Fode v. Farmers Insurance Exchange

No. 85-352

IN THE SUPREME COURT O THE STATE O MONTANA

F F

1986

R N L V.

O AD FODE,

P l a i n t i f f and AppePl-ant,

FARMERS INSURANCE EXCHANGE,

a Reciprocal o r Interinsurance

Exchange, o r g a n i z e d and e x i s t i n g

under and by v i r t u e o f t h e l a w s

of t h e S t a t e of C a l i f o r n i a ,

Defendant and Respondent.

APPEAL FROM: D i s t r i c t C o u r t cf t h e T h i r t e e n t h J u d i c i a l D i s t r i c t ,

I n and f o r t h e County of Y e l l o w s t o n e ,

The Honorable R o b e r t Holmstrom, Judge p r e s i d i n g .

COUNSEL O REC0F.D:

F

F o r Appel-1-ant:

Whalen & Whalen; Timothy J. Whalen a r g u e d , B i l l i n g s ,

Montana

For Respondent r

Crowley Law Firm; P e t e r F.Habein a r g u e d , B i l l i n g s ,

Montana

S u b m i t t e d : December 9 , 1985

Decided: A p r i l 25, 1986

Filed:

- - -

Clerk

Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of

the Court.

This is an appeal from summary judgment entered in the

Thirteenth Judicial District Court in favor of defendant. We

reverse and remand.

AppeJ-lant, Ronald Fode was involved in a three car

accident on November 30, 1984. Respondent, Farmers Insurance

insured one of the other drivers. The degrees of liability

for the accident. have yet to be determined.

Fode notified Farmers Insurance of the property damage

he sustained. Farmers refused to settle the claim. Fode

alleges that Farmers refused to settle because its

investigation of the accident showed their insured was not

liable, when he clearly was. Farmers Insurance alleges it

was willing to settle for twenty percent of what Farmers

viewed total damage to be. A letter was sent by Farmers to

Fode denying any legal liability on the part of its insured

and refusing to pay any part of Fode's claim. As this is an

appeal from summary judgment, the factual dispute has not

been resolved.

Fode asks this Court to recognize the common law duty of

good faith and fair dealing without reference to the unfair

claim settlement practices statute, S 33-18-201, MCA.

Rather, the appellant rests his case upon obligations imposed

by statute generally. Section 28-1-201, MCA, provides:

General duty of care. Every person is bound,

without contract, to abstain from injuring the

person or property of another or infringing upon

any of his rights.

Section 28-1-203, MCA, provides:

Enforcement of obligations arising by operation of

law. An obligation arising from operation of law

may be enforced by civil action or proceeding or in

the manner provided by law.

The Legislature recognized that certain obliya.tions were

owed by an insurer to an insured and therefore enacted

5 33-18-201, MCA, which seeks to prohibit certain unfair

claims practices. Generally that section compels an insurer

to be prompt in handling the claim, to conduct a rea.sonable

investigation, to deny coverage within a reasonable time, to

offer a reasonable amount in settlement, and to effectuate a

prompt, fair and equitable settlement once liability has

become reasonably clear.

In Klaudt v. Flink (Mont. 1983), 658 P.2d 1065, 40

St.Rep. 64, this Court recognized that the obligations

created under 5 33-18-201, MCA, contemplated a tort remedy

for their breach. This holding satisfies the mandates of

general obligation imposed by § 28-1-201, MCA, and the

enforcement section, 28-1-203, MCA.

R-espondent argues that no obligation is owed from an

insurer to a tort victim at common law, citing Marzolf v.

Hoover ( ~ . ~ o n t 1384), 596 F.Supp. 596.

. There the Federa.1

District Court said:

In Count I11 of her Amended Complaint, the

plaintiff asserts the existence of a common law

duty running from an insurer to a third-party

claimant, a duty separate and independent from the

obligation imposed upon an insurer by S 33-18-201,

M.C.A. (1979). No such duty, however, exists

-

under Montana law, and Klaudt v. Flink, supra, does

not alter this conclusion. Granted, a fiduciary

duty runs from the insurer to its insured by virtue

of the contract of insurance extant between the

two, see, Thompson - State Farm Mutual Automobile

v.

z,

-the only duty 161 Mont. 207, 505 P.2d 4231,

Ins. - [(1973),

but running from an insurer to a

third-party claimant is that imposed upon the

insurer by S 33-18-201, M.C.A. (1979).

Accordingly, I find that Count I11 of plaintiff's

Amended Complaint fails to sta.te a claim cognizable

under Montana law.

The rule articulated by the Federal District Court is

the general rule. However, this Court does not, in this

case, hold that no duties run from an insurer to a tort

victim. We only decide in this case that such duties have

been recognized by the Legislature in enacting S 33-18-201,

MCA . The Legislature has sufficiently articulated the

obligations and this Court will not interfere. Where the

Legislature fails to take cognizance of important legal

obligations and fails to provide the appropriate remedies,

this Court will not hesitate to act. However, such is not

the case in this instance.

Appellant Fode, in an effort to strengthen his arqument,

relies upon 5 25-10-303, MCA, which provides, in part:

In an action involving solely the recovery of

property damages arising out of the ownership,

maintenance, or use of a motor vehicle, in which

the plaintiff secures a judgment equal to or

greater than the amount of damages claimed by the

plaintiff in his last written offer to the

defendant or his agent prior to the filing of the

cause of action, the court shall allow plaintiff's

reasonable attorney's fees .. .

.

The purpose of this statute is to encourage good faith

negotiation. It acts, where property damages only are

involved, as an additional remedy to remedies resulting from

violation of obligations owed under S 33-18-201, MCA. In

this action, no judgment has been obtained. in the underlying

case and the statute has no application.

Section 33-18-201, MCA, is limited to situations where

the insurer engages in the proscribed conduct as a "general

business practice". In Klaudt, supra, we recognized that

multiple acts by the insurer could occur in the handling of a

single claim. Therefore, the provisions of 5 33-18-201, MCA,

have general application and it would be confusing for the

Court to recognize a separate cause of action, outside the

unfair claims settlement practices procedure.

In this case the appellant Fode has alleged that

liability is "reasonably clear" but has not alleged that the

insurer's conduct constituted a "general business practice".

We recognize pleadings should be liberally construed and do

not require that all statutory requirements be alleged for a

complaint to be good. Pleadings should be construed in the

manner consistent with the spirit of modern rules of civil

procedure and with an eye toward achieving justice for the

parties. See Morris v. Espeland (Mont. 1985), 696 P.2d 428,

42 St.Rep. 251.

Appellant Fode may have a cause of action pursuant to

the provisions of S 33-18-201, MCA. The "general business

practice" provision can either be satisfied by showing

specific instances of conduct on the part of the insurer

which violate the mandates of § 33-18-201, MCA, or by

providing expert testimony from attorneys, adjusters or

others knowledgeable regarding the claims practices of the

insurer. Furthermore, one need not show that liability has

become "reasonably clear" to show a violation of all sections

of § 33-18-201, MCA. The "reasonably c1ear'~equirement is

necessary to show a violation of subsections 6 and 13 of the

statute, but other provisions may also be violated and give

rise to a cause of action in tort.

We find that the appellant's allegations contained in

his complaint should be presented to the District Court to

determine whether a cause of action has been stated under

S 33-18-201, MCA. We vacate the summary judgment entered by

the District Court and remand for proceedings in conformity

with the views herein expressed.

As noted previously this bad faith case is being pursued

although the degrees of liability for the accident have yet

to be determined. Under the holding Klaudt Flink,

supr, the procedure is authorized. At the time we decided

Klaudt v. Flink the majority of jurisdictions did not permit

the bad faith action to proceed until the underlying action

was concluded. The majority opinion stated:

However, at this point, we must differ

with the position adopted by the other

jurisdictions which allow an action such

as this to be prosecuted only after the

insured's liability has been adjudicated.

We believe that the action may be filed

and tried before, concurrent with, or

after liability has been determined. We

see no problems with the possibility of

contrary findings in the two actions, the

doctrine of res judicata, collateral

estoppel or the like because different

issues are involved in the two cases. ..

More than three years have elapsed since our decision in

Klaudt. Experience in the field teaches us that a change in

procedure is necessary. The insurance company is put in a

difficult position by having to defend a bad faith case

before the underlying case has been determined. Discovery of

the insurer's file in a bad faith case raises difficult "work

product" and "attorney-client" problems affecting the

underlying case. The practice also allows for undue leverage

to be exerted by forcing the insurer to face the prospect of

two lawsuits with the additional costs incurred for defense.

The legislature enacted the unfair trade practices

section of the Montana Insurance Code to correct abuses being

practiced by insurers. The undue delay of claims worked to

the advantage of insurers who did not have to pay prejudgment

interest and worked to the disadvantage of innocent tort

victims who were forced to wait for recoupment of their loss.

However, the procedural rule adopted in Klaudt unfairly works

a prejudice to insurers. The system must be balanced. All

parties should be accorded fair and just treatment under the

law.

For the foregoing reasons we hold that all proceedings

in a bad faith case, alleging violations of the code which

require a showing that liability be reasonably clear, are

suspended until the liability issues of the underlying case

have been determined either by settlement or judgment. Our

holding applies to this case and all others involving the

same issue.

The bad faith case may be filed to toll the statute of

limitations and to expedite ultimate disposition but no

discovery may he engaged. A favorable judgment for the

plaintiff in the District Court is sufficient to trigger

discovery in the bad faith case. Plaintiff need not await

the outcome of the District Court decision on appeal.

This case is remanded to the District Court for

proceedings under the unfair trade practices section of the

Insurance Code. However, all proceedings are suspended until

liability has been determined in the underlying case.

We Concur:

Chief Justice

/

Justices

Mr. Justice John C. Sheehy, dissenting:

I dissent from the majority opinion although I agree

that the summary judgment entered by the District Court must

be vacated.

For the purposes of this dissent, the term "third party

claimant" means a person whose property has been damaged or

who has received personal injuries caused by an insured

driver. In this case the third party claimant is Fode. The

term "insured" refers to David Michael Fiedler, the driver of

the other automobile in this case. The term "insurer" refers

to Farmers Insurance Exchange, which issued a poli-cy of

liability insurance to David Kichael Fiedler.

At 5:00 p.m. on the afternoon of December 1, 1984, Fode

was operating his vehicle in the center lane of the three

lanes provided for southbound traffic on Ma.in Street in the

Billings Heights. He was driving at approximately 25 miles

per hour, about 1% car Lengths behind a pickup truck operated

by Fiedler. The r0adwa.y was icy, with a light cover of snow

a.nd it was just beginning to get dark. As the vehicles

approached an intersection, a vehicle from the northbound

lane of traffic attempted to make a left turn across the lane

of traffic occupied by Fiedler, who was followed by Fode.

The left turning vehicle lost con.tro1, missed the turn and

stopped at the right hand curb in Fiedl.erls direction of

travel. Fiedler swung out to the left to avoid the left

turn in.^ vehicle and Fode followed suit. Fiedler , however,

attempted to return to the right hand lane, lost control,

skid.ded into the center dividing strip of Main Street, spun

again and crossed to the right hand side of Main Street,

where he struck the curb and the telephone pole. In that

position, Fode's vehicle struck the Fiedler vehicle.

- 9 -

On Decerr.ber 7, 1984, Fode called Hoglun, t.he adjuster

for Farmers Insurance Group, the insurer i.n this case.

Hogl-um informed Fode by telephone that the position of

Farmers Insurance Group was that it was in no way liable to

Fode for the damages to his a u t ~ m o b ~ l e

(he does not seek

personal injury damages) and that he should see his lawyer.

Fode's testimony is that he was always wil-ling to negotiate

away from 100% of his claim but that the insurer denied his

claim in its entirety.

Fode sued the insurer claiming a breach of duty under

common law on the part of the insurer to negotiate with him.

The District Court did not look to whether issues of material

fact existed but dismissed his claim on summary judgment,

stating:

The plaintiff's claim in this case is premised on

an alleged breach of duty arising under the common

law. Because the court finds that no such duty

exists, there is no need to determine whether

issues of material. fact exist as to an alleged

Sreach of duty. Accordingly the scope of the

court's inquiry is confined to determining whether

defendant Farmers Insurance Exchange is entitled to

summary judgment as a matter of law.

The primary issue for us on this appeal, therefore, is

whether there is a common law right of action for failure to

negotiate against the insurer in this case. If such an

action does exist, then certainly material issues of fact

exist as to whether FIG should have negotiated with Fode

prior to his commencing suit.

The majority gives no consideration to this issue raised

by Fode, but looks instead to a statutory duty imposed upon

insurers und.er S 33-18-201, MCA. In so dcing, the majority

moves with too much speed and too little thought given to a

substantive issue of law raised by Fode, whether there exists

a common law duty upon an insurer to negotiate with a

third-party claimant.

In at least two Workers' Compensation cases, this Court

has recognized a common law obligation of insurers to refrain

from intentional torts and unfair practices in settlement and

negotiation of claims. In Hayes v. Aetna Fire Underwriters

(1980), 187 Mont. 148, 609 P.2d 257, we approved an action

against an insurer for alleged intentional torts of fraud,

conversion and intentional infliction of emotional distress,

in spite of the exclusivity clause of the Workers'

Compensation Act. Section 39-71-411, MCA. In Vigue v. Evans

Products Company (1980), 187 Mont. 1, 608 P.2d 488, we again

permitted a common law action against the Workers'

Compensation carrier for fraud, conversion, economic duress

and bad faith.

In Lipinski v. The Title Insurance Company (1982), 202

Mont. 1, 655 P.2d 970, we held expressly that insurance

companies have a duty to act in good faith with their

insureds and that this duty exists independently of the

insurance contract and independent of statute. 202 Mont. at

15, 655 P.2d at 977. In I,ipinski, we held that a title

insurer breached the implied duty of good faith in failing to

defend the insured's title when it was attacked.

In Weber v. Blue Cross of Montana (3982) 196 Mont. 454,

643 P.2d 198, Justice Weber stated:

[a] cause of action may sound in tort although it

arises out of a breach of contract, if a defaulting

party, by breaching the contract, also breaches a

duty which he owes to the other party independently

of the contract.

196 Mont. at 463, 643 P.2d at 203.

Is there a basis now to find a duty on the part of the

insurer to negotiate with Fode regarding his property damage

independent of contract? Certainly. The duty arises out of

the adoption in Montana of the mandatory insurance law.

Section 61-6-301, MCA.

Before the adoption of the mandatory liability insurance

law, a motorist whose vehicle was damaged by the driver of

another insured vehicle, if the insurer was unwilling to

negotiate with the third party claimant, had to sue the

insured driver personally in order to establish liability and

his right to the insurance proceeds from the insurer. It was

unfortunately the case that many insurers, in order to force

settlements or to avoid paying at all, refused to negotiate

with third parties unless suit was brought by the third party

for property damages. It was this unfair practice which led

the legislature to the adoption of § 25-10-303, MCA, referred

to in the majority opinion, which provides that if a

plaintiff secures a judgment equal to or grea.ter than the

amount of property damages claimed by him, he is entitled to

reasonable attorney fees.

Moreover, because the presence of insurance was a matter

of grace on the part of the insured this Court and others

were careful not to allow a third party plaintiff to name the

insurance company as a defendant because of the possibility

that the trier of fact might be prejudiced if the fact of

insurance were known.

Before mandatory liability insurance, whether the owner

and operator of a motor vehicle carried liability insurance

was a matter of his business acumen, and the insura-ncepolicy

was issued to the insured for the purpose of protecting -

his

liability. After mandatory liability insurance, however, the

party sought to be protected by law is not the insured, but

the injured claimant. Mandatory liability insurance laws are

passed by legislatures - protect

to -

the general traveling

public by requiring all drivers to carry liability insurance.

Before ma.ndatory liability insurance, it was assumed

that jurors or other triers of fact should not know of the

- 12 -

presence of insurance and therefore the insurance company

should not be mentioned in any proceedings relating to th.e

liability action. Now, however, every juror or trier of fact

must know that insurance is indeed involved because of the

mandatory law. Formerly, some motorists carried liability

insurance out of a sense of public duty. Now, all must carry

liability insurance because of public policy.

Thus, it was stated in Ferguson v. Employers Mutual

Casualty Company (S.C. 1970), 174 S.E.2d 768, 771:

The primary purpose of compulsory motor vehicle

liabil-ity insurance is to compensate innocent

victims who have been injured by the negligence of

financially irresponsible motorists. Its purpose

is not like that of ordinary Liability insurance to

save harmless the tortfeasor himself. The injured

person's rights against the insurer are not derived

through the insured as in the case of voluntary

insurance. They are statutory and become absolute

on the occurrence of an injury covered by the

policy.

We have upheld the constitutionality of the compulsory

automobile liability insurance statutes. State of Montana v.

Turk (1982), 197 Mont. 311, 643 P.2d 224.

Once we underst-and the true focus of the mandatory

liability insurance law we can look with a different light at

5 28-1-203, MCA, which provides:

Enforcement of obligations arising by operation of

law. An obligation arising from operation of law

may be enforced by civil action or proceeding or in

the manner provided by law.

Un.der S 28-1-203, MCA, a person entitled to enforce an

obligation has two remedies, (1) a civil action or (2) a

proceeding authorized by law. The majority in this case has

confined Fode to the "manner provided by law," in §

33-18-201., MCA, without explaining why he is not also

entitled to a civil action.

A second rea-son for my dissent is the unnumbered rule of

civil procedure promulgated by the majority which halts

proceedings against an insurer in a bad faith case and

suspends discovery. That the unnumbered rule is ill-advised

may be shown in that it springs from no issue raised by the

parties in this case, it is unbriefed and unargued, and comes

like a bolt from the blue to an unsuspecting, unprepared bar.

The unnumbered rule conflicts with statutes and with certain

numbered Rules of Civil Procedure.

The first conflict with a statute is the adoption of the

rule itself. Section 3-2-702, MCA, requires that before any

rules of procedure are adopted by us they should first be

considered and prepared by an advisory commission. Here the

advisory commission is by-passed. The precipitous action of

the majority is justified by their statement that "experience

in the field teaches us that a change in procedure is

necessary." The statement is unsubstantiated by reference to

ca.ses in our files or by citation to studies done elsewhere.

The unnumbered rule of the majority conflicts with the

remedy adopted by the legisl-a.ture 1985 following Klaudt v.

in

Flink, supra. Section 33-18-241, MCA, provides:

The trial of a claim or action against an insurer

for lack of good faith in its handling or

settlement of an insurance claim may not be

consolidated with a trial of the underlying claim

+ 6.

(1) the lack of good faith claim is against a

party different for the pa.rty against. whom the

underlying claim is made; and

(2) the parties have not stipulated to

consolidation of the trial of the lack of good

faith and the underlying claim. (Emphasis added. )

Thus a remedy for Klaudt, supra, has a1read.y been

provided by the legislature. Under 5 32-18-241, MCA, where a

third party claim against an insured is combined with a third

party claim against the insured's carrier the trials of the

two causes must be separated. The legislature made no such

provision where an insured - - - carrier both for bad

sues his own

faith and for the underlying obligation. But, under the rule

adopted by the majority now, - insured may not proceed in

an

the same suit against his own carrier to discovery and other

proceedings until the liability portion is first determined.

Thus does the majority force the insured into two trials.

Under the rule adopted by the majority, the earlier cases we

have decided in favor of insureds in bad faith cases,

Lipinski, supra; Weber, supra, and First Security Rank v.

Goddard (1979), 1.81 Mont. 407, 593 P.2d 1040; and others

would. have required two trials rather tha.n the one tria,, the

decision of which came to us on appeal.. It is on that basis

that the unnumbered rule adopted by the majority is

ill-considered and ill-advised.

The unnumbered rule conflicts with Rule 23 (d),

M.K.Civ.P. which gives to the District Court the power to

make appropriate ord.ers respecting the course of proceed.ings

in cases before it; with Rule 18(a), M.R.Civ.P., which

permits a party to join as many legal or equitable claims or

both as he has against an opposing party; and it raises havoc

with Rules 26 to 38, M.R.Civ.P., which relate to discovery.

The unnumbered rule will not wreck the tort system, of

course, because the tort system is broad.er by far than cases

against- insurers. It will however, substantially increase

the costs to litigants of litigation against insurers for

breach of the implied covenant of good faith and fair

dealing.

A third reason for my dissent is the implication in the

majority opinion that a bad faith case against an insurer

requires proof of a general business practice of unfair

claims settlement or deceptive acts.

The holding of the federal district court in Marzolf v.

Hoover (D. Mont. 1984), 596 F.Supp. 596, was incorrect when

it stated that "the only duty running from an insurer to a

third party claimant is that imposed upon the insurer by S

33-18-201, MCA (1979)." The federal district court ignored,

as does the majority in this case, the provisions of §

33-18-102, MCA, which establishes the duty upon insurers not

to engage in even a single unfair or deceptive act or

practice. That statute provides:

No person shall engage in this state in any trade

practice which is defined in this chapter as or

determined pursuant to this chapter to be an unfair

method of competition or - unfair or deceptive act

an

or

- ractice in the business of insurance.

(mhss

Ep:i added. )

That statute, by its terms, is limited to a si.ng1.e act

or practice.

Section 33-18-102, MCA, is prohibitory in nature, and

was enacted for the protection of the public. It has been

the law of this State at least since 1912 that where a

statute "makes a requirement, or prohibits a thing, for the

benefit of a person or class of persons, one injured by

reason of a violation of it is entitled to maintain an action

against him by whose disobedience he has suffered an injury."

Melville v. Butte-Balaklava Copper Co. (1913), 47 Mont. 1,

130 P. 441.

It is plain as day that a single breach of the statute

constituting a.n unfair or deceptive act or practice by an

insurer, toward an insured or a third party claimant, which

causes injury, gives rise to an action against the insurer;

a.nd further, if the brea-ch is oppressive, malicious or

fraudulent, it will also give rise to a claim for exemplary

damages, since a criminal penalty may be attached. State ex

rel. Larson v. District Court (1967), 149 Mont. 131, 423 P.2d

598.

A violation by an insurer of 33-18-102, MCA,

constitutes a misdemeanor as defined in 5 33-1-104, MCA, as

follows:

Each violation of any provision of this code,

except 33-30-1012, with respect to which violation

a greater penalty is not provided by other

applicable laws of this state shall, in addition to

any administrative penalty otherwise applicable

thereto upon conviction in a court of a competent

jurisdiction of this state be punishable by a fine

of not less than $50 or more than $1,000 or by

imprisonment in the county jail for not less than

30 da.ys or more than 90 days or by both such fine

and imprisonment. (Emphasis added.)

The California Supreme Court without referring to

whether a criminal penalty attached as our insurance cases do

in Montana, determined that a single deceptive act or

practice was sufficient to give rise to a cause of action in

Royal Globe Insurance Company v. Superior Court, Etc. (Gal.

It seems clear to us that this issue is not

independent of the matters we have discussed above.

If, as we conclude, the act affords a private

party, including a third party claimant, a right to

sue an insurer for violating subdivision (h), it

is inconceivable that the Legislature intended that

such a litigant would be required to show that the

insurer committed the acts prohibited by that

provision "with such frequency as to indicate a

general business practice." There would be no

rational reason why an insured or a third party

cl-aimant injured by an insurer's unfair conduct,

knowingly performed, should be required to

demonstrate that the insurer had frequently been

guilty of the same type of misconduct involving

other victims in the past.. ." .

Under 5 33-18-201, MCA, it is an unfair clsims

settlement practice to refuse to pay claims without

conducting a reasonable investigation based upon all

available information; to fail to acknowledge and act

reasonab1.y and promptly on communications with respect to

claims arising out of insurance policies; and to neglect to

attempt in good faith to effectuate a prompt, fair and.

equitable settlement of a claim in which liability has become

reasonably clear. For each of these unfair practices, an

issue of fact exists in this case under the complaint brought

by Fode. Farmers Insurance Exchange is prohibited under 5

33-18-102 from engaging in a single one of any of those

practices defined in the subsequent section. Therefore,

without having to prove a general business practice, Fode has

at least a statutory right, and probably a common law right

to pursue Farmers Insurance Group without first establishing

by another suit in another action against another party that

liability is reasonably clear. The majority errs when it

remands the case for further proceedings to allege and prove

a general practice of unfair claims settlement practices.

Under the facts alleged by Fode, Farmers Insurance

Exchange is forcing Fode to sue the insured and to establish

liability before it will negotiate his claim. It is this

very kind of action that brought about the adoption by the

legislature of S 25-10-303, MCA, as we said above. We should

acknowledge that Fode's complaint is sufficient now, and

remand to determine the necessary issues of fact in one

action.

Q0-L Q- 2

8

-

Justice

Mr. Justice Will-iam E. Hunt, Sr., concurs in the above

dissent: