Watters v. Guaranty National Insurance

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No. 98-718

IN THE SUPREME COURT OF THE STATE OF MONTANA

2000 MT 150

300 Mont. 91

3P. 3d 626

CHARLES K. WATTERS and JANET M. WATTERS,

Plaintiffs and Respondents,

v.

GUARANTY NATIONAL INSURANCE COMPANY,

a Colorado corporation,

Defendant and Appellant.

APPEAL FROM: District Court of the Eighteenth Judicial District,

In and for the County of Gallatin,

The Honorable Thomas A. Olson, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Guy W. Rogers (argued), Lisa A. Rodeghiero, Brown Law Firm, Billings, Montana

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For Respondents:

Richard J. Andriolo, Daniel P. Buckley (argued), Berg, Lilly, Andriolo & Tollefsen, Bozeman, Montana

For Amici:

William Conklin, Conklin, Nybo, Leveque & Lanning, Great Falls, Montana (State Farm Mutual
Automobile Insurance Company); Paul C. Meismer, Carey, Meismer & McKeon, Missoula, Montana
(Montana Trial Lawyers Association); John E. Bohyer, Phillips & Bohyer, Missoula, Montana (Estate of
Helen R. Hohstadt)

Heard: October 14, 1999

Submitted: November 18, 1999

Decided: June 6, 2000

Filed:

__________________________________________

Clerk

Justice James C. Nelson delivered the Opinion of the Court.

¶1 Guaranty National Insurance Company (Guaranty) appeals from an order issued by the
Eighteenth Judicial District Court, Gallatin County, granting summary judgment in favor
of Charles K. Watters and Janet M. Watters (Watters), and denying its cross-motion for
summary judgment.

¶2 We affirm in part, reverse in part, and remand for further proceedings.

¶3 Guaranty has raised two issues which we restate as follows:

1. Once clear liability was established and damages undisputedly exceeded policy
limits, did Guaranty violate Montana's Unfair Trade Practices Act by conditioning

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the payment of policy limits on the Watters' agreement to provide a full and final
release of all liability in favor of its insured?

2. Did Guaranty have a reasonable basis in law or in fact for contesting the Watters' claim,
and therefore may not be found liable for violating Montana's Unfair Trade Practices Act?

Factual and Procedural Background

¶4 Generally, the underlying facts are not in dispute and have been stipulated to pursuant
to a November 2, 1998 judgment issued by the District Court.

¶5 On October 31, 1993, the Watters suffered serious physical injuries following a
collision between their car and one driven by Robert O. Moore (Moore), near Bozeman,
Montana. At the time, Moore was insured by Guaranty for the statutory mandatory
minimum amounts of $25,000 for bodily injury per person, $50,000 for bodily injury per
accident, and $10,000 for property damage.

¶6 Guaranty investigated the accident and determined that Moore was at fault and that the
Watters' personal injury claims entitled them to Moore's policy limits of $50,000. By
January 4, 1994, medical bills for the Watters had reached approximately $90,000.
Ultimately, the Watters incurred in excess of $100,000 in medical bills.

¶7 Within one week of the accident, on November 5, 1993, Guaranty informed Moore that
"should the claimant pursue recovery through a lawsuit, the possibility does exist that a
judgment could be awarded against you in excess of your insurance coverage." Guaranty
further informed Moore that he could obtain an attorney at his own expense to represent
him regarding "any excess exposure which now exists or may exist in the future."
Guaranty emphasized its insurance policy provision that "settlement of any claim or suit
remains within the discretion of our company." This notice to Moore was followed up in a
letter, dated February 17, 1994, in which Guaranty again advised Moore that Guaranty
would not be liable for a judgment in excess of policy limits, and that Moore may wish to
retain counsel at his expense, recognizing that "you or your attorney may disagree with the
approach taken by Guaranty National."

¶8 With liability and entitlement to the policy limits clearly established, the Watters, in a
December 23, 1993 letter, demanded payment of Moore's bodily injury policy limits of
$50,000. The Watters would not, however, agree to execute a full and final release of all
liability in favor of Moore. Counsel for Watters also notified counsel for Guaranty that

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"any attempt to withhold payment to force a release would be an Unfair Claims Settlement
Practice." Guaranty refused to pay the policy limits without a full and final liability release.

¶9 On January 5, 1994, the Watters filed suit for personal injuries against Moore in the
Eighteenth Judicial District Court. In his February 22, 1994 Answer, filed by counsel for
Guaranty on his behalf, Moore admitted fault for the accident. By this time, both Guaranty
and the Watters realized that Moore had no assets to contribute to an excess judgment.
During this time, counsel for Watters reached a claim settlement with Guaranty for
$9,161.07 under Moore's $10,000 property damage coverage. This settlement, however,
apparently did not involve an absolute liability release that affected the bodily injury
coverage portion of Moore's policy with Guaranty.

¶10 In an exchange of letters of negotiation during 1994, Guaranty continued to offer to
pay the policy limits, but not unless the Watters agreed to execute a full and final liability
release in favor of Moore. Throughout this period, Guaranty asserted that its primary
obligation was to protect the interests of its insured. Guaranty informed the Watters that if
it paid them Moore's policy limits, it would no longer have an obligation to defend Moore
in the lawsuit. Moore's policy with Guaranty stated that "[o]ur payment of the limits of
liability ends our duty to defend or settle, but the tender of the limits of liability before a
judgment or settlement does not relieve us of our duty to defend." Under the same Part,
the policy provided that "[w]e will defend any such suit at our own expense, with counsel
of our choice, or, as we deem appropriate, we may settle any claim or suit."

¶11 In turn, the Watters offered to accept $49,950--$50 below the policy limits--thereby
allowing Guaranty to continue its obligation to defend its insured, yet still make a prompt
payment to the Watters. The Watters further offered that they would execute a partial
release to the extent of this payment by Guaranty.

¶12 Guaranty rejected this offer, and reaffirmed that a full and final release must be agreed
to before any policy proceeds would be released to the Watters. Guaranty also asserted
that paying the policy limits without a full release would essentially place it in the role of
funding the Watters' litigation against Moore, which would be an act of bad faith.
Guaranty did, however, suggest two other options: (1) depositing the $50,000 with the
court pending a declaratory judgment action to determine the respective party's rights and
obligations; and (2) deposing Moore so that the Watters could be satisfied that he did not
have sufficient assets to pay any excess judgment against him.

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¶13 On October 14, 1994, the Watters filed suit against Guaranty, alleging breaches of
Montana's Unfair Trade Practices Act (UTPA), under § 33-18-201(6) and (13), MCA.
Guaranty asserted in its Answer that, due to Moore's and his attorney's demand that
Guaranty secure a full release for Moore, its primary obligation was to protect his interests
and provide him with a defense in the underlying lawsuit. The Answer also included an
admission that Moore was "responsible for reasonable damages proximately resulting
from the accident."

¶14 By December of 1994, Guaranty retained an attorney to defend Moore in the personal
injury lawsuit pursuant to its contractual obligations under Moore's policy. Consequently,
Moore, through his counsel, demanded that Guaranty continue to defend Moore until he
received an unconditional release. Contrary to Guaranty's October 14th Answer, however,
it is unclear that Moore ever made a demand for an absolute release prior to this time.

¶15 The Watters filed for summary judgment in their UTPA claim against Guaranty on
January 25, 1995. Guaranty filed a cross-motion for summary judgment on March 13,
1995.

¶16 On March 8, 1995, the policy limits of $50,000 were "tendered" by Guaranty to the
court in the Watters' personal injury lawsuit against Moore. At this time, counsel for
Moore also asserted that Moore was considering bankruptcy, hoping to discharge any
judgment that exceeded the policy limits. The Watters were also informed that the $50,000
policy limits may be exposed to demands by other creditors should the bankruptcy action
proceed. Although denied at oral argument before this Court, the record indicates that
counsel for Moore believed that Guaranty was willing to pay the costs and fees associated
with Moore's bankruptcy, and testified to this fact in his deposition.

¶17 On May 11, 1995, approximately one-and-a-half years after the accident, the Watters
executed a full and final liability release in favor of Moore, reserving any and all claims
against Guaranty. The Watters asserted they took this action because they were in
financial need due to medical creditor claims, as well as the uncertainty presented by
Moore's potential action in bankruptcy. On May 12, 1995, the parties signed a stipulation
distributing the policy limits of $50,000 plus interest to the Watters.

¶18 On June 7, 1996, the District Court granted the Watters' motion for summary
judgment and denied Guaranty's cross-motion for summary judgment. In doing so, the
court determined that Guaranty had engaged in an unfair claims settlement practice in

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violation of UTPA, in that it had a "duty to release the funds in this case." The court
agreed with the Watters' argument that UTPA requires insurance carriers to effectuate
prompt and fair settlements, and this requirement "takes precedence over the private
contractual agreement to defend between a carrier and its insured." The court also relied
on a similarly decided case from Massachusetts, Thaler v. American Ins. Co. (Mass.App.
Ct. 1993), 614 N.E.2d 1021. With liability established, the only issue remaining for
determination at trial was damages.

¶19 On November 2, 1998, the court entered a judgment against Guaranty in favor of the
Watters for $110,000, pursuant to the parties' stipulation on damages. The parties agreed
to stipulate to this sum, pending the outcome of this appeal, in order to avoid trial if
remand was necessary. Guaranty placed this sum with the District Court. This cause was
heard on oral argument October 14, 1999.

Standard of Review

¶20 This Court reviews an order granting summary judgment de novo under Rule 56, M.R.
Civ.P., by utilizing the same criteria as the district court. See Treichel v. State Farm Mut.
Auto. Ins. Co. (1997), 280 Mont. 443, 446, 930 P.2d 661, 663. Summary judgment is a
remedy which should be granted when there is no genuine issue as to any material fact and
the moving party is entitled to judgment as a matter of law. See Rule 56(c), M.R.Civ.P.
The procedure should never be substituted for trial if a material factual controversy exists.
See Payne Realty v. First Sec. Bank (1993), 256 Mont. 19, 24, 844 P.2d 90, 93.

¶21 Here, the parties have stipulated to all material facts. Therefore, we will review this
matter to determine whether the Watters are entitled to judgment as a matter of law. On
review, all reasonable inferences that might be drawn from the offered evidence should be
drawn in favor of the party opposing summary judgment. See Payne, 256 Mont. at 24-25,
844 P.2d at 93. Further, we have held that this Court may reverse a district court's order
granting summary judgment and order it to enter summary judgment in favor of the other
party when there are no issues of material fact and all of the facts bearing on the issues are
before the court. See Kenner v. Moran (1994), 263 Mont. 368, 375, 868 P.2d 620, 624.

¶22 Accordingly, if we determine that as a matter of law Guaranty violated UTPA as
alleged and subsequently determined by the District Court, summary judgment in favor of
the Watters will be proper. The stipulated judgment should then be entered as final in their
favor. If, on the other hand, we determine subject to our de novo review that, as a matter of

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law, Guaranty did not violate UTPA when it refused to pay the policy limits to the
Watters, or that its affirmative defense excuses any violation, this matter will be remanded
for dismissal of the stipulated judgment.

DISCUSSION

¶23 The focal issue presented here posed a Hobson's choice for each party.

¶24 Guaranty had to choose between either making payment of policy limits to the
Watters without obtaining a full and final liability release--which allegedly would have
given rise to a bad faith or breach of contract claim by its insured--or withholding payment
pending the outcome of litigation, which potentially would have given rise to an unfair
trade practice claim by the Watters. As case law from other jurisdictions makes clear,
Guaranty is by no means the first insurer to find itself in this catch-22. See, e.g., Lehto v.
Allstate Ins. Co. (Cal.Ct.App. 1994), 36 Cal.Rptr.2d 814, 823; Gallagher v. Allstate Ins.
Co. (N.D.W.Va. 1999), 74 F.Supp.2d 652, 656.

¶25 Relying on our decision in Juedeman v. National Farmers Union (1992), 253 Mont.
278, 833 P.2d 191, Guaranty chose the latter course of action, and, as predicted, the
Watters brought this unfair trade practice claim. Guaranty asserts that by following the
clear rule set forth in Juedeman, at the time, it did not act in bad faith in denying the
Watters' claim because it had, pursuant to § 33-18-242(5), MCA, a "reasonable basis in
law" for the difficult choice it made, and in good faith considered its insured's interests.

¶26 The Watters' choices were equally unenviable. As innocent parties, the Watters were
required to choose either incomplete compensation for severe and permanent injuries
caused by another person who had admitted full liability, or proceed into potentially
prolonged litigation without the resources necessary to fulfill their current obligations
resulting from their injuries. Indeed, this dispute has now entered its sixth year and from
the record it is clear that the Watters suffered potentially noncompensable damage to their
economic well being, once medical-bill creditors pursued payment for the debts incurred.
Further, agreeing to such a full and final release could have interfered with their own
insurer's subrogation rights, and thereby jeopardized the Watters' rights to underinsured
coverage pursuant to the terms of their policy. Equally clear, is the fact that staving off
such damages factored into the Watters' agreement to release Moore in exchange for
policy limits in May of 1995. Either choice seemingly defies the legal principles that for
every wrong there is a remedy, see § 1-3-214, MCA; STC, Inc. v. City of Billings (1975),

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168 Mont. 364, 372, 543 P.2d 374, 378, and that a tortiously injured party should be
returned to his or her rightful position that "the party would have attained had the wrong
not occurred." Butler v. Germann (1991), 251 Mont. 107, 110, 822 P.2d 1067, 1069.

¶27 Regardless of the outcome here, this case requires that we clarify prior case law that
does not squarely provide a clear rule upon which parties such as Guaranty and the
Watters may rely under these specific factual circumstances. Namely, at the behest of the
parties, we must reconcile today any conflict between our decisions in Juedeman and
Ridley v. Guaranty Nat. Ins. Co. (1997), 286 Mont. 325, 951 P.2d 987, in the context of
Montana's Unfair Trade Practices Act, which governs the business of insurance, as well as
public policy under Montana's Motor Vehicle Safety-Responsibility Act. In doing so, we
must determine several corollary legal issues pertaining to what constitutes bad faith on
the part of insurers in Montana. Thus, we proceed to the issues.

ISSUE 1

Once clear liability was established and damages undisputedly exceeded policy limits, did
Guaranty violate Montana's Unfair Trade Practices Act by conditioning the payment of
policy limits on the Watters' agreement to provide a full and final release of all liability in
favor of its insured?

¶28 As argued by both parties, this issue must first be properly cast within the framework
of Montana's Motor Vehicle Safety-Responsibility Act. Specifically, under § 61-6-103,
MCA, all owners and operators of motor vehicles must carry mandatory liability
insurance, in the minimum amounts of $25,000 "because of bodily injury to or death of
one person in any one accident;" $50,000 "because of bodily injury to or death of two or
more persons in any one accident," and $10,000 "because of injury to or destruction of
property of others in any one accident." See § 61-6-103(2)(b)(i)-(iii), MCA. Under this
Act, the "liability of the insurance carrier with respect to the insurance required by this
part becomes absolute whenever injury or damage covered by the motor vehicle liability
policy occurs." See § 61-6-103(6)(a), MCA (emphasis added). This standard of absolute
liability does not apply to insurance coverage that exceeds the mandatory minimum limits.
See § 61-6-103(8), MCA.

¶29 Further, we have held that "[i]t is clear that the mandatory liability insurance law
seeks to protect members of the general public who are innocent victims of automobile
accidents," and that § 61-6-301, MCA, "was enacted for the benefit of the public and not

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for the benefit of the insured." Iowa Mut. Ins. Co. v. Davis (1988), 231 Mont. 166, 170-71,
752 P.2d 166, 169. See also Ridley, 286 Mont. at 335, 951 P.2d at 993 (citing Iowa Mutual
and interpreting UTPA, subsection (6) of § 33-18-201, MCA, as assuring prompt payment
of damages for which an insurer is clearly obligated).

¶30 The insurance policy at issue here provided only the statutory minimum amounts of
insurance. Accordingly, the discussion and holdings herein are limited by the foregoing,
and specifically limited to those claims for damages brought by a third-party claimant
against a clearly liable party and his or her automobile liability insurer, and only for the
mandatory coverage limits required under § 61-6-103(2), MCA.

A. Defining "Settlements" under UTPA

¶31 In this matter, a preliminary battle of semantics is inevitable. Subsection (6) of § 33-
18-201, MCA, provides that no insurer may "neglect to attempt in good faith to effectuate
prompt, fair, and equitable settlements of claims in which liability has become reasonably
clear." The term "settlement" is not defined under UTPA, or under statutory provisions
governing motor vehicles or the insurance trade in Montana.

¶32 According to Guaranty's version of the insurance trade's lexicon, "payment" of policy
limits is not a "settlement" unless the third-party claimant executes a full and final release
of all liability in favor of the insured. In support of its position, Guaranty relies on
Juedeman, where this Court concluded that "without an agreement to release, there is no
offer for settlement," and consequently no viable claim of bad faith against the insurer for
refusing such an offer, under § 33-18-201(6), MCA. Juedeman, 253 Mont. at 281, 833
P.2d at 193 (citing Thompson v. State Farm Mut. Auto. Ins. Co. (1973), 161 Mont. 207,
219-20, 505 P.2d 423, 430).

¶33 In Thompson, from which we derived this rule, we explained that even an insurance
company's refusal of a claimant's offer of a covenant not to sue could not be construed as a
bad faith refusal of a "settlement offer." We stated that "[h]ad State Farm accepted that
offer, it would not have been protecting Thompson [its insured] under the circumstances."
Accordingly, no "offer of settlement" was ever made by the third-party claimant.
Thompson, 161 Mont. at 219, 505 P.2d at 430.

¶34 Guaranty also directs our attention to other jurisdictions, which also purportedly
conclude that a full and final release of an insured is the sine qua non of a "settlement."

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See, e.g., Lazaris v. Metropolitan Property & Cas. Ins. Co. (Mass. 1998), 703 N.E.2d 205,
207 (stating that "to pay without a release is not a settlement" and "settlement typically
involves the 'release or termination of further claims against the tortfeasor'") (citations
omitted); Trinity Universal Ins. Co. v. Bleeker (Tex. 1998), 966 S.W.2d 489, 491(stating
that under the common law "Stowers" doctrine, a settlement demand must propose to
release the insured fully in exchange for a stated sum of money).

¶35 Under the facts here, according to Guaranty, by definition no "settlement" was ever
proffered from the Watters' side of the negotiation table. Thus, as a matter of law Guaranty
could not have violated UTPA, under § 33-18-201(6), MCA, by flatly refusing any
overtures of payment that did not provide an absolute release of all liability. Rather,
Guaranty's argument suggests that under the holding in Juedeman, the party that should
shoulder the blame for not effectuating a prompt settlement is the Watters, not Guaranty,
because they are the ones who refused the only legitimate "settlement" offer: policy limits
in exchange for a full and final release.

¶36 Guaranty's position overlooks one minor facet of this matter: Guaranty promptly
reached a "settlement" with the Watters in January of 1994. Guaranty agreed to pay the
Watters $9,161.07 for property damage within Moore's mandatory minimum $10,000
policy limits. This "settlement" was apparently achieved without the Watters executing a
full and final release of all further liability in Moore's favor, or Guaranty balking at such a
settlement.

¶37 That circumstances may arise where a "settlement" may be reached without a full and
final release of all liability, as the property "settlement" suggests, comports with our
discussion of this term in Ridley. In that case, the appellant, Ridley, contended that
Guaranty was liable for medical expenses caused by its insured when liability was
reasonably clear, without regard to whether a final settlement was or could be agreed
upon, because subsection (6) of § 33-18-201, MCA, by its plain language, makes no
reference to a final settlement of all claims, but refers instead to "settlements." Ridley, 286
Mont. at 333, 951 P.2d at 991. We agreed with Ridley, and concluded that both
subsections (6) and (13) of § 33-18-201, MCA, by their terms imposed an obligation to
make payments for medical expenses in advance of final settlement. Ridley, 286 Mont. at
334, 951 P.2d at 992. We further concluded that the language of § 33-18-201(6), MCA,
did not impose a requirement that all disputes or all claims be resolved between two
(1)
parties. Ridley, 286 Mont. at 334, 951 P.2d at 992.

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¶38 We also noted in Ridley that the clear language of subsection (13), under § 33-18-201,
MCA, provides that one auto accident or "occurrence" may produce more than one claim
against an insurer, which in turn may produce more than one settlement under more than
one portion of "the insurance policy coverage." See § 33-18-201(13), MCA (prohibiting
the failure to "promptly settle claims, if liability has become reasonably clear, under one
portion of the insurance policy coverage in order to influence settlements under other
portions of the insurance policy coverage) (emphasis added). See also 46A C.J.S.
Insurance § 1351 (1993) (stating that a settlement with respect to one item of loss does not
preclude recovery on the policy with respect to other items, and "[a]n insurance company
by settling one claim arising from an occurrence, may still deny coverage as to another
claim arising from the same occurrence"). As explained above, this was precisely the
nature of the "settlement" for property damage under Moore's policy, which partially
discharged his obligation to the Watters for damages arising from the one accident without
a full and final release of all other liability.

¶39 The foregoing reasoning in Ridley accords with the general, governing principles of
contract law from which the law of settlements is derived. A release, as a matter of law, is
nothing more than an accord and satisfaction, or, one of several ways in which an
obligation, contractually, may be discharged or "settled" for less than or for something
different than what is owed. See § 28-1-1401 and 1402, MCA (describing accord and
satisfaction); Hetherington v. Ford Motor Co. (1993), 257 Mont. 395, 401-402, 849 P.2d
1039, 1043-44 (distinguishing executory accord from substituted contract). See also § 28-
1-1502 (describing kinds of novation); § 28-1-1601 (describing extinction of an obligation
by a release); 66 Am.Jur.2d Release § 1 (1973) (distinguishing between a release and a
"settlement," and providing that a settlement often involves a "payment, a release, a
covenant not to sue, a promise to discontinue a pending suit, or a receipt").

¶40 On the other hand, the term "settlement" as used throughout UTPA is synonymous
with an enforceable bilateral contract that discharges a future or existing obligation. See
Carlson v. State Farm Mut. Auto. Ins. Co. (D.Mont. 1999), 76 F.Supp.2d 1069, 1079; 46A
C.J.S. Insurance § 1348 (1993) (stating that a compromise or settlement "must have all the
essential elements of a contract," and its validity is not affected "by whether the settlement
is favorable or unfavorable to the insured"). Accordingly, a claim brought by a third party
demanding payment of an insured's policy limits may be "settled" with the insurer within
the meaning of UTPA, if the resulting agreement vests the parties with the right to enforce
the "settlement" by bringing an action for breach of contract. See Carlson, 76 F.Supp. at
1079. The early "settlement" for property damage in this matter epitomizes this very point.

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¶41 Based on the foregoing, we conclude that to absolutely require that a "settlement"
between a third-party claimant and a clearly liable party's insurer, under all circumstances,
must include as a material element a full and final release of all liability would add judicial
gloss to the statutory language of § 33-18-201(6), MCA--a gloss that has been applied, we
might add, in other jurisdictions for the necessary sake of maintaining a bright, albeit
harsh, line in their bad faith jurisprudence. See, e.g., Lazaris, 703 N.E.2d at 206-207
(determining sua sponte in a case where liability was unclear, that payment of claims
(2)
without a full release in cases where liability is clear does not constitute a "settlement").
As this Court has often expressed, in a variety of applications, mere technicalities that
threaten to diminish the ends of substantial right and justice must be avoided. See, e.g.,
Waggoner v. Glacier Colony of Hutterites (1953), 127 Mont. 140, 150, 258 P.2d 1162,
1167. Likewise, a statute is to be "read as a whole and construed so as to avoid absurd
results." Clover Leaf Dairy v. State (1997), 285 Mont. 380, 388-89, 948 P.2d 1164, 1169
(citation omitted).

¶42 By concluding that a "settlement" between the Watters and Guaranty, under § 33-18-
201(6), MCA, for the payment of policy limits was legally possible without the Watters
executing a full and final release of all liability, we must necessarily turn to the issue of
whether the execution of such a "settlement" by Guaranty would have per se breached its
duty of good faith owed to its insured.

B. Guaranty's Potential "Bad Faith" Liability

¶43 Guaranty strenuously argues that had it paid the policy limits to the Watters without
obtaining in return a full and final release of all liability for its insured, "it undoubtedly
would have been sued by Moore for 'bad faith' and breach of the insurance contract."
Thus, Guaranty contends that it had no choice but to protect the interests of its insured
under the circumstances. The underlying rationale, Guaranty maintains, is that it simply
cannot place the interests of a third-party claimant above those of its insured to whom it
owes a fiduciary duty. We conclude that in this particular instance, Guaranty's "catch-22"
is illusory, at best.

¶44 Guaranty's alleged liability for bad faith is based on a reasonable forecast of future
events: after payment of the $50,000 policy limits, Moore would have been "hung out to
dry" for whatever judgment in excess of this amount the Watters could obtain, and quite
possibly without the assistance of counsel provided under his policy with Guaranty.
However, precisely on what grounds this predicament would have confounded Moore's

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reasonable expectations under his policy with Guaranty, and consequently given rise to a
viable bad faith claim under UTPA is less than clear. See generally American Family Mut.
Ins. Co. v. Livengood, 1998 MT 329, ¶ 32, 292 Mont. 244, ¶ 32, 970 P.2d 1054, ¶ 32
(providing that insured's expectations of policy "should be honored notwithstanding the
fact that a painstaking study of the policy would have negated those expectations").

¶45 First, several of the decisions from courts which Guaranty assert constitute a "majority
rule" do not address the same factual scenario as here. As mentioned earlier, one court
resolved the issue sua sponte. See Lazaris, 703 N.E.2d at 207. Others were concerned with
the issue of multiple insureds under one policy. See Lehto v. Allstate Ins. Co. (Cal.Ct.App.
1994), 36 Cal.Rptr.2d 814 (insurer does not commit bad faith by refusing third-party
claimant offer to release one of two joint tortfeasors); Strauss v. Farmers Ins. Exch. (Cal.
Ct.App. 1994), 31 Cal.Rptr.2d 811 (claimant offers to release one of three joint
tortfeasors); Premier Ins. Co. of Mass. v. Furtado (Mass. 1998), 703 N.E.2d 208 (multiple
insureds).

¶46 Still others do not address a common law or statutory claim for bad faith. See Trinity
Universal Ins. Co. v. Bleeker (Tex. 1998), 966 S.W.2d 489, 491 (discussing common law
"Stowers" duty owed to insured under negligence theory).

¶47 Further still, those "majority rule" courts that were actually faced with similar facts as
those identified here decided the issue based on the holdings from the foregoing courts
without distinguishing the facts. See, e.g., Gallagher v. Allstate Ins. Co. (N.D.W.Va.
1999), 74 F.Supp.2d 652, 656 (citing Strauss, Lehto, and Lazaris).

¶48 Finally, others simply offered the "majority rule" via dictum. See Pareti v. Sentry
Indem. Co. (La. 1988), 536 So.2d 417, 424 (suggesting, but not holding, that payment of
policy limits which does not release the insured from a pending claim raises "serious
questions" as to whether insurer discharged its policy obligations in good faith); Cook v.
Trinity Universal of Kansas (Ala. 1991), 584 So.2d 813, 815 (stating that it is "wise" to
demand that the creditor, as a condition of settlement, sign a release acknowledging
extinguishment of the debt).

¶49 On the other hand, several courts which have addressed factual circumstances
identical to those found here have decided the issue of "full liability release in exchange
for policy limits" in favor of the third-party claimant. See Blank v. USAA Property & Cas.
Ins. Co. (Wis.Ct.App. 1996), 546 N.W.2d 512, 514-15 (concluding that an insurer has "no

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reasonable grounds to fear a bad faith claim" where policy limits of $100,000 are paid
without a full release, and jury awards third-party claimant plaintiff $7.5 million);
Dairyland Ins. Co. v. Herman (N.M. 1997), 954 P.2d 56, 64 (concluding that the duty to
an insured does not mandate an "all-or-nothing approach" where recovery of third party
likely will exceed policy limits); Thaler v. American Ins. Co. (Mass.App.Ct. 1993), 614 N.
E.2d 1021, overruled by Lazaris v. Metropolitan Property & Cas. Ins. Co. (Mass. 1998),
703 N.E.2d 205.

¶50 Aside from the applicability of a "majority rule" to the factual scenario here, all of the
foregoing jurisdictions are clearly distinguishable from such disputes arising in Montana.
In 1987, our Legislature provided insurers such as Guaranty with the following protection
from bad faith claims under either the common law or UTPA:

An insured who has suffered damages as a result of the handling of an insurance
claim may bring an action against the insurer for breach of the insurance contract,
for fraud, or pursuant to this section, but not under any other theory or cause of
action. An insured may not bring an action for bad faith in connection with the
handling of an insurance claim.

Section 33-18-242(3), MCA (emphasis added). See also O'Fallon v. Farmers Ins. Exch.
(1993), 260 Mont. 233, 243-44, 859 P.2d 1008, 1014-15 (discussing the legislative history
of § 33-18-242, MCA, and identifying the limitation of the types of claims that could be
brought against insurers as one of its purposes). Section 33-18-242(3), MCA, is a unique
feature in contrast to other states, such as Massachusetts and California, that have similar
unfair trade practices acts governing their insurance businesses where bad faith claims
remain virtually unimpeded.

¶51 Confronted with such statutory plain language, we will not second guess the intent of
the Legislature in its desire to explicitly limit the liability of insurers. See State Bar of
Montana v. Krivec (1981), 193 Mont. 477, 481, 632 P.2d 707, 710 (citation omitted). See
also Meech v. Hillhaven West, Inc. (1989), 239 Mont. 21, 32, 776 P.2d 488, 494
(providing that the "law of Montana has long recognized that the courts and the legislature
establish the substantive law governing tort claims"). Thus, we have stated that § 33-18-
242(3), MCA, "explicitly prohibits bringing an action for bad faith in connection with the
handling of an insurance claim." Dees v. American Nat. Fire Ins. Co. (1993), 260 Mont.
431, 450, 861 P.2d 141, 153 (Gray, J., concurring). We have distinguished this prohibition
by concluding that the subsection "prohibits an insured, but not a third-party claimant,

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from bringing an action for bad faith." Brewington v. Employers Fire Ins. Co., 1999 MT
312, ¶ 13, 297 Mont. 243, ¶ 13, 992 P.2d 237, ¶ 13.

¶52 Guaranty's reasoning is therefore unclear as to how Moore, as an insured who had yet
to suffer damage as a result of Guaranty's "handling" of the Watters' claim, could bring an
action for "bad faith" under UTPA had Guaranty paid the undisputed full policy limits
without obtaining a full release of liability on his behalf. Although providing some
evidence of veiled threats of litigation asserted by Moore's attorney, Guaranty has not
provided one decision from Montana or elsewhere where such a claim was made under
these particular facts, let alone one in which the insured prevailed. See, e.g., Blank, 546 N.
W.2d at 515 (reviewing Louisiana and California case law and concluding that "no cases
recognize a bad faith claim" where damages are in excess of policy limits, liability is not
in doubt, the insurer uses reasonable efforts to settle and then accepts claimant's offer to
settle without a full release).

¶53 Additionally, the demands made by counsel for Moore are rather hollow. First, these
demands did not enter the picture until December of 1994, approximately one year into the
negotiation process and several months after the Watters filed their UTPA claim.
Secondly, Moore's attorney, although exercising independent judgment on behalf of
Moore, was paid by Guaranty pursuant to its duty to defend, a duty that would certainly
not include financing a bad faith or breach of contract action against Guaranty, nor, for
that matter, an action in bankruptcy.

¶54 Guaranty, in fact, evidenced signs of acting in good faith toward its insured when it
informed Moore within one week of the accident that he should consider seeking legal
counsel, at his own expense, to address the issue of his own liability that would exceed the
policy limits. There is likewise substantial evidence that Guaranty fully informed its
insured throughout this matter, and dutifully investigated the Watters' claim for policy
limits. Further, Moore purchased insurance coverage limited to the statutory minimums. If
and when these limits were paid, he would have realized the full benefit of the coverage
for which he had paid premiums: a reduction of the total personal injury damages he
caused by $50,000.

¶55 While we have recognized the reasonable expectations doctrine, see American Family,
¶ 32, we have also concluded that this doctrine is inapplicable where the terms of the
policy at issue clearly demonstrate an intent to exclude coverage. See American Family, ¶
33. Thus, Moore could not reasonably have expected under such circumstances that

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Guaranty would be obligated to, in effect, provide greater coverage than that purchased in
the issued policy by demanding a full release of all liability as a condition of paying the
limits of the minimum coverage which he had purchased.

¶56 Undoubtedly, where the monetary consequences of a person's tortious conduct
undisputedly exceed policy limits, and liability is clear, the only incentive for an injured
third-party claimant to settle for policy limits and provide the insured with an absolute
release is some form of coerced economic necessity. In Ridley, we addressed this very
subject and stated:

Medical expenses from even minor injuries can be devastating to a family of
average income. The inability to pay them can damage credit and, as alleged in this
case, sometimes preclude adequate treatment and recovery from the very injuries
caused. Just as importantly, the financial stress of being unable to pay medical
expenses can lead to the ill-advised settlement of other legitimate claims in order to
secure a benefit to which an innocent victim of an automobile accident is clearly
entitled. We conclude that this is not what was intended by the Montana Legislature
when mandatory liability insurance laws and unfair claims practice laws were
enacted.

Ridley, 286 Mont. at 335, 951 P.2d at 993. Absent such necessity, and where damages are
twice, ten, or one hundred times the mandatory limits imposed by law, such an absolute
release is an absurdity, and potentially raises the issue of whether such a release would be
(3)
unconscionable as a matter of law.

¶57 Accordingly, we conclude that compelling an innocent third-party claimant, under the
circumstances described here, to proceed to trial to recoup that which is already owed is
entirely inconsistent with the declared public policy of Montana to encourage settlement
and avoid unnecessary litigation. See generally Augustine v. Simonson (1997), 283 Mont.
259, 266, 940 P.2d 116, 120. While we agree with Guaranty that it must consider the
interests of its insured, we hold that the payment of policy limits under these particular
factual circumstances would not have exposed Guaranty to per se liability for bad faith.

C. Guaranty's Potential "Breach of Contract" Liability

¶58 Whether a breach of contract may have occurred is equally unclear and of little
concern here. As we have stated, it is "axiomatic that laws established for the benefit of

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the public cannot be contravened by private contract." Iowa Mutual, 231 Mont. at 171,
752 P.2d at 169. In light of this policy, the Montana Legislature has required that
insurance companies in good faith promptly settle claims with third parties, such as the
one brought here by the Watters, when liability has become reasonably clear.

¶59 Furthermore, a contractual duty to secure a third-party's absolute release is not
mentioned once in Guaranty's policy. Rather, the policy explicitly states that Guaranty
would "pay damages for which any insured person is legally liable because of bodily
injury and property damage caused by a car accident . . ." Guaranty had the right to "settle
any claim or suit" and the "payment of the limits of liability ends our duty to defend or
settle." As previously addressed, expectations which are contrary to a clear exclusion from
coverage are not objectively reasonable. See American Family, ¶ 33.

D. Summary

¶60 In summary, we hold that where liability resulting from an automobile accident is
reasonably clear, and a third-party claimant's damages undisputedly exceed mandatory
minimum policy limits pursuant to § 61-6-103, MCA, the prompt, fair, and equitable
settlement of such claims cannot be forestalled by an insurer based on an illusory bad faith
or breach of contract claim that its insured may bring. To refuse payment based on such
unfounded potential liability is, in and of itself, a deceptive practice within the meaning of
§ 33-18-201(6), MCA.

¶61 Further, we hold that where an insured's liability for damages caused to a third party
in an auto accident is reasonably clear, and those damages undisputedly exceed the
mandatory limits set forth under § 61-6-103(2), MCA, it is an unfair trade practice per se
under § 33-18-201, MCA, for an insurer to condition the payment of the owed mandatory
minimum policy limits on the third party's agreement to provide a full and final release of
all liability in favor of an insured. To this extent, we affirm the summary judgment order
of the District Court. To hold otherwise, under the specific facts here, would render our
mandatory liability insurance law, which was "enacted for the benefit of the public and not
for the benefit of the insured," meaningless. Iowa Mutual, 231 Mont. at 171, 752 P.2d at
169.

¶62 Accordingly, we conclude that an insurer, who pays mandatory minimum policy
limits that are owed under the circumstances herein described, does not act in bad faith per
se against its insured by not obtaining a full and final liability release on the insured's

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behalf. This ruling is by no means intended to foreclose any or all bad faith claims--
including those related to the duty to defend--that an insured may bring against its insurer
for conduct prior to or following the handling of an insurance claim.

¶63 We overrule and distinguish Juedeman as well as Thompson to the extent those
decisions are inconsistent with this opinion. Namely, the insurer in Juedeman, under our
decision here today, would commit an unfair trade practice per se by withholding those
policy proceeds under its coverage that are mandated pursuant to § 61-6-103(2), MCA.
Thus, our decision here does not affect excess coverage that an insured chooses to carry,
pursuant to § 61-6-103(8), MCA. Thompson is overruled to the extent it suggests that a
third-party claimant's full and final release of an insured's liability is, as a matter of law, a
material element of a "settlement" under the UTPA.

ISSUE 2

Did Guaranty have a reasonable basis in law or in fact for contesting the Watters' claim,
and therefore may not be found liable for violating Montana's Unfair Trade Practices Act?

¶64 Guaranty contends that even if we overrule Juedeman, and thereby broaden and
clarify our decision in Ridley, we must nevertheless reverse summary judgment because
although engaging in an unfair settlement practice, Guaranty had a "reasonable basis in
law or in fact" for contesting the Watters' claim.

¶65 In addition to limiting the liability of insurers for bad faith in 1987, the Legislature
also provided insurers with an affirmative defense under § 33-18-242(5), MCA. This
provision provides that "[a]n insurer may not be held liable under this section if the insurer
had a reasonable basis in law or in fact for contesting the claim or the amount of the claim,
whichever is in issue."

¶66 Guaranty maintains that at the very least, our decision in Juedeman during the
relevant period of 1993-95, was the undisputed law in Montana. The Watters, on the other
hand, assert that Juedeman did not at any time control the circumstances of this case, and
therefore it could not provide a reasonable basis for Guaranty's refusal to pay the policy
limits. The District Court, in its summary judgment order, did not explicitly determine
whether Guaranty's defense, under § 33-18-242(5), MCA, failed as a matter of law.

¶67 As we have stated before, the party asserting this defense has the burden of
establishing it by a preponderance of the evidence. Dees v. American Nat. Fire Ins. Co.

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(1993), 260 Mont. 431, 451, 861 P.2d 141, 153 (Gray, J., concurring). Consequently, we
have held that whether an insurer has a "reasonable basis" is generally a question of fact,
and cannot be made "as a matter of law." Dean v. Austin Mut. Ins. Co. (1994), 263 Mont.
386, 389, 869 P.2d 256, 258. The insurer in Dean, for example, contested coverage based
solely on the fact that the insureds had been charged with felony arson, and subsequently
argued that this served as a reasonable basis for it denying coverage up until the time that
the Deans were acquitted, reasoning that the policy excluded from coverage acts of arson.
Dean, 263 Mont. at 387-88, 869 P.2d at 257. Under those circumstances, we concluded
that whether the insurer had a reasonable basis in law or in fact was an issue properly
presented for determination to the trier of fact. Dean, 263 Mont. at 389, 869 P.2d at 258.

¶68 In a recent de novo review of a district court's summary judgment, however, we
determined that an insurer clearly had a reasonable basis in law for not paying its insured's
claim for insurance proceeds, and affirmed without requiring that the insurer's conduct
reach the trier of fact. See Bartlett v. Allstate Ins. Co. (1996), 280 Mont. 63, 70, 929 P.2d
227, 231 (concluding that claimant as a matter of law did not have an insurable interest in
damaged property, and therefore insurer clearly had a reasonable basis for not paying
claim). See also Watts v. Westland Farm Mut. Ins. Co. (1995), 271 Mont. 256, 263, 895
P.2d 626, 630 (affirming summary judgment in favor of insurer where insurance policy
was as a matter of law not in effect at time of insured's loss, and therefore denial of claim
was reasonable).

¶69 Thus, the "trier of fact" rule set forth in Dean is not necessary in a summary judgment
proceeding where the underlying "basis in law" is grounded on a legal conclusion, and no
issues of fact remain in dispute. Here, therefore, it is for the court, not the trier of fact, to
determine whether our holding in Juedeman sufficiently provides an absolute defense as a
matter of law in this instance.

¶70 In Juedeman we unequivocally stated that "[i]n substance, this Court has held that
without an agreement to release, there is no offer for settlement." Juedeman, 253 Mont. at
281, 833 P.2d at 193. This succinct rule rested soundly on our decision in Thompson,
where we stated that "there was never an agreement to release Thompson fully . . . . [t]hus,
no offer or demand for settlement within policy limits was made." Thompson, 161 Mont.
at 220, 505 P.2d at 430. In both instances, the third-party's bad faith claim based on the
insurer's refusal to pay policy limits without a full and final release failed. Further, our
decision in Juedeman was not subsequently addressed by this Court until 1997, when we
decided Ridley.

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¶71 We conclude that at the time this dispute arose, Juedeman was the lone precedent
from Montana case law upon which Guaranty could rely under the circumstances. From
early on in this dispute, counsel for Guaranty offered Juedeman as legal authority for its
position. In contrast, counsel for the Watters, while insisting as early as December of 1993
that Guaranty was acting in bad faith pursuant to § 33-18-201(6), MCA, did not cite to one
favorable Montana case that squarely addressed the issues here in its dialogue of
negotiation with Guaranty.

¶72 We must therefore conclude that a plain reading of the available case law at the time
gave Guaranty a reasonable basis in law upon which it could deny payment of policy
limits. That is, Juedeman was legally conclusive to the extent there was simply no other
authority in Montana at the time suggesting that in order to effectuate a prompt, fair, and
equitable settlement of a third-party claim in good faith, an insurer must, under certain
circumstances, pay policy limits without a full and final release for its insured.
Unfortunately for the Watters, this was simply not the law in Montana at the time. Now, it
is.

¶73 Accordingly, the District Court's order granting summary judgment in favor of the
Watters is reversed, and the court is ordered to grant summary judgment in favor of
Guaranty pursuant to its cross-motion for summary judgment. This case is remanded for
further proceedings consistent with this opinion.

/S/ JAMES C. NELSON

We Concur:

/S/ J. A. TURNAGE

/S/ WILLIAM E. HUNT, SR.

/S/ TERRY N. TRIEWEILER

/S/ JIM REGNIER

/S/ TED L. MIZNER

District Judge, sitting for Justice W. William Leaphart

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Justice Karla M. Gray, specially concurring.

¶74 I join in the Court's resolution of both issues in this case. With regard to its discussion
of issue one, however, I cannot agree with the Court's decision that it is necessary to
overrule any portion of Juedeman or Thompson.

¶75 The Court goes to great lengths throughout its opinion, and properly so, to observe
that this case ust be resolved on its specific facts, including the material facts that this case
involves the Unfair Trade Practices Act (UTPA), Montana's Motor Vehicle Safety-
Responsibility Act and the mandatory minimum insurance coverages required thereunder.
Neither Thompson nor Juedeman involved these facts. Indeed, Thompson does not discuss
or apply any statutory requirements; that decision is based entirely on "bad faith" case law.
Juedeman, on the other hand, involves the UTPA but not mandatory minimum insurance
coverages under the Motor Vehicle Safety-Responsibility Act. Given these differences, it
is possible to distinguish both Juedeman and Thompson on their facts and limit their
holdings to the facts of those cases, and I would do so. Under such an approach, the
Juedeman holding that there is no offer for settlement without an agreement to release
would--and should--continue to apply to cases which do not involve the mandatory
minimum coverages required under the Motor Vehicle Safety-Responsibility Act. Such an
approach also would support the Court's conclusion--with which I agree--that § 33-18-201
(6), MCA, does not require a settlement to include a full and final release of all claims
"under all circumstances."

¶76 Furthermore, the Court's decision to overrule Juedeman and Thompson does not meet
our standard in determining whether to depart from the fundamental doctrine of stare
decisis which "reflects our concerns for stability, predictability and equal treatment. . . ."
See Formicove, Inc. v. Burlington Northern, Inc. (1983), 207 Mont. 189, 194, 673 P.2d
469, 472. While we are not required to follow a manifestly wrong decision (Formicove,
207 Mont. at 194, 673 P.2d at 472 (citations omitted)), the Court does not point to any
portion of either Juedeman or Thompson which is wrong, much less manifestly wrong. I
simply cannot join the Court in overruling cases for no reason.

¶77 Finally, I continue to disagree with the practice of overruling cases "to the extent"
they are inconsistent with the opinion in a current case. In this regard, the Court purports
to both "overrule and distinguish" Juedeman and Thompson "to the extent those decisions
are inconsistent with this opinion." As set forth above, the cases are readily distinguishable
from the present case and should simply be distinguished. The Court provides no guidance

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for future cases by both overruling and distinguishing the earlier cases. Moreover, if there
are portions of those cases which are actually inconsistent with something in the present
case, the Court should clearly identify them and, if necessary, overrule those specific
portions so that legal practitioners and trial courts are properly advised of the continuing
viability or lack thereof of Juedeman and Thompson. In my view, the Court has taken the
easy--but not the prudent--way out in its final discussion of those cases.

¶78 Aside from these concerns, I join in the Court's opinion.

/S/ KARLA M. GRAY

1. Our decision in Ridley, as both parties point out, was decided several years after Guaranty refused
payment and the Watters brought this unfair trade practice action. Notwithstanding our decision in
Ridley, Guaranty asserts that Juedeman is still good law on the issue of whether the refusal of policy
limits without a full and final release is an act of bad faith.

2. Guaranty points out that the Lazaris court overruled Thaler v. American Ins. Co. (Mass.App.Ct.
1993), 614 N.E.2d 1021, a case the district court followed here in determining that Guaranty, as a matter
of law, committed an unfair trade practice. Like Ridley, Lazaris was decided well after this litigation
commenced. Unlike Lazaris, however, the facts in Thaler were identical to those here. The Thaler court
concluded that "the insistence on a release by an insurer as a condition of payment of the policy limits
where liability of its insured is undisputed and damages clearly exceed the policy limits amounts to an
unfair settlement practice . . ." Thaler, 614 N.E.2d at 1023-24. The Thaler court, however, decided in
favor of the insurer based on the insurer's reasonable reliance on the case law--or, rather, the lack of
"applicable precedent"--at the time of its decision to refuse payment. See Thaler, 614 N.E.2d at 1024.

3. The Watters have, in fact, raised the issue that such a release is unconscionable. However, whether the
release in this instance was, as a matter of law, unconscionable was not specifically raised or addressed
by the parties, and is therefore not within the scope of our de novo review of this matter.

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