Britton v. Farmers Insurance Group

NO. 84-322
IN THE SUPREME COURT OF THE STATE OF MONTANA

1986

BILL BRITTON,
Cross-Claimant, Respondent
and Cross-Appellant,

FARMERS INSURANCE GROUP
(TRUCK INSURANCE EXCHANGE) ,
Cross-Defendant, Appellant
and Cross-Respondent.

APPEAL FROM: District Court of the Twentieth Judicial District,
In and for the County of Lake,
The Honorable R.D. McPhil-lips, Judge presiding.

COUNSEL OF RECORD:

For Appellant:
Murphy, Robinson, Heckathorn & Phillips; Dana L.
Christensen and Donald R. Murray argued, Kalispell,
Montana

For Respondent :
Milodragovich, Dale & Dye; Lon J. Dale argued,
Missoula, Mont.ana
I?. Lloyd Ingraham, Ronan, Montana

Submitted: October 1, 1 9 8 5
Decided: A p r i l 1 7 , 1 9 8 6

Clerk
Mr. Justice John C. Sheehy delivered the Opinion of the
Court.

We determine principally in this case that an insurer
must meet the standard of a lawful basis for refusal to
decline payment of an insured's claim for an insured's loss;
and that reliance by the insurer on inadmissible evidence of
arson by the insured in declining payment of an insured's
loss does not meet the standard of a lawful basis for refusal
of the insuredls claim.
Farmers Insurance Group (FIG) appeals a judgment
granting Bill E. Britton compensatory damages of $214,748.54
and punitive damages of $400,000.00, following a jury verdict
rendered in the District Court, Fourth 2udicial District,
Lake County.
Bill E. Eritton cross-appeals from a judgment of the
District Court denying him attorney's fees and costs under
section 30-14-133, MCA.
It is well to have a backdrop of applicable law before
we view the facts in this case.
The justifiable expectations of parties to an insurance

contract must include a broad freedom in the insurer to
evaluate claims under the policy and to reject nonmeritorious
claims. That freedom would be imperiled if the law imposed
so high a duty of performance on the insurer that a
reasonable rejection of a claim wou1.d invite a "bad faith"
judgment against the insurer. The law must leave open to
insurers the use of reasonableness in investigating,
negotiating and paying claims. Chavers v. National Security
Fire & Casualty Co. (Ala. 1981), 405 So. 2d 1.
 However, an insurer has corresponding duties to its
policyholder. The insurer must use due diligence in
reviewing and. determining meritorious cla.ims, and must pay
such cl-aims promptly. Those duties are not implied. They
are expressly bargained for in the insurance contract. A
breach of any of those express duties opens the insurer to a
judgment for contract damages. If the misdeed of the insurer
in breach of the contract is also a violation of public
policy, or a breach of the implied duty of good faith and
fair dealing, the injured party has a tort action against the
insurer for "bad faith," notwithstanding that the act
complained of may also be a breach of contract. Weber v.
Blue Cross of Montana (1982), 196 Mont. 454, 643 P.2d 198;
First Security Bank v. Goddard (1979), 181 Mont. 4@7, 598
P.2d 1040; State ex rel. Larson v. District Court (1967), 149
Mont. 131, 423 P.2d 598.
One aspect of public policy in this case is the duty of
insurers under the "valued policy" or "stated value" statute,
section 33-24-102, MCA. No stranger to American statutory
law, our valued policy statute provides in the absence of
criminal fault or fraud that when insured improvements on
real property are considered to be a total loss, the amount
of applicable insurance coverage written in the policy
contract is taken conclusively to be the true amount of the
loss and measure of damages. The provisions of our valued
policy statute, section 33-24-102, MCA, are a part of every
policy of fire insurance issued in Montana. Goddard, supra;
McIntosh v. Hartford Fire Ins. Co. (1938), 106 Mont. 434, 78
P.2d 82; Caldwell v. Washington Fidelity National Ins. Co.
(1933), 94 Mont. 431, 23 P.2d 257.
We have few cases construing the effect of the valued

policy statute, but it is clear from the jurisdictions
considering like statutes, and acceptable to us, that such a
statute determines automatically and. conclusively the amount
of loss recoverable for total loss, Grandview Inland Fruit
Co. v. Hartford Fire Ins. Co. (Wash. 1937), 66 P.2d 827 and
may obviate even the necessity of a proof of loss.
Commercial Union Ins. Co. v. Stanmike Investment Co. (Tex.
C.A. I-971), 475 S.W.2d 295. Further, an insurer may not
create a question of total loss simply to compromise its duty
to pay the full amount or to negotiate a lesser amount.
Grandview Inland Fruit Co. , supra. Any agreement for a
lesser settlement of total loss other than the amount of
applicable coverage is void ab initio as against public
policy. Coddington v. Safeguard Ins. Co. of N.Y. (Ark.
1963), 373 S.W.2d 413.
The statutory duty to pay the full amount of applicable
coverage in valued policies applies as well to a mortgagee
under a loss payable clause to the extent of the mortgagee's
lien. Section 33-24-102, MCA, makes the amount of insurance
conclusive as to the true value of the insured property. It
does not attempt to fix the interests of the persons entitled
to benefits under the policy. A loss payable clause makes
the mortgagee the appointee of the mortgagor to receive the
insurance money. Malvaney v. Yager (1936), 101 Mont. 331,
338, 54 P.2d 135, 138.
When, therefore, an insurer faces a claim under its
issued policy for damages to an improvement on real property

in Montana, the freed-omof the insurer to evaluate the claim
and to determine its merit does not include the amount
payable if the cost of the damages to the improvement insured
exceeds the predamaged value of the improvement. In that
event the loss is total, and. as to the amount of loss the
valued policy law applies. The insurer retains the freedom,
however, to determine if the loss has merit as a claim,
again, on a reasonable basis.
We determine as a matter of law in this case, under the
facts, the insurer did not comply with the valued policy
statute, section 33-24-102, MCA, particularly with regard to
the mortgagee Bank which was entitled to payment regardless
of any claim of arson against the insured Britton. As to the
insured. Britton, the failure of the insurer to comply with
section 33-24-102, MCA would be unimportant if in fsct
Britton had committed arson to cause the loss for then he
would not be entitled to coverage in any event.
The examination of rights of the parties on appeal
therefore has three facets of applicable law as far as
Britton is concerned:
(1) If Rritton committed arson, he is not entitled to
coverage and his judgment is a nullity;
(2) If the insurer reasonably suspected that Britton
committeCI arson, it could decline to pay his claim without
incurring a judgment for "bad faith," though a court or jury
might later determine that t.he arson by the insured was not
proved;
(3) If the insurer unreasonably declined to pay his
claim, and failed to prove Britton's arson, it is subject to
"bad faith" charges if it also violated public policy or
breached the implied duty of good faith and fair dealing in
so doing.

It is notable that each facet presents issues of fact,
the determination of which by a properly instructed jury
forecloses us from determining contrariwise, unless the jury
erred as a matter of law. In other words, questions of fact
come within the sole province of the jury and the jury
verdict prevails. Gee v. Egbert (Mont. 1984), 679 P.2d 1194,
41 St.Rep. 515; Barry v. City of Butte (19431, 115 Mont. 224,
1-42 P.2d 571.
The issues raised by FIG on appeal do not include the
sufficiency of the evidence to justify the jury verdict.
Rather, FIG raises issues which pertain to its principal
argument, that as a matter of law it did not unreasonably
decline payment of Britton's claim. We will discuss those
issues and the applicable facts first, and reserve for later
discussion in this opinion the other issues and other
applicable facts.
I.

DID FIG VIOLATE ITS DUTY OF GOOD FAITH IN DENYING PAYMENT OF

BRITTON'S CLAIM?
On this subject FIG claims that it was entitled to a
directed verdict from the District Court on the question of
bad faith and Britton's claim for extra-contractual. damages;
that the District Court erred in refusing to permit FIG to
introduce evidence of information which FIG had obtained and
relied on in reaching its decision to deny Britton's claim;
that the District Court erred in instructing the jury on
portions of section 33-18-201, MCA, which had no basis in the
evidence; and, that the District Court erred in admitting the
testimony of Arthur M. Clark, M.D.
E i . E. Britton, a rancher, horse breeder and trainer,
3ll
owned a ranch in Lake County, near P.onan, on which he had
constructed a large horse arena. Britton purchased the Ronan
ranch in 1974. Before that time, since 1970, he had a
serious heart condition which had required open-heart surgery
and had caused him uninsured medical expenses. In 1976, his
heart condition again forced surgery and limited his ability
to train horses personally. He decided to sell the Ronan
property and listed it with a local realtor in Polson. In
August 1981, the realtor received an offer from a California
resident for the purchase of the Britton property. The price
and terms were agreed on with the exception that the buyer
wanted at the same time to lease the property and continue to
reside in California. In September 1981, the realtor and
Eritton were actively seeking a lessee for the Britton
property in order to complete the sale.
The Britton property was subject to a mortgage to the
Ronan State Bank. Britton provided a quit claim deed to the
bank so that his affairs could be in order in the event a
sale occurred while he was hospitalized i.n Spokane,
Washington.
In the summer of 1981, FIG'S agent, Mike Lanktree
solicited Britton's insurance business. Lanktree inspected
the property and he estimated the market value of the horse
arena at $144,500.00. FIG issued its policy of fire
insurance effective August 18, 1981, which included coverage
for the horse arena at 80% of its market value. Accordingly,
FIG'S policy provided $116,000.00 in stated value coverage.
Other real and personal property was insured for separate
amounts .
In late September 1981, Britton prepared the arena for
his stud horse, which was to be kept in the arena while
Britton was absent due to a prospective hospitalization in
Spokane. Britton's friend, Ethel McCready, was to care for
the stud horse and to make it easy for her, straw and hay had
been placed adjacent to the stalls in the arena.
Prior to September 1981, a series of vandalisms had
occurred to the arena and property had been stolen. Britton
wanted to make sure that the arena was secure. On September
2 , 1-981, he placed an additional hasp lock on a door that
had only a knob key lock. All other doors, including an
internal tack room door were secured with inside locking
devices such as padlocks and hook-eyes. Britton left the
arena secure at about 6:00 p.m. on September 21 and returned
to his house located a considerable distance from the arena.
Britton went to bed early on September 21 after checking
the arena. At approximately 12:30, his friend Ethel McCready
arrived and found Britton in bed. At 1: 00 a.m. Britton went
to the bathroom to take medication. While up he observed a
vehicle containing several individuals in the driveway of his
home. He turned the porch light of his home on a n 6 off
several times and the vehicle was driven away. He returned
to bed. At approximately 3:00 a.m., he and McCready were
awakened by a loud knocking on the front door. Howard
Morigeau, a passing motorist, was at the door and told
Britton that his arena was on fire. Britton attempted to
call the fire department and then drove his pickup to the
arena, arriving just shortly after the first fire truck had
come to the scene. Britton claimed he had a heart failure at
the fire, was given oxygen by the firefighters and went to
the Ronan Hospital. Because he did not want to receive
medication or treatment of any extensive nature from the
hospital in Ronan, he stayed at the hospital until the next
morning when he was driven to Spokane for treatment.
Although five saddles were in the arena on the day of
the fire, three were found to be missing after the fire. The
remains of the other two saddles were found in the tack room.
The investigation after the fire by the Lake County Sheriff's
Office discloses that the tack room door had been forced
open.
 Britton does not dispute that the fire and damage to the
horse arena were the result of someone's arson.
Investigation by the State Crime Laboratory identified the
presence of an accelerant to the fire by a substance similar
to kerosene. Bri.ttonVsinvestigator revealed evidence of a
forcible entry other than by firemen to an external door as
well as to the internal tack room door from which the saddles
were missing after the fire. Rritton filed a theft report
concerning the sad.dleswith the Lake County Sheriff" Office.
Following the fire to the horse arena, the State Fire
Marshall conducted an investigation, which included a
polygraph examination of Britton. At the suggestion of
officers of the Ba.nk, Britton retained Lloyd 1ngraha.m as an
attorney to represent him in connection with the fire loss.
Britton submitted a proof of loss to the insurance company on
November 24, 1981. FIG'S policy relating to when the loss
was payable provided that the loss "shall be payable 60 days
after proof of loss, as herein provided, is received by this
company and ascertainment of the loss is made either by
agreement between the insured and this company expressed in
writing or by the filing of this company of an award as
herein provided." On January 20, 1982, Britton received from
an attorney representing FIG a letter in which the attorney
informed Rritton that the amount of the loss had not yet been
ascertained and that the circumstances of the fire were still
under investigation. "Farmers is not yet ready to make a
final determination as to either coverage or amount."
(Emphasis added.) Pursuant to the letter Britton submitted
to a sworn statement taken by FIG on January 25, 1982.

On February 19, 1982, FIG took the position that Russell
Rritton, a son of the insured, was an insured under the
policy and that FIG was entitled to take his sworn statement
also. That position was reiterated on April 20, 1982, in a
letter from FIG'S attorney to Mr. Ingraham in which the
attorney stated "we are rejecting Mr. Britton's claim until
we have had. an opportunity to take the sworn statement of his
son, Russell Britton."
The insurance policy issued by FIG to Britton is a
"Package of Protection" containing several coverages, divided
into sections. Section 1 of the policy is devoted to hazard
insura-nce for farm buildings, including the horse arena, and
other improvements on real property, and scheduled and
unscheduled personal property. There is no definition of
"insured" in the policy pertaining to Section 1. The named
insured, of course, is Rill E. Britton. Section 2 of the
policy provides liability and medical coverages for
automobiles and like vehicles. Section 2 contains a
definition of "insured" which would include the na.med
insured, his relatives while residents of his household,
pertaining to the use of insured vehicles. The question of
FIG'S insistence that Britton's son was an insured, under
Section 1 of the policy and that the insurer was entitled to
take the examination of the son was scotched by the District
Court in its charge to the jury:
Some of the evidence in this case mentions Russell
Britton in connection with being an insured, and I
am telling you now that the court has ruled as a
matter of law that Russell Britton is not an
insured under Mr. Britton's insurance contract.
The contractual provisions of FIG'S policy with respect
to requirements in case of fire loss, provided only that the
insured must submit to examination und.er oath as often as
reasonably required. Under Section 1 of the policy Bill E.
Britton was the only insured.
 FIG'S policy issued to Britton also contained a
mortgagee clause which made the first proceeds of a loss
payable to Ronan State Bank as the mortgagee. The mortgagee
clause included a provision that "this insurance, as to the
interest of the mortgagee only therein, shall not be
invalidated by any act or neglect of the mortgagor or owner
of the described property . . .."
FIG'S files on this loss contained shortly after the
fire three estimates of damage repair, one obtained by
Britton. One of those estimates was for $75,000, if the
remaining parts of the burned building were used in repair.

-- Various interoffice memos between employees of FIG indicated
.

the belief of the writers that the loss was tot.a.1.
One of FIG'S interoffice memos dated February 12, 1982,
said to let the attorney for FIG know that the Pocatello
Branch claims office had received $75,000 authority to pay
the mortgagee. "Not to pay, but to start talking pay." This
authority was extended to FIG'S attorney on February 16,
1982.
On March 25, 1982, FIG paid Ronan State Rank the sum of
$75,000 under the mortgagee clause on the condition demanded

by FIG that Ronan State Bank deliver to FIG a partial
assignment of Britton's mortgage to the Bank and a full
release from the Bank of its claim against the insurer.
Under the "general conditions" applicable to Section I.
in FIG'S policy, Section 13 relates to the loss payable
clause. It states "Loss, if any, shall be adjusted - -
with the
named insured and shall be payable to him unless other payee
is specifically named hereunder." (Emphasis added.) FIG did
not adjust the payment to the Bank with Britton, the named
insured.
 FIG claims under the subrogation paragraphs of the
policy a right to receive from the Bank a partial assignment
of Britton's mortgage, and to stand in the shoes of the Rank
with respect to that partial assignment. The insurance
policy provides:
... - - Company shall claim - -no liability
If this that
existed - - - mortgagor or owner, it shall, to
as to the
the extent of payment of loss to the mortgagee, be
subrogated to all the mortgagee's rights of
recovery, but without impairing mortgagee's right
to sue; . . ."
A.t the time of the payment to Ronan State Bank, FIG did
not claim either to the Bank or to Britton that no liability
existed as to Rritton. It had. not yet acted with respect to
Britton's proof of loss.
Ronan State Bank commenced an action to foreclose its
mortgage from Britton by filing its complaint on May 10,
1982. Donald E. Olsson, the president of the Bank, explained
why :
Yes. The rea.son that we instituted a foreclosure
action, the--we had an obligation at the time of
the fire of approximately--this js a matter of
.
recollection--a hundred thirty-five thousand
dollars, I think it is. The--after we received the
settlement for the seventy-five thousand. dollars,
or a payment in that amount, we gave the insurance
company, at their insistence--and these were
documents that they prepared, the assignment--an
assignment of our mortgage and obligation in that
amount. So now we were sitting with less money
owing to the Bank in that sum. There's a contract
to Mary Schroer that Mr. Britton had. That was
lady he's buying the property from. We had. an
unpaid balance on our mortgage, and the insurance
company had an assignment in the amount of
seventy-five thousand dollars.
And so the total obligation, the total - -or
- - - lien
mortgages against - property, - - -
the had not been
decreased; they - - - were going 9,
in fact beca.use of
the interest accruing on the Schroer contract and
on our mortgage and on the interest the insurance
company had an assignment of. . ..
So the only way
we could clear the title, clear the air, we felt,
was to institute a foreclosure action on the
mortgage to bring in the insurance company, to
bring in Mr. Rritton, so we could get the matter
 resolved and disposed of. Because, as it was,
there was no way a purchaser, willing purchaser,
would buy the property subject to the outstanding
interests that were there and that were not
resolved. This was the reason that we did
institute that action. (Emphasis added.)
On July 19, 1982, Britton appeared in the foreclosure
action, and cross-claimed against FIG for the full amount of
the coverage provided by FIG'S policy, and for further
compensatory damages and punitive damages by reason of "bad
faith."
FIG responded to the foreclosure action on August 10,
1982, setting up as a cross-claim against Rritton its right
under its partial assignment of the mortgage and requesting
foreclosure of the same as against Britton. It further
defended against Britton's cross-claim by alleging, for the
first time, that Britton had intentional-ly caused the fire,
had been guilty of fraud with respect to his interest in the
property insured, and that he had n.ot submitted a proper
proof of loss.
Prior to the filing of its answer to Britton's cross
claim, FIG had never rejected Britton's proof of loss, nor
informed him in writing or otherwise that FIG contended that
Britton had intentionally burned the horse arena. Instead,
on July 15, 1982, FIG had written to Britton, advising him
that it was cancelling and terminating his coverage under his
policy, giving as a reason that "we believe that the fire
loss to your insured property September 22, 1981 was a result
of a fire of an incendiary nature -
set - person - persons
a or
unknown having access to your insured property. l1 (Emphasis
added. 1
We have set out the foregoing facts, as we must, in a
light favorable to RrLtton since the jury agreed with his
contentions of fact. Anaconda Company v. P7hittaker (1980),
188 Mont. 66, 610 P.2d 1177. However, FIG, in the trial of
the cause, was able to put before the jury the following
information that FIG contended proved that Britton had set
the fire:
FIG'S agent, Lanktree, came to the fire scene at 10:OO
a.m. of the day of the fire. After surveying the damages he
called adjustor David Drynan, of Missoula who also
immediately came. Drynan concluded that the fire was
"suspicious, and that there were "multiple sets. "
"

The case was referred to the regional office of
investigation division of FIG for the purpose of further
investigation.
The division retained Richard Kirsh as investigator. He
zrrived on site on September 24, and identified five
different points of origin and possibly as many as eight. He
testified that it was a well planned fire, that the minimum
amount of accelerant was 10 gallons of fuel and that whoever
set the fire was familiar with the premises.
A further FIG investigator, Mike Russell, arrived on
October 6, 1981 to review and photograph the scene, interview
Britton and other individuals. He found from a review of a
Lake County records, documents which would adversely affect
Britton's financial condition. Russell in his report of
October 11, 1981 which he wrote to the company identified
"undeveloped leads" which included contact with previous
insurance companies to gather information concerning the two
previous fires, contacts with the Montana State Fire
Marshall's office to acquire the results of a polygraph
examination administered to Britton, and a recommended
interview with Rritton's son, Russell-, who was believed to
possess substantial knowledge regarding the fire.
Without any reference to transcript pages nor to dates,
FIG'S brief on appeal states:

Farmers followed up on the recommendations of
investigator Russell, and as a result of all the
efforts made by the representatives of Farmers, it
was determined that the insured, Britton, was
intentionally responsible for the setting of the
fire which damaged his arena. Accordingly Farmers
denied Britton's claim.
From the record, it clearly appears that whatever was
concluded from the investigation of Russell, including any
decision to deny Britton's claim, was never communicated
either to Britton or to his lawyer before the foreclosure
action was instituted.
The further following facts however did go before the
jury in the cause:
The fire had been fueled by ingredients on the premises,
straw and a liquid petroleum-based accelerant. After the
fire the smell of diesel was reported to be "heavy." Firemen
arriving at the scene had difficulty knocking and keeping the
fire down. Britton acknowledged the fire was incendiary.
The fire had been set by someone familiar with the premises
because of the placing of the "sets." Approximately one week
before the fire Britton purchased 50 to 55 gallons of diesel
fuel although Rritton's only use for diesel fuel was to heat
his house. The purchase was made in September. Britton had
no money to spare for fuel. His heating fuel was usually
delivered by truck but this time the pickup of the fuel was
made in a little used container tank by Britton. The straw
had been delivered and placed in the arena the day before the
fire at locations pojnted out by Britton.
 In addition, Britton had s o l e means of access t o t h e

a r e n a , and was a l o n e on t h e p r e m i s e s t h e e n t i r e day a f t e r h i s

son and g i r l f r i e n d d e p a r t e d on t h e morning b e f o r e t h e f i r e .

He knew t h a t h i s son Rusty was l e a v i n g and would n o t r e t u r n .

E t h e l McCready would n o t r e t u r n t o t h e home p r e m i s e s u n t i l

2:30 o r 3:00 a.m. a f t e r she closed her d u t i e s a t a b a r t h a t

evening. He had gone t o t h e a r e n a a t l e a s t two t i m e s d u r i n g

t h e day p r e c e d i n g t h e f i r e i n h i s p i c k u p . He was up and o u t

of h i s bedroom a t 1:30 t o 1:45 a.m.

The a r e n a was l o c k e d upon t h e a r r i v a l o f f i r e m e n . The

doors had been locked and secured by Britton on the day

preceding t h e f i r e . B r i t t o n had t h e o n l y k e y s t o t h e a r e n a .

A l l d o o r s were l o c k e d when t h e f i r e m e n f i r s t a p p e a r e d , and

t h e y were r e q u i r e d t o f o r c i b l y b r e a k i n t o e v e r y d o o r .

B r i t t o n had removed v a l u a b l e p e r s o n a l p r o p e r t y from t h e

premises, taking a l l of t h e saddles, tack, halters, bridles

and b l a n k e t s out of t h e t a c k room and p l a c i n g them on t h e

floor of the milk house which could not be locked, and

c o v e r e d them w i t h h o r s e b l a n k e t s . A f t e r t h e f i r e t h e remains

of o n l y two s a d d l e s were found i n t h e a r e n a : three other

s a d d l e s were r e p o r t e d s t o l e n .

B r i t - t o n was under f i n a n c i a l p r e s s u r e a t t h e t i m e o f t h e

f i r e because of h i s debts: $132,000 owing t o t h e Ronan S t a t e

Bank, secured by all of Britton's property including the

h o r s e arer.2; $40,000 owing t o Mary S c h r o e r on t h e c o n t r a c t

for deed for the purchase of the property when the fire

occurred; $8,800 owing t o S a l l y Lucas on a judgment o b t a i n e d

by her one month before the fire and miscell.aneous other

d e b t s of approximately $6,000, making a t o t a l of $1.86,800.

Britton had no income since 1975, was under pressure

from t h e Bank and Lucas t o s a t i s f y t h e o b l j - g a t i o n s owed t o
them, had not reduced his debt to the Bank since April- 1979,
ha.d to borrow additional amounts from the Ronan State Bank in
order to make the payment on the Schroer contact, had deeded
his property by quit claim deed to the Ronan State Bank, and
had given Ronan State Bank an assignment of his buyer's
interest in the Mary Schroer contract. The arena was totally
unproductive, was not being used for any purpose, and had
been for sale since mid 1978.
Britton had purchased his Farmers Insurance policy one
month before the fire on August 18, 1981. Other suspects
were eliminated by authorities.
FIG's brief contends that the Office of the State Fire
Marshall was of the opinion that Britton caused the fire and
communicated this opinion to Farmers. However FIG'S
reference to transcript does not bear out this statement.
The testimony of Deputy State Fire Marshall Churchwell was to
the effect that the Fire Marshall's office had two suspects,
Rill Britton and his son, Rusty. They had eliminated Rusty
as a suspect. They had determined that Britton had the
opportunity to set the fire and had a motive because of
financial pressure. On cross examination of Churchwell, he
was unable to establish financial gain for Britton from the
proceeds of the insurance policy. Churchwell had estimated
the cost of repair to the fire damage to be $135,000, and
since the insurance proceeds would constitute $116,000, there
was a loss to Britton under Churchwell's estimate, of $19,000
from the fire.
With all those facts before it, the jury decided 11 to 1
that Bill E. Britton did not intentionally set fire to the
horse arena; unanimously that his arena was wholly destroyed
as defined in the instructions; that his damages for the
breach of the insurance contract amounted to $116,000, 11 to
1; and unanimously that FIG had breached the implied-in-law
covenant of good faith and fair dealing in its conduct of the
claim. We should note that in an earlier trial in the same
cause, the jury had deadlocked on the question whether
Britton had started the fire and a mistrial had been
declared. We are bound, however, on this appeal by the
findings of the second jury.
The testimony at the trial relating to the value of the
damaged property reflects that Garold Jette testified a
replacement value of the horse arena to be $182,600. The
Rank witness of the Ronan State Bank testified that the total
value of the Britton property including the other
improvements in the land was $260,000, on which the Rank had
loaned as of the date of the fire a total of $131,000
(rounded) . FIG'S agent, Mike Lanktree, testified that the
replacement value of the horse arena was $144,500. The
Deputy State Fire Marshall testified the damage to the
property amounted to $135,000.
Witnesses for FIG testified that as agents for FIG they
had obtained estimates for the repair of the fire damage.
One estimate was for $25,000, one for $75,000 and one for
approximately $98,000. Mike Crouch testified for the company
that the settlement with the Ronan State Bank was based on
the $75,000 estimate of repair. None of the persons making
the repair estimates was presented at trial to substantiate
their respective estimates of fire damage. FIG presented no
witnesses to testify as t o the value of the fire damage.
With the testimony before it, the jury finding that the
damages from the breach of the contract amounted to $116,000
is unshakable by us. Moreover, neither the jury nor we have
any basis in the record to determine whether FIG was

justified in relying on lesser estimates of the cost of

r e p a i r o f t h e f i r e damage t h a n t h e s t a t e d v a l u e i n t h e p o l i c y

because no ~r.i.tnesses t e s t i f i e d to justify the lesser

estimates.

A. Did t h e T r i a l Court. Improperly Exclude Evidence F a v o r i n g

FIG?

FIG contends that in addition to the above

c i r c u m s t . a n t i a 1 e v i d e n c e t h a t B r i t t o n s e t t h e f i r e , it s h o u l d

a l s o have been allowed to show (1) e v i d e n c e o f polygraph

examinations which Britton failed and two other suspects

successfully passed.; and (2) evidence that Britton had a

history of three other fires and subsequent recovery of

i n s u r a n c e p r o c e e d s from t h o s e f i r e s .

Taking t h e p o l y g r a p h i s s u e f i r s t , it a p p e a r s t h a t Mike

S t o t t s , employed by t h e S t a t e F i r e M a r s h a l l ' s o f f i c e , a , f t e r

the f i r e of September 22, 1981, conducted t h r e e polygraph

t e s t s of Britton. B r i t t o n s u b m i t t e d a motion i n l i m i n e t o

exclude t h e polygraph r e s u l t s . A h e a r i n g was h e l d on t h e

motion on A.pril 1 3 , 1 9 8 3 , b e f o r e t h e f i r s t t r i a l and b e f o r e

D i s t r i c t Judge John S. Henson who was t h e n i n j u r i s d i c t i o n i n

t h e cause.

A t t h e hearing, B r i t t o n c a l l e d David Lykken, Ph.D., and

qualified him as an expert on polygraph interrogation.

Lykken testified that the polyqraph results have "zero

p r o b a t i v e v a l u e , " and t h a t a l l o w i n g p o l y g r a p h e v i d e n c e i n t h e

courtroom would be on a par to al-lowing testimony of

a s t r o , - o g e r s and f o r t u n e t e l l e r s .

At the hearing, Mike Stotts was present in the

courtroom. FIG'S c o u n s e l d i d n o t c a l l him i n c o n n e c t i o n w i t h

a n o f f e r o f p r o o f on t h e p o l y g r a p h r e s u l t s , b u t c o u n s e l f o r
Britton interrogated Stotts, and developed from him that he
had performed the polygraph examinations without determining
the effect of the various medications which Stotts knew that
Britton had been taking. Stotts wrote after the polygraph
examination to one Robert Hensor, at the Backster School of
Lie Detection, in San Diego, California, requesting
information as to whether Britton's h e ~ r t problem and
medication could be the reasons that Britton appeared to be
deceptive. Hensor answered in writing that he could not
answer the question as to medication though he regarded the
polygraph results as deceptive.
FIG failed to make a record as to the details of the
pol-ygraph examinations of Russell Britton and Sally Lucas,
the results of which FIG now claims should have been admitted
to evidence.
Judge Henson granted the motion in limine and excluded
the polygraph test of Britton, relying on State v. Beachman
(Mont. 1980), 616 P.2d 337, 37 St.Rep. 1558; Gropp v. Lotton
(1972), 160 Mont. 415, 503 P.2d 661, as determining that in
Yontana polygraph results are inadmissible in civil and
criminal trials. (After Judge Henson's order in 1983,
section 37-62-302, MCA, became effective, which provides that
results of a polygraph examination may not be introduced or
admitted in a court of law.)
On May 19, 1983, Britton moved for an order in limine to
exclude all reference in the trial to prior fires occurring
to Britton's properties on whjch he may have received
insurance proceeds. In ruling on the motion, the District
Court had before it the testimony of Rritton at a hearing
held on May 19, 1983, and the deposition of Sally H. Llucas
taken on September 24, 1982.
 Britton testified that he had disclosed on the morning
of the fire to FIG'S investigator information about other
fire losses during the course of his life. One involved the
fire loss of a Trail Boss, which is a combination mobile home
and two-horse trailer. Britton testified that the Trail Boss
had caught fire as he was pulling it down the road with his
pickup. It was worth $16,000 on a proposed sale, and there
was a $7,000 loan to the Ronan State Bank. The insurance
coverage was $11,000. The trailer fire occurred in April
1979.
In 1967, he had a fire loss involving a farm home at
Ovando, Montana. He received a check for $10,000 covering
mortgage insurance which he used to buy a trailer house in
place of the home at Ovando. He was not present when the
fire occurred but wa.s in Billings, Montana. The home was
destroyed because of a chimney fire.
A third fire involved property in Hamilton, Montana,
which was in the possession of his former wife after divorce.
His name was on the insurance policy and when the fire loss
occurred, he simply signed the insurance proceeds to the
mortgage holder on the wife's property. He was not present
when the fire occurred.
The deposition of Sally Lucas is unworthy of
consideration. It is unintelligable regarding the prior
fires, and is replete with irrelevancies and hearsay upon
hearsay.
Judge Henson granted the motion in limine to exclude
reference to the prior fires at the commencement of the first
trial on May 23, 1983. During the course of the second
trial, before District Judge R. D. McPhillips, FIG made an
offer of proof. It sought to elicit from Adam Kirsch
testimony to the effect that he had Loaned to Britton $7,106
in 197? and that it was repaid on April 9, 1979; that in
connection with making the loan in 1977, the Bank took a
security interest on a Trail Boss which was on the market for
$16,000. It was insured and a loan was made for one year.
In March 1979, a fire occurred to the horse trailer, the
insurance proceeds were received and two weeks later the loan
was made to the Ronan State Bank. The basis of the offer of
proof was that it showed evidence of a common scheme or
motive. Judge McPhillips denied the offer of proof, stating
that Judge Henson had already ruled in the matter.
Taking the matter of the refusal of the polygraph
results first, it is clear that the District Court was
correct in denying the polygraph evidence. Gropp v. Lotton,
supra. FIG contends that because it is being sued for "bad
faith" the polygraph results ought to be admissible as proof
of FIG'S good faith in refusing to pay the claim. FIG relies
principally on Moskos v. National Ben Franklin Ins. Co.
(Ill. App. 1978), 376 M.E.2d 388. In Moskos, it was held by
the Third Division of the Ill-inois Appellate Court that
whether the polygraph test results were accurate or
inaccurate was irrelevant but the fact that the insurance
company had knowledge of the results in denying the claim was
relevant to establish that the insurer did not act in bad
faith "in contending that the plaintiff committed arson."
There is, however, a later different decision in another
division of the appellate level in Illinois respecting the
admissibility of polygraph results within the knowledge of
the insurer when denying a claim on the basis of arson. In
Lynch v. Mid-American Fire & Marine Ins. Co. (Ill. App.
1981), 418 N.E.2d 421, 429, that appellate court said:
 . . .The trial court refused an offer of proof
that a polygraph test was given to Boes and the
examiner's opinion was that he showed deception
when he denied setting the fire or knowing who did.
The parties did not dispute that the evidence would
have been inadmissible for purposes of showing that
Roes was guilty of arson. There is authority for
its admissibility if limited to proof of
defendant's good faith in refusing to pay [citing
Moskus.] As the evidence would likely to have been
improperly considered by the jury as to the arson
policy defense despite any limiting instruction the
trial court did not err in balancing the prejudice
against the probative value and denying admission.
We hold that the polygraph results were inadmissible in
this case. Such was the declared public policy of this state
in section 37-62-302, MCA when this case was tried, even
though Judge Henson's ruling preceded the effective date of
that declared public policy. The District Court properly
followed the decided law of Montana in Gropp v. Lotton
(1972), 160 I4ont. 415, 503 P.2d 661 in denying evidence of
the polygraph results.
In like manner, we find no error in the denial by the
District Court of evidence or testimony relating to prior
fires on which Britton may have received insurance proceeds.
In the usual case, questions of admissibility of evidence are
left largely to the sound discretion of the trial court,
subject to review only in case of manifest abuse. Cech v.
State (1979), 184 Mont. 522, 604 P.2d 97. The proffered
evidence did not meet the test of relevancy, in that it did
not make probable that Britton. had committed arson either
from the viewpoint of motive, intent or the deed itself.
Rhodes v. Weigand (1965), 145 Mont. 542, 402 P.2d 588.
Unless evidence naturally and logically tends to establish a
fact in issue, it is not admissible, Frion v. Brown (1959),
135 Mont. 356, 340 P.2d 539. See McConnell-Cherewick v.
Cherewick (Mont. 19831, 666 P.2d 742, 40 St-Rep. 1102.
B. Reliance on 1nadmissibI.e Evidence to Deny Fire Claim.
We come now to consider whether FIG was entitled to rely
on the inadmissible evidence foregoing to decline payment of
the insurance proceeds and so escape the charge that it had
not acted in good faith.
The jury in this case has decided that on the
circumstantial evidence presented to it by FIG, and the other
evidence on the cause, FIG did indeed breach its duty of good
faith. We hold that FIG was not entitled to rely on
inadmissible evidence to deny payment of Britton's claim.
It is not within the bounds of the duty of good faith
between an insurer and the insured for the insurer to rely on
rumor, hearsay, polygraph results or other inadmissible
evidence to deny a loss und-er a fire insurance policy and so
force the insured to court action to col-lect the proceeds of
his claim. While an insurer may utilize inadmissible facts
or evidence to develop admissible evidence, it does not act
reasonably if it declines payment of an insured's claim
merely upon inadmissible evidence or testimony. Chavers v.
National Security Fire & Casualty Co. (Ala. 1981) , 405 So. 2d
1, 8.
C. Did the District Court Overinstruct the Jury?
FIG's position under this issue is that the District
Court erred in including in its charge to the jury a verbatim
reproduction of the fourteen proscribed unfair claim
settlement practices contained in the Montana Insurance Code
(section 33-18-201, MCA).
FIG's claim is based on its argument that the majority
of the unfair claims settlement practices enumerated in
section 33-18-201 have no applicability to any issue in this
case. FIG relies on Richland County v. Anderson (1955), 129
Mont. 559, 291 P . 2 d 267; Rogovich v. Chicago-Milwaukee-St.
Paul & Pacific Railroad Co. (1.949), 122 Mont. 312, 203 P.2d
971; and Garrison v. Trowbridge (194?), 119 Mont. 505, 177
P.2d 464, among others.
There was at least an arguable basis for the submis,L1 on
-

to the -jury for the determination of issues under the
following unfair claims settlement practices contained in
section 33-18-201, MCA: (1) misrepresenting insurance
pol-icy provisions relating to coverages at issue; (2) failing
to acknowledge and act reasonably promptly upon
comunications with respect to claims; (3) failing to adopt
and implement reasonable standards for the prompt
investigation of claims; (4) refusal to pay claims without
conducting a reasonable investigation ba-sed upon available
information; (5) failing to affirm or deny coverage within a
reasonable time after proof of loss statements have been
completed; (6) neglecting in good faith to effectuate
settlements in which liability had become reasonably clear;
(7) compelling the insureds to institute litigation to
recover the amounts due by offering substantially less than
the amounts ultimately recovered; (8) attempting to settle a
claim for less than the amount to which a reasonable man
would be entitled to by reference to advertising material or
an application; (9) making claims payments to insureds and
beneficiaries not accompanied by statements setting forth the
coverage under which the payments were made; (10) delaying
the investigation or payment of claims by requiring an
insured to submit preliminary claim reports and subsequent
formal proof of loss which contains substantially the same
information; (11) failure to promptly settle a claim if
liability has become reasonably clear; and (12) failing to
promptly provide a reasonable explanation of the basis for
denial of a claim.
Of the fourteen unfair settlement practices listed in
section 33-18-201, MCA, only two appear to be not applicable
to this case. They are: (1) attempting to settle claims on
the basis of an applicati-on which is altered without notice
or knowledge of the insured; and (2) making known to insureds
a policy of appealing from arbitration awards to compel
settlements. We determine that the inclusion of those two
unfair claims settlement practices in the jury charge was
harmless in this case. Such error is not prejudicia.1 where
it appears that without the erroneous instruction the same
verdict would be rendered. Wolfe v. Schulz Refrigera.tion
(1979), 188 Mont. 511, 614 P.2d 1015.
D. Should the District Court have Granted FIG'S Motion for
Directed Verdict?
FIG contends that the District Court erred in not
granting its motion for directed verdict so as to relieve it
from extra-contractual damages and for liability on its
implied duty of good faith and fair dealing.
A motion for directed verdict is properly granted only
in the complete a-bsence of any evidence to warrant submission
to the jury, and all inferences of fact must be considered in
the light most favorable to the opposing party. Jacques v.
Montana National Guard (1982), 199 Mont. 493, 649 P . 2 d 1319;
if the evidence viewed in a light most favorable to plaintiff
indicates reasonable men could differ as to the conclusions
drawn from the evidence a directed verdict is not proper.
Weber v. Blue Cross of Montana !1982), 196 Mont. 454, 643
P.2d 198.
 The question of Britton's arson was an affirmative
defense by FIG, and of course, an issue of fact for the jury.
Arson may be proved by circumstantial evidence, and a
prima facie case is shown if there is (1) arson by someone;
(2) motive by the insured; and (3) unexplained surrounding
circumstantial evidence implicating the insured. Lawson v.
State Farm Fire and Casualty Insurance Company (Colo. App.
1978) , 585 P. 2d 318. Circumstantial evidence alone may be
relied upon to prove the defense of incendiarism but the
proofs should do more than throw a mere suspicion of guilt on
the insured. The insurer may not rest upon speculation and
conjecture alone. However, a preponderance of the evidence
is sufficient to establish the arson. Great American
Insurance Company v. K & W Log, Inc. (Wash. App. 1979), 591
P.2d 457.
Had FIG in this case relied on admissible circumsta-ntial
evidence and promptly denied the claim, we would then have
been constrained to hold that Britton was not entitled to
extra-contractual damages or to punitive damages in this
case. There were other elements in its handling of the
claim, however, that made a jury issue of whether FIG
breached its duty of fair dealing in at least the following
respects:
1. It created an issue of total loss to the horse arena
to avoid the application of the valued policy statute.
2. It failed to pay under the loss payable mortgage
clause the stated value of the loss to the mortgagee Bank.
3. It did not negotiate its payment to the mortgaqee
Bank with the insured as required by its policy.
4. In making payment to the mortgagee Bank, it took a
partial assignment of the Bank's mortgage, which had the
effect of (a) not reducing the debt on the mortgage owed by
Britton, (h) continuing interest charges on that portion of
the debt assigned, and (c) precipitating the mortgage
foreclosure action by the Bank.
5. It failed to deny coverage of the claim within a
reasonable time after Britton's proof of loss statements had
been completed.
6. It never raised the question of arson directly with
Britton until it filed its answer and cross-claim in the
foreclosure action.
7. It claimed a subrogation right under the policy
without first denying the claim to its insured. (We know
from the record, though it has no application here, that the
Bank later contended with the insurance company that it had
no right to a partial assignment under its subrogation
clause. The effect of taking the partial assignment was to
place the insurance company ahead of a judgment creditor in
this case.)
8. It wrongfully delayed the claim from Britton upon
its insistence that Russell Britton was an insured under the
policy.
There were therefore sufficient elements of breach of
good faith in the handling of the Britton claim for the
District Court to submit the issue of extra-contractual
damages and punitive damages to the jury.
The District Court in this case carefully covered the
issue of good faith in its charge to the jury. The court
instructed the jury that it was a breach of good faith to
refuse unreasonably to pay a valid claim and such refusal
would subject the insurer to liability for all damages
proximately resulting from the conduct. The jury was
instructed that FIG could be incorrect in denying a claim and
not be subject to liability. Its refusal had to be
unwarranted, unreasonable and without justification.
The District Court in this case properly submitted the
issues of extra-contractual damages and punitive damages to
the jury. We find no error on this issue.
E. Did the District Court Err in Admitting the Testimony of
Dr. Clark?
FIG assjgns as error the admission to evidence of the

videotape deposition of Arthur M. Clark, M.D. FIG contends

the deposition was cumulative, had no probative value and
invoked the sympathy and passion of the jury.
Britton's counsel argued tha.t Dr. Clark 's testimony was
relevant to the question of whether or not Britton was
physically capable of setting the fire and also relevant for
testimony concerning the condition of Britton's lungs
immediately after the fire, the lack of smoke in his lungs,
offered in support of Britton's contention that he did not
set the fire.
Britton responds that the videotape deposition was
edited by the District Court to delete the portion showing
Britton's diseased and enlarged heart.
The edited version was submitted to the jury without -
an
objection a FIG, and under a cautionary instruction from the
court that the video was not to be considered for Britton's
damages, but only to show whether he was physically able to
participate in the fire in the way that FIG claimed he did.
The district judge in his order denying the post-trial
motions of FIG found the objection to have been waived.
Sections 103(a) and (a)(I), M.R.Evid. are in accord. We find
no error on this point.
SHOULD THE DISTRICT COURT HAVE GRANTED SEPARATE TRIALS ON THE
CONTRACT AND TORT ISSUES?
The District Court declined to bifurcate the trials so
as to determine in separate trials (1) whether Rritton
intentionally caused the fire and (2) whether FIG committed a
breach of good faith.
FIG claj-ms prejudice from the denial because of (a) the
preclusion of evidence regarding the polygraph examinations,
and the prior insurance claims for fire losses; (b) a finding
of intentional burning by the insured would preclude further
proceedings; (c) error in the order of presentation in the
evidence--FIG claj-ming that it was entitled to present its
evidence first because of its affirmative defenses of
intentional burning and misrepresentation; and, (d)
commingling of the evidence regardin.g FIG'S affirmative
defenses with evidence of unfair claims settlement practices
and the wea.lth of FIG.
The District Court denied the motion for separate trials
upon the mistaken impression that the district judge earlier
in jurisdiction had denied bifurcation of the issues.
Several times during the trial the District Court made
off-the-cuff comments that the case should have been severed
for purposes of trial. In its order denying the post-trial
motions made by FIG, the District Court noted that the
earlier district judge had decided not to bifurcate the trial
and that "while this judge questions the wisdom of combining
the claims because of very obvious problems tha.t arise in the
proof, it will not disturb Judge Henson's order."
Although no order by District Judge Henson can be found
in the record denying bifurcation, it is clear from the
record that all parties assumed that he had done so and it
was never brought to the attention of District Judge
McPhillips that District Judge Henson had in fact not so
ordered a denial.
In Klaudt v. Flink (Mont. 1983), 658 P.2d 1065, 40
St.Rep. 64, we held that a third party to the insurance
contract could join his cause of action against the insurer
for violation of the unfair claims settlements act of our
code with the underlying action against the insured
individual in a liability case.
In 1985, the legislature enacted section 33-18-241, MCA,
effective October 1, 1985, to the effect that the trial of a
claim against an insurer for lack of good faith in its
handling or settlement of a claim could not be consolidated
with the trial of the underlying claim if the lack of good
faith claim i.s against a party different from the party
against whom the underlying claim is made without stipulation
of counsel. Section 3, Ch. 504, Laws of Montana (1985).
That statute does not apply to this case, both because of the
effective date and because this case involves a first party
claim.
In deciding this issue, we must keep in mind the status
of the pleadings in this case. As we indicated, Ronan State
Bank started a foreclosure action aqainst Britton, FIG and
others by filing its complaint for foreclosure on May 10,
1982. Britton answered the Bank's foreclosure complaint by
answer on July 19, 1982 in which Britton included a
cross-claim against codefendant FIG. Britton's cross-claim
does not allege a cause of action in contract, hut rather one
in tort for violation of the unfair claims settlement
practices act, section 33-18-201, MCA.
 FIG responded to the Bank's complaint of foreclosure by
filing its own cross-claim against the remaining defendants
for foreclosure of its partial interest in the mortgage, and
then set out ten defenses against Britton's claim in tort.
The third defense alleged that Britton had. failed to meet the
terms and conditions of the policy for recovery; FIG'S fourth
defense alleged that Britton had intentionally caused the
fire; FIG'S fifth defense alleges willful concealment by
Britton of material facts involving his interest in the
insured property by fraud and by false swearing and by
failure to submit a proper proof of loss within the time
required by the policy; its sixth defense is one that Britton
refused to submit to sworn statements and refused to produce
records; the seventh defense raises estoppel, failure of
consideration and fraud; its eighth defense is a claim for
mitigation of Britton's damages; its ninth defense is that
punitive damages are not permitted under applicable law; and
its tenth defense is that Britton's claims are barred by
section 50-63-405, MCA.
On April 12, 1984, FIG moved for a separate trial,
stating in its motion:
... [moves the Court] to order a separate trial
of the defenses raised by Farmers in their answer
to Plaintiff ' s Cross-Claim (including the defenses
of failure to meet the terms and conditions of the
insurance policy, intentional setting of fire,
willful concealment, misrepresentation, fraud,
false swearing, failure to submit a proper Proof of
Loss and failure of the insured's son to properly
submit to a sworn statement) and further directing
that the trial of the remaining issues raised by
the Plaintiff in his Cross-Claim be postponed until
after final determination of the separate trial of
the said issues . . ..

Defendant Farmers further moves that the trial of
the allegations of Plaintiff's Cross-Claim, if
required, follow irnrnediatel-y the trial on the
 affirmative defenses of Farmers, and be tried
before the same jury.
In a supporting brief, FIG argued. for a separate trial,
because its case would take a lesser amount of trial time and
if decided in its favor would negate Britton's cross-claim.
Here, Britton, having a choice of two remedies, one in
contra-ct and one in tort, elected to pursue his claim in
tort. Recovery by him on his claim in tort would have the
effect of barring his claim for breach of contract. Massett
v. Anaconda Company (Mont. 1983.), 630 P.2d 736, 38 St.Rep.
961. If the District Court had granted FIG'S motion for
separate trials, it would have then converted Britton's claim
for tort to one for breach of contract. Britton would then
have been precluded from presenting any evidence as to
consequential damages for the tort, let alone any evidence
relating to punitive damages in the first trial. His right
to a trial by jury of his tort claim, guaranteed by Art. 11,
S 26, 1972 Mont. Const. and the Seventh Amendment to the
Federal Constitution would have been prejudiced.
Under Britton's tort claim, the issues of fact regarding
FIG'S violations of the Unfair Claims Settlement Act are
inextricably woven with FIG'S claim of intentional burning.
FIG made no attempt to sustain its other affirmative
defenses. As we said in State ex rel. Fitzgerald v. District
Court (1985), 703 P.2d 148, 42 St.Rep. 1061:
It is clear to us that the issue of exemplary
damages in any case is so interwoven with the proof
first of negligence and secondly of willfulness,
wantonness, malice or oppression, that their
separation under Rule 42 (b), M. R.Civ. P. for
decision by a single jury seriatim or by different
juries is an abuse of discretion by the District
Court, which would result in extended and needless
litigation.
Moreover, FIG, having filed its motion for a separate trial
while Judge McPhillips was in jurisdiction of the cause,
failed to follow up on its motion to procure a written order
or minute entry granting or denying separate trials. If
Judge McPhillips orally denied the motion on the assumption
that Judge Henson had earlier denied separate trials, it was
the duty of counsel for FIG to alert the district judge as to
his mistaken assumption. In those circumstances the district
judge may not be put in error.
FIG filed its motion for separate trials on April 12,
1984, and 11 days later, on April 23, 1984, the case came on
for trial. What happened in the interim as to the motion for
separate trials is not found in the record. FIG neither
procured a written order granting or denying the motion, nor
caused a minute entry to be made of the disposition of the
motion. The case then went to trial without bifurcation.
From the nature and extent of the motion made by FIG, it is
clear that if the court had granted the motion it would have
been reversible error.
FIG'S motion for separate trial was not directed simply
to the issue of intentional burning by Britton. Rather, the
motion requested that all of FIG's defenses be first tried
before Britton's tort claim could be considered.
FIG'S affirmative defense of "failure to meet the terms
and conditions of the insurance policy" would include the
following issues of fact contended for by Britton and
included in the pretrial order: That the damages caused by
the fire claimed by Britton were exaggerated and in excess of
the amounts indicated by FIG's investigation; that the bid of
John Rody for $75,000 was reasonable and would completely
repair the damaged structure; and that Britton refused to
cooperate in identifying the location of Russell Britton.
FIG's affirmative defenses of willful concealment,
misrepresentation, fraud, and false swearing raised these
issues of fact in the pretrial order: That Britton submitted
a proof of loss for three saddles which were neither burned
nor stolen at the time of the fire and were concealed for the
purpose of fraud; and that his proof of loss for the three
saddles was fraudulent. FIG'S affirmative defense of
Britton's failure to submit a proper proof of loss was
intertwined as an issue of fact with Britton's claim that the
failure of FIG to reject the proof of loss and to deny the
claim constituted waiver and estoppel. FIG'S further
affirmative defense that the failure of the insured's son to
properly submit to his sworn statement raised tssues of both
law and fact as to whether Russell Britton was an insured
under the policy and whether he did in fact submit to a sworn
statement.
The issues of fact and law under FIG's defenses were
inextricably intertwined with the issues and contentions of
Britton that the damages caused by the fire exceeded the
$75,000 which FIG paid to the Bank; that Britton had
submitted a proof of loss in accordance with "the stated
value" law and was entitled to payment of $116,000; that the
actions of FIG were unreasonable in contending tha.t it had a
right to subrogation after paying the Bank, that Russell
Britton was an insured under the policy, that Britton had
intentional-ly burned the barn, that he had willfully
concealed the saddles and had claimed insurance proceeds for
their loss, and that FIG had never rejected his claim after
proof of loss had been submitted, causing him emotional
distress.
 Obviously it would have been impossible for the District
Court to grant FIG a separate trial on the defenses claimed
by FIG's without overlapping on issues raised by Britton in
his tort claim. The policy of the law is to avoid
multifariousness in litigation and to resolve all issues and
1-awsuits in one trial. Carlson v. Cain (Mont. 1985), 700
P.2d 607, 42 St.Rep. 695. Affirmative defenses which do not
go to the merits of defendant's claim, as for example a
defense of a statute of limitation or of lack of
jurisdiction, may lend themselves to bifurcation, but
affirmative defenses which dispute the merits of a claim on
issues of fact do not. It is when plaintiff's issues of fact
arc interwoven and intertwined with the issues raised by the
defendant that the rule we announced in State ex rel.
Fitzgerald v. District Court (Mont. 1985), 703 P.2d 148, 42
St.Rep. 1061, applies; a grant of FIG's motion for separate
trials of its affirmative defenses in this case would have
been an abuse of discretion, and reversible by us.
Finally, as we stated earlier, all parties, including
counsel for FIG, assumed that District Judge Henson had in
fact entered an order denying bifurcation. This mistaken
assumption continued past the time when District Judge
McPhillips denied a new trial after the post-trial motions.
It was not until this appeal that FIG raised the issue that
District Judge Henson had not in fact so ruled. Thus Farmers
is in the position of asking this Court to put District Judge
McPhillips in error on a point not brought to his attention.
This Court looks with disfavor on raising issues on appeal
not addressed to the District Court in the underlying action.
A trial court cannot be put in error, on its order denying a
motion for a new trial, on matters not brought to its
attention by notice or otherwise. See Gardiner 17. Eclipse
Grocery Company (1925), 72 Mont. 540, 234 P. 490.

DID COUNSEL FOR BRITTON MAKE IMPROPER ARGUMENT TO THE ZURY?
In closing argument, Britton's counsel stated. to the
jury:
.
. . And the evidence here is this: Mr. Britton
has not been convicted of any criminal. offense in
regard to this situation . . ..
In closing argument, he said to the jury in part:
..
. And we're not coming in here and saying that
arsonists shouldn't be punished because they
should, by the proper authorities--not some
California insurance company.
The ground of FIG'S objection to the closing arguments
is that evidence of nonprosecution for arson in cases for
insurance proceeds is not admissible, relying on American
Home Assurance Company v. Sunshine Supermarket, Inc. (3rd
Cir. 1985), 753 F.2d 321, and other cases.
The issue arose because of the provision in the stated
value law, section 33-24-102, MCA, which provides that the
valued policy law applies "without criminal fault on the part
of the insured. "
It was pertinent to Britton's case that the jury, in
considering whether the valued policy law is applicable,
should also know whether Britton was without criminal fault.
Otherwise, under its terms, the valued policy statute would
not apply.
Prior to final argument, the matter was brought up to
the court as follows:
MR. DALE: And then in terms of conviction, we just
get to say Mr. Britton hasn't been convicted of any
criminal offense.
THE COURT: Yes, and that's the end of that.
 FIG made no objection to this ruling. The argument made
by Britton's counsel was proper in the circumstances.
IV.
DID CONSUMPTION OF ALCOHOLIC BEVERAGE BY THE JURY INFLUENCE

THE OUTCOME OF THE CASE?
FIG maintains that the jury verdict here was invalid per
se because of "drinking by a jury after deliberations have
begun. "
The record reveals that while the jury was considering
this case, it was taken to dinner. Some members of the jury
asked if it would be alright to have a drink. The bailiff in
charge told them yes after receiving approval from her
"boss." The evidence was that no juror had more than one
glass of wine or beer during dinner and that no juror was
observed in an impaired condition from the consumption of the
one drink.
This issue is controlled by Wibaux Realty Company v.
Northern Pacific Railway Company (1935), 101 Mont. 126, 54
P.2d 1175. There this Court held that unless a party
litigant is culpable, the consumption of alcoholic beverage
by a juror during its deliberations which is not excessive
a.nd which is not shown to have 1-ed to a miscarriage of
justice is not grounds for reversal of a jury verdict.
While we caution judges and bailiffs that no persons
serving on a jury during their deliberation should be allowed
alcoholic beverages, particularly at county expense, we
decline to adopt a per se rule invalidating jury verdicts on
the record presented here. FIG has made no showing that the

consumption of one glass of beer or wine by several jurors
during dinner did in any way influence the outcome of the
case.
 v.
CONCLUSION.
Accordingly, we affirm the judgment of the District
Court in favor of the cross-claimant Bill E. Britton.
CROSS-APPEAL
Britton assigns as error in his cross appeal the refusal
of the District Court to award attorney's fees and nontaxable
costs to him under the Consumer Protection Act, section
30-1-4-133,MCA.
Following the verdict, Britton made a motion for
determination by the District Court for Consumer Protection
Act relief under section 30-14-133, MCA. Because
consideration of Britton's motion was still pending at the
time FIG filed its appeal in this Court, we reinvested
District Judge McPhillips with jurisdiction to determine
whether Britton was entitled to consumer protection relief.
On February 27, 1985, District Judge McPhillips entered
findings of fact and conclusions of law i.n regard to the
issue. He found that the representation of Britton was "on a
contingency basis," and that Britton's 'kttorneys had made
their fee arrangement." The District Court found that a
total of 2,841.02 hours were spent by plaintiff's attorneys
in the prosecution of the case which the court determined. was
reasonable under the circumstances. The District Court
further found that $75.00 an hour was a reasonable hourly
rate for attorney's services in the cause. It also found
that Britton's attorneys had advanced costs of $34,654.84, of
which only $5,513.36 qualified as taxable costs. Judge
McPhillips declined attorney's fees and further costs on the
ground that the total punitive damages award of $400,000.00
was sufficient to pay Britton's attorney's fees plus the
nonallowable costs.
On cross-appeal, Britton argues that the refusal of the
District Court to award attorney's fees and costs under the
Consumer Protection Act invades the punitive damages award
which he rightfull-y obtained from the jury, and that under
Salois v. Mutual of Omaha Insurance Company (Wash. 1978), 581
P.2d 1349, a violation of the unfair claims settlement act by
an insurer entitles the aggrieved party to relief under the
Consumer Protection Act. The district judge agreed that
Salois applied, but denied relief for the reasons stated
above .
Punitive damages may be awarded by a jury in a proper
case where the defendant has been guilty of oppression, fraud
or malice in addition to actual damages "for the sake of
example and by way of punishing the defendant. l1 Section
27-1-221, MCA. The function of punitive damages is just as
the statute says and the office of punitive damages is not to
make up for attorney's fees or noncollectable expenses to
which a litigant may feel entitled. On that point, the
District Court was in error in denying relief.
The District Court, however, reached the right result
for the wrong reason.
Section 30-14-103, MCA, a part of the Unfair Trade
Practices and Consumer Protection Act provides that "Unfair
methods of competition 2nd unfair or deceptive acts or
practices in the conduct of any trade or commerce are
unlawful. " (Emphasis added. ) IJnder section 30-14-133, MCA,
a person guilty of an unfair trade practice under section
30-14-103 is subject to actual damages incurred by the
aggrieved party which the court in its discretion may
increase up to three times.
However, the Consumer Protection Act was meant to be
interpreted and enforced in conjunction with and guided by
the interpretations of the Federal Trade Commission and the
federal courts relating to the Federal Trade Commission Act.
See section 30-14-104, MCA. No interpretation of the Unfair
Trade Practices and Consumer Protection Act can be
inconsistent with the rules, regulations and decisions of the
Federal Trade Commission Act. Section 30-14-104, MCA.
On the other hand, the Unfair Claims Settlement
Practices Act, section 33-18-201, MCA, springs from a
d.ifferent source than the Federal Trade Commission Act. It
is part of a response by the state to the mandate of the
federal government that with respect to insurance companies
engaged in interstate commerce, the state should provide
effective regulation of insurance companies and their
practices.
In 1944, the United States Supreme Court reversed a
longstanding rule in U.S. v. South-Eastern Underwriters v.
Assoc. (1944), 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440,
reh. denied 323 U.S. 811. It held the business of insurance
was interstate commerce. The impact of that decision was to

put in doubt at that time all of the powers of the individual
states to regulate insurance companies and their activities,
and to tax their insurance premiums.
Following the South-Eastern Underwriters' decision,
Congress adopted the McCarran-Ferguson Insurance Regulation
Act, 1 5 U.S.C.
. 5 1011, et seq., 59 Stat. 33, enacted March 9,
1945. The McCarran-Ferguson Act provided that if states

undertook to regulate the insurance business, the state
regulation would bring the insurance industry in the state
within the exceptions to federal law relating to taxation,
anti-trust and trade practices provided by the
b!lcCarran-Ferguson Act. See U.S. Code and Congressional
Service, Vol. 2, at 670 (1945), Report of House Committee on
Judiciary.
Under the influence of the McCarran-Ferguson Act the
insurance commissioners of the states promoted a model code
for the regulation of insurance companies. In 1959, our
legislature adopted a complete recodification of the
insurance code. It included a chapter on trade practices and
fraud. The stated purpose of Montana in adopting the trade
practices law was to regulate the business of insurance in
accordance with the intent of Congress as expressed. in the
McCarran-Ferguson Act. Former section 40-3501, R.C.M.
(1947).
The present Unfair Claims Settlement Practices Act of
our code was adopted in Ch. 320, Laws of Montana (1977). The
stated purpose of the act was "to regulate trade practices in
the business of insurance in accordance with the intent of
congress as expressed in [the McCarran-Ferguson Act] by
defining or providing for determination of all such practices
in this state which constitute unfair methods of competition
or unfair or deceptive acts or practices and by prohibiting
the trade practices so defined or determined." That language
is now found in section 33-18-101, MCA.
Under 15 U.S.C. § 1011, the federal anti-trust laws and
the federal trade practice laws are not applicable to the
business of insurance in the state to the extent that such
activities of the insurance industry are regulated by state
law.
 I t w i l l be s e e n t h e r e f o r e t h a t t h e p u r p o s e of t h e U n f a i r

Trade P r a c t i c e s and Consumer P r o t e c t i o n Act i s t o conform t o

t h e Federa.1 Trade Commission Act. O t h e o t h e r hand,
n the

purpose of the Unfair Claims Settlement Act, relating to

i n s u r a n c e companies, i s t o p r o v i d e e f f e c t i v e s t a t e r e g u l a t i o n

in accordance with t h e P'IcCarran-Ferguson Act, s o a s t o be

exempt from t h e f e d e r a l r e g u l . a t i o n s .

We therefore hold that the provisions of the Unfair

Trade P r a c t i c e s and Consumer P r o t e c t i o n A c t , a s r e l i e d on hy

B r i t t o n may n o t be a p p l i e d w i t h r e s p e c t t o i n s u r a n c e company

p r a c t i c e s , and B r i t t o n must be c o n f i n e d t o such r e l i e f a s may

a r i s e o u t o f t h e i n s u r a n c e code f o r u n f a i r c l a i m s s e t t l e m e n t

practices.

Accordingly, we affirm the judgment of the District

Court with r e s p e c t t o d-enial of f u r t h e r a t t o r n e y ' s f e e s and

nontaxable costs. In any event, we award costs on this

a-ppeal t o B r i t t o n .

W Concur:
e

Justices
Mr. Justice Fred J. Weber separately concurs as follows:
I concur in the majority opinion with the exception that
I do not agree with all of the statements regarding whether
the District Court should have granted separate trials on the
contract and tort issues as set forth in Part 11. I do agree
that separate trials are not appropriate as stated in the
last paragraph of Part 11.
As pointed out in the majority opinion, all of the
parties, including the counsel for FIG, assumed that Judge
Henson had entered an order denying bifurcation. This mis-
taken assumption continued past the time when Judge
McPhillips denied a new trial after trial on the merits and
post trial motions. It was not until this appeal that FIG
raised the issue that Judge Henson in fact had not ruled
against bifurcation. I agree with the majority conclusion
that FIG may not put Judge McPhillips in error on a point not
brought to his attention and not raised prior to the time of
this appeal. I therefore join in the conclusion that it
would not be proper for this court to remand for separate
trials.

We join in the special concurrence of M r . Justicr,.Fred J.

Weber.

\,,1
,'// '" ---------
,, ,

'oer
gb't M. Holter, District Judqe, - .
Sitting f o r M r . Justice John C .
, Harrison
The Hon. Henry Loble, District Judge, dissenting:

I respectfully dissent. The trial judge did not
consider and rule upon appellant Farmers Insurance Group's
(FIG) motion for separate trial on that motion's merits.
The trial court was under the erroneous impression that
District Judge Henson, who had previously presided in the
case, had denied a cross-defense motion for separate trial.
The trial judge repeatedly, during the trial, recognized that
he should have severed the case. For example, he said: "THE
COURT: Well, I think it's another prime example of why this
case should - - severed - purposes - trial."
have been for of
(Emphasis added.) And again, he said: "THE COURT: If I
were over here, I'd sever - -
this case." (Emphasis added. 1
Further, he stated: "THE COURT: Well, this is just another
prime example of why these cases should - severed.
be That old
sword cuts both ways." (Emphasis add.ed.) In his order of
June 28, 1384, denying Farmers' post-trial motions, the trial
judge said:
The irregularity of not bifurcating the trial into
a contract- action and a separate tort action is
Farmer's first point of contention.
District Judge Henson in pre-trial proceedings
herein ordered. the contract and tort claim tried
together. This Judge will not disturb Judge
Henson's order. K1aud.t v. Flink, 658 P. 2d 1065,
sucraests the contract action and the tort may be
tried together. While this Judge questions the
wisdom - combining - claims because - very
of the of
obvious problems that arise - - proof, it will
in the
not disturb Judge Henson ' s order. (Enpkiasis
added. 1
In the same order of June 28, 1984, the trial judge said.:
The exclusion of the evidence prejudiced the
Cross-Defendant's Farmers' defense in the had faith
claim. Another reason why this cause ought - -
to have
been bifurcated. (Emphasis added.)
Rule 42(b), M.R.Civ.P., provides as follows:
 Separate trials. The court in furtherance of
convenience or to avoid prejudice may order a
separate trial of any claim, cross-claim,
counterclaim, or third-party claim, or of any
separate issue or of any number of cla-ims,
-
cross-claims, counterclaims, third-party claims, or
issues.
This Court has endorsed the use of separate trials to avoid
prejudice and for judicial economy. State ex rel. Northern
Pacific Railway Co. v. District Court (1970), 155 Mont. 91,
467 P.2d 145; Monaco v. Cecconi (1979), 180 Mont. 111, 589
P.2d 156.
Appellant was entitled to have the trial court consider
its motion for separate trial on the merits. The trial judge
did not exercise his discretion at all when he failed to rule
on the motion. In State ex rel. McGinnis v. District Court
(Mont. 19831, 673 P.2d 1207, 1208, 40 St.Rep. 1858, 1859, it
is said:
The purpose of Rule 42 (b), M..R..Civ.P., is to
provide a broad discretion in the District Court in
the handlinq of the trial procedures. (Emphasis
added. )
The judgment of the lower court cannot be sustained when the
trial judge, under a mistake of fact, abdicated his
responsibility to exercise his discretion in deciding a Rule
42(b) motion. Had he ruled on the merits of the motion he
would have granted it, as he repeatedly said.
I do not agree with the majority opinion that Rritton's
case was tried only in tort. Under our system of notice
pleading it is not possible to determine the issues simply by
examination of the pleadings alone. Resort must also he had
to other sources to resolve this question. In this cause it
is clear that the case was prepared and tried first on the
question of whether the insurance contract was breached and
second as to whether bad faith was involved. The trial judge
said so, as above noted, when in his order of June 28, 1984
he referred to ". .. the contract - - claim."
and tort
(Emphasis added.) Questions No. 3 and 4 of the jury verdict
read as follows:
QUESTION NO. 3: What damages did Bill E. Britton
incur as a result of the breach - - insurance
of the
contract by Farmers Insurance Group?
QUESTION NO. 4: Did Farmers Insurance Group (Truck
Insurance Exchange) breach the implied-in-law
covenant of good faith and fair dealing by its
conduct in handling B ~ T E-~ritton's claim?
(Emphasis added.)
The instructions given to the jury were replete with
references to the insurance contract. The briefs of the
pa.rties show that the case was prepared and tried on a
contract - tort
and theory. This is also true of the
interrogatories and. the answers thereto. In the pretrial
order of May 23, 1383, it is set forth that one of
cross-claimant Britton's contentions is that he ". . . is
entitled to his insurance proceeds pursuant to the insurance
contract with Farmers.. . ." (Emphasis added.) In a July
17, 1-983 order of the trial judge's predecessor which denied
a motion for partial summary judgment, repeated references
are made to the "insurance contract" and it is said: " TO
recover under the insurance policy, Britton has cross-claimed
against Farmers Insurance Group." In FIG'S brief filed on
April 1, 1983, it is said:
In his responsive pleading Britt.on - stated a
has
cross-claim a.gainst Farmers attempting to recover
wder - -
a fire insurance policy issued by ~zrnersfor
a fire which occurred in Britton's horse arena
located. south of Ronan, Montana. Britton also
claims damages for alleqed bad faith on the part of
Farmers, as well as violations of the Montana
Unfair Claims Settlement Practices Act, §
33-18-201, et seq., MCA. (Emphasis added.)
There are many other instances shown in the record which
substantiate the contract and tort theories upon which
Britton's case was prepared and tried.
 Granting separate trials under these facts would not
have been reversible error. The trial court had "broad
discretion." Its decision would not have been limited by the
scope of the motion for separate trial by FIG.
Contrary to the majority opinion, the two claims were
not so "inextricably woven" together that their bifurcation
would ha.ve been reversible error. The case of State ex rel.
Fitzgerald v. District Court (Mont. 1985) , 703 P.2d 148, 42
St.Rep. 1061, cited by the majority as authority for their
"inextricably woven" theory did not involve the question of
separate trials for contract and bad faith claims but,
rather, separate trials for liability and damages, an
entirely different matter.
The trial judge relied upon an order of his predecessor
judge which was never made. Thus, he failed to exercise his
discretion when deciding a Rule 42(b) motion for bifurcation.
The previous district judge had never ruled that the contract
and tort actions should be tried together. As a consequence
the trial judge did not consider this issue on its merits.
He recognized that separate trials were justified but instead
of granting a separate trial, mistakenly placed his reliance
on a non-existing previous ruling by his predecessor district
judge. I would reverse and remand the case to the lower
court for separate trials in accordance with the repeatedly
and emphatical-ly expressed opinion of the trial judge that
trial of the contract and bad faith claims should have been
bifurcated.