No. 85-352
IN THE SUPREME COURT O THE STATE O MONTANA
F F
1986
R N L V.
O AD FODE,
P l a i n t i f f and AppePl-ant,
FARMERS INSURANCE EXCHANGE,
a Reciprocal o r Interinsurance
Exchange, o r g a n i z e d and e x i s t i n g
under and by v i r t u e o f t h e l a w s
of t h e S t a t e of C a l i f o r n i a ,
Defendant and Respondent.
APPEAL FROM: D i s t r i c t C o u r t cf t h e T h i r t e e n t h J u d i c i a l D i s t r i c t ,
I n and f o r t h e County of Y e l l o w s t o n e ,
The Honorable R o b e r t Holmstrom, Judge p r e s i d i n g .
COUNSEL O REC0F.D:
F
F o r Appel-1-ant:
Whalen & Whalen; Timothy J. Whalen a r g u e d , B i l l i n g s ,
Montana
For Respondent r
Crowley Law Firm; P e t e r F.Habein a r g u e d , B i l l i n g s ,
Montana
S u b m i t t e d : December 9 , 1985
Decided: A p r i l 25, 1986
Filed:
- - -
Clerk
Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of
the Court.
This is an appeal from summary judgment entered in the
Thirteenth Judicial District Court in favor of defendant. We
reverse and remand.
AppeJ-lant, Ronald Fode was involved in a three car
accident on November 30, 1984. Respondent, Farmers Insurance
insured one of the other drivers. The degrees of liability
for the accident. have yet to be determined.
Fode notified Farmers Insurance of the property damage
he sustained. Farmers refused to settle the claim. Fode
alleges that Farmers refused to settle because its
investigation of the accident showed their insured was not
liable, when he clearly was. Farmers Insurance alleges it
was willing to settle for twenty percent of what Farmers
viewed total damage to be. A letter was sent by Farmers to
Fode denying any legal liability on the part of its insured
and refusing to pay any part of Fode's claim. As this is an
appeal from summary judgment, the factual dispute has not
been resolved.
Fode asks this Court to recognize the common law duty of
good faith and fair dealing without reference to the unfair
claim settlement practices statute, S 33-18-201, MCA.
Rather, the appellant rests his case upon obligations imposed
by statute generally. Section 28-1-201, MCA, provides:
General duty of care. Every person is bound,
without contract, to abstain from injuring the
person or property of another or infringing upon
any of his rights.
Section 28-1-203, MCA, provides:
Enforcement of obligations arising by operation of
law. An obligation arising from operation of law
may be enforced by civil action or proceeding or in
the manner provided by law.
The Legislature recognized that certain obliya.tions were
owed by an insurer to an insured and therefore enacted
5 33-18-201, MCA, which seeks to prohibit certain unfair
claims practices. Generally that section compels an insurer
to be prompt in handling the claim, to conduct a rea.sonable
investigation, to deny coverage within a reasonable time, to
offer a reasonable amount in settlement, and to effectuate a
prompt, fair and equitable settlement once liability has
become reasonably clear.
In Klaudt v. Flink (Mont. 1983), 658 P.2d 1065, 40
St.Rep. 64, this Court recognized that the obligations
created under 5 33-18-201, MCA, contemplated a tort remedy
for their breach. This holding satisfies the mandates of
general obligation imposed by § 28-1-201, MCA, and the
enforcement section, 28-1-203, MCA.
R-espondent argues that no obligation is owed from an
insurer to a tort victim at common law, citing Marzolf v.
Hoover ( ~ . ~ o n t 1384), 596 F.Supp. 596.
. There the Federa.1
District Court said:
In Count I11 of her Amended Complaint, the
plaintiff asserts the existence of a common law
duty running from an insurer to a third-party
claimant, a duty separate and independent from the
obligation imposed upon an insurer by S 33-18-201,
M.C.A. (1979). No such duty, however, exists
-
under Montana law, and Klaudt v. Flink, supra, does
not alter this conclusion. Granted, a fiduciary
duty runs from the insurer to its insured by virtue
of the contract of insurance extant between the
two, see, Thompson - State Farm Mutual Automobile
v.
z,
-the only duty 161 Mont. 207, 505 P.2d 4231,
Ins. - [(1973),
but running from an insurer to a
third-party claimant is that imposed upon the
insurer by S 33-18-201, M.C.A. (1979).
Accordingly, I find that Count I11 of plaintiff's
Amended Complaint fails to sta.te a claim cognizable
under Montana law.
The rule articulated by the Federal District Court is
the general rule. However, this Court does not, in this
case, hold that no duties run from an insurer to a tort
victim. We only decide in this case that such duties have
been recognized by the Legislature in enacting S 33-18-201,
MCA . The Legislature has sufficiently articulated the
obligations and this Court will not interfere. Where the
Legislature fails to take cognizance of important legal
obligations and fails to provide the appropriate remedies,
this Court will not hesitate to act. However, such is not
the case in this instance.
Appellant Fode, in an effort to strengthen his arqument,
relies upon 5 25-10-303, MCA, which provides, in part:
In an action involving solely the recovery of
property damages arising out of the ownership,
maintenance, or use of a motor vehicle, in which
the plaintiff secures a judgment equal to or
greater than the amount of damages claimed by the
plaintiff in his last written offer to the
defendant or his agent prior to the filing of the
cause of action, the court shall allow plaintiff's
reasonable attorney's fees .. .
.
The purpose of this statute is to encourage good faith
negotiation. It acts, where property damages only are
involved, as an additional remedy to remedies resulting from
violation of obligations owed under S 33-18-201, MCA. In
this action, no judgment has been obtained. in the underlying
case and the statute has no application.
Section 33-18-201, MCA, is limited to situations where
the insurer engages in the proscribed conduct as a "general
business practice". In Klaudt, supra, we recognized that
multiple acts by the insurer could occur in the handling of a
single claim. Therefore, the provisions of 5 33-18-201, MCA,
have general application and it would be confusing for the
Court to recognize a separate cause of action, outside the
unfair claims settlement practices procedure.
In this case the appellant Fode has alleged that
liability is "reasonably clear" but has not alleged that the
insurer's conduct constituted a "general business practice".
We recognize pleadings should be liberally construed and do
not require that all statutory requirements be alleged for a
complaint to be good. Pleadings should be construed in the
manner consistent with the spirit of modern rules of civil
procedure and with an eye toward achieving justice for the
parties. See Morris v. Espeland (Mont. 1985), 696 P.2d 428,
42 St.Rep. 251.
Appellant Fode may have a cause of action pursuant to
the provisions of S 33-18-201, MCA. The "general business
practice" provision can either be satisfied by showing
specific instances of conduct on the part of the insurer
which violate the mandates of § 33-18-201, MCA, or by
providing expert testimony from attorneys, adjusters or
others knowledgeable regarding the claims practices of the
insurer. Furthermore, one need not show that liability has
become "reasonably clear" to show a violation of all sections
of § 33-18-201, MCA. The "reasonably c1ear'~equirement is
necessary to show a violation of subsections 6 and 13 of the
statute, but other provisions may also be violated and give
rise to a cause of action in tort.
We find that the appellant's allegations contained in
his complaint should be presented to the District Court to
determine whether a cause of action has been stated under
S 33-18-201, MCA. We vacate the summary judgment entered by
the District Court and remand for proceedings in conformity
with the views herein expressed.
As noted previously this bad faith case is being pursued
although the degrees of liability for the accident have yet
to be determined. Under the holding Klaudt Flink,
supr, the procedure is authorized. At the time we decided
Klaudt v. Flink the majority of jurisdictions did not permit
the bad faith action to proceed until the underlying action
was concluded. The majority opinion stated:
However, at this point, we must differ
with the position adopted by the other
jurisdictions which allow an action such
as this to be prosecuted only after the
insured's liability has been adjudicated.
We believe that the action may be filed
and tried before, concurrent with, or
after liability has been determined. We
see no problems with the possibility of
contrary findings in the two actions, the
doctrine of res judicata, collateral
estoppel or the like because different
issues are involved in the two cases. ..
More than three years have elapsed since our decision in
Klaudt. Experience in the field teaches us that a change in
procedure is necessary. The insurance company is put in a
difficult position by having to defend a bad faith case
before the underlying case has been determined. Discovery of
the insurer's file in a bad faith case raises difficult "work
product" and "attorney-client" problems affecting the
underlying case. The practice also allows for undue leverage
to be exerted by forcing the insurer to face the prospect of
two lawsuits with the additional costs incurred for defense.
The legislature enacted the unfair trade practices
section of the Montana Insurance Code to correct abuses being
practiced by insurers. The undue delay of claims worked to
the advantage of insurers who did not have to pay prejudgment
interest and worked to the disadvantage of innocent tort
victims who were forced to wait for recoupment of their loss.
However, the procedural rule adopted in Klaudt unfairly works
a prejudice to insurers. The system must be balanced. All
parties should be accorded fair and just treatment under the
law.
For the foregoing reasons we hold that all proceedings
in a bad faith case, alleging violations of the code which
require a showing that liability be reasonably clear, are
suspended until the liability issues of the underlying case
have been determined either by settlement or judgment. Our
holding applies to this case and all others involving the
same issue.
The bad faith case may be filed to toll the statute of
limitations and to expedite ultimate disposition but no
discovery may he engaged. A favorable judgment for the
plaintiff in the District Court is sufficient to trigger
discovery in the bad faith case. Plaintiff need not await
the outcome of the District Court decision on appeal.
This case is remanded to the District Court for
proceedings under the unfair trade practices section of the
Insurance Code. However, all proceedings are suspended until
liability has been determined in the underlying case.
We Concur:
Chief Justice
/
Justices
Mr. Justice John C. Sheehy, dissenting:
I dissent from the majority opinion although I agree
that the summary judgment entered by the District Court must
be vacated.
For the purposes of this dissent, the term "third party
claimant" means a person whose property has been damaged or
who has received personal injuries caused by an insured
driver. In this case the third party claimant is Fode. The
term "insured" refers to David Michael Fiedler, the driver of
the other automobile in this case. The term "insurer" refers
to Farmers Insurance Exchange, which issued a poli-cy of
liability insurance to David Kichael Fiedler.
At 5:00 p.m. on the afternoon of December 1, 1984, Fode
was operating his vehicle in the center lane of the three
lanes provided for southbound traffic on Ma.in Street in the
Billings Heights. He was driving at approximately 25 miles
per hour, about 1% car Lengths behind a pickup truck operated
by Fiedler. The r0adwa.y was icy, with a light cover of snow
a.nd it was just beginning to get dark. As the vehicles
approached an intersection, a vehicle from the northbound
lane of traffic attempted to make a left turn across the lane
of traffic occupied by Fiedler, who was followed by Fode.
The left turning vehicle lost con.tro1, missed the turn and
stopped at the right hand curb in Fiedl.erls direction of
travel. Fiedler swung out to the left to avoid the left
turn in.^ vehicle and Fode followed suit. Fiedler , however,
attempted to return to the right hand lane, lost control,
skid.ded into the center dividing strip of Main Street, spun
again and crossed to the right hand side of Main Street,
where he struck the curb and the telephone pole. In that
position, Fode's vehicle struck the Fiedler vehicle.
- 9 -
On Decerr.ber 7, 1984, Fode called Hoglun, t.he adjuster
for Farmers Insurance Group, the insurer i.n this case.
Hogl-um informed Fode by telephone that the position of
Farmers Insurance Group was that it was in no way liable to
Fode for the damages to his a u t ~ m o b ~ l e
(he does not seek
personal injury damages) and that he should see his lawyer.
Fode's testimony is that he was always wil-ling to negotiate
away from 100% of his claim but that the insurer denied his
claim in its entirety.
Fode sued the insurer claiming a breach of duty under
common law on the part of the insurer to negotiate with him.
The District Court did not look to whether issues of material
fact existed but dismissed his claim on summary judgment,
stating:
The plaintiff's claim in this case is premised on
an alleged breach of duty arising under the common
law. Because the court finds that no such duty
exists, there is no need to determine whether
issues of material. fact exist as to an alleged
Sreach of duty. Accordingly the scope of the
court's inquiry is confined to determining whether
defendant Farmers Insurance Exchange is entitled to
summary judgment as a matter of law.
The primary issue for us on this appeal, therefore, is
whether there is a common law right of action for failure to
negotiate against the insurer in this case. If such an
action does exist, then certainly material issues of fact
exist as to whether FIG should have negotiated with Fode
prior to his commencing suit.
The majority gives no consideration to this issue raised
by Fode, but looks instead to a statutory duty imposed upon
insurers und.er S 33-18-201, MCA. In so dcing, the majority
moves with too much speed and too little thought given to a
substantive issue of law raised by Fode, whether there exists
a common law duty upon an insurer to negotiate with a
third-party claimant.
In at least two Workers' Compensation cases, this Court
has recognized a common law obligation of insurers to refrain
from intentional torts and unfair practices in settlement and
negotiation of claims. In Hayes v. Aetna Fire Underwriters
(1980), 187 Mont. 148, 609 P.2d 257, we approved an action
against an insurer for alleged intentional torts of fraud,
conversion and intentional infliction of emotional distress,
in spite of the exclusivity clause of the Workers'
Compensation Act. Section 39-71-411, MCA. In Vigue v. Evans
Products Company (1980), 187 Mont. 1, 608 P.2d 488, we again
permitted a common law action against the Workers'
Compensation carrier for fraud, conversion, economic duress
and bad faith.
In Lipinski v. The Title Insurance Company (1982), 202
Mont. 1, 655 P.2d 970, we held expressly that insurance
companies have a duty to act in good faith with their
insureds and that this duty exists independently of the
insurance contract and independent of statute. 202 Mont. at
15, 655 P.2d at 977. In I,ipinski, we held that a title
insurer breached the implied duty of good faith in failing to
defend the insured's title when it was attacked.
In Weber v. Blue Cross of Montana (3982) 196 Mont. 454,
643 P.2d 198, Justice Weber stated:
[a] cause of action may sound in tort although it
arises out of a breach of contract, if a defaulting
party, by breaching the contract, also breaches a
duty which he owes to the other party independently
of the contract.
196 Mont. at 463, 643 P.2d at 203.
Is there a basis now to find a duty on the part of the
insurer to negotiate with Fode regarding his property damage
independent of contract? Certainly. The duty arises out of
the adoption in Montana of the mandatory insurance law.
Section 61-6-301, MCA.
Before the adoption of the mandatory liability insurance
law, a motorist whose vehicle was damaged by the driver of
another insured vehicle, if the insurer was unwilling to
negotiate with the third party claimant, had to sue the
insured driver personally in order to establish liability and
his right to the insurance proceeds from the insurer. It was
unfortunately the case that many insurers, in order to force
settlements or to avoid paying at all, refused to negotiate
with third parties unless suit was brought by the third party
for property damages. It was this unfair practice which led
the legislature to the adoption of § 25-10-303, MCA, referred
to in the majority opinion, which provides that if a
plaintiff secures a judgment equal to or grea.ter than the
amount of property damages claimed by him, he is entitled to
reasonable attorney fees.
Moreover, because the presence of insurance was a matter
of grace on the part of the insured this Court and others
were careful not to allow a third party plaintiff to name the
insurance company as a defendant because of the possibility
that the trier of fact might be prejudiced if the fact of
insurance were known.
Before mandatory liability insurance, whether the owner
and operator of a motor vehicle carried liability insurance
was a matter of his business acumen, and the insura-ncepolicy
was issued to the insured for the purpose of protecting -
his
liability. After mandatory liability insurance, however, the
party sought to be protected by law is not the insured, but
the injured claimant. Mandatory liability insurance laws are
passed by legislatures - protect
to -
the general traveling
public by requiring all drivers to carry liability insurance.
Before ma.ndatory liability insurance, it was assumed
that jurors or other triers of fact should not know of the
- 12 -
presence of insurance and therefore the insurance company
should not be mentioned in any proceedings relating to th.e
liability action. Now, however, every juror or trier of fact
must know that insurance is indeed involved because of the
mandatory law. Formerly, some motorists carried liability
insurance out of a sense of public duty. Now, all must carry
liability insurance because of public policy.
Thus, it was stated in Ferguson v. Employers Mutual
Casualty Company (S.C. 1970), 174 S.E.2d 768, 771:
The primary purpose of compulsory motor vehicle
liabil-ity insurance is to compensate innocent
victims who have been injured by the negligence of
financially irresponsible motorists. Its purpose
is not like that of ordinary Liability insurance to
save harmless the tortfeasor himself. The injured
person's rights against the insurer are not derived
through the insured as in the case of voluntary
insurance. They are statutory and become absolute
on the occurrence of an injury covered by the
policy.
We have upheld the constitutionality of the compulsory
automobile liability insurance statutes. State of Montana v.
Turk (1982), 197 Mont. 311, 643 P.2d 224.
Once we underst-and the true focus of the mandatory
liability insurance law we can look with a different light at
5 28-1-203, MCA, which provides:
Enforcement of obligations arising by operation of
law. An obligation arising from operation of law
may be enforced by civil action or proceeding or in
the manner provided by law.
Un.der S 28-1-203, MCA, a person entitled to enforce an
obligation has two remedies, (1) a civil action or (2) a
proceeding authorized by law. The majority in this case has
confined Fode to the "manner provided by law," in §
33-18-201., MCA, without explaining why he is not also
entitled to a civil action.
A second rea-son for my dissent is the unnumbered rule of
civil procedure promulgated by the majority which halts
proceedings against an insurer in a bad faith case and
suspends discovery. That the unnumbered rule is ill-advised
may be shown in that it springs from no issue raised by the
parties in this case, it is unbriefed and unargued, and comes
like a bolt from the blue to an unsuspecting, unprepared bar.
The unnumbered rule conflicts with statutes and with certain
numbered Rules of Civil Procedure.
The first conflict with a statute is the adoption of the
rule itself. Section 3-2-702, MCA, requires that before any
rules of procedure are adopted by us they should first be
considered and prepared by an advisory commission. Here the
advisory commission is by-passed. The precipitous action of
the majority is justified by their statement that "experience
in the field teaches us that a change in procedure is
necessary." The statement is unsubstantiated by reference to
ca.ses in our files or by citation to studies done elsewhere.
The unnumbered rule of the majority conflicts with the
remedy adopted by the legisl-a.ture 1985 following Klaudt v.
in
Flink, supra. Section 33-18-241, MCA, provides:
The trial of a claim or action against an insurer
for lack of good faith in its handling or
settlement of an insurance claim may not be
consolidated with a trial of the underlying claim
+ 6.
(1) the lack of good faith claim is against a
party different for the pa.rty against. whom the
underlying claim is made; and
(2) the parties have not stipulated to
consolidation of the trial of the lack of good
faith and the underlying claim. (Emphasis added. )
Thus a remedy for Klaudt, supra, has a1read.y been
provided by the legislature. Under 5 32-18-241, MCA, where a
third party claim against an insured is combined with a third
party claim against the insured's carrier the trials of the
two causes must be separated. The legislature made no such
provision where an insured - - - carrier both for bad
sues his own
faith and for the underlying obligation. But, under the rule
adopted by the majority now, - insured may not proceed in
an
the same suit against his own carrier to discovery and other
proceedings until the liability portion is first determined.
Thus does the majority force the insured into two trials.
Under the rule adopted by the majority, the earlier cases we
have decided in favor of insureds in bad faith cases,
Lipinski, supra; Weber, supra, and First Security Rank v.
Goddard (1979), 1.81 Mont. 407, 593 P.2d 1040; and others
would. have required two trials rather tha.n the one tria,, the
decision of which came to us on appeal.. It is on that basis
that the unnumbered rule adopted by the majority is
ill-considered and ill-advised.
The unnumbered rule conflicts with Rule 23 (d),
M.K.Civ.P. which gives to the District Court the power to
make appropriate ord.ers respecting the course of proceed.ings
in cases before it; with Rule 18(a), M.R.Civ.P., which
permits a party to join as many legal or equitable claims or
both as he has against an opposing party; and it raises havoc
with Rules 26 to 38, M.R.Civ.P., which relate to discovery.
The unnumbered rule will not wreck the tort system, of
course, because the tort system is broad.er by far than cases
against- insurers. It will however, substantially increase
the costs to litigants of litigation against insurers for
breach of the implied covenant of good faith and fair
dealing.
A third reason for my dissent is the implication in the
majority opinion that a bad faith case against an insurer
requires proof of a general business practice of unfair
claims settlement or deceptive acts.
The holding of the federal district court in Marzolf v.
Hoover (D. Mont. 1984), 596 F.Supp. 596, was incorrect when
it stated that "the only duty running from an insurer to a
third party claimant is that imposed upon the insurer by S
33-18-201, MCA (1979)." The federal district court ignored,
as does the majority in this case, the provisions of §
33-18-102, MCA, which establishes the duty upon insurers not
to engage in even a single unfair or deceptive act or
practice. That statute provides:
No person shall engage in this state in any trade
practice which is defined in this chapter as or
determined pursuant to this chapter to be an unfair
method of competition or - unfair or deceptive act
an
or
- ractice in the business of insurance.
(mhss
Ep:i added. )
That statute, by its terms, is limited to a si.ng1.e act
or practice.
Section 33-18-102, MCA, is prohibitory in nature, and
was enacted for the protection of the public. It has been
the law of this State at least since 1912 that where a
statute "makes a requirement, or prohibits a thing, for the
benefit of a person or class of persons, one injured by
reason of a violation of it is entitled to maintain an action
against him by whose disobedience he has suffered an injury."
Melville v. Butte-Balaklava Copper Co. (1913), 47 Mont. 1,
130 P. 441.
It is plain as day that a single breach of the statute
constituting a.n unfair or deceptive act or practice by an
insurer, toward an insured or a third party claimant, which
causes injury, gives rise to an action against the insurer;
a.nd further, if the brea-ch is oppressive, malicious or
fraudulent, it will also give rise to a claim for exemplary
damages, since a criminal penalty may be attached. State ex
rel. Larson v. District Court (1967), 149 Mont. 131, 423 P.2d
598.
A violation by an insurer of 33-18-102, MCA,
constitutes a misdemeanor as defined in 5 33-1-104, MCA, as
follows:
Each violation of any provision of this code,
except 33-30-1012, with respect to which violation
a greater penalty is not provided by other
applicable laws of this state shall, in addition to
any administrative penalty otherwise applicable
thereto upon conviction in a court of a competent
jurisdiction of this state be punishable by a fine
of not less than $50 or more than $1,000 or by
imprisonment in the county jail for not less than
30 da.ys or more than 90 days or by both such fine
and imprisonment. (Emphasis added.)
The California Supreme Court without referring to
whether a criminal penalty attached as our insurance cases do
in Montana, determined that a single deceptive act or
practice was sufficient to give rise to a cause of action in
Royal Globe Insurance Company v. Superior Court, Etc. (Gal.
It seems clear to us that this issue is not
independent of the matters we have discussed above.
If, as we conclude, the act affords a private
party, including a third party claimant, a right to
sue an insurer for violating subdivision (h), it
is inconceivable that the Legislature intended that
such a litigant would be required to show that the
insurer committed the acts prohibited by that
provision "with such frequency as to indicate a
general business practice." There would be no
rational reason why an insured or a third party
cl-aimant injured by an insurer's unfair conduct,
knowingly performed, should be required to
demonstrate that the insurer had frequently been
guilty of the same type of misconduct involving
other victims in the past.. ." .
Under 5 33-18-201, MCA, it is an unfair clsims
settlement practice to refuse to pay claims without
conducting a reasonable investigation based upon all
available information; to fail to acknowledge and act
reasonab1.y and promptly on communications with respect to
claims arising out of insurance policies; and to neglect to
attempt in good faith to effectuate a prompt, fair and.
equitable settlement of a claim in which liability has become
reasonably clear. For each of these unfair practices, an
issue of fact exists in this case under the complaint brought
by Fode. Farmers Insurance Exchange is prohibited under 5
33-18-102 from engaging in a single one of any of those
practices defined in the subsequent section. Therefore,
without having to prove a general business practice, Fode has
at least a statutory right, and probably a common law right
to pursue Farmers Insurance Group without first establishing
by another suit in another action against another party that
liability is reasonably clear. The majority errs when it
remands the case for further proceedings to allege and prove
a general practice of unfair claims settlement practices.
Under the facts alleged by Fode, Farmers Insurance
Exchange is forcing Fode to sue the insured and to establish
liability before it will negotiate his claim. It is this
very kind of action that brought about the adoption by the
legislature of S 25-10-303, MCA, as we said above. We should
acknowledge that Fode's complaint is sufficient now, and
remand to determine the necessary issues of fact in one
action.
Q0-L Q- 2
8
-
Justice
Mr. Justice Will-iam E. Hunt, Sr., concurs in the above
dissent: