPHAKE, Judge

Appellant challenges summary judgment entered against it, finding insurance coverage for losses suffered by respondent and denying appellant a setoff against other insurance. Because we conclude as a matter of law that there was direct physical loss to -insured property as required by terms of the policy, and because the exclusions from coverage relied on by appellant are ambiguous, we affirm the decision of the district court. Because the district court did not err in its application of the law regarding setoffs, we affirm as to that issue as well.

FACTS

Respondent General Mills,. Inc. (General Mills), is a Delaware corporation with executive offices in Minnesota. Appellant Gold Medal Insurance Co. (Gold Medal), a Minnesota corporation and wholly-owned subsidiary of General Mills, was established by General Mills as a captive insurer for the purpose of accessing insurance markets in a cost-effective manner. Because Gold Medal has no actual employees, American Risk Management (ARM), an independent company that specializés in such work, handles its essential services. ARM drafted the wording of the Gold Medal insurance contracts that were issued to General Mills, although General Mills had considerable bargaining power with respect to the terms of the various policies.

This matter involves two insurance policies. The first policy, a Named Peril/Grain Stocks policy (named-peril policy), provided coverage for General Mills’ grain storage facilities at Duluth and Superior, as well as other storage facilities. The second, the All Risk Property Policy (all-risk policy) covered- all real and personal property of General Mills at named locations, but did not include the Duluth and Superior storage facilities. The limit of coverage for the named-peril policy was $65,576,000, and for the all-risk policy was $3,276,890,000.

In 1993-94, General Mills hired George Roggy, an independent contractor, to treat its grain stocks in Duluth and Superior with an FDA-approved pesticide, Reldan. Unbeknownst to General Mills, Roggy substituted the cheaper, but unapproved, pesticide Dursban. Although Reldan and Dursban are chemically almost identical, and although Dursban was approved for treatment of other foods, Dursban was not approved for use on oats. The FDA treats the presence of an unapproved chemical as an illegal adulteration of food products, even if not dangerous for human consumption; the fact that Dursban was not approved for application on oats was sufficient to violate FDA regulations on adulteration of food products.

In a routine inspection, the FDA discovered traces of Dursban in oat stocks at one of General Mills’ facilities and traced it to the Fridley plant. Upon notification, General Mills immediately halted distribution and production of oat products, but some of the adulterated oat stocks had already been milled into oat flour and converted to finished product, and other adulterated oat stocks had been mixed with unadulterated stock. By the time the problem was uncovered, 16 million bushels of raw oats and the equivalent of 55 million boxes of Cheerios and other oat-based cereals had been affected. To remove all traces of Dursban, all machinery at the milling .plants had to be disassembled, cleaned, and reassembled.

There is little dispute that Dursban presented no health hazard to the consuming public. However, General Mills voluntarily held the adulterated cereals, based on the understanding that the FDA would order it to do so if General Mills attempted to distribute the product. General Mills considered petitioning the FDA for a waiver that would permit distribution of the cereals, but concluded that the matter could not be resolved in a timely fashion. Even if the FDA eventually granted a waiver, General Mills product freshness deadlines could not have been met. Instead, General Mills discarded all adulterated products. General Mills was also faced with a public relations problem, as news of the pesticide adulteration became public. The parties stipulated that General Mills’ losses, including destruction of oat stocks and finished products and cleaning costs, were $167,542,874, plus interest and costs.

General Mills sought coverage for its losses under the all-risk and named-peril policies purchased through Gold Medal, and under another policy, the National Union Malicious Product Tampering Policy (National Union policy), purchased through a New York insurer. Coverage was denied under all three policies. A declaratory judgment action filed in New York over the National Union policy was eventually settled for $17.5 million, without an admission of coverage. General Mills also brought this breach of contract suit against Gold Medal for coverage under its two policies.

On a motion for summary judgment, the district court held that the losses were covered under the all-risk policy, but not covered under the named-peril policy. Further, the district court found no basis for a setoff against the National Union policy. Appellant Gold Medal appeals from the judgment finding coverage and denying a setoff.

ISSUES

I. Did the district court err in concluding that General Mills had suffered a direct physical loss of insured property?

II. Did the district court err in concluding that General Mills’ loss was not excluded from coverage under the policy exclusions?

III. Did the district court err in concluding that Gold Medal was not entitled to a setoff because of .other insurance?

ANALYSIS

“On an appeal from summary judgment, we must examine two questions, whether there are any genuine issues of material fact and whether the lower courts erred in their application of the law.” Cummings v. Koehnen, 568 N.W.2d 418, 420 (Minn.1997) (citation omitted). “A reviewing court must view evidence in the light most favorable to the party against whom summary judgment was granted.” Vetter v. Security Continental Ins. Co., 567 N.W.2d 516, 520 (Minn.1997) (citation omitted). Both parties agree that there are no genuine issues of material fact.

The construction of an insurance contract is a question of law determined de novo by the reviewing court. Jenoff, Inc. v. New Hampshire Ins. Co., 558 N.W.2d 260, 262 (Minn.1997). As a question of law, interpretation of an insurance contract may be decided by the district court on a motion for summary judgment. American Nat’l Fire Ins. Co. v. Cordie, 478 N.W.2d 531, 533 (Minn.App.1991).

In construing an insurance contract, the intention of the parties is the overriding concern, to be determined by the language of the entire contract. Bobich v. Oja, 258 Minn. 287, 294, 104 N.W.2d 19, 24 (1960). Endorsements and exclusions must be construed in terms of the entire contract, and in such a way, if possible, to give effect to all provisions. Id. at 294-95, 104 N.W.2d at 24-25. Language is to be given its plain and ordinary meaning. Id. at 294, 104 N.W.2d at 24.

Where an insurance contract is ambiguous, the court applies the doctrine of contra proferentem, by which ambiguities in a document are to be construed unfavorably to the drafter or in favor of coverage. Black’s Lato Dictionary 328 (7th ed.1999). The court may not create an ambiguity where none exists. Bobich, 258 Minn. at 294, 104 N.W.2d at 24. Relatively equal bargaining power does not preclude application of the doctrine of contra proferentem. St. Paul Fire & Marine Ins. Co. v. MetPath, Inc., 38 F.Supp.2d 1087, 1092 (D.Minn.1998); see, e.g., SCSC Corp. v. Allied Mut. Ins. Co. 536 N.W.2d 305, 315 (Minn.1995); Minnesota Mining & Mfg. Co. v. Travelers Indem. Co., 457 N.W.2d 175, 180-81 (Minn.1990); Northwest Airlines, Inc. v. Globe Indem. Co., 303 Minn. 16, 26, n. 2, 225 N.W.2d 831, 837 n. 2 (1975).

I. Physical Damage to Property

The all-risk policy provides coverage against “ ‘All Risks’ of direct physical loss or damage to property insured and described herein.” There is no definition of “direct physical loss or damage” included in the policy. Gold Medal argues that the district court erred in finding a direct physical loss, because Dursban did not render the oats and products unfit for human consumption; the loss occurred only because of government regulation, and not because of direct damage to the insured property.

In an “all-risk” policy, coverage usually-extends to

risks not usually covered under other insurance, and recovery under an “all-risk” policy will, as a rule, be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.

13A George J. Couch, Couc-h on Insurance § 48:141 (2d ed.1982).

We have previously held that direct physical loss can exist without actual destruction of property or structural damage to property; it is sufficient to show that insured property is injured in some way. Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn.App.1997). In Sentinel, we noted that the function of a residential apartment building, to provide safe housing, was seriously impaired or destroyed by the presence of asbestos fibers, although the building itself - did not suffer a “tangible injury.” Id. Likewise, the function of the food products produced by General Mills is not only to be sold, but to be sold with an assurance that they meet certain regulatory standards. When General Mills is unable to lawfully distribute its products because of FDA regulations, that function is seriously impaired.

We are not persuaded by Gold Medal’s argument that the food products could be safely consumed but for a legal regulation that does not truly affect the function of the product. This matter is similar to the factual scenario in Marshall Produce Co. v. St. Paul Fire & Marine Ins. Co., 256 Minn. 404, 98 N.W.2d 280 (1959). Marshall Produce was under contract with the United States Army to produce milk powder, egg powder, and raw eggs and had to meet certain very specific and rigorous standards. One of the standards was that the plant had to be “free from strong foul odors, dust, and smoke-laden air.” Id. at 408, 98 N.W.2d at 284-85. The produce company was covered by a fire policy issued by St. Paul Fire & Marine. A fire at a neighboring property caused the plant to be filled with heavy smoke, although no fire occurred on the premises of Marshall Produce. Id. at 407, 98 N.W.2d at 284.

When apprised of the presence of smoke, the army rejected the goods, apparently with no attempt to ascertain whether there was actual damage to the product. Id. at 409-10, 98 N.W.2d at 285-86. Thus, the product was damaged not necessarily because it was hazardous, but because of army regulations that set forth stringent requirements for the manufacturing environment. The court noted that the impairment of value, not the physical damage, was the measure of damages. Id. at 423, 98 N.W.2d at 293.

Much like Marshall Produce, General Mills was unable to sell its products or use the contaminated oats, because of legal regulations. The business of manufacturing food products requires conforming to the appropriate FDA regulations. Whether or not the oats could be safely consumed, they legally could not be used in General Mills’ business. The district court did not err in finding this to be an impairment of function and value sufficient to support a finding of physical damage.

II. Exclusions from Coverage

Contamination

Gold Medal argues that, even if there is direct physical loss, it is excluded from coverage by policy language that states:

PERILS EXCLUDED:
* *[T]his policy does not insure against loss or damage caused by or resulting from any of the following regardless of any other cause or event contributing concurrently or in any other sequence to the loss:
A. Delay, loss of market or any other indirect or consequential loss or damage not specifically covered herein, gradual deterioration or leakage, seepage, inherent vice, latent defect, moth, vermin, termites or other insects, ordinary wear and tear, contamination> dampness of atmosphere, wet or dry rot, mold, shrinkage, evaporation, loss of weight, rust, corrosion, change in flavor or color or texture or finish, unless caused by or.resulting from a peril not excluded hereunder.

(Emphasis added.) Gold Medal asserts that the injury is one of contamination, clearly excluded by this language.

The district court concluded that this exclusion was unambiguous if read in the following manner: damage caused by a concurrent peril and an excluded peril (contamination) is not covered, except if the peril, not the damage, of the excluded peril (contamination) is caused by a peril not excluded. Because the actions of Rog-gy are a non-excluded peril that created the peril of contamination, the resulting injury would be covered.

Gold Medal, on the other hand, urges that the proper interpretation is that the exclusion and anti-concurrent clause apply, unless the peril of contamination is caused by a peril not excluded by the policy as a whole. Gold Medal argues that Rogges actions are not covered by the policy, occurring as they did at a site specifically not covered by the policy.

A policy is ambiguous if it is reasonably subject to more than one interpretation. American Commerce Ins. Brokers, Inc. v. Minnesota Mut. Fire & Cas. Co., 551 N.W.2d 224, 227 (Minn.1996). As one court noted:

[T]he very fact that their respective positions as to what this policy says are so contrary compels one to conclude that the agreement is indeed ambiguous.

NoHhwest Airlines, Inc., 303 Minn, at 26, 225 N.W.2d at 837. Here we have two opposing interpretations reasonably based on policy language, particularly in the absence of any definition of material terms. We conclude that this exclusion is open to more than one interpretation and thus is ambiguous. Therefore, although the district court did not find this clause to be ambiguous, we agree with its conclusion in favor of coverage.

When relying on an exclusion to coverage, the insurer bears the burden of proving the application of the exclusion. SCSC Corp., 536 N.W.2d at 313-14. Exclusions are interpreted narrowly against the insurer. Id. at 314. Gold Medal has not sustained its burden of proving that its interpretation of the exclusion is the only reasonable one. Thus, this exclusion will not operate to deny coverage.

Faulty Materials

Gold Medal also claims that the district court erred in deciding that the exclusion against faulty materials did not preclude coverage. This exclusion is as follows:

Unless endorsed hereon, this policy does not insure against loss or damage caused by or resulting from any of the following regardless of any other cause or event contributing concurrently or in any other sequence to the loss:
D. Errors in design, faulty workmanship or faulty materials, unless a loss from a peril not otherwise excluded ensues and then only for the loss or damage caused by the ensuing peril.

(Emphasis added.)

The court concluded that this exclusion, by its grouping with “design” and “faulty workmanship” refers to materials for construction of property, rather than to raw stock for making cereal products. This is a permissible interpretation; courts often look at the greater context or purpose of a clause in order to determine its meaning. Henning Nelson Const. Co. v. Fireman’s Fund Am. Life Ins. Co., 361 N.W.2d 446, 450 (Minn.App.1985) (exclusion for earth movement applies only to natural disasters when included in provision with earthquakes, volcanic eruption, and landslide), aff'd as modified, 383 N.W.2d 645 (Minn.1986).

Gold Medal bears the burden of proving the applicability of this exclusion. See SCSC, 536 N.W.2d at 313-14. The district court did not clearly err in finding that this exclusion was not applicable.

III. Other Insurance

Gold Medal appeals from the district court’s ruling dismissing its setoff claim against the National Union policy. The referee and district court concluded that the National Union policy, a malicious product tampering policy, did not afford coverage under New York law, because New York law requires actual malice. The district court found that Roggy’s conduct constituted ordinary, not actual malice. Because this would not trigger coverage, no setoff was due to Gold Medal.

Gold Medal’s setoff claim is premised on the following clause from the all-risk policy:

This policy shall not cover to the extent of any other insurance whether prior or subsequent hereto in date, and by whomsoever effected, directly or indirectly covering the same property against the same perils and this Company shall be liable for loss or damage only for the excess value beyond the amount due from such other insurance, subject to the limits of this policy.

The National Union policy contains much the same language:

The insurance provided under this policy will be excess over any other coverage provided under any other valid bond or insurance applicable in whole or in part to any Loss under this policy.

The primary issue, then, is whether there is coverage under the National Union policy, an issue that the district court answered in the negative. The operative language of the National Union policy states:

MALICIOUS PRODUCT TAMPERING is any actual, alleged or threatened, intentional, malicious, and wrongful alteration or contamination of the Insured’s Product(s), whether or not by an employee of the Insured, so as to render it unfit or dangerous for use or consumption or to create such impression to the public.

Finding no New York decisions specifically dealing with malicious product tampering insurance, the court concluded that, based on New York property insurance cases, “malicious mischief’ requires actual, not ordinary, malice. The district court here found that Roggy’s actions were ordinarily malicious; thus, there was no coverage.

Actual malice, as opposed to ordinary malice, requires a subjective intent to injure the policyholder. See Fanberg Realty Corp. v. Travelers Cos., 117 A.D.2d 582, 498 N.Y.S.2d 53 (N.Y.App.Div.1986); Romanych v. Liverpool & London & Globe Ins. Co., 8 Misc.2d 269, 167 N.Y.S.2d 398 (N.Y.Sup.Ct.1957). The difference between actual and ordinary malice is well-defined in a case analyzing Minnesota law, which is similar to New York law:

Malice alone contemplates an intentional act undertaken with the knowledge that is wrongful, while actual malice adds the desire to injure another or, as discussed below, an affirmative disregard of the known harm accruing to others as a result of the intentional act.

U.S. Fire Ins. Co. v. Beltmann North Am. Co., Inc., 883 F.2d 564, 566 (7th Cir.1989).

After taking testimony from Roggy, the district court concluded that he acted with ordinary malice. This conclusion is based on the fact that although he knew it was wrong to substitute Dursban, he assumed that the substitution would never be discovered and that no one would be harmed by his action. In the absence of a desire to injure the policyholder, General Mills, the court held that Roggy lacked the actual malice to trigger coverage under the National Union policy.

The policy language requires “intentional, malicious and wrongful” tampering in order to trigger coverage. This language goes beyond the mere commission of a wrongful act; it includes the concept of intending'to harm, which is within the definition of actual malice. The district court did not err in concluding that there was no coverage and thus no setoff under the National union policy.

DECISION

The district court did not err in finding a direct physical loss under the policy. The loss of the function of the insured property, General Mills’s ability to sell products for consumption within the regulatory framework calculated to guarantee safe consumption, is sufficient to prove a direct physical loss under the policy language. Gold Medal has the burden of proving application of exclusions from coverage. Where an exclusion is ambiguous, Gold Medal has not sustained that burden; thus, the district court did not err in concluding that the exclusions from coverage for contamination and faulty materials were not applicable. In order to have a setoff against other insurance, Gold Medal must demonstrate coverage under the other policy, which it has failed to do. The district court’s conclusion in this issue is not erroneous.

Affirmed.

      . The problem was eventually traced to Rog-gy, who confessed he had done it as a cost-saving measure. He eventually pled guilty to adulteration of food and served a jail sentence.

      . The parties agree that New York is the proper forum for interpretation of the National Union policy, under its choice of law clause.

      . General Mills did recover $17.5 million from National Union through a settlement agreement; there was no admission of coverage.


text:
    John THOMMES, individually and d/b/a Thommes & Thomas Land Clearing, Appellant, v. MILWAUKEE MUTUAL INSURANCE COMPANY, Respondent.
    No. C9-00-1393.
    Court of Appeals of Minnesota.
    Feb. 13, 2001.

      William R. Joyce, Faegre & Benson, LLP, Minneapolis, MN, for appellant.
    Jeanne H. Unger, Paul B. Kohls, Rider, Bennett, Egan & Arundel, LLP, Minneapolis, MN, for respondent.
    Considered and decided by TOUSSAINT, Presiding Judge, ANDERSON, Judge, and MULALLY, Judge.

       Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const, art. VI, § 10.

   OPINION

G. BARRY ANDERSON, Judge

Appellant, a contractor, accidentally destroyed an adjacent property owner’s trees while clearing land as part of a project for a client. After the property owner brought an action for damages, appellant sought a declaratory judgment to compel respondent insurance company to defend and indemnify appellants for losses associated with the damages action. The district court granted respondent’s motion for summary judgment. Appellant argues the district court erred by granting summary judgment on the grounds that (1) respondent insurer had no duty to defend appellant against a negligence action brought by the adjacent property owner and (2) the insurance policy exclusions barred coverage for appellant’s accidental destruction of the trees. Because the policy exclusions at issue are business risk exclusions that do not apply to injured third parties, we reverse.

FACTS

The material facts are not disputed. In September 1996, appellant Thommes and Thomas Land Clearing contracted with Richard Knutson, Inc., to clear trees from land owned by HHA Development, Inc., Dean Morlock, and Charles Vig (“HHA”). John and Donna Krajewski own adjacent property. Before appellant’s employees commenced clearing, Dean Morlock pointed out a tree marking the property line up to which appellant was to cut and clear trees. When asked whether certain brush and trees were on the adjacent property, Morlock told appellant’s employees not to worry because his sister owned the property. Appellant’s employees cleared the trees as instructed, but later learned they had destroyed trees on the Krajewski property.

Krajewski brought an action against appellant, seeking damages. Appellant tendered defense of the action to appellant’s insurance carrier, respondent Milwaukee Insurance Company, which subsequently refused to defend, and also refused to indemnify appellant for losses resulting from appellant’s actions in damaging and destroying trees owned by Krajewski. Respondent’s denial was based on two commercial general liability insurance policy exclusions, 2j(5) and 2j(6). Following the insurer’s denial of coverage, appellant and Krajewski settled for $15,000.

Appellant then sought a declaratory judgment that respondent had a duty to defend the Krajewski action and a duty to indemnify appellant. Both parties filed motions for summary judgment; the district court granted summary judgment to respondent, holding that policy exclusions 2j(5) and 2j(6) unambiguously denied coverage. Appellant now challenges that ruling.

ISSUE

Did the district court err as a matter of law in granting respondent summary judgment on the basis that policy exclusions 2j(5) and 2j(6) barred coverage for the trees owned by a third party which were lost or damaged as a result of appellant’s actions?

ANALYSIS

Appellant claims that the district court erred as a matter of law by reading the insurance policy provisions to exclude coverage. Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that either party is entitled to judgment as a matter of law. Minn. R. Civ. P. 56.03. On appeal from summary judgment, we determine whether any issues of material fact exist and whether the district court erred in its application of the law. Offerdahl v. University of Minn. Hosp. & Clinics, 426 N.W.2d 425, 427 (Minn.1988). We view the evidence in the light most favorable to the party against whom summary judgment was granted. Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn.1993).

The interpretation and construction of insurance policy provisions are matters of law which this court reviews de novo. Haarstad v. Graff, 517 N.W.2d 582, 584 (Minn.1994). Whether an insurer has a duty to defend an insured is also a question of law which this court reviews de novo. Franklin v. Western Nat’l Mut. Ins. Co., 574 N.W.2d 405, 406 (Minn.1998). The duty to defend is broader than the duty to indemnify. St. Paul Fire & Marine Ins. Co. v. Lenzmeier, 309 Minn. 134, 139, 243 N.W.2d 153, 156 (1976). An insurer’s duty to defend is determined by comparing the allegations of a complaint with the relevant policy language. Garvis v. Employers Mut. Cas. Co., 497 N.W.2d 254, 256 (Minn.1993). A duty to defend generally covers those claims that arguably fall within the scope of the policy. Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 415 (Minn.1997).

Thus, in order for respondents to have owed appellant a duty to defend, appellant’s claims must arguably be covered by the policy.

Insurance coverage exclusions are generally construed narrowly, and ambiguous exclusions must be construed in the insured’s favor. State Farm Ins. Cos. v. Seefeld, 481 N.W.2d 62, 64 (Minn.1992). The insurer has the burden of proving that a policy exclusion applies. Henning Nelson Constr. Co. v. Fireman’s Fund Am. Life Ins. Co., 383 N.W.2d 645, 652 (Minn.1986).

The relevant portions of appellant’s commercial general liability (CGL) insurance policy read:

I. Section I — Coverages
Coverage A. Bodily Injury and Property Damage Liability
1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.
2. Exclusions
This insurance does not apply to:
⅜ * ⅜ *
j. Damage to property
“Property damage” to:
* ⅝ * *
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or (6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
15. “Property damage” means:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
* * * *
19. “Your work” means:
a. Work or operations performed by you or on your behalf * * %.

Appellant argues that exclusions 2j(5) and 2j(6) are business risk exclusions, and that third-party losses are outside the scope of the exclusions under the business risk doctrine. The business risk doctrine is the expression of a public policy applied to the insurance coverage provided under commercial general liability policies. O’Shaughnessy v. Smuckler Corp., 543 N.W.2d 99, 102 (Minn.App.1996), review denied (Minn. Mar. 28, 1996). Reduced to its simplest terms, the risk that an insured’s product will not meet contractual standards is a business risk not covered by a general liability policy. Bor-Son Bldg. Corp. v. Employers Comm. Union Ins. Co., 323 N.W.2d 58, 63 (Minn.1982). To ensure predictable and affordable insurance rates, the business risk doctrine limits an insurer’s assumption of risk to those risks that are beyond the “effective control” of the insured. Knutson Constr. Co. v. St. Paul Fire & Marine Ins. Co., 396 N.W.2d 229, 234-35 (Minn.1986).

Business risks, then, are

those risks which management cannot effectively avoid because of the nature of the business operations; and risks which relate to the repair or replacement of faulty work or products. These risks are a normal, foreseeable and expected incident of doing business and should be reflected in the price of the product or service rather than as a cost of insurance to be shared by others.

Sphere Drake Ins. Co. v. Tremco, Inc., 513 N.W.2d 473, 477 (Minn.App.1994) (citations omitted), review denied (Minn. Apr. 28, 1994).

Significantly, under the business risk doctrine, harm to the property of a third party caused by the insured’s defective work is not excluded from coverage. Id. at 479. Sphere Drake explains that a comprehensive liability policy

is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.
When the insured’s faulty workmanship results in damage to the property of a third party * * * such third-party property damage is not excluded from coverage by business risk doctrine.

Id. at 478-79 (citation omitted).

Citing OShaughnessy, 543 N.W.2d at 105, respondent asserts that business risk doctrine principles, including the notion that coverage extends to damage to third-party property, do not apply if the policy contains express exclusions barring coverage. This is an overly broad reading of OShaughnessy’s holding.

In OShaughnessy, the CGL insurer for a general contractor sought declaratory judgment that it was not obligated to provide coverage to the general contractor or architect for the cost of repairing defective work of the general contractor or its subcontractors. Id. at 101. The CGL policy contained a standard exclusion, (l), which excluded from coverage property damage to the insured’s work arising out of the insured’s work. Id. at 103-04. An exception to (l) provided that the exclusion did not apply “if the damaged work * ⅞ * was performed on [the insured’s] behalf by a subcontractor.” Id. at 104.

OShaughnessy recognized that CGL policy exclusion (l) is consistent with business risk doctrine principles. See id. at 104 (stating change of words in exclusion (l) did not abrogate the business risk doctrine as it applied to that exclusion). But OShaughnessy also explained that an express exception to an exclusion can limit the scope of the business risk doctrine. Id. at 105. In OShaughnessy, the application of exclusion (l) was limited by the express language of the exception, which restored coverage for work performed by subcontractors. Id. (concluding that “the exception at issue was intended to narrow” the business risk doctrine.)

The policy exclusions here, 2j(5) and 2j(6), may be read as the embodiment of the business risk doctrine principles. See Knutson, 396 N.W.2d at 236-37 (reading policy exclusion language together with business risk doctrine); Sphere Drake, 513 N.W.2d at 477 (suggesting that exclusions themselves may set forth business risk doctrine). Other jurisdictions have squarely and sensibly characterized 2j(5) and 2j(6) as business risk exclusions. See, e .g., Columbia Mut. Ins. Co. v. Schauf, 967 S.W.2d 74, 76-77 (Mo.1988) (noting that an exclusion for property damage to “that particular part of real property on which * * * [the insured] is performing operations” is a business risk exclusion); Glens Falls Ins. Co. v. Donmac Golf Shaping Co., 203 Ga.App. 508, 417 S.E.2d 197, 201 (1992) (same); LISN, Inc., v. Commercial Union Ins. Cos., 83 Ohio App.3d 625, 615 N.E.2d 650, 653-54 (1992) (recognizing 2j(6) as a business risk exclusion). See also Gregory G. Schultz, Commercial General Liability Coverage of Faulty Construction Claims, 33 Tort & Ins. L.J. 257, 266 (1997) (explaining that the standard CGL policy exclusions (j), (k), (l), (m), and (n) are generally known as “business risk” exclusions); 9 George J. Couch et al., Couch on Insurance § 129:13 (3d ed.1995) (citing cases addressing faulty workmanship and similar CGL exclusions, and stating that business risk exclusions do not extend to third-party damage caused by insured’s defective work).

We conclude that the 2j(5) and 2j(6) exclusions are business risk exclusions designed to exclude coverage for faulty workmanship that is within the insured’s control. In appellant’s policy, exclusions 2j(5) and 2j(6) share an exception: the exclusions do not apply to “liability assumed under a sidetrack agreement,” which concerns agreements between railroad companies and their customers. Exclusion 2j(6) has an additional exception: it does not apply to “property damage” included in the “products completed operations hazard,” which concerns completed projects.

The facts of this case do not invoke the exceptions to 2j(5) and 2j(6), nor do the exceptions expressly limit the scope of the business risk doctrine in a manner that would allow us to conclude that the doctrine does not apply. By applying the business risk doctrine in this case, damage to third-party property caused by appellant’s work is not excluded from coverage. The parties do not dispute that, in the course of clearing the HHA property, appellant’s employees accidentally damaged third-party property by clearing trees located on property owned by a third party. Accordingly, we conclude that exclusions 2j(5) and 2j(6) do not operate to deny appellant coverage.

We hold that the district court erred as a matter of law by determining that the policy exclusions barred coverage and by determining that respondent had no duty to indemnify appellant. Because we reverse on this basis, we do not reach appellant’s claims that the policy exclusions are ambiguous as a matter of law.

DECISION

The district court erred as a matter of law by holding that insurance policy exclusions 2j(5) and 2j(6) barred coverage and relieved respondent of a duty to defend appellant from an action for real property damages brought by a third party. The policy exclusions at issue, 2j(5) and 2j(6), are business risk exclusions that do not apply to injuries caused by the insured’s work and that are sustained by third parties.

Reversed.


author: CRIPPEN, Judge

text:
    In the Matter of the WELFARE OF R.J.R.
    No. C5-00-645.
    Court of Appeals of Minnesota.
    Feb. 13, 2001.

      Richard E. Edinger, Fargo, ND; and Richard D. Varriano, Moorhead, MN, for appellant R.J.R.
    Mike Hatch, Attorney General, St. Paul, MN; and Lisa N. Borgen, Clay County Attorney, Scott G. Collins, Assistant County Attorney, Moorhead, MN, for respondent.
    Considered and decided by TOUSSAINT, Chief Judge, CRIPPEN, Judge, and HOLTAN, Judge.

       Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const, art. VI, § 10.

   OPINION

CRIPPEN, Judge

Appellant disputes the district court’s decision to certify a juvenile court petition for adult court proceedings. Because, under the circumstances here, exclusive jurisdiction for prosecution rests in the district court, we affirm on grounds other than those announced by the district court.

FACTS

Appellant R.J.R. allegedly committed an offense in 1995 and the state filed a juvenile court petition on January 18, 2000, nearly one year after appellant attained 21 years of age. Upon filing the petition, the prosecutor requested certification of the proceedings to the district court. By statute, certification is presumed because the alleged offense would result in a presumptive commitment to prison under the Minnesota Sentencing Guidelines. Minn. Stat. § 260B.125, subd. 3 (Supp.1999). Appellant disputes application of this presumption and the court’s determination that he failed to rebut the presumption “by clear and convincing evidence that retaining the proceeding in the juvenile court serves public safety.” Id.

ISSUE

Did the juvenile court err in certifying . the petition for adult court proceedings?

ANALYSIS

“On appeal, this court is not bound by the lower courts’ conclusions with respect to issues of law and instead conducts an independent review of the record.” Watson v. United Servs. Auto. Ass’n, 566 N.W.2d 683, 688 (Minn.1997) (citation omitted).

In 1994, the legislature redetermined the jurisdiction of courts over prosecution of juvenile offenses commenced after the alleged offender becomes an adult. 1994 Minn. Laws ch. 576, §§ 13 subd. 3b, 25, subd. 4. If the state files a petition before the alleged offender turns 21 years of age, the juvenile court has jurisdiction to hold a certification hearing on a motion to certify the proceedings for adult prosecution. Minn.Stat. §§ 260B.125, subd. 6, 260B.193, subd. 5(c) (Supp.1999). If the state prosecutes after the alleged offender turns 21 years of age, the district court “has original and exclusive jurisdiction” over the proceedings. Id. § 260B.193, subd. 5(d) (Supp.1999).

This case is governed by Minn.Stat. § 260B.193, subd. 5(d) because the state filed its petition after R.J.R. turned 21. Thus, we affirm the transfer of jurisdiction accomplished by the court’s order, even though the certification proceedings were unnecessary. By statute, the district court has original and exclusive jurisdiction; certification need not and should not occur to establish that jurisdiction.

Appellant suggests that our decision in In re Welfare of C.A.N., 370 N.W.2d 438 (Minn.App.1985), precludes application of section 260B:193, subd. 5(d). In re Welfare of C.A.N., however, was decided before enactment of section 260B.193, subd. 5(d), in circumstances where the case could not automatically be referred for adult prosecution and where the juvenile court lacked jurisdiction to refer the case. See id. at 440-41. In contrast, the legislature has conferred jurisdiction by statute under the circumstances presented in this case.

DECISION

Because exclusive jurisdiction for prosecution of this case rests in the district court, we affirm the result accomplished by the trial court’s certification proceedings.

Affirmed.

      . Appellant has not asserted that the state purposefully caused the delay in order to gain an unfair advantage.

      . The prosecution elected not to proceed in district court under Minn. § 260B.193, subd. 5(d) (Supp.1999), to which reference is made later in this opinion, and it does not appear that the trial court considered this statute. Appellant states that the court relied on the statute to reach its certification decision, but this is not evident from the record.


author: MARING, Justice. SANDSTROM, Justice,

text:
    2001 ND 19
    Ann L. SCHMITZ, Plaintiff, Appellee and Cross-Appellant, v. Orell D. SCHMITZ, Defendant, Appellant and Cross-Appellee.
    No. 20000133.
    Supreme Court of North Dakota.
    Feb. 2, 2001.

      Cathy Howe Schmitz (submitted on brief), Schmitz Law Office, Williston, ND, for defendant, appellant and cross-appel-lee.
    Michael L. Gjesdahl (submitted on brief), Gjesdahl & Deitz, PLLP, Fargo, ND, for plaintiff, appellee and cross-appellant.
   MARING, Justice.

[¶ 1] Orell Schmitz appeals from a judgment denying his motion to modify spousal support, and Ann Schmitz appeals from a judgment awarding her $2,000 in attorney fees. We affirm.

I

[¶ 2] Orell Schmitz and Ann Schmitz were married April 13, 1974, and divorced June 15, 1993. The original divorce decree established Orell’s spousal support at $800 a month for five years, with the trial court retaining jurisdiction over spousal support.

[¶ 3] On August 13, 1997, Ann moved the trial court to amend the original judgment. The trial court entered an amended judgment dated December 17, 1997, increasing the spousal support to $2,200 per month from August 1997 to May 1998 and $4,000 per month from June 1998 to May 2001. Again, the trial court retained jurisdiction over spousal support. On appeal, this Court affirmed the amended judgment. Schmitz v. Schmitz, 1998 ND 203, 586 N.W.2d 490.

[¶ 4] On February 24, 1999, Orell moved the trial court to amend his spousal support obligation. He claimed an 18.5 percent reduction in his gross income between 1997 and 1998 was a material change in circumstances warranting modification of his spousal support obligation. On April 15, 1999, Ann filed a response opposing the motion for a reduction in spousal support and a counter motion requesting an award of attorney fees.

[¶ 5] After a hearing in October 1999, the trial court entered a money judgment on March 13, 2000, ordering Orell to pay Ann $2,000 in attorney fees. The court on March 17, 2000, issued a second judgment, denying Orell’s request to reduce spousal support. The trial court concluded Ann’s needs had not changed and Orell’s ability to pay spousal support had not changed. In its Findings of Fact, Conclusions of Law, and Order for Judgment the court stated: “[Orell] has shown a downward trend in gross income. However, he has also had a decrease in expenses and has[,] therefore[,] not shown a substantial change in circumstances which would justify the [cjourt in reducing his spousal support obligation.” Accordingly, the trial court concluded Orell had not shown a material change in circumstances justifying a reduction in spousal support. Orell filed his Notice of Appeal on April 28, 2000, and Ann filed her Notice of Cross-Appeal on May 15, 2000.

II

[¶ 6] Orell contends the trial court applied an incorrect standard in determining whether he experienced a material change in circumstances. Specifically, he states the trial court failed to consider the needs of Ann against his ability to pay support. He further states the court erroneously considered in-kind income he receives from his second wife in determining whether a change in circumstances existed.

[¶ 7] A trial court’s determination regarding a material change in circumstances warranting a modification of spousal support is a finding of fact and will only be set aside on appeal if it is clearly erroneous. Greenwood v. Greenwood, 1999 ND 126, ¶ 15, 596 N.W.2d 317. A finding of fact is clearly erroneous if it is induced by an erroneous view of the law, if there is no evidence to support it, or if, although there is some evidence to support it, on the entire evidence we are left with a definite and firm conviction a mistake has been made. Schiff v. Schiff, 2000 ND 113, ¶ 10, 611 N.W.2d 191.

[¶ 8] The trial court did not apply an erroneous view of the law in determining whether to modify spousal support. Spousal support payments may be modified only upon a showing of a material change of circumstances justifying the modification. Ketelsen v. Ketelsen, 1999 ND 148, ¶ 11, 598 N.W.2d 185. A “material change” is something substantially affecting the financial abilities or needs of a party. Pearson v. Pearson, 2000 ND 20, ¶ 12, 606 N.W.2d 128. Not every financial change in circumstances justifies a modification, and when the change is self-induced no modification is warranted. Wheeler v. Wheeler, 548 N.W.2d 27, 31 (N.D.1996).

[¶ 9] At the time of the December 17, 1997, amended judgment, Ann had obtained recertification to teach home economics and had made a good faith effort to find employment. Obtaining her teaching certificate was not her rehabilitative goal, however. It was her intent to attend a counseling program that would allow her the opportunity to live independently. The amended judgment provided Ann with three additional years of spousal support in order to provide her with such an opportunity. Ann, however, has not yet completed her educational goals to increase her earning capacity. The trial court determined Ann continues to earn significantly less income than Orell. Moreover, she continues to maintain the marital home at a great expense. Although her home is presently listed with a real estate agent, it remains unsold despite efforts to sell it. Ann testified that it would be necessary for her to sell the marital home before she could afford to relocate and attend a counseling program. Therefore, until Ann is able to sell the marital home, the trial court determined her financial situation would likely not improve.

[¶ 10] Our Court has stated that changes in the parties’ financial conditions which were contemplated by the court in the original divorce judgment or the previous modification do not constitute a material change in circumstances warranting modification. Schmitz, 1998 ND 203, ¶ 9, 586 N.W.2d 490; Wheeler, 548 N.W.2d at 31. The reduction in Orell’s income is not an uncontemplated material change in circumstances affecting .his ability to pay support. Our Court has stated that earned income is not the sole consideration in determining a party’s ability to pay support. Hager v. Hager, 539 N.W.2d 304, 306 (N.D.1995). Rather, the court must consider a party’s net worth, including the extent of his assets and his earning ability as demonstrated by past income. Id. The trial court concluded Orell is in his prime earning years as an attorney. The court’s findings of fact indicate he has a high potential earning capacity and his current gross income is the direct result of the number of hours he works. While Orell’s income fluctuates from one year to the next due to the nature of his profession such fluctuations were contemplated in the previous modification. Schmitz, 1998 ND 208, ¶ 10, 586 N.W.2d 490. In 1999, Orell earned a gross income of $86,000, but the next year he could earn significantly more. We are not convinced the trial court erred in finding his current reduction in income is not a material change in circumstances. Having concluded there is evidence to support the court’s findings, we do not need to address whether in-kind income Orell received from his second wife can be considered in determining his financial circumstances.

Ill

[¶ 11] Ann asserts the trial court erred in awarding her only $2,000 in attorney fees. She argues the court’s award was insufficient because Orell had the benefit of free legal services and because he needlessly prolonged the litigation. We disagree.

[¶ 12] A trial court’s decision regarding attorney fees will not be set aside on appeal unless it is established the trial court abused its discretion. Cermak v. Cermak, 1997 ND 187, ¶ 20, 569 N.W.2d 280. “A court abuses its discretion when it acts in an arbitrary, unreasonable, or unconscionable manner or when its decision is not the product of rational mental process.” Weigel v. Weigel, 2000 ND 16, ¶ 16, 604 N.W.2d 462. The principle considerations concerning an award of attorney fees are one party’s need and the other’s ability to pay. Jorgenson v. Ratajczak, 1999 ND 65, ¶ 16, 592 N.W.2d 527 (citing Bakes v. Bakes, 532 N.W.2d 666, 669 (N.D.1995)). After considering the parties’ disparity in earning capacity, the court determined Orell had a greater ability to pay and, therefore, ordered him to pay a portion of Ann’s attorney fees. The trial court further determined that neither party increased the cost of the litigation by unreasonably prolonging it. Upon review of the entire record, we conclude the trial court did not abuse its discretion in assessing only $2,000 in attorney fees.

IV

[¶ 13] Ann requests that we award her attorney fees on appeal. “Although we have concurrent jurisdiction with the trial court to award attorney fees on appeal, we prefer that the trial court decide the issue.” Conkins v. Steffan, 532 N.W.2d 59 (N.D.1995).

V

[¶ 14] We, therefore, affirm the judgment of the trial court and remand Ann’s request for attorney fees on appeal.

[¶ 15] GERALD W. VANDE WALLE, C.J., WILLIAM A. NEUMANN, J„ and WILLIAM F. HODNY, S.J., concur.

[¶ 16] The Honorable WILLIAM F. HODNY, S.J., sitting in place of KAPSNER, J„ disqualified.

SANDSTROM, Justice,

concurring in the result.

[¶ 17] Because the majority opinion mischaracterizes the evidentiary record and obscures the district court’s rationale, thus avoiding a significant public policy question, I concur only in the result.

[¶ 18] The majority, at ¶ 10, says fluctuation in Orell Schmitz’s income was contemplated so there is no substantial change in circumstances. The undisputed evidence, however, does not reflect fluctuation, but steady decline. Orell Schmitz’s annual income has declined steadily from $124,000 in 1996 to $76,853 in 1998. The district court estimated Orell Schmitz’s 1999 income at approximately $86,000. In fact, the district court characterized this decline in income as “a downward trend in gross income.” This steady decline in income is not what was contemplated. See Schmitz v. Schmitz, 1998 ND 203, ¶ 12, 586 N.W.2d 490 (a change now foreseeable “with the benefit of hindsight is not necessarily” a contemplated change).

[¶ 19] The district court considered the financial contributions of Orell Schmitz’s new wife in analyzing his current financial needs and ability to pay. In finding of fact number nine, the district court found, “At least one-half of the defendant’s living expenses are paid by his new wife in the form of payments for clothing, gifts, food and other monthly expense items.” The new wife’s financial contributions offset the effects of Orell Schmitz’s steady income decline. In its second conclusion of law, the district court concluded, “The defendant has shown a downward trend in gross income. However, he has also had a decrease in expenses and has therefore not shown a substantial change in circumstances which would justify the Court in reducing his spousal support obligation.” Arguably, there are offsetting substantial changes in circumstance.

[¶ 20] Although there are great questions as to where this analysis could lead, I would affirm the district court’s conclusion under these very limited circumstances. See Carnahan v. Carnahan, 118 Ohio App.3d 393, 692 N.E.2d 1086, 1089, 1091 (1997) (Ohio law does not allow the inclusion of “the new spouse’s income for the purpose of determining spousal support,” but the income “can be considered when there is an allegation of a change in circumstances.”); Page v. Page, 219 N.W.2d 556, 558 (Iowa 1974) (citing Holesinger v. Holesinger, 252 Iowa 374, 107 N.W.2d 247, 251 (1961) (stating all factors of remarriage “must be considered with their attending circumstances, i.e., how do they affect the needs and obligations of the parties?”)); In re Marriage of Serna, 85 Cal.App.4th 482, 102 Cal.Rptr.2d 188, 191 (2000) (“The Legislature has made it quite clear, however, that the income of a new spouse is not to be considered in any spousal support order .”) (citation omitted).

[¶ 21] Dale V. Sandstrom.

      . In ¶ 10, the majority improperly attributes an $86,000 gross income to Orell Schmitz for 1999. In its findings, the district court extrapolated an estimated income for 1999 based on Orell Schmitz's income through September.