BILL 

NO. 84-322 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1986 

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, 1985 

Decided: April 17, 1986 

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-om of 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. 

E3il.l E. Britton, a rancher, horse breeder and trainer, 

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 an6 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.ttonVs investigator 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.dles with 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: 

. . . -- If this Company shall claim -- that no liability 

existed --- as to the mortgagor or owner, it shall, to 

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 j.s 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 lien -- or 

mortgages against - the property, - had - not - been 

decreased; they --- in fact were going 9, 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 - a person - or persons 

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 sole means of access to the 

arena, and was alone on the premises the entire day after his 

son and girl friend departed on the morning before the fire. 

He knew that his son Rusty was leaving and would not return. 

Ethel McCready would not return to the home premises until 

2:30 or 3:00 a.m. after she closed her duties at a bar that 

evening. He had gone to the arena at least two times during 

the day preceding the fire in his pickup. He was up and out 

of his bedroom at 1:30 to 1:45 a.m. 

The arena was locked upon the arrival of firemen. The 

doors had been locked and secured by Britton on the day 

preceding the fire. Britton had the only keys to the arena. 

All doors were locked when the firemen first appeared, and 

they were required to forcibly break into every door. 

Britton had removed valuable personal property from the 

premises, taking all of the saddles, tack, halters, bridles 

and blankets out of the tack room and placing them on the 

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

covered them with horse blankets. After the fire the remains 

of only two saddles were found in the arena: three other 

saddles were reported stolen. 

Brit-ton was under financial pressure at the time of the 

fire because of his debts: $132,000 owing to the Ronan State 

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

horse arer.2; $40,000 owing to Mary Schroer on the contract 

for deed for the purchase of the property when the fire 

occurred; $8,800 owing to Sally Lucas on a judgment obtained 

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

debts of approximately $6,000, making a total of $1.86,800. 

Britton had no income since 1975, was under pressure 

from the Bank and Lucas to satisfy the oblj-gations owed to 
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 to 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 

repair of the fire damage than the stated value in the policy 

because no ~r.i.tnesses testified to justify the lesser 

estimates. 

A. Did the Trial Court. Improperly Exclude Evidence Favoring 

FIG? 

FIG contends that in addition to the above 

circumst.antia1 evidence that Britton set the fire, it should 

also have been allowed to show (1) evidence of 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 

insurance proceeds from those fires. 

Taking the polygraph issue first, it appears that Mike 

Stotts, employed by the State Fire Marshall's office, a,fter 

the fire of September 22, 1981, conducted three polygraph 

tests of Britton. Britton submitted a motion in limine to 

exclude the polygraph results. A hearing was held on the 

motion on A.pril 13, 1983, before the first trial and before 

District Judge John S. Henson who was then in jurisdiction in 

the cause. 

At the hearing, Britton called David Lykken, Ph.D., and 

qualified him as an expert on polygraph interrogation. 

Lykken testified that the polyqraph results have "zero 

probative value," and that allowing polygraph evidence in the 

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

astro,-ogers and fortune tellers. 

At the hearing, Mike Stotts was present in the 

courtroom. FIG'S counsel did not call him in connection with 

an offer of proof on the polygraph results, but counsel for 
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 he~rt 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.2d 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,L -1 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.2d 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 $40 0,000.00 
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. 
It will be seen therefore that the purpose of the Unfair 

Trade Practices and Consumer Protection Act is to conform to 

the Federa.1 Trade Commission Act. On the other hand, the 

purpose of the Unfair Claims Settlement Act, relating to 

insurance companies, is to provide effective state regulation 

in accordance with the P'IcCarran-Ferguson Act, so as to be 

exempt from the federal regul.ations. 

We therefore hold that the provisions of the Unfair 

Trade Practices and Consumer Protection Act, as relied on hy 

Britton may not be applied with respect to insurance company 

practices, and Britton must be confined to such relief as may 

arise out of the insurance code for unfair claims settlement 

practices. 

Accordingly, we affirm the judgment of the District 

Court with respect to d-enial of further attorney's fees and 

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

a-ppeal to Britton. 

We Concur: 

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 mistaken 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 Mr. Justicr,.Fred J. 

Weber. 

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

'gobe'rt M. Holter, District Judqe, -. 

Sitting for Mr. 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 -- have been severed - for purposes - of trial." 

(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 - be severed. 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 - of combining - the claims because - of very 

obvious problems that arise -- in the proof, it will 

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 - and - tort claim." 

(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 -- of the insurance 

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 - and tort 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 - has stated a 

cross-claim a.gainst Farmers attempting to recover 

wder -- a fire insurance policy issued by ~zrners for 

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.