October 15 2013
DA 12-0543
IN THE SUPREME COURT OF THE STATE OF MONTANA
2013 MT 301
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY,
Plaintiff, Appellee
and Cross-Appellant,
v.
FRANK FREYER, as Personal Representative of
the Estate of Heath Evans Freyer, and as
Conservator of the Estate of Alicia Freyer,
a Minor Child, and VAIL FREYER,
Defendants, Appellants
and Cross-Appellees.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and For the County of Gallatin, Cause No. DV 07-754A
Honorable Holly Brown, Presiding Judge
COUNSEL OF RECORD:
For Appellants:
Allan H. Baris; Moore, O’Connell and Refling, P.C.; Bozeman, Montana
(for Frank Freyer)
Daniel P. Buckley; Buckley Law Office, P.C.; Bozeman, Montana
(for Vail Freyer)
For Appellee:
Dale R. Cockrell; Jinnifer Jeresek Mariman; Moore, Cockrell, Goicoechea
& Axelberg P.C.; Kalispell, Montana (for State Farm)
Robert F. James; Ugrin, Alexander, Zadick, & Higgins, P.C.;
Great Falls, Montana (for State Farm)
For Amici:
Lawrence A. Anderson; Attorney at Law, P.C.; Great Falls, Montana
(for Amicus MTLA)
Submitted on Briefs: July 24, 2013
Decided: October 15, 2013
Filed:
__________________________________________
Clerk
2
Justice Jim Rice delivered the Opinion of the Court.
¶1 This is the second appeal in this case. See State Farm Mut. Aut. Ins. Co. v. Freyer
(Freyer I), 2010 MT 191, 357 Mont. 329, 239 P.3d 143. Generally, Heath Freyer (Heath)
and Vail Freyer (Vail), who were married and the parents of Alicia Freyer (Alicia), were
all riding in their vehicle, which was insured by State Farm Mutual Automobile Insurance
Company (State Farm). Vail was driving when the vehicle was involved in a rollover
accident that resulted in Heath’s death. In Freyer I, we held, based upon the language of
the subject policy’s “Limits of Liability” clause, that there was coverage for Alicia’s
claim for derivative damages stemming from the death of her father, Heath, under her
own “Each Person” policy limit of $50,000, contrary to State Farm’s position that all
damages arising from Heath’s death were covered only by the “Each Person” policy limit
of $50,000 applicable to him. Freyer I, ¶¶ 13-16. After remand, State Farm paid the
contested coverage amounts. Appellants then brought claims against State Farm under
several theories for the wrongful denial of coverage for Alicia’s derivative claims. The
District Court granted summary judgment to State Farm on all of those theories, which
Appellants challenge on appeal. We reverse in part, affirm in part, and remand for
further proceedings. We address the following issues:
¶2 1. Did the District Court err in concluding that State Farm had not breached the
insurance contract when it failed to indemnify Vail for Alicia’s derivative claims because
it had a “reasonable basis in law” to challenge coverage of those claims?
3
¶3 2. Did the District Court err in granting summary judgment to State Farm on the
common-law bad faith and breach of the covenant of good faith and fair dealing claims?
¶4 3. Did the District Court err in granting summary judgment to State Farm on the
Unfair Trade Practices Act claims?
¶5 4. Did the District Court err in concluding State Farm waived its statute of
limitations affirmative defenses?
FACTUAL AND PROCEDURAL BACKGROUND
¶6 In October 2003, Vail was driving a family vehicle in the Bozeman area, and
Heath and three-month-old Alicia (collectively the Freyers), were passengers. Vail
maneuvered the vehicle to pass a string of cars ahead of them, but when they were nearly
even with the lead vehicle, driven by Michelle Manning (Manning), Manning executed a
left-hand turn. The vehicles collided, sending the Freyers’ vehicle off the road, where it
overturned. Heath was ejected and suffered fatal injuries. Alicia, who was confined by
her car seat, suffered minor injuries.
¶7 State Farm insured the Freyers’ three vehicles against liability arising from Vail’s
driving. On the subject vehicle, State Farm’s automobile liability policy provided
coverage limits of $50,000 per person and $100,000 per accident, as well as underinsured
motorist coverage of $50,000. Within days of the accident, State Farm offered to pay
Heath’s Estate the $50,000 per person coverage limit for Heath’s injuries, but Vail’s
attorney asked State Farm to wait on payment until a probate proceeding had been
4
initiated. Heath’s father, Frank Freyer (Frank), was appointed as personal representative
of Heath’s Estate and as conservator of Alicia’s Estate.
¶8 On August 4, 2004, Frank requested by letter that State Farm pay the $50,000 it
had previously offered to Heath’s Estate. Frank also advised State Farm that he would be
demanding $50,000 for settlement of Alicia’s claims. The next day, State Farm sent
Frank a check for $49,723.22, the balance of the $50,000 per person coverage limit for
Heath’s Estate’s claim after deduction for payments made for Heath’s funeral and
medical care.
¶9 In September 2004, State Farm filed a declaratory judgment action in federal court
in an unrelated case that sought a declaration that the “Limits of Liability” clause in its
auto liability policy limited coverage to $50,000 for all claims arising from the bodily
injury to one person. See State Farm Mut. Aut. Ins. Co. v. Bowen (Bowen I), No. 04-63-
BU-RFC (D. Mont. Aug. 3, 2005). The Limits of Liability clause at issue in Bowen I was
identical to the one in the policy insuring Vail. That clause provides, in pertinent part:
The amount of bodily injury liability coverage is shown on the declarations
page under “Limits of Liability–Coverage A-Bodily Injury [-W-], Each
Person, Each Accident.” Under “Each Person” is the amount of coverage
for all damages due to bodily injury to one person. “Bodily injury to one
person” includes all injury and damages to other persons, including
emotional distress, sustained by such other persons who do not sustain
bodily injury.
(Emphasis added.)
¶10 On November 18, 2004, Frank demanded by letter that State Farm also pay
$50,000 to satisfy Alicia’s claims against Vail. Frank asserted that because Alicia
5
suffered “bodily injury,” she was entitled to payment for all her damages, including her
derivative claims arising from her father’s death, out of her own $50,000 “Each Person”
limit. Frank also asserted that Alicia had personally sustained over $50,000 in damages
because she had suffered a “closed head injury.”
¶11 Four days later, State Farm contacted its in-house counsel, Jo Ridgeway
(Ridgeway), concerning Frank’s interpretation of the Limits of Liability clause. Two
days later, Ridgeway advised State Farm that the majority rule from courts that had
interpreted the clause was that all “derivative claims”—damages arising from another
person’s injury or wrongful death—were subject to the $50,000 Each Person coverage
limit. In other words, any derivative claim Alicia had pertaining to Heath’s death was
subject to the $50,000 Each Person coverage limit for his claims, which had already been
paid to Heath’s Estate. Based on this advice, State Farm informed Frank that it had
already paid the available coverage limits for damages stemming from Heath’s death.
Further, State Farm advised that, based upon Alicia’s medical records indicating that her
head CT scan was normal, and her doctor’s conclusion that she suffered only “minor
bruising,” it would settle her personal bodily injury claim against Vail for $5,000.
¶12 On January 27, 2005, Frank rejected the $5,000 offer and renewed his demand for
$50,000. Frank advised that, if State Farm tendered that amount, he would provide a full
release for all claims against Vail. State Farm rejected that offer, responding that it had
changed neither its position regarding the interpretation of the policy nor its $5,000
valuation of damages for Alicia’s own physical injuries.
6
¶13 On August 3, 2005, the U.S. District Court for Montana ruled in Bowen I that a
derivative claim was subject to the same Each Person coverage limit as other claims for
that person. See Bowen I at 9. That decision was ultimately affirmed by the Ninth
Circuit. State Farm Mut. Aut. Ins. Co. v. Bowen (Bowen II), 247 Fed. Appx. 901, 902-03
(9th Cir. 2007).
¶14 On September 19, 2006, Frank, in his capacity as personal representative of
Heath’s Estate and conservator of Alicia’s Estate, sued his daughter-in-law Vail for the
damages sustained in the accident due to Vail’s negligent driving. State Farm accepted
defense of the lawsuit and retained counsel to defend Vail.
¶15 On October 30, 2007, State Farm filed an action seeking a declaration that it had
complied with the payment obligations under the Limits of Liability clause. In their
answers, Frank, on behalf of Heath’s Estate and Alicia, and Vail asked the court to
declare that the policy provided the additionally claimed coverage, and counterclaimed
that State Farm had breached the insurance contract and the implied covenant of good
faith and fair dealing, and violated Montana’s Unfair Trade Practices Act (UTPA) by its
mishandling of Alicia’s and Heath’s Estates’ claims.
¶16 Two days later, Frank sent to State Farm a settlement letter demanding $2.6
million to settle all of the claims against Vail. According to Frank, $1.7 million of that
settlement represented the “low range” of the economic loss to Heath’s Estate because of
his death, while approximately $1 million represented the loss of support, loss of
companionship, loss of established course of life, and emotional distress damages
7
stemming from Alicia’s loss of her father. Frank subtracted from the $2.7 million the
$100,000 he had already been paid ($50,000 from State Farm and $50,000 from
Manning’s insurer). Although State Farm did not change its position regarding
interpretation of the policy, it paid an additional $150,000 to Heath’s Estate for three
stacked $50,000 underinsured motorist coverages for the Freyers’ three vehicles insured
by State Farm on June 4, 2008.
¶17 On July 21, 2008, Frank and Vail executed a $2.6 million stipulated judgment that
is the center of controversy in this case. The settlement agreement stated that $2.6
million was “a fair and reasonable” amount for settlement of Heath’s Estate’s claims and
Alicia’s claims. In return for Vail’s confession of negligence and the assignment of all
claims she may have against State Farm, Frank signed a covenant not to execute against
Vail’s personal assets.
¶18 On May 4, 2009, in the declaratory proceeding, the District Court ruled that State
Farm had correctly interpreted the Limits of Liability clause of its policy. However, the
Freyers appealed, and on August 27, 2010, this Court reversed, ruling that coverage for
Alicia’s derivative claims was not limited to Heath’s Each Person limit. See Freyer I,
¶¶ 13-16. State Farm then paid another $50,000 to Alicia under the Each Person
coverage limit applicable to her, and paid $20,000 in attorney fees to compensate Vail’s
attorney for his work in the declaratory judgment action. Further, because Freyer I had
found there was coverage for Alicia’s derivative claims, State Farm also paid her
$150,000 in stacked underinsured motorist coverage, as it had for Heath’s Estate. Thus,
8
State Farm paid Freyers a total of $400,000—$200,000 to Heath’s Estate and $200,000 to
Alicia.
¶19 In January 2011, Vail and Frank filed amended counterclaims in the proceeding.
Vail alleged an additional violation of Montana’s UTPA, and asked for a declaration that
the $2.6 million stipulated judgment was valid and enforceable against State Farm. Frank
also sought enforcement of the stipulated judgment against State Farm. State Farm
denied and countered that the claims were barred by the statute of limitations.
¶20 All parties moved for summary judgment. The District Court granted State
Farm’s motion for summary judgment and denied Frank’s and Vail’s motions. The court
concluded that it was reasonable for State Farm to interpret its policy as it did because
“‘every other court faced with the issue before this Court has concluded that the “Each
Person” limitation applies to a wrongful death claim.’” (Quoting Bowen I at 9.) While
the District Court acknowledged that additional coverage was found in Freyer I, it
concluded that State Farm had not been unreasonable in the determination about coverage
it had made. Because State Farm had a “reasonable basis in law” to contest coverage, the
District Court dismissed all of Frank’s and Vail’s claims. As to State Farm’s statute of
limitations defense, the court concluded that Vail’s and Frank’s 2011 amended
complaints were filed merely to reflect the shift in the parties’ respective positions
pursuant to the assignment of rights, and therefore did not “state any new theory or claim
for relief” from their 2008 counterclaims. Thus, State Farm had waived its statute of
9
limitations defense by failing to assert the defense in its answer to the counterclaims filed
in 2008.
¶21 All parties appeal the District Court’s order. Vail and Frank appeal from the
District Court’s order disposing of all of their claims. State Farm cross-appeals the
District Court’s order dismissing its statute of limitations defense.
STANDARD OF REVIEW
¶22 A district court’s grant or denial of summary judgment is reviewed de novo,
utilizing the same analysis as the district court pursuant to Rule 56 of the Montana Rules
of Civil Procedure. Lorang v. Fortis Ins. Co., 2008 MT 252, ¶ 36, 345 Mont. 12, 192
P.3d 186. “The interpretation of an insurance contract [is] a question of law.” Modroo v.
Nationwide Mut. Fire Ins. Co., 2008 MT 275, ¶ 23, 345 Mont. 262, 191 P.3d 389. A
district court’s legal conclusions are reviewed for correctness. Crane Creek Ranch, Inc.
v. Cresap, 2004 MT 351, ¶ 8, 324 Mont. 366, 103 P.3d 535.
DISCUSSION
¶23 Frank and Vail assert that the District Court erred by dismissing their (1) breach of
contract claims and (2) § 33-18-201(1) UTPA claims. In addition, Frank asserts that the
District Court erred by dismissing his third-party bad-faith claim against State Farm and
his first-party claim for breach of the covenant of good faith and fair dealing that was
assigned to the Estate by Vail. The District Court held that State Farm was entitled to
summary judgment on all of these claims because it had a “reasonable basis in law” to
dispute coverage. We address these claims in turn, and hold that the District Court erred
10
by applying a “reasonable basis in law” defense to Frank and Vail’s breach of contract
claim, but did not err by applying that defense to the remaining claims.
¶24 1. Did the District Court err by concluding that State Farm had not breached the
insurance contract when it failed to indemnify Vail for Alicia’s derivative claims because
it had a “reasonable basis in law” to challenge coverage of those claims?
¶25 Frank and Vail argue that, under contract law, a breach is a breach—it does not
matter if the breaching party was “reasonable” in its breach. They assert the District
Court erred by concluding that State Farm did not breach its duty to pay Alicia’s claims
when it wrongfully denied coverage for her derivative claims because State Farm had a
“reasonable basis in law” to contest coverage for those claims. State Farm responds that
its payment of policy limits, prejudgment interest and Freyers’ attorneys’ fees in pursuing
the coverage determination leading to Freyer I has mooted Frank’s and Vail’s breach of
contract claims and, in any event, the District Court properly applied the reasonable basis
in law defense. We reject the mootness argument. An issue is moot when “‘the court is
unable due to an intervening event or change in circumstances to grant effective relief or
to restore the parties to their original position . . . .’” Gateway Opencut Mining v. Bd. of
Co. Commrs., 2011 MT 198, ¶ 16, 361 Mont. 398, 260 P.3d 133 (quoting Greater
Missoula Area Fedn. of Early Childhood Educators v. Child Start, Inc., 2009 MT 362,
¶ 23, 353 Mont. 201, 219 P.3d 881). Freyers are seeking damages for breach of the
insurance contract beyond the payments made by State Farm. As further developed
herein, it is possible that further relief could be granted.
11
¶26 The duty to defend and the duty to indemnify are different, and those differences
compel the results ultimately reached herein. The duty to indemnify is independent of
and narrower than the duty to defend. Unlike an insurer’s duty to defend, which arises
“when ‘a complaint against an insured alleges facts, which if proven, would result in
coverage[,]’” an insurer’s duty to indemnify arises only if coverage under the policy is
actually established. State Farm Fire & Cas. Co. v. Schwan, 2013 MT 216, ¶ 15, 371
Mont. 192, ___ P.3d ___ (emphasis added) (quoting Farmers Union Mut. Ins. Co. v.
Staples, 2004 MT 108, ¶ 21, 321 Mont. 99, 90 P.3d 381, in turn citing St. Paul Fire &
Marine Ins. Co. v. Thompson, 150 Mont. 182, 188, 433 P.2d 795, 799 (1967) and
Grindheim v. Safeco Ins. Co., 908 F. Supp. 794, 800 (D. Mont. 1995)). Put another way,
while an insurer’s duty to defend is triggered by allegations, “[a]n insurer’s duty to
indemnify hinges not on the facts the claimant alleges and hopes to prove but instead on
the facts, proven, stipulated or otherwise established that actually create the insured’s
liability.” 43 Am. Jur. 2d Insurance § 676 (West 2013).
¶27 “Insurance agreements are contracts that are subject to the general rules of contract
law.” Fisher ex rel. McCartney v. State Farm Mut. Aut. Ins. Co., 2013 MT 208, ¶ 25,
371 Mont. 147, 305 P.3d 861 (citing Travelers Cas. & Sur. Co. v. Ribi Immunochem
Research, Inc., 2005 MT 50, ¶ 17, 326 Mont. 174, 108 P.3d 469). This general principle
includes the determination of whether an insurer has breached a provision of the
insurance contract. Under contract law, “a breach of contract is a failure, without legal
excuse, to perform any promise that forms the whole or part of a contract.” Richard A.
12
Lord, Williston on Contracts vol. 23, § 63:1 at 434 (4th ed., West Group 2002). Hence,
the contractual duty to indemnify is breached when an “insurer has wrongfully refused to
provide coverage to an insured.” Yovish v. United Servs. Aut. Assn., 243 Mont. 284, 291,
794 P.2d 682, 686 (1990) overruled on other grounds in Mt. West Farm Bureau Mut. Ins.
Co. v. Brewer, 2003 MT 98, ¶ 20, 315 Mont. 231, 69 P.3d 652; accord Davis v. Criterion
Ins. Co., 754 P.2d 1331, 1332 (Alaska 1988). An insurer thus breaches the duty to
indemnify by failing to provide coverage when (1) the established facts trigger coverage
under the terms of the policy, and (2) the extent of the claimant’s damages are undisputed
or clearly exceed policy limits. Cf. Yovish, 243 Mont. at 286-88, 794 P.2d at 684-85
(USAA breached duty to indemnify because it denied coverage based on non-renewal
even though clear terms of policy, and Montana law, required insurer to provide adequate
notice of cancelation or non-renewal of coverage, and the property damage to insured’s
car and other car was undisputed); Brewer, ¶ 36 (insurer breached duty to indemnify
when it incorrectly interpreted policy to exclude newly acquired car from coverage)
(factual history in Christensen v. Mt. West Farm Bureau Mut. Ins. Co., 2000 MT 378,
303 Mont. 493, 22 P.3d 624). “Established facts” in this context are facts that are either
undisputed or are initially disputed but subsequently determined by the fact finder. When
facts necessary to determine the existence of coverage are contested in an underlying
action, the insurer cannot be said to have yet breached the duty to indemnify. See Skinner
v. Allstate Ins. Co., 2005 MT 323, ¶¶ 18-19, 329 Mont. 511, 127 P.3d 359 (court could
not issue order determining duty to indemnify because issues of personal liability of the
13
insured were yet to be determined in an underlying case); Northfield Ins. Co. v. Mont.
Assn. of Cos., 2000 MT 256, ¶ 17, 301 Mont. 472, 10 P.3d 813 (court could not
determine secondary insurer’s duty to indemnify because underlying litigation had not
determined insured’s liability and primary insurer’s coverage cannot be said to have been
exceeded).
¶28 Here, Freyers asserted derivative claims for damages sustained by Alicia arising
from her father’s death caused by Vail’s negligent driving, and argued for coverage under
State Farm’s policy. State Farm did not challenge Frank’s assertion that the value of
Alicia’s derivative claims exceeded the $50,000 Each Person limits of the policy. This
Court held that State Farm incorrectly interpreted its policy by applying a single Each
Person coverage limit and refusing further payment for Alicia’s claims. Freyer I,
¶¶ 13-16. Consequently, State Farm breached its duty to indemnify Vail to the proper
limits of its policy against Alicia’s derivative claims, and it breached the insurance
contract by so doing.
¶29 A breach of contract cannot be ameliorated by the reasonableness of the breaching
party’s actions. The District Court thus erred by permitting State Farm to raise a
“reasonable basis in law” defense to Frank’s and Vail’s breach of contract claims. See
Kerry B. Harvey & Thomas A. Wiseman III, First Party Bad Faith: Common Law
Remedies and a Proposed Legislative Solution, 72 Ky. L.J. 141, 163 (1983-84)
(“Contract law, being amoral, does not inquire into the defendant’s state of mind at the
time of the breach.”). We thus turn to the measure of damages for State Farm’s breach.
14
¶30 Frank and Vail entered a stipulated judgment against Vail for $2.7 million.1 Vail
argues that this is the measure of damages and offers that this Court and Montana’s
Federal District Court have “repeatedly held that an insurer who breaches the contract is
liable for all damages flowing from that breach, including judgments against the insured,”
citing Indep. Milk & Cream Co. v. Aetna Life Ins. Co., 68 Mont. 152, 156-57, 216 P.
1109, 1110 (1923); Staples, ¶¶ 20, 24, 27, 31; Lee v. USAA Cas. Ins. Co., 2004 MT 54,
¶¶ 19-21, 320 Mont. 174, 86 P.3d 562; Grindheim, 908 F. Supp. at 797, 808; Nielsen v.
TIG Ins. Co., 442 F. Supp. 2d 972, 975-76 (D. Mont. 2006). However, as State Farm
correctly notes, all of these cases cited by Vail involve breaches of the duty to defend, not
the duty to indemnify, and “this Court has never approved a confessed judgment as the
proper measure of damages where the insurer defended its insured.”
¶31 We start with the principle that an insurer’s wrongful refusal to indemnify entitles
its insured to recover consequential damages. See Mont. Petroleum Tank Release Comp.
Bd. v. Crumleys, 2008 MT 2, ¶ 64, 341 Mont. 33, 174 P.3d 948; Safeco Ins. Co. v.
Munroe, 165 Mont. 185, 192, 527 P.2d 64, 68 (1974) (holding that insured was entitled to
consequential damages). “Consequential damages are those damages ‘within the
contemplation of the parties when they entered into the contract, and such as might
1
In entering the stipulated judgment, Vail was represented by her counsel who was provided by
State Farm, pursuant to the automobile liability policy.
15
naturally be expected to result from its violation.’” Crumleys, ¶ 64 (quoting Martel
Const., Inc. v. State, 249 Mont. 507, 511, 817 P.2d 677, 679 (1991)).2
¶32 The Colorado Supreme Court addressed a strikingly similar case in Old Republic
Ins. Co. v. Ross, 180 P.3d 427 (Colo. 2008) (en banc). Surviving spouses and children
(the Rosses) of two passengers who died in a plane crash sued the airline company for
their wrongful deaths. Old Republic, 180 P.3d at 428. The airline company was insured
by Old Republic under an aviation policy and a commercial general liability policy. Old
Republic, 180 P.3d at 429. At the outset of litigation, Old Republic tendered $200,000 to
the Rosses, which it believed was the maximum coverage available under the aviation
policy. Old Republic, 180 P.3d at 429. Old Republic disputed coverage under the
commercial general liability policy, which had a policy limit of $1 million, and therefore,
rejected the Rosses’ settlement demand of $800,000. Old Republic, 180 P.3d at 429. Old
Republic filed an action in federal court seeking a declaration that its policy interpretation
was correct and that its contractual obligation to the Rosses had been fulfilled by the
$200,000 payment. Old Republic, 180 P.3d at 429. While the declaratory action was
pending, the Rosses entered a settlement with the airline company wherein the airline
company confessed judgment in the amount of $4 million, plus prejudgment interest of
$1.3 million, for a total stipulated settlement of $5.3 million. Rosses agreed not to
execute upon the airline company. Old Republic, 180 P.3d at 429.
2
This definition of consequential damages is taken directly from § 27-1-311, MCA, which
permits the recovery of both proximate and consequential damages for breach of contract. See
Crumleys, ¶ 64.
16
¶33 In the declaratory action, Old Republic contended that coverage under the aviation
policy was limited to $100,000 for each passenger, or $200,000 total for the two
passengers, and did not provide additional coverage for the derivative claims of mental
anguish brought by deceased passengers’ family members. Old Republic Ins. Co. v.
Durango Air Service, Inc., 283 F.3d 1222, 1226-27 (10th Cir. 2002) (hereinafter Old
Republic Declaratory Action). The Tenth Circuit for the United States Court of Appeals
ultimately concluded that the aviation policy provided $700,000 in coverage for the plane
crash, and construed an ambiguity in the commercial general liability policy in favor of
additional coverage for the airline company. Old Republic Declaratory Action, 283 F.3d
at 1227-28, 1230. Thus, the Tenth Circuit concluded that the two policies provided $1.7
million in coverage. Old Republic Declaratory Action, 283 F.3d at 1231.3
¶34 Consequently, there were now two judgments: the state court stipulated judgment
against the airline company for $5.3 million, and the federal judgment declaring coverage
limits of $1.7 million under the policies. Old Republic, 180 P.3d at 429. Old Republic
paid $1.7 million to satisfy the declaratory judgment of policy limits, but refused to pay
any further amount toward the stipulated judgment. Old Republic, 180 P.3d at 429.
3
The insurer was incorrect about its interpretation of the policy because the policy specifically
distinguished between claims brought by passengers and claims brought by others. Old Republic
Declaratory Action, 283 F.3d at 1227. Hence, the court held that the 10 family members of the
passengers could bring individual claims for “mental anguish.” Old Republic Declaratory
Action, 283 F.3d at 1227. However, a Colorado statute limited recovery of noneconomic
damages in a wrongful death action to $250,000. Old Republic Declaratory Action, 283 F.3d at
1228. The policy therefore provided $200,000 ($100,000 x 2) for the bodily injury of the
deceased passengers and $500,000 ($250,000 x 2) for the “mental anguish” suffered by the
passengers’ family members. Old Republic Declaratory Action, 283 F.3d at 1228.
17
Similar to the case before us, the Rosses asked the Colorado Supreme Court to enforce
the stipulated judgment with the airline company as the proper measure of damages for
Old Republic’s incorrect interpretation of both its policies. Old Republic, 180 P.3d at
428. In rejecting the Rosses’ request, the court surveyed the jurisdictions that had
addressed the enforcement of pretrial stipulated judgments:
We find no jurisdiction that would enforce a pretrial stipulated judgment
against an insurer who was not a party to the underlying settlement
agreement unless the insurer acted in bad faith, denied coverage, or refused
to defend the claim on behalf of the insured. We therefore decline to
extend [Colorado law] to encompass a settlement agreement entered under
these circumstances.
The majority rule in states that have considered this issue is that a pretrial
stipulated judgment may be enforceable against the defendant’s liability
insurer if the insurer breaches its contractual obligation to defend the
insured. Under the majority view, when an insurer improperly abandons its
insured, the insured is justified in taking steps to limit his or her personal
liability.
. . .
A number of states have adopted a modification of the majority rule,
demonstrating a willingness to enforce pretrial stipulated judgments under
various enumerated circumstances. . . . In sum, many states broaden the
circumstances under which a stipulated judgment may be enforceable, but
none of these states has enforced a pretrial stipulated judgment against an
insurer where the insurer has conceded coverage and defended its insured,
and where there has been no finding of bad faith against the insurer.
. . .
We conclude that under the facts of this case, where the insurer has
conceded coverage and defended its insured, and where there has been no
finding of bad faith against the insurer, a stipulated judgment entered before
trial, to which the insurer is not a party, cannot be enforced against the
insurer.
Old Republic, 180 P.3d 432-34 (emphasis added; internal citations omitted).
18
¶35 The California Supreme Court has likewise disapproved of stipulated judgments as
a measure of an insured’s damages when the insurer has provided a defense for the
insured. In Hamilton v. Maryland Cas. Co., 41 P.3d 128, 131 (Cal. 2002), the insurer
defended its insureds but refused the claimants’ demand for the $1 million policy limits,
instead countering with a $150,000 offer to settle. The insureds and claimants
subsequently entered into a stipulated judgment of $3 million; the insureds assigned any
breach of contract claims they might have against the insurer, and, in return, the
claimants agreed not to execute the $3 million judgment against the insureds. Hamilton,
41 P.3d at 131. The claimants then sued the insurer for breach of contract arising from its
failure to accept the claimants’ settlement offers, asserting that the $3 million stipulated
judgment was the appropriate measure of damages for the breach. Hamilton, 41 P.3d at
131-32. The California Supreme Court disagreed, holding:
Where, as here, the insured, without the insurer’s agreement, stipulates to a
judgment against it in excess of both the policy limits and the previously
rejected settlement offer, and the stipulated judgment is coupled with a
covenant not to execute, the agreed judgment cannot fairly be attributed to
the insurer’s conduct, even if the insurer’s refusal to settle within the policy
limits was unreasonable.
Hamilton, 41 P.3d at 137. Importantly, the Hamilton Court distinguished cases where the
insurer had failed to defend from cases where the insurer did defend, and reasoned that a
stipulated judgment was presumptively enforceable as the measure of damages only in
the former instance, because the non-defending insurer has left its insured on its own to
challenge liability, and the insurer should not be able to “reach back” and interject itself
into a controversy it has sidestepped to “void a deal the insured has entered to eliminate
19
personal liability.” Hamilton, 41 P.3d at 135 (citation and quotation marks omitted).
Conversely, however, when “the insurer has accepted defense of the claim, and might
have prevailed at trial had the insured and the claimants not settled without the insurer’s
participation, no presumption of the insured’s liability generally arises from the fact or
amount of settlement.” Hamilton, 41 P.3d at 135 (emphasis in original).
¶36 These cases are representative of what occurred in the case before us, and we find
their reasoning persuasive. When an insurer defends the insured against a claim, and
challenges coverage in a separate declaratory action, a stipulated settlement that relieves
the insured of any financial stake in the outcome of the case does not represent the
damages “within the contemplation of the parties when they entered into the [insurance]
contract, and such as might naturally be expected to result from its violation.” Crumleys,
¶ 64 (internal quotation omitted). The insured has little incentive to minimize the
settlement amount in negotiating a stipulated judgment. Nor is there any assurance that a
stipulated judgment represents a proper calculation of the actual damages incurred by
way of the breach. These concerns are clearly evident in the case before us. First, under
the settlement, Vail has escaped all risk by simply assigning her insurance dispute with
State Farm to Frank. The size of the judgment was essentially irrelevant to her. Then,
the stipulated judgment does not, by its own terms, represent the correct measure of
damages for the denial of Alicia’s claims—the only denial forming State Farm’s breach.
As explained above, the settlement agreement provides that $1.7 million of the $2.7
million total represents the economic loss to Heath’s Estate. Yet, State Farm did not err
20
in any way in adjusting and settling the claims made by Heath’s Estate. State Farm
tendered the full $50,000 Each Person coverage limit to Heath’s Estate and did not
breach its duty to indemnify Vail for Heath’s claims. Thus, the bulk of the face amount
of the stipulated judgment does not represent any measure of damages resulting from
State Farm’s breach of its duty to indemnify Vail for Alicia’s claims. Alicia would not
be entitled to the $1.7 million in damages Heath’s Estate suffered even had the case
proceeded to trial. The economic loss the decedent’s estate suffers, as measured by the
“present value of [the decedent’s] reasonable earnings during his life expectancy,” is
“personal to the decedent” and does not “include any damages suffered by the decedent’s
widow, children, or other heirs.” Swanson v. Champion Intl. Corp., 197 Mont. 509, 515,
646 P.2d 1166, 1169 (1982) (emphasis added; citations omitted). Alicia’s claims, on the
other hand, were to compensate her personal loss of her father—loss of support, loss of
companionship, loss of established course of life, etc. These wrongful-death claims are
measured, not by the economic loss to the decedent’s estate, but, rather, the emotional,
physical, and monetary support the decedent would have provided the heir. Swanson,
197 Mont. at 517-18, 646 P.2d at 1170-71.
¶37 The rule articulated by these jurisdictions is even more appropriate for Montana,
given that State Farm pursued the action we have repeatedly admonished insurers to take
if there is a coverage question—defend the insured and file a declaratory judgment action
to discern coverage. See e.g. Palmer by Diacon v. Farmers Ins. Exch., 261 Mont. 91,
102-03, 861 P.2d 895, 902 (1993); see also St. Paul Fire & Marine Ins. Co. v. Cumiskey,
21
204 Mont. 350, 358, 665 P.2d 223, 227 (1983) (“an insurer may use this procedural
device in order to obtain a determination of the validity, continuance, or coverage of an
insurance policy; a determination of the extent of liability; or a determination of the
insurer’s duties under the policy.”) (emphasis added); Staples, ¶ 28 (“If FUMIC wished
to dispute coverage, it could have defended Staples under a reservation of rights and later
sought judicial determination through a declaratory judgment action to determine whether
coverage existed.”); Brewer, ¶ 30; see also Nielsen, 442 F. Supp. 2d at 977. This practice
is also urged by leading commentators. See Appleman, Insurance Law & Practice vol.
20, § 11354 at 332-33 (West Publg. 1980) (“The insurer thus has a right to test [through a
declaratory judgment action] its liability to pay judgments which may be recovered
against the insured, or to test its liability for penalties and interest.”) (collecting cases);
Allan D. Windt, Insurance Claims & Disputes: Representation of Insurance Companies
& Insureds vol. 2, § 8.3 at 8-5 to 8-6 (6th ed., Thomson Reuters 2013) (noting it is
appropriate for insurer to institute declaratory action after insured suffers loss so insurer
can “determine whether the company is obligated to pay all or any part of the judgment
or loss.”); Couch on Insurance vol. 16, § 232:47 (Lee R. Russ & Thomas F. Segalla, eds.,
3d ed., Thomson/West 2005) (“In essence, where language in the insurance contract is
thought to need clarification in order to determine the legal positions of the parties,
declaratory action is appropriate.”). Lord, Williston on Contracts vol. 11, § 30:2 at 36-37
(West 2012) (“A frequently employed means of demonstrating in an authoritative manner
the intent of the parties to a contract, either for the purpose of establishing rights or the
22
nonexistence of liabilities, is the petition for declaratory judgment. Insurance companies
have often used this procedure in seeking a declaration from the courts that because of
some exclusionary provision or false representation by the insured, they are not liable on
a given policy which they have issued.”).4 The rule also recognizes the distinctions
between the duty to defend and the duty to indemnify. The broader duty to defend
requires an insurer to act immediately to defend the insured from a claim. The insurer
must do so on the basis of mere allegations that could implicate coverage, if proven.
Schwan, ¶ 15. On the other hand, the narrower duty to indemnify typically involves
complicated interpretational questions that often require legal opinions and separate
declaratory actions to determine.
¶38 A rule to the contrary would allow insureds to unilaterally inflate policy limits
anytime an insurer tests coverage through a declaratory action. As State Farm notes,
“[b]asically, Frank’s and Vail’s position is that all an insured has to do is file suit, enter a
confession of judgment, obtain a covenant not to execute, and the insurer becomes liable
for the confessed judgment, regardless of whether the insurer pays limits as asked or has
a reasonable basis in fact or law for disputing the amount of the claim and defending the
underlying action.” Indeed, while Frank was willing to settle all claims against Vail for
$100,000 if State Farm would foot the bill, the demand ballooned to $2.6 million when
Vail’s financial responsibility was removed from the equation.
4
Alicia’s and Heath’s claims did not implicate State Farm’s duty to pay, in advance of final
settlement, actual medical payments and lost wages of a tort victim when “liability is reasonably
clear.” Ridley v. Guar. Natl. Ins. Co., 286 Mont. 325, 327, 951 P.2d 987, 988 (1997) (med pay);
DuBray v. Farmers Ins. Exch., 2001 MT 251, ¶ 15, 307 Mont. 134, 36 P.3d 897 (lost wages).
23
¶39 Vail points to several cases which, when closely analyzed, do not address the issue
here. In Ariz. Prop. & Cas. Ins. Guar. Fund v. Helme, 735 P.2d 451, 460 (Ariz. 1987),
the Arizona Supreme Court held that doctors sued for malpractice did not breach their
duty to cooperate with their insurer’s defense of them by entering a settlement with the
claimants after the insurer breached its duty to indemnify. The insurer erroneously
interpreted the coverage available as limited to a per occurrence limit of $99,900. Helme,
735 P.2d at 454, 457. In a declaratory action, a court determined that there had been two
occurrences. Helme, 735 P.2d at 455. Meanwhile, the doctors settled with the claimants
for $350,000 in exchange for the claimants’ covenant not to execute against the doctors.
Helme, 735 P.2d at 455. The insurer sought a declaration that it was not obligated to pay
the survivors on the second claim—not the total settlement amount of $350,000—
because the doctors had settled without the insurer’s permission. Helme, 735 P.2d at 458.
The Court disagreed, holding that the insurer’s breach of its duty to indemnify under the
policy permitted the insured to take “reasonable steps” to save himself from the financial
disaster of an excess judgment, including settling with the claimants. Helme, 735 P.2d at
460. However, the Court specifically noted that it was not determining whether that
settlement would be binding on the insurer: “The parties have not argued, and this
opinion does not reach, any issue regarding the extent to which the stipulations which
form part of the settlement agreement are binding upon the insurer.” Helme, 735 P.2d at
460. Put another way, the Arizona Court did not hold that the insurer was bound to pay
the stipulated judgment, but rather concluded the insurer was required to pay the
24
appropriate policy limits for two occurrences, even though the insureds had settled
without its permission.
¶40 Vail also cites Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). There, while the
insurer was litigating whether it had coverage, the insured stipulated to a $100,000
judgment—twice the $50,000 limit of the policy—with the claimant in exchange for a
covenant not to execute against him. Miller, 316 N.W.2d at 731-32. After the Court had
determined that coverage existed, the claimant sought to enforce only $50,000 of the
stipulated judgment, which represented the policy limits. The insurer countered that it
owed nothing because the insured had breached the cooperation clause of the policy.
Miller, 316 N.W.2d at 732. The Minnesota Supreme Court, like the Arizona Supreme
Court in Helme, concluded that because the insurer had failed to indemnify its insured,
the insured did not breach his duty to cooperate by entering a settlement to protect his
personal finances:
If, as here, the insureds are offered a settlement that effectively relieves
them of any personal liability, at a time when their insurance coverage is in
doubt, surely it cannot be said that it is not in their best interest to accept
the offer. Nor, do we think, can the insurer who is disputing coverage
compel the insureds to forego a settlement which is in their best interests.
Miller, 316 N.W.2d at 733-34. While the Court ultimately concluded that the stipulated
judgment was enforceable upon the insurer, it was only enforceable up to the policy
limits: “Nor is there anything wrong with the insureds’ confessing judgment in an amount
double the policy limits, since plaintiff, in her motion for summary judgment, has
recognized [the insurer’s] coverage is only $50,000 and seeks to recover no more than
25
that sum from [the insurer].” Miller, 316 N.W.2d at 734. In sum, the Minnesota
Supreme Court never approved binding the insurer to a stipulated judgment in excess of
policy limits.5
¶41 The other cases Vail cites are also unavailing because they are either cases
involving a breach of the duty to defend and the court refused to enforce the stipulated
judgment on the insurer, Great Divide Ins. Co. v. Carpenter ex rel. Reed, 79 P.3d 599
(Alaska 2003) or, like the cases above, hold that the insured did not breach its duty to
cooperate, and therefore is entitled to be indemnified for the settlement up to policy
limits. See Presrite Corp. v. Commercial Union Ins. Co., 680 N.E.2d 216, 217, 220-21
(Ohio App. 8th Dist. 1996) (insurer required to pay settlement the “policy afforded”
because insured did not breach duty to cooperate when it settled lawsuit after insurer
denied coverage thereby exposing insured to entire amount of potential damage award).6
In sum, none of the cases urged by Vail support the holding she asks for today: a
5
Moreover, three years later the Minnesota Supreme Court limited Miller’s holding to situations
where the insurer had denied all coverage under the policy. Buysse v. Baumann-Furrie & Co.,
448 N.W.2d 865, 873-74 (Minn. 1989). There, because the insurer was only arguing over the
extent of coverage to a claim—whether the insured accounting firm was entitled to only the
$500,000 “each error” limit or whether it was entitled to the $1,000,000 “per year” limit—the
insured’s stipulated judgment with the claimants was not binding on the insurer. Buysse, 448
N.W.2d at 875. The Court’s decision was founded on the practical point that, without such a
rule, insureds could unilaterally bind insurers to settlements in every case where coverage was
contested. Buysse, 448 N.W.2d at 872.
6
Amicus MTLA and Vail argue that Peris v. Safeco Ins. Co., 276 Mont. 486, 493-94, 916 P.2d
780, 785 (1996) controls here. However, like the other cases cited, Peris does not stand for the
proposition that an insurer who defends the insured while contesting coverage is bound to a
stipulated judgment if it is later determined the insurer was wrong on the coverage issue.
Instead, like Helme and Miller, Peris merely holds that the insured is permitted, without voiding
the insurance contract via its duty to cooperate with the insurer, to enter settlement.
26
stipulated judgment in excess of policy limits coupled with a covenant not to execute
against the insured is the proper measure of damages when an insurer is defending its
insured but contesting coverage.
¶42 As noted above, an insurer’s wrongful refusal to indemnify entitles its insured to
recover consequential damages. Crumleys, ¶ 64. In Crumleys, we awarded the insured’s
assignee the “administrative costs” incurred when the insurer denied coverage to extract
an underground storage tank and remediate the area for leaking gasoline. Crumleys,
¶¶ 70-71. We reasoned that the property liability policy contemplated management and
oversight costs of pollutant cleanup and that the administrative costs incurred in
coordinating and managing the extraction and remediation were the natural consequence
of the insurer’s failure to step in and begin that cleanup. Crumleys, ¶¶ 70-71. An insurer
is also “liable for attorney fees when the insurer breaches its duty to indemnify.” Brewer,
¶ 36. Other courts have permitted insureds to recover lost profits as consequential
damages from the wrongful denial or delay of coverage. See Lawrence v. Will Darrah &
Assocs., Inc., 516 N.W.2d 43 (Mich. 1994) (permitting insured to recover payment under
an insurance policy for a stolen truck and for lost profits arising from insurer’s breach of
duty to indemnify); Bettius & Sanderson, P.C. v. Natl. Union Fire Ins. Co., 839 F.2d
1009 (4th Cir. 1988) (professional corporation entitled to lost profits based on insurer’s
unjustifiable delay in settling third-party claim); Salamey v. Aetna Cas. & Sur. Co., 741
F.2d 874 (6th Cir. 1984) (convenience-store owner permitted to recover lost profits
resulting from insurer’s wrongful refusal to pay benefits for fire loss); accord Windt,
27
Insurance Claims & Disputes at § 6:39 (collecting cases which have held that the proper
measure of damages arising from insurer’s “breach of a contract to pay money” includes
consequential damages but not listing stipulated judgments as a measure of those
consequential damages). We offer these cases merely as examples of cases employing
the principle that consequential damages are “those damages ‘within the contemplation of
the parties when they entered into the contract, and such as might naturally be expected to
result from its violation.’” Crumleys, ¶ 64 (quoting Martel Constr., 249 Mont. at 511,
817 P.2d at 679).
¶43 The District Court correctly refused to require State Farm to pay the stipulated
judgment. However, we remand to the District Court to determine, in the first instance,
the amount of damages, if any, Vail incurred because of State Farm’s breach of its duty to
indemnify.
¶44 2. Did the District Court err in granting summary judgment to State Farm on the
common-law bad faith and breach of the covenant of good faith and fair dealing claims?
¶45 In his capacity as assignee of Vail’s claims, Frank asserts that State Farm breached
its duty of “good faith and fair dealing” to Vail by refusing to accept the reasonable offer
from Frank to settle Alicia’s claims for $50,000 (first party claim). On behalf of Heath’s
Estate and Alicia, he asserts that State Farm committed bad faith when it failed to settle
for this amount (third party claims). The District Court dismissed these claims on the
ground that State Farm had a reasonable basis in law to contest coverage, which it
reasoned was a complete defense to these causes of action.
28
¶46 In Jessen v. O’Daniel, 210 F. Supp. 317 (D. Mont. 1962), Judge Jameson provided
an early explanation of the origins of an insurer’s duty to settle. Although insurance
policies do not contain explicit contractual provisions requiring an insurer to accept
reasonable settlement offers within the policy limits, a duty of “good faith” consideration
of settlement offers arises by implication from the policy’s delegation to the insurer the
authority to settle third-party claims. Jessen, 210 F. Supp. at 325-26. Judge Jameson
pointed out that an insurer’s “[e]rror in judgment in not settling a case within the policy
limits is not in itself sufficient to impose liability upon the insurer for any recovery in
excess of the limits; nor is the mere fact that the insurer was unsuccessful in the trial of
the case sufficient to show that the defense was not made in good faith.” Jessen, 210
F. Supp. at 325. Rather, whether an insurer acted in “good faith” had to be made on a
case-by-case basis. Jessen, 210 F. Supp. at 326.
¶47 In Fowler v. State Farm Mut. Aut. Ins. Co., this Court adopted the Jessen
formulation of the duty to settle, and rejected the plaintiff’s request to adopt a
strict-liability remedy for an insurer’s failure to settle a third-party claim that had led to
an excess judgment. 153 Mont. 74, 78-80, 454 P.2d 76, 78-79 (1969) (“To the extent that
[ ] Crisci [v. Security Ins. Co. of New Haven, 426 P.2d 173 (Cal. 1967)] is viewed as
abandoning any requirement of proof of bad faith, we would reject it”); accord Thompson
v. State Farm Mut. Aut. Ins. Co., 161 Mont. 207, 215, 505 P.2d 423, 427 (1973)
overruled on other grounds by Watters v. Guar. Natl. Ins. Co., 2000 MT 150, ¶ 63, 300
Mont. 91, 3 P.3d 626. In Gibson v. Western Fire Ins. Co., 210 Mont. 267, 274, 682 P.2d
29
725, 730 (1984), we held “[i]t is now fairly established in American jurisprudence that an
insurer which in bad faith fails to settle a bona fide third party liability claim against its
insured, within policy coverage limits, takes the risk of a judgment by the trier of fact in
excess of the coverage limits.” (Emphasis added.) We subsequently addressed the bad
faith issue and held that an insurer does not act in bad faith in rejecting a settlement if it
had a reasonable basis in law or fact to contest the claim or the amount of the claim.
Safeco Ins. Co. v. Ellinghouse, 223 Mont. 239, 248, 725 P.2d 217, 223 (1986) (“It is
generally held that an insurer is entitled to challenge a claim on the basis of debatable law
or facts and will not be liable for the bad faith or punitive damages for denying coverage
if its position is not wholly unreasonable.”); Palmer by Diacon, 261 Mont. at 102, 861
P.2d at 901 (“Under Montana common law, an insurer cannot be held liable for bad faith
in denying a claim if the insurer had a reasonable basis for contesting the claim or the
amount of the claim.”); White v. State ex rel. Mont. St. Fund, 2013 MT 187, ¶ 24, 371
Mont. 1, 305 P.3d 795 (same) (quoting Palmer by Diacon). We have never held an
insurer liable in bad faith for failing to settle within policy limits when it had a reasonable
basis in law or fact for contesting coverage. Although Freyers request that we deviate
from our well-settled precedent on this issue, we decline.
¶48 “To determine whether an insurer had ‘a reasonable basis in law . . . for contesting
the claim or the amount of the claim,’ it is necessary first to survey the legal landscape as
it existed during the relevant time period.” Redies v. Attys. Liab. Protec. Socy., 2007 MT
9, ¶ 29, 335 Mont. 233, 150 P.3d 930 (quoting § 33-18-242(5), MCA). In Redies, ¶¶ 30-
30
35, we reconciled our previous cases analyzing whether reasonableness is a question of
fact for the jury or a question of law for the court. We concluded that although the
determination of whether a party acted reasonably was typically a question of fact for the
jury, whether an insurer was reasonable in its interpretation of legal precedent in its
coverage determination was a question of law for the court:
[W]e now clarify that while the assessment of reasonableness generally is
within the province of the jury (or the court acting as fact-finder),
reasonableness is a question of law for the court to determine when it
depends entirely on interpreting relevant legal precedents and evaluating
the insurer’s proffered defense under those precedents. This distinction not
only reflects the principle that the jury does not decide or determine the
law, but also honors the relevant language of the [UTPA’s reasonable basis
in law defense].
Redies, ¶ 35 (emphasis added; citations omitted). Then, the court must assess the
insurer’s proffered defense in light of that legal landscape. The reviewing court is not to
ask whether it “agree[s] with the plaintiff’s theories of liability in the underlying suit but,
rather, whether the insurer’s grounds for contesting those theories were reasonable under
the existing law.” Redies, ¶ 38. In the absence of caselaw on point, “the determinative
question” is whether the law in effect at the time, caselaw or statutory, provided sufficient
guidance to signal to a reasonable insurer that its grounds for denying the claim were not
meritorious. See Redies, ¶ 43 (“Accordingly, the determinative question is whether this
progression in our case law toward holding an attorney liable to certain nonclients had,
by the time [the plaintiff] stated her claims against [her lawyer], reached the point at
which [the insurer’s] assertion that [it] owed her no duty no longer constituted ‘a
reasonable basis in law’ for contesting her claim.”).
31
¶49 State Farm contested coverage for Alicia’s derivative claims because it believed
the “Each Person” limit in the policy unambiguously limited coverage to $50,000 for all
claims related to Heath’s death. Freyer I, ¶¶ 4, 7. State Farm asked its in-house counsel,
Ridgeway, for an opinion about whether the policy covered Alicia’s derivative claims.
Ridgeway advised that courts interpreting the clause had concluded that derivative claims
were subject to the same each person limit as the survivorship claim. See McKinney v.
Allstate Ins. Co., 722 N.E.2d 1125 (Ill. 1999) (“per person” limit of liability clause
“clearly limited” all claims arising out of the decedent’s death to a single per person
limit); Geico Gen. Ins. Co. v. Arnold, 730 So. 2d 782 (Fla. Dist. App. 3d Dist. 1999)
(“each person” limit of liability clause not ambiguous and limited wrongful death and
survival claims); Cradoct v. Employers Cas. Co., 733 S.W.2d 301 (Tex. App. El Paso
1987) (“per person” limitation applied to person injured in accident, not other persons
suffering loss because of that injury). Thus, State Farm took the position that, once it
paid the $50,000 Each Person limit to Heath’s Estate, it had fulfilled its contractual
obligation under the policy for claims related to his death. Freyer I, ¶ 11.
¶50 The state of Montana precedent, discussed below, and this “legal landscape”
across numerous jurisdictions certainly gave credence to State Farm’s decision to contest
coverage for Alicia’s derivative claims. However, that did not end the inquiry, as State
Farm was also required to analyze the claim in light of the specific language of the Limit
of Liability clause in Vail’s policy, which read:
32
The amount of bodily injury liability coverage is shown on the declarations
page under “Limits of Liability–Coverage A-Bodily Injury [-W-], Each
Person, Each Accident.” Under “Each Person” is the amount of coverage
for all damages due to bodily injury to one person. “Bodily injury to one
person” includes all injury and damages to other persons, including
emotional distress, sustained by such other persons who do not sustain
bodily injury.
(Emphasis added.) State Farm’s position was that the first emphasized sentence limited
the amount of coverage for any and all claims arising from the bodily injury to one
person to the $50,000 “Each Person” limit. Therefore, because Alicia’s derivative claims
stemmed from her father’s death, and not her own bodily injury, those claims were
subject to the same $50,000 limit as Heath’s Estate’s claims. As to the second sentence,
State Farm read it as clarifying that emotional distress claims were likewise subject to the
same $50,000 “Each Person” limit.
¶51 Montana precedent that came closest to addressing this issue was Bain v. Gleason,
223 Mont. 442, 726 P.2d 1153 (1986) and Treichel v. State Farm Mut. Auto. Ins. Co., 280
Mont. 443, 930 P.2d 661 (1997). In Bain, the plaintiff’s wife was injured by a negligent
driver who was insured under a $25,000 per person and $50,000 per accident policy.
Bain, 223 Mont. at 444, 726 P.2d at 1154. The insurer paid the $25,000 per person limit,
arguing that it constituted the “full extent of and the limit” of coverage under its policy.
Bain, 223 Mont. at 445, 726 P.2d at 1154. The policy limited the insurer’s liability
applicable to “each person” to $25,000 “for all damages arising out of bodily injury
sustained by one person in any one occurrence.” Bain, 223 Mont. at 447, 726 P.2d at
1156. Plaintiff-husband brought a loss of consortium cause of action seeking to recover
33
the additional $25,000 under the per accident limit. We rejected the plaintiff’s claim
because it was “plain under our statutes, and under the policy provisions here that the
‘each person’ limitation refers to all damages imposed by law by whomever suffered
resulting from one bodily injury and one accident; the ‘each accident’ limitation applies
when two or more persons suffer bodily injury in the same accident.” Bain, 223 Mont. at
451, 726 P.2d at 1158. Bain did not specifically answer the question in Freyer I because
there was only one person injured in the accident. However, its holding, especially when
coupled with our analysis of the statutory minimum mandatory limits, suggested that the
“Each Person” policy language restricting coverage to $25,000 “for all damages arising
out of bodily injury sustained by one person in any one occurrence” meant that no matter
how many others were injured in the accident, they could not use their own bodily injury
to obtain additional “Each Person” coverage for derivative damages stemming from
another’s bodily injury.
¶52 In Treichel, we analyzed another automobile liability policy that limited coverage
to $25,000 per person and $50,000 per accident. Treichel, 280 Mont. at 445, 930 P.2d at
663. The operative provision read: “Under ‘Each person’ is the amount of coverage for
all damages due to bodily injury to one person.” Treichel, 280 Mont. at 445, 930 P.2d at
663. The plaintiff was riding her bicycle some distance behind her husband when she
witnessed a motorist, insured with the above-described policy, strike her husband and
throw him into the air; she also saw the “severe head wound [the husband] received when
his head hit the vehicle’s windshield before he fell to the pavement.” Treichel, 280 Mont.
34
at 444-45, 930 P.2d at 662. The insurer, State Farm, paid the husband’s estate the
$25,000 per person coverage, but denied paying the plaintiff the remaining $25,000
because her claim was similar to the claim for loss of consortium presented in Bain.
Treichel, 280 Mont. at 448, 930 P.2d at 664. We disagreed with State Farm,
distinguishing Bain because the loss of consortium claims pursued by the husband there
were materially different from the “on the scene, direct physical and emotional impact”
the wife suffered in personally watching her husband’s grisly death in Treichel:
As the District Court pointed out in the case before us “it is this personal,
on the scene, direct physical and emotional impact which distinguishes
emotional distress claims under Sacco from loss of consortium claims.”
[The plaintiff] was a separate person who received an independent and
direct injury at the accident scene.
Treichel, 280 Mont. at 449, 930 P.2d at 665. Treichel’s holding suggested that, unlike
derivative claims that were not considered “bodily injury” under Bain, emotional distress
claims would be considered stand-alone bodily injury claims because they stemmed from
the personal trauma experienced by an on-the-scene witnessing of bodily injury to
another. State Farm then decided that the “Each Person” policy provisions of the kind at
issue in Bain and Treichel needed to be revised. State Farm thereafter modified the
language of its “Each Person” limit by adding the sentence at issue in Freyer I: “Bodily
injury to one person includes all injury and damages to other persons, including
emotional distress, sustained by such other persons who do not sustain bodily injury.”7
7
The record contains communications between State Farm and the State Auditor’s Office. State
Farm advised the Auditor’s Office that it was amending its policy “in response to the court case
of Treichel vs. State Farm.”
35
Consequently, the “legal landscape” for State Farm’s interpretation of the policy
language as applied to derivative claims was even more favorable than the landscape that
was sufficient to shield the insurer in Redies. There, despite noting a “progression in our
case law” away from the insurer’s coverage position, Redies, ¶ 43, we nonetheless agreed
with the insurer that at the time of the coverage decision, the law was not reasonably
clear. Redies, ¶ 57. Here, although Bain did not involve a situation where two people
suffered bodily injury, it appeared to hold that derivative claims were subject to the
“Each Person” limit of the deceased person. Treichel appeared to nuance Bain by
holding that emotional distress claims arising from on-the-scene traumatic experiences
would also constitute a bodily injury of the observing person. Then, State Farm took
action in response to Treichel by supplementing the language of the Limit of Liability
clause—which, according to Bain, already provided that derivative claims were subject to
the deceased person’s “Each Person” limit—with an additional sentence that specified
that emotional distress claims were likewise subject to the “Each Person” limits of the
deceased person. While this drafting fix failed to accomplish its intended purpose in
Freyer I, ¶¶ 12-14 (interpreting by negative inference the clause’s specific mention of
“people who do not sustain bodily injury” to mean that derivative claims of those who
36
did suffer bodily injury were not subject to “Each Person” limits of the deceased person),
its interpretation, while ultimately wrong, was clearly not unreasonable.8
¶53 Because under “Montana common law, an insurer cannot be held liable for bad
faith in denying a claim if the insurer had a reasonable basis for contesting the claim,”
State Farm did not breach the covenant of good faith and fair dealing with Vail, nor
commit bad faith by failing to settle with Frank. Ellinghouse, 223 Mont. at 248, 725 P.2d
at 223; Palmer by Diacon, 261 Mont. at 102, 861 P.2d at 901-02; White, ¶ 24. The
District Court properly granted State Farm summary judgment on these claims.9
8
The reasonableness of State Farm’s position is further evidenced by the fact that Montana’s
federal district court had agreed with it. Prior to Freyer I, Hon. Richard Cebull held that even in
a case involving bodily injury to two passengers, the “Limits of Liability” clause prohibited an
injured person from recovering derivative claims under their own “Each Person” policy limits.
See Bowen I. There, like here, two people suffered bodily injury in an accident. A wife suffered
“abrasions to her face, a broken right arm, glass imbedded in her forehead, chest contusions, and
post-traumatic stress disorder.” The husband died from his injuries. Bowen I at 1. The vehicle
was insured for policy limits of $100,000 for “Each Person” and $300,000 for “Each Accident.”
After State Farm paid policy limits to the husband’s estate, the wife sought derivative damages
for her husband’s death. Bowen I at 1-2. State Farm filed a declaratory judgment action,
“seeking a judicial determination of whether the ‘Each Person’ limit contained in the Bowens’
policies applies when there are survival and wrongful death claims arising out of the injury and
death of a single insured.” Bowen I at 2. Judge Cebull analyzed Bain and Treichel and
concluded that the key question was “whether wrongful death and survival claims are more like
the loss of consortium claims encountered in Bain or the emotional distress claims in Treichel.”
Bowen I at 5. Judge Cebull concluded that they were more akin to Bain because of the
fundamental difference between emotional distress claims and wrongful death/survival claims.
Bowen I at 8, aff’d, 247 Fed. Appx. 901 (9th Cir. 2007).
9
Vail briefly argues that pursuant to our decision in Freyer I, the law-of-the-case doctrine and
collateral estoppel prevent State Farm from arguing it had a reasonable basis in law to challenge
coverage. To the extent Vail is arguing that because Freyer I turned on the Court’s interpretation
of policy language, instead of case law, her argument is unavailing because the “interpretation of
an insurance contract presents a question of law.” Modroo, ¶ 23. Collateral estoppel is likewise
inapplicable because Freyer I did not decide that State Farm’s interpretation was unreasonable.
Thus, State Farm is not reopening an issue already decided by this Court. See Baltrusch v.
Baltrusch, 2006 MT 51, ¶ 15, 331 Mont. 281, 130 P.3d 1267.
37
¶54 The Dissent would reverse and remand for trial on the basis of Shilhanek v. D-2
Trucking, Inc., 2003 MT 122, 315 Mont. 519, 70 P.3d 721, citing an insurer’s obligation
to attempt to settle within policy limits when “liability is reasonably clear,” and the
possibility that a “reasonable jury could conclude . . . State Farm breached its obligation
to attempt settlement within policy limits, thus placing the insured in jeopardy.” Dissent,
¶ 68. However, this case is not a Shilhanek situation, because Shilhanek did not involve a
coverage issue. Without coverage, a duty to settle does not arise, even if the facts of the
accident indicate that the insured’s liability, i.e., her negligence, is reasonably clear.
See Mowry v. Badger St. Mut. Cas. Co., 385 N.W.2d 171, 178 (Wis. 1986) (the insurer’s
“duty to settle is dependent upon whether the policy extends coverage for the
circumstances underlying the harm sustained.”). Here, State Farm contested, not whether
Vail’s liability for the accident was reasonably clear, but whether there was coverage at
all for the claim. The Dissent notes there was no question about Vail’s liability for the
accident. Had there had been no coverage issues, and State Farm had still refused to
budge from its $5,000 offer, Shilhanek would have been implicated and this would be a
different case.
¶55 The Dissent cites Dean v. Austin Mut. Ins. Co., 263 Mont. 386, 869 P.2d 256
(1994), for the proposition that reasonableness is a jury question. See Dissent, ¶ 71.
Oddly, the Dissent does not discuss Redies, in which we expressly concluded that the
general rule stated in Dean did not apply when the insurer raises a “reasonable basis in
law” defense because questions of law are resolved by the courts, reflecting “the principle
38
that the jury does not decide or determine the law.” Redies, ¶ 35; see also White, ¶ 24.
While the issue did go to the jury in Palmer by Diacon, coverage there was denied
because of factual disputes about the underlying accident that required resolution by the
trier of fact. Palmer by Diacon, 261 Mont. at 102, 861 P.2d at 902 (“In this case,
Farmers contested liability, contending that Palmer’s accident was not caused by another
motorist, and therefore, Palmer’s uninsured motorist policy did not cover the accident.”).
Ellinghouse is likewise consistent with our analysis. There, we held it was error for
Ellinghouse to introduce evidence and argue to the jury on the question of whether the
insurer had a reasonable basis in law defense, but concluded the error was harmless in
light of other circumstances. Ellinghouse, 223 Mont. at 251, 725 P.2d at 224-25. None
of our cases declare this issue of law to be a jury question, and Redies clearly resolved
any doubt on the issue. Factual disputes affecting coverage are certainly decided by the
trier of fact, and this opinion does not change that. Here, there were no such disputes of
material fact.10
10
Of note, the Dissent relies heavily on the fact that State Farm revised its policy language after
this claim was made to urge reversal. See Dissent, ¶¶ 67, 69. However, there is no indication in
the record that State Farm’s subsequent language revision, which was applicable prospectively to
future claims, was done as a result of this claim. Courts must be cautious about permitting
evidence of post-claim actions to assess the reasonableness of claim decisions when no relation
to the claim has been demonstrated. To do otherwise would prompt speculation and raise
questions of relevance and prejudice. The question turns on an analysis of “the legal landscape
as it existed during the relevant time period.” Redies, ¶ 29. In any event, State Farm’s
post-claim actions here did not change the clear authority that existed in favor of State Farm’s
interpretation of its policy at the time of the claim, and do not raise a material fact prohibiting
summary judgment on this issue.
39
¶56 3. Did the District Court err in granting summary judgment to State Farm on the
Unfair Trade Practices Act claims?
¶57 Frank argues that the District Court erred by dismissing the UTPA claims because
the “reasonable basis in law” defense does not apply to the particular provision of the
UTPA he is claiming State Farm violated—§ 33-18-201(1), MCA. State Farm responds
that the defense does apply to that provision of the UTPA, and the District Court
correctly dismissed the claims.
¶58 Montana’s Unfair Trade Practices Act prohibits insurers from practicing certain
claims-settlement practices. Subsection (1) of § 33-18-201, MCA, makes it illegal for an
insurer to “misrepresent . . . insurance policy provisions relating to coverages at issue[.]”
“An insured or a third-party claimant has an independent cause of action against an
insurer for actual damages” if the insurer violates subsection (1) and “misrepresents” the
insurance policy. See § 33-18-242(1), MCA. However, an “insurer may not be held
liable under this section if the insurer had a reasonable basis in law or in fact for
contesting the claim or the amount of the claim, whichever is in issue.” Section 33-18-
242(5), MCA; Lorang, ¶ 116 (“Before analyzing these claims, we note that our statutory
law provides the insurer with an affirmative defense whereby it may avoid liability in a
UTPA action if it ‘had a reasonable basis in law or in fact for contesting the claim or the
amount of the claim, whichever is in issue.’”) (citing Redies, ¶ 28, and quoting § 33-18-
242(5), MCA).
40
¶59 Based on the plain language of § 33-18-242(5), MCA, State Farm cannot be held
liable for violating the UTPA if it had a “reasonable basis in law” for contesting the
claim. As noted above, we conclude that State Farm indeed had a reasonable basis in law
to interpret its Limit of Liability clause in the manner it did. Therefore, the District Court
did not err in granting summary judgment to State Farm on Frank’s and Vail’s UTPA
claims.
¶60 4. Did the District Court err by concluding State Farm waived its statute of
limitations affirmative defenses?
¶61 On cross appeal, State Farm challenges the District Court’s ruling that it waived
the limitation defense. Citing M. R. Civ. P. 8(c), the District Court rejected State Farm’s
statute of limitations defense because State Farm failed to raise that affirmative defense
in its answer to Frank’s and Vail’s 2008 counterclaims to State Farm’s coverage action.
State Farm asserts error, arguing that Frank’s and Vail’s 2011 amended counterclaims
“superseded any previously filed counterclaims” which permitted State Farm to raise the
statute of limitations defense anew.
¶62 We decline to reach this issue. In the District Court and on appeal, State Farm
asserted the statute of limitations defenses for common-law bad faith, covenant of good
faith and fair dealing, and the UTPA claims, but did not assert the defense for the breach
of contract claim. Because we have held in State Farm’s favor on the claims for which
State Farm asserted the defense, we need not address the issue. See Caldwell v. Sabo,
41
2013 MT 240, ¶ 5, 371 Mont. 328, 308 P.3d 81 (declining to address second issue
because first issue was dispositive).
¶63 Affirmed in part, reversed in part, and remanded for further proceedings consistent
therewith.
/S/ JIM RICE
We concur:
/S/ MIKE McGRATH
/S/ BETH BAKER
/S/ LAURIE McKINNON
/S/ BRIAN MORRIS
Justice Patricia O. Cotter concurs and dissents.
¶64 I concur with the Court’s disposition of Issue One. I would reverse and remand Issues
Two and Three for trial.
¶65 Issue Two presents the question of whether the District Court erred in granting summary
judgment to State Farm on the common-law bad faith and breach of the covenant of good faith
and fair dealing claims presented by Frank. Frank asserts two claims. In his first-party claim, in
which he stands in the shoes of Vail pursuant to assignment, Frank argues that State Farm
breached its duty of good faith and fair dealing to Vail, by refusing to accept Frank’s reasonable
demand to settle Alicia’s claims against Vail for the additional $50,000 available under the
policy. He presents a similar third-party claim on behalf of Heath’s estate and Alicia. The Court
42
agrees with the District Court’s conclusion that summary judgment was appropriate because
State Farm had a reasonable basis in law to contest coverage.
¶66 Frank points out that by refusing to accept his demand, and by offering only $5,000 and
refusing to further negotiate, State Farm put Vail in jeopardy of having an excess judgment
entered against her. Vail asked State Farm to defend her in the underlying liability suit and
indemnify her without limits, both of which State Farm refused to do. In fact, in a letter written
to Vail in 2008, State Farm not only refused to indemnify her, but also indicated it would not pay
for the defense of the declaratory judgment action that it had filed against her. Frank further
points out that it was almost three years after he made a demand for the limits of liability upon
State Farm that the company even began considering the filing of a declaratory judgment action.
¶67 In addition to the foregoing, it bears noting that in 2006, a year before it filed its
declaratory action defending its limits of liability clause in the Freyer I litigation, State Farm
amended its automobile policies in Montana to remove the key phrase in the limits of liability
clause that reads “sustained by such other persons who do not sustain bodily injury.” This fact
was not disclosed to Frank or Vail at all until December 2011 and only then because State Farm
was asked in discovery to produce the text of the “Limits of Liability” clauses it had used both
before and after the issuance of Freyer’s policy.
¶68 The Court errs in its analysis of Issue Two in two major respects. First, it focuses solely
on the question of whether State Farm had a reasonable basis in law to contest coverage. It
apparently concludes that the question of whether State Farm refused to settle within policy
limits where liability is reasonably clear is wholly subsumed within the “reasonable basis in law”
analysis. The questions are related but nonetheless distinct. There is no question of Vail’s
liability for the accident. Where liability is reasonably clear, an insurer has an obligation to
43
attempt to settle within policy limits so as to protect its insured from the prospect of a judgment
in excess of policy limits. Shilhanek v. D-2 Trucking, Inc., 2003 MT 122, ¶ 25, 315 Mont. 519,
70 P.3d 721. A reasonable jury could conclude that by refusing over a period of three years to
budge from a $5,000 offer under the foregoing circumstances, State Farm breached its obligation
to attempt settlement within policy limits, thus placing its insured in jeopardy. The Court cites
Jessen with approval in ¶ 46, but then disregards the very point of the discussion: the question of
whether an insurer acted in “good faith” is to be made on a case-by-case basis. As noted below,
the question is one of fact, not law.
¶69 Second, the Court errs in construing all facts in favor of State Farm in reaching its
conclusion that State Farm had a reasonable basis in law to contest coverage. It presumes
throughout its analysis that State Farm acted in complete good faith, weaving into the Opinion an
analysis of our case law so as to justify the amended language that State Farm added to its “each
person” limit—language which this Court later interpreted against it. Noticeably, however, the
Court does not even address the fact that State Farm again amended its automobile policies in
Montana a year before filing this declaratory action, so as to remove the key phrase from its
limits of liability clause. Given the timing of this policy revision, and the fact that it occurred
while State Farm was steadfastly refusing to negotiate with Frank, a reasonable jury could
certainly conclude that State Farm made the conscious decision to change its policy midstream
because it concluded it may not have a reasonable basis in law for contesting such claims after
all.
¶70 On summary judgment, a court should not be weighing the evidence or choosing one
disputed fact over another. Cole v. Valley Ice Garden, L.L.C., 2005 MT 115, ¶ 4, 327 Mont. 99,
113 P.3d 275. This covert policy change in the midst of a settlement standoff plays an important
44
role in Freyers’ argument that State Farm engaged in bad faith. The Court errs in choosing to
wholly disregard this significant factor and the potential bearing it could have on a jury’s
analysis of State Farm’s reasonableness.
¶71 Unfortunately, making reasonableness determinations at the summary judgment stage is
becoming a trend. In White (Cotter, J., concurring and dissenting), we upheld summary
judgment in favor of State Fund, concluding that White’s bad faith claims must fail because State
Fund had a reasonable basis in law for terminating his benefits. In so doing, we ignored a time-
honored premise. White, ¶ 28. In Dean v. Austin Mut. Ins. Co., 263 Mont. 386, 389, 869 P.2d
256, 258 (1994), we said that “reasonableness is generally a question of fact; therefore, it is for
the trier of fact to weigh the evidence and judge the credibility of the witnesses in determining
whether the insurer had a ‘reasonable basis’ for denying a claim.” As in White, we again ignore
Dean’s caution by concluding here that reasonableness is susceptible to determination on
summary judgment, and by selecting the facts that support our conclusion.
¶72 The Court cites three cases for the proposition that an insurer cannot be held liable for
bad faith if the insurer had a reasonable basis for contesting the claim. Opinion, ¶ 55. White is
one of those cases. In the other two cases we cite—Ellinghouse and Palmer by Diacon—the
question of whether the insurer engaged in bad faith was resolved by a jury. Though the verdict
in favor of Palmer was reversed on other grounds, we stated in Palmer that the district court did
not err “by concluding that reasonable people could draw different conclusions about whether
Farmers’ had a reasonable basis for contesting Palmer’s claim.” Palmer, 261 Mont. at 104, 861
P.2d at 903. As in White, I again maintain here that while reasonable people could ultimately
determine that State Farm had a reasonable basis for denying a claim, they could also conclude
to the contrary. The point is that the reasonableness of State Farm’s conduct is for the trier of
45
fact to determine. I would therefore reverse and remand for a jury’s determination Freyers’
common-law bad faith claims and their claims that State Farm breached the covenant of good
faith and fair dealing.
¶73 Finally, as to Issue Three, I conclude consistent with the above analysis that the Court
also errs in upholding summary judgment on the UTPA claims. I would reverse and remand the
UTPA claims for trial.
¶74 I therefore concur and dissent.
/S/ PATRICIA COTTER
Justice Michael E Wheat joins the Concurrence and Dissent of Justice Patricia O. Cotter.
/S/ MICHAEL E WHEAT
46