NO. 92-270
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
STEVEN J. HARMAN,
Plaintiff and Appellant,
v.
MIA SERVICE CONTRACTS and
AMERICAN ADJUSTMENT COMPANY, INC.,
Defendants and Respondents.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone,
The Honorable Maurice R. Colberg, Jr., Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Paul M. Warren, Attorney at Law, Billings,
Montana: A. Clifford Edwards, Edwards Law
Firm, Billings, Montana
For Respondents:
William R. McNamer, McNamer, Thompson,
Werner & Stanley, Billings, Montana
Submitted on Briefs: September lo, 1992
Decided: August 19, 1993
Justice Terry N. Trieweiler delivered the opinion of the Court.
Plaintiff Steven J. Harman filed his complaint in the District
Court for the Thirteenth Judicial District inYellowstone County to
recover damages pursuant to a vehicle service contract entered into
with a Billings auto dealer. Defendant MIA Service Contracts (MIA)
was the original administrator of the contract and adjusted claims
made pursuant to the contract. Defendant American Adjustment
Company, Inc. (MC) I later assumed responsibility for adjusting
plaintiff's claim. The District Court concluded that plaintiff was
not entitled to recover against defendant AAC under any theory
alleged in plaintiff's complaint and granted AAC'S motion
dismissing plaintiff's claim against it by summary judgment. From
that judgment, plaintiff appeals. We affirm in part and reverse in
part.
The issues on appeal are:
1. Was plaintiff a third-party beneficiary of a contract
entered into by defendant American Adjustment Company, Inc., and
therefore, entitled to enforce that contract?
2. Can plaintiff sue American Adjustment Company, Inc., or
Century Indemnity Company, for violations of the Unfair Trade
Practices Act found at 5 33-18-201, MCA, or is such a suit barred
by plaintiff's failure to first comply with 5 33-18-242(6)(b), MCA?
FACTUAL BACKGROUND
On November 23, 1985, plaintiff purchased a Jeep Cherokee from
Bert Arnlund Chrysler in Billings. On August 29, 1986, he paid
Arnlund $655 for a vehicle service contract in which Arnlund agreed
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to make certain repairs to plaintiff's vehicle beyond the period of
time covered in the manufacturer's warranty agreement.
The contract provided that it would be administered by MIA
Service Contracts and that the administrator must be contacted for
authorization of repairs. The contract also provided that the
administrator did not assume any liability to the contract holder,
but that the administrator's liability was to the dealer in
accordance with their separate agreement.
From what can be determined from the record, it appears that
MIA helped dealers throughout the country market vehicle service
contracts, and then had a separate agreement with each dealer to
administer the contracts by adjusting claims made pursuant to the
contracts after they were sold. Pursuant to a separate agreement
between MIA and the dealer, repairs could not be made without MIA's
prior approval. A portion of the premium would be retained by the
dealer and put into a reserve fund to pay some claims made pursuant
to the contracts. A portion of the premium was retained by the
dealer as his fee for selling the contract; a portion was paid to
MIA to administer the contract; and a portion was paid by MIA to
Century Indemnity Company (Century) to insure against those claims
which exceeded the dealer's responsibility under its agreement with
MIA and Century. Century is a wholly owned subsidiary of CIGNA.
In 1987, MIA declared itself bankrupt and stopped doing
business as administrator of the contracts.
As mentioned above, Century had sold an insurance policy to
Arnlund covering him against vehicle service contract claims above
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those amounts which were covered by the reserve fund maintained by
Arnlund.
Another wholly owned subsidiary of CIGNA, AAC, had been
basically dormant until 1988 when it was resurrected by Century for
the sole purpose of adjusting any claims made pursuant to contracts
marketed by MIA prior to its bankruptcy. According to AAC's
general manager, Robert McAllister, the agreement to handle these
claims would have been entered into between AAC and Century.
However, it is clear from his testimony that AAC assumed those
responsibilities for adjusting claims that had previously been
assigned to MIA pursuant to its separate contract with Arnlund.
On April 12, 1990, the fuel pump in plaintiff's Jeep Cherokee
malfunctioned and he replaced it while in Bozeman at a cost of
$144. He submitted a claim to AAC for the amount of that repair.
However, defendant refused to authorize payment for the repair
based upon the fact that defendant had not given prior approval for
the expenditure.
On October 17, 1990, plaintiff discovered damage to his front
drive line axle and requested coverage from AAC for the cost of
that repair. However, AAC denied that the drive line axle was a
covered part under the vehicle service contract. Prior to
plaintiff's purchase of the vehicle service contract, Arnlund and
MIA provided plaintiff with a brochure which indicated that the
drive line would be covered.
On November 13, 1990, plaintiff filed a complaint against AAC
and MIA in which he described the vehicle service contract and
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alleged that it had been breached by defendants. In addition to
his claim for breach of contract, plaintiff alleged that
defendants' denial of his claims was a violation of the covenant of
good faith and fair dealing, that defendants were negligent, that
defendants violated § 33-18-201(5), MCA, of the Unfair Trade
Practices Act, and that defendants were guilty of constructive
fraud, gross negligence, and oppression which entitled plaintiff to
punitive damages pursuant to § 27-1-221, MCA.
Defendant MIA did not appear and did not respond to
plaintiff's allegations.
On April 11, 1991, defendant AAC moved for summary judgment
for the reason that it had no direct contractual relationship with
plaintiff and that the third-party claim filed by plaintiff
pursuant to § 33-18-242, MCA, must await resolution of any
underlying claim that plaintiff had against the auto dealer,
Arnlund.
On April 1, 1992, the District Court entered its memorandum
and order granting AAC's motion for summary judgment, and on
April 21, 1992, final judgment was entered by the District Court in
favor of AAC and certified as final pursuant to Rule 54(b),
M.R.Civ.P.
On appeal from the judgment of the District Court, plaintiff's
arguments focus on two principal issues. The first is whether
plaintiff had enforceable rights as a third-party beneficiary of
contracts in which AAC promised to perform services for plaintiff's
benefit. The second issue is whether AAC can be sued as an insurer
5
for violation of the Unfair Trade Practices Act without any prior
resolution of plaintiff's right under its contract with the auto
dealer, Arnlund.
CONTRACT ISSUE
The District Court found that the vehicle service contract was
entered into between plaintiff and his auto dealer. It also
determined that any repair work done under the contract must be
approved by the administrator (MIA), but that the administrator
assumed no personal liability to plaintiff.
The District Court also found that Century insured Arnlund
against claims under extended service contracts, and that when MIA
folded, Century resurrected AAC to adjust claims under the service
contracts. However, the court concluded that neither Century nor
AAC were involved in marketing the vehicle service contracts.
Based upon the discrepancy between the brochure used in
marketing the contract and the terms of the written agreement
itself, the District Court concluded that there was at least a
genuine issue of fact as to whether there was coverage under the
contract for the claims made by plaintiff. The District Court also
concluded that there was a genuine issue of fact regarding whether
Arnlund was acting as an agent for MIA, which would make MIA liable
for performance under the contract. Therefore, the District Court
concluded that plaintiff could sue both the dealer and MIA.
However, Arnlund was not a party to the suit and MIA was involved
in bankruptcy proceedings and had not appeared.
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The District Court concluded that since neither Century (whom
plaintiff sought to join as a defendant by amendment) nor AAC were
parties to the contract, they could not be sued for breach of the
contract nor its related theories. Furthermore, the District Court
concluded that even though Century did insure Amlund, and AAC
acted on Century's behalf in adjusting claims pursuant to that
policy of insurance, there was no direct policy of insurance issued
from either Century or AAC to plaintiff. Therefore, any claim that
plaintiff may have pursuant to the Unfair Trade Practices Act is a
third-party claim; and before it can be pursued, plaintiff would
first have to resolve his underlying claim against the dealer
pursuant to § 33-18-242(6)(b), MCA.
while it is true that plaintiff had no direct contractual
arrangement with AAC, AAC did, by necessary inference, enter into
some agreement with Century to adjust claims made pursuant to
plaintiff's vehicle service contract with Arnlund. When it did so,
it assumed the administrative responsibility formerly promised by
MIA. It also impliedly agreed to handle those responsibilities in
a manner consistent with Arnlund's obligations under the contract.
It is plaintiff's position that he was the intended
beneficiary of AAC's agreement to adjust claims consistent with
Amlund's contractual obligations, and that as an intended
beneficiary, he has the right to enforce those obligations against
the promisor, AAC. We agree.
The rule regarding the rights of third-party beneficiaries to
enforce contracts is accurately summarized at Restatement (Second)
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of Contracts 5 304 (1981), where it provides that "[a] promise in
a contract creates a duty in the promisor to any intended
beneficiary to perform the promise, and the intended beneficiary
may enforce the duty."
The issue then is whether plaintiff was an intended
beneficiary of AAC's agreement to administer claims under the
contract. The answer is found in Restatement (Second) of Contracts
$3 302 (1981), where intended beneficiaries are described as
follows:
(1) Unless otherwise agreed between promisor and
promisee, a beneficiary of a promise is an intended
beneficiary if recognition of a right to performance in
the beneficiary is appropriate to effectuate the
intention of the parties and either
(a) the performance of the promise will satisfy an
obligation of the promisee to pay money to the
beneficiary: or
(b) the circumstances indicate that the promisee
intends to give the beneficiary the benefit of the
promised performance.
In this case, Century enlisted the services of AAC to adjust
claims under Amlund's extended service agreement because of
Century's obligation to insure against those claims and possibly
pay money to claimants like plaintiff. Therefore, we conclude that
when AAC agreed to administer the plaintiff's rights under the
contract, the performance of its promise to do so satisfied an
obligation of Century and Arnlund to plaintiff. And since AAC has
exclusive authority to approve or disapprove claims under the
contract, we also conclude that it is appropriate to recognize
plaintiff's right to performance in order to effectuate the
8
intentions of the parties that plaintiff receive all benefits
provided for under his contract with Arnlund.
For these reasons, we conclude that plaintiff was an intended
third-party beneficiary of AAC's agreement with Century, and he had
a right to seek contract damages from AAC for its failure to
perform its administrative responsibilities in accordance with his
rights under the vehicle service contract. The District Court's
summary judgment is reversed and this case is remanded to the
District Court for a factual determination of plaintiff's rights
under that contract.
UNFAIR TRADE PRACTICES ACT
The District Court found that there was no insurance contract
entered into between plaintiff and either AAC or Century.
Plaintiff does not disagree.
Century insured Arnlund, and AAC agreed with Century to
administer and adjust claims made against Amlund. Therefore, any
claim by plaintiff against Century or AAC for their failure to
handle his claim in accordance with the provisions of the Unfair
Trade Practices Act found at § 33-18-201, MCA, is a third-party
claim. Pursuant to 5 33-18-242(6)(b), MCA:
A third-party claimant may not file an action under this
section until after the underlying claim has been settled
or a judgment entered in favor of the claimant on the
underlying claim.
We agree with the District Court's holding that pursuant to
§ 33-18-242, MCA, no claim under the Unfair Trade Practices Act can
be brought against AAC or Century until plaintiff first asserts and
9
resolves his claim on the underlying contract against AAC or
Arnlund. That part of the District Court's summary judgment
dismissing plaintiff's claim pursuant to 5 33-18-201, MCA, is
affirmed.
For the foregoing reasons, the judgment of the District Court
is affirmed in part, reversed in part, and remanded for further
proceedings consistent with this opinion.
We concur:
Chief Justice
Justices
District Court Judge Dorolhy
McCarter sitting in place of
Justice Karla M. Gray
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Justice Fred J. Weber dissents as follows:
I dissent from the conclusion of the majority opinion that
plaintiff was an intended third-party beneficiary of AAC's
(American Adjustment Company) agreement with Century (Century
Indemnity Company) and had a right to seek contract damages from
AAC for its failure to perform its administrative responsibilities
in accordance with plaintiff's rights under the Vehicle Service
Contract (VSC).
Plaintiff purchased a 1986 Jeep Cherokee from Arnlund
Automotive, Inc. d/b/a Arnlund Chrysler Plymouth Jeep (Amlund).
On August 29, 1986, plaintiff purchased a Vehicle Service Contract
from Arnlund. The key part of the VSC is the following promise by
Arnlund as dealer:
The Dealer [Arnlund] agrees that subject to all terms and
conditions on the front of this Service Contract for the
period indicated to make such repairs to the described
vehicle as shall become necessary because of mechanical
failure as defined herein.
The record does not demonstrate why Arnlund was not named as a
party defendant. Plaintiff's briefs suggest that the reason was
because Arnlund was not the party making the decisions regarding
the repair of plaintiff's vehicle under the VSC.
The VSC showed it was administered by defendant MIA Services
Contracts (MIA). In case of loss the pertinent provisions of the
VSC are:
IN CASE OF LOSS
In the event of mechanical failure you may take your
vehicle to any licensed repair facility. However, it is
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suggested that you take your vehicle back to the dealer
from whom you purchased it. In your presence have the
service manager contact the office of the administrator
[MIA]. . . . You must contact the administrator before
authorizing repairs . . . No indemnity shall be payable
under the service contract without authorization issued
by the dealer [Arnlund] or administrator [MIA] prior to
the repair or replacement of vehicle parts covered by
this service contract. . . . The administrator [MIA]does
not assume, and specifically disclaims any liability to
you [plaintiff] for any benefits provided herein. The
liability of the Administrator [MIA] is only to the
Dealer [Arnlund] in accordance with their separate
agreement.
Note that MIA as administrator was liable only to Arnlund as dealer
and not to plaintiff. Plaintiff has named MIA as a party-defendant
but because of the bankruptcy of MIA, it is not an active party.
The District Court in its Memorandum and Order made specific
reference to the foregoing contractual provisions. The District
Court made further reference to the contractual relationship
between Arnlund and Century, stating:
In connection with the VSC Arnlund also had an
"Automobile Extended Service Contract Policy” with
Century. Arnlund was the insured and Century the
insurer. . . . Century agreed to insure Arnlund to pay
under certain conditions and subject to some self
insurance provisions "losses arising out of the
reasonable and customary cost of repair or replacement
under and in accord with the all of the terms of the
extended service contracts issued by the insured
[Arnlund] on or after the inception date of this policy".
. . .
The District Court further established the relationship between
various parties stating:
The deposition of Robert McCallister, the general manager
of American [AAC] establishes the relationships between
American [AAC], Century and related companies. When MIA
filed bankruptcy Century took steps to protect consumers
and itself concerning contracts it had insured such as
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the contract with plaintiff. . . . Century is a wholly
owned subsidiary of CIGNA. . . . Century did not have an
adjusting department and American [AAC] was used for that
purpose. American was a previously dormant company
revived for the purpose of adjusting the claims of
dealers for which MIA had acted as administrator under
VSC contracts. American is also a wholly owned
subsidiary of CIGNA. Neither Century nor American were
involved in any way in marketing anv VSC contracts or the
particular contract issued to olaintiff in 1986. . .
.(Emphasis supplied.)
The uncontradicted facts in the record establish that the District
Court was correct in its above stated conclusions.
With further regard to AAC the District Court stated:
The only defendant who has appeared is American [AAC]
which is the wholly owned subsidiary of CIGNA given the
job of adjusting the VSC contracts administered by MIA
after its business failure. The reason American is
adjusting the contracts is because of the automobile
extended service contract policy written by Century,
another wholly owned subsidiary of CIGNA. That policy
names Arnlund as the insured and Century as the insurer.
. . .
It is important to emphasize the District Court's further analysis
and conclusions as follows:
Century's sole involvement in this case is because
of its automobile extended service contract policy
written in favor of Arnlund where it has agreed to insure
Arnlund for "losses arising out of the reasonable and
customary costs of repair or replacement" under the VSC
(McCallister Depo. Ex. 12). American's sole involvement
is its charge to adjust the claims for Century under
previously issued VSC's naming MIA as administrator after
the business failure of MIA.
Under no theory are Century and American oarties to
the VSC who could be sued directlv by olaintiff for
breach of contract or breach of covenants runninq with
the contract. The VSC is between plaintiff and Arnlund.
Perhaps MIA could be held liable under the contract as
the principal represented by its agent Arnlund but there
is no theorv wherebv Centurv and American are themselves
parties to the contract with plaintiff. (Emphasis added.)
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The District Court emphasized that Century was involved only
because of its policy written in favor of Arnlund. The
uncontradicted record supports that conclusion. At this point I
emphasize that AAC's sole involvement was to adjust the claims for
Century and Arnlund. As previously mentioned, AAC was not in any
way administering the VSC in the manner in which MIA was required
to do under the terms of the plaintiff-Amlund VSC.
The deposition of Robert McCallister relied upon by the
District Court establishes that CIGNA came to the realization that
it was going to have to take over the obligation of adjusting the
losses on contracts which were in existence with the public.
Century and AAC both are wholly owned subsidiaries of CIGNA. The
deposition established that Century arranged for the adjustment of
its claims with Arnlund through AAC. The specific terms of that
arrangement, whether oral or in writing, are not established in the
record. The deposition further established that AAC had done
nothing with regard to marketing, and was not in any way involved
with VSC contracts such as that between plaintiff and Arnlund, with
the exception only of the adjustment of claimed losses.
The majority opinion states as follows:
While it is true that plaintiff had no direct
contractual arrangement with AAC, AAC did, by necessary
inference, enter into some agreement with Century to
adjust claims made pursuant to plaintiff's vehicle
service contract with Arnlund. When it did so, it
assumed the administrative responsibility formerly
promised by MIA. It also impliedly agreed to handle
those responsibilities in a manner consistent with
Amlund's obligations under the contract.
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I find nothing in the record which establishes an assumption by AAC
of any administrative responsibilities formerly promised by MIA.
Clearly that is a reference to the VSC between plaintiff and
Arnlund. There is nothing in the record to demonstrate that AAC
assumed any administrative responsibilities under that VSC, and in
particular nothing which demonstrates it was obligated to take the
place of MIA. I find nothing in the record from which the opinion
may conclude that AAC impliedly agreed to handle the
responsibilities in a manner consistent with Amlund's obligation
under the contract--again an apparent reference to Arnlund's
obligation to the plaintiff under his VSC.
After referring to the Restatement provisions, the majority
opinion states as follows:
In this case, Century enlisted the services of AAC
to adjust claims under Arnlund's extended service
agreement because of Century's obligation to insure
against those claims and possibly pay money to claimants
like plaintiff. Therefore, we conclude that when AAC
agreed to administer the plaintiff's rights under the
contract, the performance of its promise to do so
satisfied an obligation of Century and Arnlund to
plaintiff. And since AAC has exclusive authority to
approve or disapprove claims under the contract, we also
conclude that it is appropriate to recognize plaintiff's
right to performance in order to effectuate the
intentions of the parties that plaintiff receive all
benefits provided for under his contract with Arnlund.
The record does not support the conclusion that AAC agreed to
"administer the plaintiff's rights under the contract." At most
AAC agreed to adjust the claims made against Arnlund under the
provisions of the contract between Arnlund and Century. That
contract of course is not directly connected to the VSC contract
15
between plaintiff and Amlund. We find no record basis to conclude
that AAC agreed to administer the plaintiff's rights under the
contract, by which I assume reference is made to the VSC between
plaintiff and Arnlund.
Next the majority states that AAC has "exclusive authority" to
approve or disapprove claims under the contract from which it
concludes that it is appropriate to recognize plaintiff's right of
performance. The record does not support the conclusions that AAC
had exclusive authority to approve or disapprove claims.
Apparently the majority is referring to the provisions of the VSC
between plaintiff and Arnlund which does provide that MIA must be
contacted. There is nothing in the record to establish that AAC in
any way assumed the responsibilities of MIA. As a result I
disagree emphatically with the conclusion that it is appropriate to
recognize plaintiff's right to performance to effectuate the
intentions of the parties. The record does not substantiate any
intention that AAC should succeed to any of the obligations of MIA
under the plaintiff-Arnlund VSC.
Next the majority opinion states:
For these reasons, we conclude that plaintiff was an
intended third-party beneficiary of AAC's agreement with
Century, and he had a right to seek contract damages from
AAC for its failure to perform its administrative
responsibilities in accordance with his rights under the
vehicle service contract.
I find no record basis for the foregoing conclusion. The record
demonstrates that AAC did not have any obligation to perform
16
administrative responsibilities of any type and in particular not
under the VSC between plaintiff and Arnlund.
I conclude the record supports all of the findings and
conclusions on the part of the District Court. I dissent from the
opinion's reversal of the summary judgment by the District Court.
I would affirm the District Court.
Chief Justice J. A. Turnage and Justice R. C. M
in the foregoing dissent.
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August19, 1993
CERTIFICATE OF SERVICE
I herebycertify that the following order was sentby United Statesmail, prepaid,to the following
named:
PaulM. Warren
Attorney at Law
P.O. Box 21282
Billings, MT 59104
A. Clifford Edwards
Edwards& Paoli
P.O. Box 20039
Billings, MT 59104
William R. McNamer
McNamer, Thompson, Werner, & Stanley
P.O. Box 1980
Billings, MT 59103-1980
ED SMITH
CLERK OF THE SUPREMECOURT
STATEfi)F MONTANA