FILED
United States Court of Appeals
Tenth Circuit
January 25, 2011
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
ALAN BLAKELY and COLELYN
BLAKELY,
Plaintiffs - Appellants,
v. No. 09-4165
USAA CASUALTY INSURANCE
COMPANY,
Defendant - Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
(D. Ct. No. 2:06-CV-00506-BSJ)
Karra J. Porter (L. Rich Humpherys, with her on the briefs), Christensen &
Jensen, P.C., Salt Lake City, Utah, appearing for Appellants.
S. Baird Morgan (Zachary E. Peterson, with him on the brief), Richards, Brandt,
Miller & Nelson, Salt Lake City, Utah, appearing for Appellee.
Before TACHA, SEYMOUR, and LUCERO, Circuit Judges.
TACHA, Circuit Judge.
Plaintiffs-appellants Alan and Colelyn Blakely appeal the district court’s
entry of judgment in favor of defendant-appellee USAA Casualty Insurance
Company (“USAA”) on the Blakelys’ claims for breach of contract, breach of the
implied covenant of good fath and fair dealing, and intentional infliction of
emotional distress. We have jurisdiction pursuant to 28 U.S.C. § 1291. We
AFFIRM in part and REVERSE in part.
I. BACKGROUND
In August 2002, a fire damaged the Blakelys’ home in Bountiful, Utah.
The fire was caused by Stone Touch, a contractor who the Blakelys had hired to
refinish the floors in their basement. The fire caused significant damage to the
Blakelys’ home and personal belongings, and they were temporarily forced to find
alternate housing.
At the time of the fire, the Blakelys were insured under a homeowners’
insurance policy issued by USAA. The policy insured against losses sustained to
the dwelling itself and to the Blakelys’ personal property, as well as against
expenses incurred to obtain temporary living arrangements. To file a claim under
the policy, the contract required the Blakelys to prepare an inventory of their loss
amount and submit it to USAA. The policy also contained the following
“appraisal clause” related to the determination of the loss amount:
Appraisal. If you and we do not agree on the amount of loss, either
party can demand that the amount of the loss be determined by
appraisal. If either makes a written demand for appraisal, each will
select a competent, independent appraiser and notify the other of the
appraiser’s identity within 20 days of receipt of the written demand.
The two appraisers will then select a competent, impartial umpire. If
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the two appraisers are not able to agree upon the umpire within 15
days, you and we can ask a judge of a court of record in the state
where the residence premises is located to select an umpire.
The appraisers will then set the amount of loss. If they submit a
written report of any agreement to us, the amount agreed upon will
be the amount of loss. If they fail to agree within a reasonable time,
they will submit their differences to the umpire. Written agreement
signed by any two of these three will set the amount of the loss.
Each appraiser will be paid by the party selecting that appraiser.
Other expenses of the appraisal and the compensation of the umpire
will be equally paid by you and us.
Aplt. App. at 652.
The contract also set forth the schedule for paying out claims:
Loss Payment. We will adjust all losses with you. We will pay you
unless some other person is named in the policy or is legally entitled
to receive payment. Loss will be payable 60 days after we receive
your proof of loss and:
a. reach an agreement with you;
b. there is an entry of a final judgment; or
c. there is a filing of an appraisal award with us.
Id. (emphasis added).
The Blakelys timely reported the fire to USAA. USAA then sent an
adjuster to meet with the Blakelys and inspect the damage, and USAA’s preferred
contractor repaired the damage to their home. Ultimately, USAA paid out
$93,332.20 under the policy allocated as follows: dwelling/structural: $47,789.94;
personal property: $37,832.70; temporary housing: $7,709.56.
Throughout the process, however, the Blakelys were dissatisfied with the
work to their home and the extent their personal property was cleaned and/or
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replaced. Because USAA refused to authorize the additional expenses sought by
the Blakelys, they did the work (and paid for it) themselves.
In 2005, approximately two and a half years after the fire, the Blakelys
invoked the appraisal demand clause and notified USAA of their appraiser.
USAA timely responded and named its appraiser. An umpire was selected, and
on October 18, 2005, a final appraisal award was issued. The award totaled
nearly $300,000. After a credit for the $93,332.20 USAA had already paid under
the policy, the appraisal stated that the difference USAA owed the Blakelys was
$197,524.32. On December 5, 2005, USAA paid the Blakelys $197,524.32. The
Blakelys admit that with the payment of the appraisal award, no further amounts
are either claimed or owing under the policy.
In March 2006, the Blakelys filed the instant lawsuit against USAA
asserting four claims: breach of contract, breach of the implied covenant of good
faith and fair dealing, breach of industry standards and statutes, and intentional
infliction of emotional distress. In relevant part, the Blakelys allege that USAA
failed to make adequate and timely repairs, reimbursements, and investigations
under the policy, and that they suffered both financial and emotional damages as a
result.
After the close of discovery, USAA sought summary judgment on all
claims except for breach of the implied covenant of good faith and fair dealing.
The district court dismissed the Blakelys’ claim for breach of industry standards
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and statutes during a pretrial conference on March 31, 2008, and that ruling is not
at issue in this appeal. At another pretrial conference held on June 5, 2008, the
district court granted USAA’s summary judgment motion as to the Blakelys’
claim for intentional infliction of emotional distress. During its final pretrial
conference, the district court granted the motion as to the Blakelys’ breach of
contract claim, and it also granted USAA’s oral motion to dismiss the claim for
breach of the covenant of good faith and fair dealing as frivolous under Fed. R.
Civ. P. 16(c)(2)(A). USAA then prepared a written Order of Dismissal disposing
of those final two claims. This appeal followed. We begin by addressing the
claims for breach of contract and breach of the implied covenant of good faith and
fair dealing. We then turn to the claim for intentional infliction of emotional
distress.
II. DISCUSSION
A. Breach of Contract and Breach of the Implied Covenant of Good Faith and
Fair Dealing
In Utah, a plaintiff may sue on a contract for: (1) breach of the contract’s
express terms; and/or (2) breach of the covenant of good faith and fair dealing,
which is an implied duty that inheres in every contractual relationship. See
generally Machan v. UNUM Life Ins. Co. of Am., 116 P.3d 342 (Utah 2005); Beck
v. Farmers Ins. Exch., 701 P.2d 795, 798, 801 (Utah 1985). While the former
claim is confined to the obligations imposed by the contract itself, the latter is not
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so constrained. See Campbell v. State Farm Mut. Auto. Ins. Co., 840 P.2d 130,
140 (Utah 1992) (“It is true that the insurer’s principal duty, under the express
terms of the insurance contract, is to pay the liability that the insured incurs, up to
a specified dollar limit. The implied duty of good faith and fair dealing goes
beyond the bare contract, however, and gives meaning and substance to the
insurer’s obligations.”). Instead, “the implied obligation of good faith
performance contemplates, at the very least, that the insurer will diligently
investigate the facts to enable it to determine whether a claim is valid, will fairly
evaluate the claim, and will thereafter act promptly and reasonably in rejecting or
settling the claim.” Beck, 701 P.2d at 801.
Given the reach of the implied covenant of good faith and fair dealing,
damages for its breach are broad and may extend beyond any amount owed under
the policy’s express terms. Id. at 801–02. Utah courts often refer to these
damages as “consequential damages.” See Billings v. Union Bankers Ins. Co.,
918 P.2d 461, 466 (Utah 1996); Machan, 116 P.3d at 345–46. It is somewhat
unclear, however, the extent to which consequential damages are permitted for a
claim alleging breach of express contract. See, e.g., Billings, 918 P.2d at 466,
468 (holding that an “expanded consequential damage measure should be
available only for breach of the implied covenant, not . . . for breach of the
express terms of the contract” but that “[a]ttorney fees may be recoverable as
consequential damages flowing from an insurer’s breach of either the express or
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the implied terms of an insurance contract”); Saleh v. Farmers Ins. Exch., 133
P.3d 428, 435 n.4 (Utah 2006) (discussing attorney fees as part of a claim for
express breach of contract and stating that “this court has historically limited the
availability of consequential damages to breaches of the covenant of good faith
and fair dealing. The admittedly unclear language suggesting the contrary in
Billings does not change that policy.”); Machan, 116 P.3d at 344 (“Consequential
damages are available for the breach of either the express or the implied terms of
an insurance contract, but . . . the consequential damages available for breach of
an insurance contract’s express terms may be more limited in scope, based on the
language of the contract and the extent to which any damages were caused by the
breach.”).
The district court in this case properly granted summary judgment to USAA
on the Blakelys’ claim for breach of express contract because USAA fully
complied with the terms of the policy. Although the Blakelys point to USAA’s
refusal to pay the amount of loss they claimed prior to their invocation of the
appraisal demand clause, nothing in the policy required USAA to do so. Instead,
the policy provided for a mechanism—the appraisal process—to determine the
amount of loss when USAA and the insured could not reach an agreement. USAA
complied with that provision and timely paid the Blakelys in accordance with the
clause. Indeed, the Blakelys admit that with the payment of the appraisal award,
no further amounts are either claimed or owing under the terms of the policy, and
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the Blakelys do not identify any provision in the insurance policy they contend
USAA violated. 1 Because USAA complied with all of the express terms of the
policy held by the Blakelys, including the appraisal demand clause, USAA is
entitled to summary judgment on the Blakelys’ claim for breach of express
contract. 2
1
The Blakelys argue that they would not have had to invoke the appraisal
demand clause had USAA acted reasonably in assessing and paying their claim.
This allegation, however, is not founded in the terms of the policy; rather, it is
relevant only to the Blakelys’ second cause of action for breach of the implied
covenant of good faith and fair dealing. See Beck, 701 P.2d at 801 (the implied
covenant of good faith and fair dealing requires an insurance company to “act
promptly and reasonably in rejecting or settling [a] claim”).
2
Using the terms “extra-contractual claims,” “extra-contractual damages,”
and “extra-contractual relief,” the Blakelys appear to incorrectly conflate two
separate issues: a cause of action for breach of the implied covenant of good faith
and fair dealing, and a request for consequential damages as part of their cause of
action for breach of express contract. In this way, the Blakelys argue that the
district court improperly “dismiss[ed their] claims for extra-contractual relief
because the parties had gone through an appraisal process under the policy, and
USAA had paid the appraisal award.” Certainly, USAA’s compliance with the
appraisal demand clause and the other express provisions of the policy does not,
as a matter of law, preclude a cause of action for breach of the implied covenant
of good faith and fair dealing and for consequential damages resulting from any
such breach. See Miller v. USAA Cas. Ins. Co., 44 P.3d 663, 668, 677 (Utah
2002) (holding that claims other than for breach of the express terms of the
insurance policy, i.e., for bad faith and consequential damages, cannot be
resolved under an appraisal clause similar to the one at issue in this case). But
compliance with the appraisal demand clause and the other express provisions of
the policy does preclude a cause of action for breach of express contract. And
without a cause of action, of course, there is no entitlement to
damages—consequential or otherwise. Accordingly, the district court properly
granted summary judgment to USAA on the Blakelys’ claim for breach of express
contract and any request for damages they sought under that claim based on its
correct conclusion that USAA had complied fully with the express terms of the
(continued...)
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Unlike the cause of action for breach of express contract, the Blakelys’
claim for breach of the implied covenant of good faith and fair dealing was not
part of USAA’s motion for summary judgment. Instead, at the same pretrial
conference during which the parties argued the summary judgment motion as to
the breach of contract claim, counsel for USAA suggested that the district court
dismiss the cause of action for breach of the implied covenant of good faith and
fair dealing as frivolous under Fed. R. Civ. P. 16. See Fed. R. Civ. P. 16(c)(2)(A)
(“At any pretrial conference, the court may consider and take appropriate action
on the following matters: (A) formulating and simplifying the issues, and
eliminating frivolous claims or defenses.” (emphasis added)). USAA contended
that the evidence demonstrated that its view of the loss was fairly debatable and
thus the Blakelys could not succeed on their claim. See Saleh, 133 P.3d at 435
(“If a claim brought by an insured against an insurer is fairly debatable, failure to
comply with the insured’s demands cannot form the basis of bad faith.”). At the
end of the conference, the district court agreed with USAA’s position and
dismissed the claim. 3 We review a dismissal under Rule 16 based on frivolity for
2
(...continued)
policy.
3
On appeal, USAA appears to argue that the district court dismissed this
claim on summary judgment under Rule 56. USAA’s motion for summary
judgment, however, explicitly disclaimed dismissal of the claim for breach of the
implied covenant of good faith and fair dealing on summary judgment, and
counsel for USAA unequivocally asked for dismissal under Rule 16 at the pretrial
(continued...)
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abuse of discretion. Cf. Conkle v. Potter, 352 F.3d 1333, 1335 n.4 (10th Cir.
2003) (reviewing frivolity dismissals under 28 U.S.C. § 1915(e)(2)(B)(i) for
abuse of discretion).
The Blakelys’ claim for breach of the implied covenant of good faith and
fair dealing is not frivolous. “[A] complaint . . . is frivolous where it lacks an
arguable basis either in law or in fact.” See Neitzke v. Williams, 490 U.S. 319,
325 (1989); Denton v. Hernandez, 504 U.S. 25, 33 (1992) (describing frivolous
claims as “fanciful,” “fantastic,” and “delusional,” and holding “a finding of
factual frivolousness is appropriate when the facts alleged rise to the level of the
irrational or the wholly incredible, whether or not there are judicially noticeable
facts available to contradict them”). In this case, the Blakelys alleged and put
forth the following evidence suggesting that USAA acted unreasonably in taking
its initial position regarding the loss amount: the appraisal award was nearly three
times, or $200,000 more, than USAA’s initial payout of $93,322.20; USAA’s
3
(...continued)
conference. Moreover, the written Order of Dismissal prepared after the pretrial
conference (which also memorialized the court’s entry of summary judgment on
the breach of express contract claim) states that it is pursuant to “Fed. R. Civ. P.
16(c), 56.” Finally, although a district court may grant summary judgment sua
sponte, it must give the losing party an adequate opportunity to oppose summary
judgment. N. Tex. Prod. Credit Ass’n v. McCurtain Cnty. Nat’l Bank, 222 F.3d
800, 816 (10th Cir. 2000) (“The entry of summary judgment is warranted only
when . . . the losing party has had an adequate opportunity to address the issues
involved . . . .”). There is no indication here that the Blakelys were aware that
the court was considering entering judgment against them on this claim and that
they needed to corral all of their evidence at this pretrial conference.
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adjuster refused to communicate with the Blakelys; USAA’s adjuster claimed that
he could not smell smoke when the smell proved noticeable in the house three
years later; USAA delegated adjustment of the contents claim to a non-adjuster;
and USAA refused to pay for any repairs other than structural ones. Although we
express no opinion on the ultimate merits of the Blakelys’ claim for breach of the
implied covenant of good faith and fair dealing, or whether the evidence is
sufficient to withstand any other type of dispositive motion, it is abundantly clear
that this claim is not wholly incredible. Indeed, until the pretrial conference
during which USAA first raised its Rule 16 argument, USAA had taken the
position that “there may be fact issues sufficient [for the bad faith claim] to go to
a jury.” See Aplt. App. at 1338. Accordingly, we conclude that the district court
abused its discretion in dismissing the claim as frivolous under Rule 16.
B. Intentional Infliction of Emotional Distress
The district court also granted summary judgment on the Blakelys’ tort
claim for intentional infliction of emotional distress. The Blakelys contend that
based on the nature of the insurer-insured relationship and the conduct and
damages alleged and supported by their evidence, the claim should have been
submitted to a jury. USAA argues that the district court correctly ruled in its
favor because, as a matter of law, (1) the emotional distress the Blakelys allege
they have suffered is insufficient, and (2) the alleged conduct was not
“outrageous.”
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In order to demonstrate the intentional infliction of emotional distress, a
plaintiff must show: (1) intentional or reckless conduct (2) which is “of such a
nature as to be considered outrageous and intolerable in that [it] offend[s] against
the generally accepted standards of decency and morality.” Oman v. Davis Sch.
Dist., 194 P.3d 956, 969 (Utah 2008) (quotations omitted). “If the trial court
determines that a defendant’s conduct was not outrageous as a matter of law, then
the plaintiff’s claim fails, and a court may properly grant the defendant summary
judgment on an intentional infliction of emotional distress claim.” Prince v. Bear
River Mut. Ins. Co., 56 P.3d 524 (Utah 2002) (internal citations omitted).
Here, the district court granted summary judgment on the claim for
intentional infliction of emotional distress without an order specifically
identifying its rationale. It appears from the transcript of the pertinent pre-trial
hearing, however, that the district court was focused on whether USAA’s alleged
conduct could reasonably be called “outrageous.” “To be considered outrageous,
the conduct must evoke outrage or revulsion; it must be more than unreasonable,
unkind, or unfair.” Oman, 194 P.3d at 969 (quotations omitted). The allegations
and evidence in this case do not rise to this level. Although USAA’s conduct—if
it was as the Blakelys allege—may have been unreasonable, 4 unkind, and unfair;
it was not conduct which evokes outrage or revulsion. See id.; see also
4
In so stating, we emphasize that we do not take any position on the
Blakelys’ claim for breach of the implied covenant of good faith and fair dealing,
other than to hold, as explained above, that it is not frivolous.
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Retherford v. AT&T Comms. of the Mountain States, Inc., 844 P.2d 949, 977 n.19
(Utah 1992) (describing outrageous conduct as “extraordinarily vile conduct,
conduct that is atrocious, and utterly intolerable in a civilized community”)
(quotations omitted). Accordingly, we affirm the district court’s grant of
summary judgment in favor of USAA on the Blakelys’ intentional infliction of
emotional distress claim.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the district court’s grant of
summary judgment to USAA on the Blakelys’ causes of action for breach of
express contract and for intentional infliction of emotional distress. We
REVERSE, however, the district court’s dismissal of their claim for breach of the
implied covenant of good faith and fair dealing as frivolous under Rule 16.
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