No. 85-327 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1986 

KELLY W. TYNES and WALTER E. TYNES, 

Plaintiffs and R-espondents, 

-vsBANKERS LIFE COMPANY, 

Defendant and Appellant. 

APPEAL FROM: District Court of the Eighth Judicial District, 

In and for the County of Cascade, 

The Honorable Thomas McKittrick, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Jardine, Stephenson, Blewett & Weaver; John Stephenson, 

Jr. argued, Great Falls, Montana 

For Respondent: 

Linnell, Newhall & Martin; Norman L. Newhall argued, 

Great Falls, Montana 

Submitted: September 11, 1986 

Decided: December 17, 1986 

Clerk 
Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of 

the Court. 

Bankers Life Company appeals the verdict entered in the 

Eighth Judicial District Court, County of Cascade, awarding 

Kelley and Walter Tynes judgment against Bankers Life. We 

affirm the jury verdict, but reverse the trial judge's 

decision to award the Tynes attorneys' fees. 

Bankers Life is an insurance company authorized to sell 

group health insurance in Montana. Walter Tynes was the 

principal owner and employee of a family-owned plumbing shop 

in Great Falls. Kelley is his son. Bankers Life issued the 

plumbing shop group health insurance in June 1974. Kelley 

was originally covered under the policy as a dependent of 

Walter. When Kelley became nineteen in November of 1975, he 

was not a full-time student and no longer eligible for 

coverage as a dependent. Nevertheless, Walter, allegedly 

ignorant of Kelley's lack of eligibility, continued paying 

Kelley's premiums and Bankers Life continued accepting them. 

Kelley has always worked at the plumbing shop. 

Initially, he primarily cleaned and ran errands. As he grew 

older, Kelley began to help at various job sites. Kelley 

continued working at the shop after he dropped out of high 

school. The work was seasonal and Kelley's, as well as the 

other employee's, hours were flexible. 

In the spring of 1977, Kelley began exhibiting abnormal 

behavior. He was antisocial and lethargic. He worked at the 

shop only sporadically. In early July 1977, Kelley was 

diagnosed as suffering from acute schizophrenia and was 

admitted to a hospital. He escaped, suffered injuries in a 

car accident and was readmitted. 
At this same time, Walter learned that Kelley was no 

longer eligible for insurance coverage as a dependent. The 

exact details of this discovery are unclear. The records of 

Laverne (Verne) Sebens, the insurance agent who sold Walter 

Tynes his Bankers Life policy, indicate Sebens made a service 

call to the plumbing shop on July 11, 1977, and made 

telephone contact with Walter Tynes' bookkeeper on July 18, 

1977. Sebens does not remember much about those calls. 

Walter testified Sebens suggested he cover Kelley as an 

employee of the shop. In any event, an enrollment card for 

Kelley Tynes, employee, dated July 10, 1977, was received 

July 19, 1977, by Bankers Life's billing department. 

Coverage for Kelley's July and August 1977 medical bills 

was denied in September 1977 because Kelley was an ineligible 

dependent. Sebens contacted Bankers Life with respect to the 

denial of coverage. Nothing happened at that time. On 

November 1, 1977, Jo Scholl, a processor in the billing 

department of Bankers1 Life, contacted Walter Tynes about 

Kelley's attempted transfer to employee status. Per Schollls 

telephone memorandum, Walter's response was that Kelley had 

been attending school and. working for Walter sporadically. 

Scholl agreed to transfer Kelley from eligible dependent to 

eligible employee starting July 10, 1977. 

Kelley's July and August bills remained unpaid. Sebens 

again contacted Bankers Life per letter, advising that Kelley 

was "carried" as an employee of the plumbing shop "even 

though he couldn't carry his own workload." Sebens' inquiry 

was directed to Lil Peterson by memo noting "there is some 

question as to whether or not these bills are payable. 

Please make your usual good investigation." Peterson 

forwarded investigation of the problem to Jan Hatting, a 

senior claims processor. Hatting, after three months, 
approved payment of bills totalling more than $3,000 in April 

Kelley's condition deteriorated. Walter contacted the 

Constance Bultman Wilson Center in Minnesota about admitting 

Kelley to the facility. Wilson Center had several 

prerequisites for admission, including verification of 100% 

financial coverage of the expenses incurred during treatment. 

At Walter's request, Wilson Center contacted Bankers Life 

about coverage of Kelley while at the Center. Wilson Center 

received a letter from Bankers Life stating Kelley was an 

insured and setting forth his maximum coverage. The letter 

stated in pertinent part: 

In reviewing the insured's claim we find that 

patient Kelley Tynes is also our insured. The 

insurance policy provides for $75 a day room and 

board benefits payable for 365 days. Hospital 

miscellaneous expense benefits are payable at 100 

percent after a $25 hospital miscellaneous 

deductible. The remaining charges not covered 

under the basic benefits are payable under major 

medical at 80 percent of the first $2000 and 100 

percent of the balance after the satisfaction of a 

$100 major medical deductible. All outpatient 

services are payable under major medical at 50 

percent. The insured's policy allows for a major 

medical maximum of $250,000 per lifetime. 

However, this is not a guarantee of benefits, the 

insured must meet the requirements of his policy 

before benefits will be payable on his claim . . . 

This letter, coupled with Walter's guaranty that he 

would pay all remaining bills, resulted in the Wilson Center 

agreeing in August of 1978 to accept Kelley. Kelley 

repeatedly refused to go to Wilson Center, but was finally 

admitted on January 1, 1979. 

Meanwhile, Walter's bookkeeper had major surgery in 

October of 1978. The plumbing shop's books fell behind. The 

November and December 1978 premiums due Bankers Life were not 

paid. On January 1, 1979, while Walter was at the Wilson 

Center admitting Kelley, the policy was terminated for 
nonpayment of premium. Walter, upon learning of the 

termination, sent Rankers Life a check for the delinquent 

premium payments and requested reinstatement on January 5, 

1979. 

Testimony at trial established that Bankers Life 

considers four criteria when determining whether to 

reinstate: 1) bad claims (claims exceeding premiums) ; 2) 

history of late payments; 3) "non-sufficient funds" checks; 

and 4) administrative problems. The plumbing shop's claims 

had recently exceeded its premiums. However, evidence was 

presented that this was not unusual for small businesses when 

one or more employees have major problems. Documentation on 

the plumbing shop's file indicated a history of late 

payments. Upon closer examination, however, it was 

determined that Bankers Life erroneously issued the late 

payment notices. Reinstatement was denied anyway. 

Walter next contacted the Montana Insurance 

Commissioner's Office. Robert Abbott reviewed the policy, 

noting an Extended Benefits Provision for coverage of certain 

charges incurred after the date of termination. Coverage 

required that the insured be totally disabled at the time of 

termination and that the insured be admitted to a hospital 

for treatment of the disability within 90 days of 

termination. Abbott contacted Bankers Life regarding the 

application of this provision to Kelley Tynes. An 

investigation was commenced by Bankers Life with Verne Sebens 

as the investigator. After nine months, Walter Tynes was 

sent a letter September 13, 1979, denying coverage of Kelley 

because he was not an eligible employee. Nothing was 

resolved with respect to the Extended Coverage Provision. 

Evidence was submitted at trial that a similar investigation 
by a professional investigator could have been completed in 

two weeks. 

Upon notification of denial of coverage, Kelley was 

removed from Wilson Center. Kelley's reaction was 

devastating to both himself and his family. He became 

withdrawn and then violent. He was unable to work or to 

function. People were afraid of him. Testimony at trial 

established that Kelley should have remained at Wilson for 18 

to 24 months in order to achieve optimum recovery. 

In 1981, Tynes' counsel demanded that Bankers Life 

review their denial of benefits to Kelley. Senior personnel 

conducted a review of the previous investigations and 

affirmed the decision. 

Thereafter, Kelley filed a complaint December 21, 1981, 

against Bankers Life seeking damages for failure to pay 

policy benefits (breach of contract). The complaint also 

alleged that Bankers Life's actions in failing to pay were 

oppressive, fraudulent and malicious and entitled insured to 

exemplary damages. An amended complaint was filed May 29, 

1984, adding Walter as a plaintiff and denominating three 

specific counts: breach of contract; tortious breach of the 

implied covenant of good faith and fair dealing; and tortious 

violation of Montana's Insurance Code. 

In its answer, Bankers Life denied Kelley was entitled 

to benefits and claimed the new counts were barred by various 

statutes of limitations. The defenses were raised by motions 

for summary judgment and directed verdict. The motions were 

denied. 

Following trial in March 1985, the jury returned a 

special verdict awarding plaintiffs $49,167.09 on the 

contract claim, $100,000 for Walter's emotional distress, 

$100,000 for Kelley's general damages and emotional distress, 
and $200,000 in punitive damages. Thereafter, plaintiffs 

filed a motion requesting over $30,000 in attorneys' fees and 

costs. The motion was granted. 

Numerous important issues are raised by Bankers Life on 

appeal : 

1. Should Walter and Kelley Tynes' claims have been 

dismissed as barred by applicable statutes of limitations? 

2. Is Walter Tynes barred from any action on the 

contract since he is neither a party to the contract nor an 

intended third-party beneficiary? 

3. Was Verne Sebens the agent of Bankers Life for all 

purposes? 

4. Is the evidence sufficient to establish Bankers 

Life's obligation to provide coverage? 

5. Did the trial judge err in refusing to rule as a 

matter of law that Bankers Life did not act in "bad faith?" 

6. Did the trial judge erroneously submit the case to 

the jury on the basis of constructive fraud? 

7. Did the trial judge erroneously instruct the jury on 

damages for emotional distress? 

8. Did the trial judge erroneously award attorneys' 

fees and improper costs to the Tynes? 

I. 

STATUTES OF LIMITATIONS and THE RELATION-BACK DOCTRINE 

Bankers Life denied Kelley Tynes coverage on September 

13, 1979. Kelley's complaint was filed more th.an two years 

later, December 21, 1981. Walter was added as a plaintiff 

nearly five years after Bankers Life denied coverage. Kelley 

also amended his own complaint at that time to specifically 

allege breach of the implied covenant of good faith and fair 

dealing and tortious violation of Montana Is 1nsuran.ce Code. 

Bankers Life, citing Rule 15 (c) , M.R.Civ.P., concedes that 
Kelleyls claims relate back to the date his original 

complaint was filed, but then contends the claims are still 

barred by various two-year statutes of limitations. We 

disagree. 

A cause of action for breach of the implied covenant of 

good faith and fair dealing is a separate tort action, 

independent of the underlying contract. Nicholson v. United 

Pacific Insurance Co. (Mont. 1985), 710 P.2d 1342, 1348, 42 

St.Rep. 1822, 1827. Therefore, the applicable statute of 

limitations is that for a tort action, three years. Section 

27-2-204 (I), MCA. 

The claim for violation of the Unfair Claims Practices 

Act arises out of a statutory scheme but consists of a 

separate cause of action, again in tort. "It is the breach 

of that statutory requirement, a duty independent of the 

insurance contract, that gives rise to tort liability. . . ." 

First Security Bank of Bozeman v. Goddard (1979), 181 Mont. 

407, 420, 593 P.2d 1040, 1047. The three-year tort statute 

of limitations again applies. Bennett v. Dow Chemical Co. 

(Mont. 1986), 713 P.2d 992, 995, 43 St.Rep. 221, 225. 

Constructive fraud was defined as fraud by this Court in 

Purcell v. Automatic Gas Distributors, Inc. (Mont. 1983), 673 

P.2d 1246, 1251, 40 St.Rep. 1997, 2002. Section 27-2-203, 

MCA, provides: 

Actions for relief on ground of fraud or mistake. 

The period prescribed for the commencement of an 

action for relief on the ground of fraud or mistake 

is within 2 years, . . . 

Thus, Bankers Life argued correctly that a cause of action 

premised on constructive fraud is subject to a two-year 

statute of limitations. 

However, Tynes did not plead constructive fraud. Nor 

did the jury rule on the issue of constructive fraud. The 
special verdict form referred only to breach of the implied 

covenant of good faith and fair dealing. The jury 

necessarily relied only on that claim in finding against 

Bankers Life. The trial judge did give instructions on 

constructive fraud. However, as will be discussed in part VI 

of this opinion, those instructions actually incorporate 

elements of constructive fraud into the implied covenant of 

good faith and fair dealing. Constructive fraud was neither 

pled by Tynes nor decided by the jury as a distinct claim in 

this case. Therefore, there is no statute of limitations 

problem with respect to constructive fraud. 

Bankers Life argues Walter Tynes' cause of action 

against Bankers Life cannot relate back, pursuant to Rule 

15(c), M.R.Civ.P., to the date of Kelley's original complaint 

because Walter alleged separate claims on his own behalf and 

sought damages in his own right. Whether a second 

plaintiff's cause of action can relate back to the date the 

first plaintiff's complaint was filed is a question of first 

impression in Montana. Our research, as well as that of the 

parties, reveals a split of authority in other jurisdictions 

on the issue. See 12 A.L.R. Fed. 233. 

Statutes of limitations exist in order to insure that a 

defendant receives adequate notice of the claim against it. 

They provide a defendant with the opportunity to adequately 

defend. Statutes of limitations insure fairness. They 

prevent undue prejudice to the defendant. Cunningham by 

Cunningham v. Quaker Oaks Co. (W.D.N.Y. 1985), 107 F.R.D. 66, 

72; Williams v. United States (5th Cir. 1968), 405 F.2d 234, 

12 A.L.R. Fed. 224. 

Permitting Walter's claims against Bankers Life to 

relate back to the date of Kelley's original complaint did 

not undermine Bankers Life's ability to defend itself. The 
claims of the two parties are nearly identical. They arise 

from the exact same "conduct, transaction, or occurrence set 

forth . . . in the original pleading" as required by Rule 

15 (c) , M.R.Civ.P. The pleadings contain the same causes of 

action. Finally, there is a "clear identity of interest" 

between Kelley and Walter. Walter was the original insured. 

He agreed, as Kelley's father, to be responsible for Kelley's 

medical bills incurred at Wilson Center. The only 

difference in the two pleadings is damages. Under these 

circumstances, we do not believe Bankers Life was prejudiced 

when the trial judge allowed Walter's claims to relate back 

to the date of Kelley's original complaint. 

DOES WALTER TYNES HAVE AN ACTION ON THE CONTRACT? 

Bankers Life contends Walter Tynes is barred from any 

action on the insurance contract between Bankers Life and 

Kelley because Walter is neither a party to, nor an intended 

third-party beneficiary of, the contract. 

Walter has causes of action against Bankers Life in his 

own right, independent of the contract between Kelley and 

Bankers Life. One cause of action is premised on promissory 

estoppel. 

In Fiers v. Jacobson (1949), 123 Mont. 242, 250, 211 

P.2d 968, 972, we adopted the definition of promissory 

estoppel found in the Restatement of the Law of Contracts, 

A promise which the promisor should reasonably 

expect to induce action or forebearance of a 

definite and substantial character on the part of 

the promisee and which does induce such action or 

forebearance is binding if injustice can be avoided 

only by enforcement of the promise. 

Essentially, the amended complaint alleges that Bankers 

Life promised Wilson Center and Walter they would cover 
Kelley's expenses. Walter relied on the promise in 

guaranteeing payment of all expenses not covered. The 

reliance was to Walter's detriment as Bankers Life 

subsequently refused to cover the charges, resulting in 

Walter having sole responsibility for the bills. The 

doctrine of promissory estoppel was invoked. (This issue is 

discussed in Part IV, infra.) 

Further, Walter has a cause of action against Bankers 

Life in tort based on Hawthorne v. Kober Construction Co. 

(1982), 196 Mont. 519, 640 P.2d 467. In Hawthorne, 196 Mont. 

at 523, 640 P.2d at 469, we specifically held that privity of 

contract is not required to maintain an action grounded in 

negligence. 

We view privity to be a concept having proper 

application in the area of contra.ct law. There 

seems to be no sound public policy argument for 

extending its application to tort. 

The rationale is aptly explained in W. Prosser, The Law 

of Torts § 93 (4th ed. 1971) : 

". . . by entering into a contract with A, the 

defendant may place himself in such a relation 

toward B that the law will impose upon him an 

obligation, sounding in tort and not in contract, 

to act in such a way that B will not be injured. 

The incidental fact of the existence of the 

contract with A does not negative the 

responsibility of the actor when he enters upon a 

course of affirmative conduct which may be expected 

to affect the interests of another person. 

". . . there are situations in which the making of 

the contract creates a relation between the 

defendant and the promisee, which is sufficient to 

impose a tort duty of reasonable care. By the same 

token, there are situations in which the making of 

a contract with A may create a relation between the 

defendant and B, which will create a similar duty 

toward B, and may result in liability for failure 

to act. " 

Hawthorne, 196 Mont. at 523-524, 640 P.2d at 470. 

Here, Bankers Life's contract with Kelley resulted in 

Walter Tynes guaranteeing all unpaid medical bills incurred 
by Kelley at Wilson Center. Bankers Life's failure to cover 

Kelley's medical bills resulted in a breach of duty owed to 

Walter by Bankers Life. 

WAS SEBENS AN AGENT? 

The trial judge gave the following instructions: 

Instruction No. 10 

You are instructed that in this case, Laverne 

Sebens was an agent for Bankers Life Company. 

Instruction No. 11 

You are instructed that the knowledge of Laverne 

Sebens, as agent for Rankers Life Company, is 

considered to be knowledge held by Bankers Life 

Company. 

Bankers Life objects to these instructions. Because 

Verne Sebens sells insurance for several different companies, 

Bankers Life contends he is an independent insurance broker. 

As such, Bankers Life contends, Sebens acts at times on 

behalf of the insured and at times on behalf of the insurer, 

depending on his responsibilities at any given moment. We 

reject this argument. 

Sebens testified that he had been employed by Bankers 

Life to sell insurance for 37 years. As an independent 

agent, he sold other types of insurance as well. 

Nevertheless, Sebens enjoyed a fixed or permanent 

relationship of over 37 years as an insurance agent for 

Bankers Life. At trial, Sebens referred to himself as an 

insurance agent for Bankers Life. We agree with Sebens 

assessment of his position. 

Bankers Life established a principal/agent relationship 

with Sebens. It enlisted Sebens' aid in investigating 

Kelley's claims, gaining access to Kelley's work records a.nd 
communicating with Walter. All but one contact with Walter 

by Bankers Life was made by Sebens. 

The weight of authority, albeit primarily statutory 

authority, is that "a soliciting agent of an insurance 

company is the agent of the insurer and not of the insured 

for the purpose of soliciting and procuring the insurance and 

preparing the application." See 16 J. Appleman, Insurance 

Law and Practice 8697, p. 276 (1981) and cases cited 

therein. Therefore, Sebens was acting as Bankers Life's 

agent when he suggested Walter enroll Kelley as an employee. 

The giving of Instruction No. 10 was not error. 

Instruction No. 11, that Sebens' knowledge is considered 

to be knowledge held by Bankers' Life, is a correct statement 

of law with respect to the acts of Sebens related to this 

lawsuit. 

The rule that knowledge gained by an agent of an 

insurance company as to matters within the general 

scope of his authority is imputable to the company 

does not require the citation of authority. 

Wells-Dickey v. American Alliance Insurance Co. (1924), 69 

Mont. 586, 591, 223 P. 489, 490. 

IV. 

COVERAGE 

Walter testified at trial that the insurance company 

(Sebens) suggested Kelley be enrolled as an employee of the 

plumbing shop. Sebens did not deny making that suggestion. 

An enroll-ment card was completed. and submitted to Bankers 

Life on behalf of Kelley. This application constitutes an 

offer. 1 A. Corbin, Contracts S 82, p. 354 (1963). Neither 

acceptance nor refusal of the offer was communicated to the 

Tynes. Walter Tynes, believing Kelley had a contract for 

insurance with Bankers Life, continued paying premiums. 

Numerous premiums on behalf of Kelley were accepted by 
Rankers Life, leaving the Tynes with the reasonable belief 

that Bankers Life had accepted Kelley as an insured. Bankers 

Life subsequently refused to provide Kelley coverage, 

claiming he was not an eligible employee. 

In response to requests from Walter Tynes and Verne 

Sebens, claims personnel investigated Kelley Tynes' employee 

status. It was determined Kelley was an eligible employee 

after all and his medical bills were paid. The insurance 

company had not only accepted Kelley's offer, but had 

executed the insurance contract. 

Subsequently, Bankers Life represented to Wilson Center 

that if it accepted Kelley Tynes as a patient, a large 

portion of the cost of his treatment would be covered by 

Bankers Life. Bankers Life later reversed this 

representation, alleging Kelley was not an eligible 

employee. 

We must examine the legal principles of estoppel, waiver 

and fraud to determine if error was committed by the trial 

court. This Court has defined the elements of promissory 

estoppel as: 

(1) a promise clear and unambiguous in its terms; 

(2) reliance on the promise by the party to whom 

the promise is made; (3) reasonableness and 

foreseeability of the reliance; (4) the party 

asserting the reliance must be injured by the 

reliance. (Citations omitted.) 

Keil v. Glacier Park, Inc. (1980), 188 Mont. 455, 462, 614 

The jury was given this instruction on promissory 

estoppel : 

A promise which Bankers Life Company should 

reasonably expect to induce action on the part of 

Kel-ley Tynes or Walt Tynes, and which does induce 

such action is binding if injustice can be avoided 

only by enforcement of the promise. (Ct.Inst. No. 

22) 
We find the instruction accurately states Montana law 

under the authority of Keil, supra. 

There was abundant evidence to support a jury finding of 

promissory estoppel. Bankers Life treated Kelley as an 

insured when it paid his medical bills in April of 1978. It 

also represented to Wilson Center that Kelley was an insured. 

By these acts, Bankers Life promised to pay Kelley's medical 

bills, including those incurred at Wilson Center. Tynes 

relied on this promise when admitting Kelley to Wilson 

Center. Reliance was reasonable and foreseeable as Kelley's 

admittance hinged on financial coverage of the costs. Tynes 

were injured by this reliance when Bankers Life refused to 

cover the expenses incurred at Wilson Center. Kelley was 

injured because he was denied the insurance coverage he had 

been promised. Walter's injury occurred because he had 

guaranteed all costs incurred at Wilson Center not covered by 

insurance. 

Next we must determine if waiver was properly treated by 

the trial court. In 1978, Bankers Life investigated Kelley 

Tynes' employee status at the plumbing shop. At the close of 

that investigation, Bankers Life found Kelley to be an 

eligible employee. 

Waiver is generally defined as a voluntary and 

intentional relinquishment of a known right, claim 

or privilege. . . Waiver may be proved by express 

declarations or by a course of acts and conduct so 

as to induce the belief that the intention and 

purpose was to waive. (Citations omitted.) 

Kelly v. Lovejoy (19771, 172 Mont. 516, 520, 565 P.2d 321, 

The jury was instructed with respect to waiver in 

Instruction No. 19: 

A waiver is defined as the intentional and 

voluntary relinquishment of a known right, claim or 

privilege. A waiver can also arise by conduct, in 
which case it is called an "implied waiver". An 

implied waiver can occur only if the party relies 

on the waiver to his detriment. 

If you find that Bankers Life Company, by i-ts 

conduct, has waived its right to deny coverage to 

Kelley Tynes, and if you find further that Walt and 

Kelley Tynes relied on such waiver to their 

detriment, then Bankers Life has waived its right 

to deny coverage. 

Bankers Life alleges it could not have waived its right 

to deny coverage in 1978 because it did not know Kelley was 

not an eligible employee. That might have been true had 

Bankers Life not made an independent investigation of 

Kelley's employee status. But, having undertaken to 

determine in 1978 whether Kelley was covered and determining 

that he was, Bankers Life could have been found by the jury 

to have relinquished any defense it might otherwise have had. 

Bankers Life claims the facts of employee status were 

misrepresented. This issue was properly submitted to the 

jury in Instruction No. 21. 

If Bankers Life Company, claiming to have been 

defrauded, makes an independent investigation of 

the subject matter of the alleged false 

representation, and its decision to engage in the 

transaction is the result of its independent 

investigation and not its reliance upon the 

representation, then it may not deny coverage, even 

though the representation is false. 

There was sufficient credible evidence for the jury to 

find that Bankers Life relied on its own investigation. 

Under one or more of these theories the jury could find 

coverage. 

v. 

BAD FAITH 

Bankers Life contends there was a debatable question 

whether Kelley Tynes was an eligible employee and thus 

entitled to insurance coverage. Further, Bankers Life 

attributes the delay in its determination of the coverage 

issue to false representations by the Tynes with respect to 
Kelley's employment status. Therefore, Bankers Life asserts, 

it was not exercising bad faith in denying coverage. The 

jury should have been so instructed as a matter of law. 

Whether the issue of coverage is "fairly debatable" is a 

jury question. Sparks v. Republic National Life Ins. Co. 

(Ariz. 1982), 647 P.2d 1127, 1137. he court gave the 

following correct instruction: 

If there is a debatable question of insurance 

coverage which provides Bankers Life with a 

reasonable and valid ground on which to oppose 

payment of the proceeds of the policy, the 

insurance company has the right to have the 

coverage question determined in a court of law. 

Therefore even if you find that there is coverage 

under the Bankers Life group policy for Kelley 

Tynes, and that there are benefits due under the 

insurance contract, there can be no liability for 

bad faith if you find that Bankers Life had 

reasonable grounds to debate the coverage in a 

court of law. (Ctls. Instr. No. 32) 

The jury found against Bankers Life on the issue. 

Again the jury's determination is supported by amp1.e 

evidence. Bankers Life had the duty to investigate Kelley's 

claims and coverage promptly. Egan v. Mutual of Omaha Ins. 

Co. (Cal. 1979), 598 P.2d 452, 456-457. There was amp1.e 

evidence tha.t Bankers Life failed to fulfill its duty. 

Bankers Life investigated Kelley's status three times, 

granting coverage once, before finally denying coverage. The 

final investigation took nine months. Evidence was submitted 

that had a professional undertaken the investigation, it 

could have been concluded within two weeks. Meanwhile, the 

Tynes incurred nine months of bills at Wilson Center. 

Bankers Life failed to inform the Tynes of the potential for 

coverage under the Extended Benefits Provision of the policy. 

Finally, Bankers Life's acceptance of premiums for Kelley and 

payment of Kelley's smaller claims followed by denial of 

coverage with respect to his large claims, smacked of bad 

faith. We find no error. 
VI. 

CONSTRUCTIVE FRAUD 

The jury was instructed concerning fiduciary d-uties as 

follows: 

Instruction No. 26 

Under the law in Montana, an insurance company owes 

what is called a fiduciary duty to its insured, the 

policy holder. This duty is no less than that of a 

trustee. The insurance company is bound to act in 

the highest good faith towards the insured, and may 

not obtain any advantage over the insured by 

misrepresentation, concealment, threat, or adverse 

pressure of any kind. 

Instruction No. 33 

Constructive fraud is defined in the laws of 

Montana as: 

"any breach of duty which, without an actually 

fraudulent intent, gains an advantage to the 

person in fault or anyone claiming under him 

by misleading another to his prejudice or to 

the prejudice of anyone claj-ming under him." 

(5 28-2-406 (1) , M.C.A. ) 

In order to find liability for constructive fraud, 

you must find that Bankers Life made false 

statements of fact or withheld or concealed facts 

and that such falsely stated or withheld facts 

misled the plaintiffs or one of them to their 

prejudice resulting in an advantage to Bankers 

Life. In order to prove constructive fraud it is 

not necessary to show that Bankers Life acted with 

intent to deceive or mislead. 

Bankers Life objected at trial and objects now to these 

instructions, claiming there is no fiduciary duty between an 

insured and an insurer. 

The question of whether a fiduciary relationship exists 

between an insurer and an insured has been the subject of 

discussion by a number of appellate courts. The 

jurisdictions of Wisconsin, Kentucky and California consider 

most relationships between insureds and insurers to be 

fiduciary in nature, although not necessarily identical to 

the fiduciary relationship in a formal trust. 
In Benke v. Mukwonago-Vernon Mutual Insurance Co. (Wis . 

App. 1982), 329 N.W.2d 243, the insurance company fired its 

own expert and refused to rely on his report after the expert 

determined plaintiffs1 arena roof collapsed d.ue to wind, 

rather than to snow. The policy covered damage caused by 

wind and excluded damage caused by snow. Thereafter, the 

insurer hired a second expert who determined that snow caused 

the collapse. The second expert was relied on at trial. In 

affirming a jury verdict finding bad faith, the appellate 

court stated: 

We are not holding that an insurance company is 

open to suit for bad faith every time it rejects 

the opinion of the first expert retained and hires 

a second or third instead. An insurance company 

may have perfectly good reasons for not relying on 

the first expert hired . . . We are simply stating 

the rule that - an insurance company -- has a fiduciary 

duty - to - act - on behalfof - - the insured and to 

exercise - the - same standard ---- of care that the 

insurance company would exercise were -- it exercisinq 

ordinary diligence in respect --- to its own business. 

(Emphasis supplied.)(~itation omitted.) 

Renke, 329 N.W.2d at 248. 

In Feathers v. State Farm Fire and casualty Co. (~y.~pp. 

1983) , 667 S.W.2d 693, the insurer denied coverage under a 

fire insurance policy on the "reasonable belief that said 

fire was the result of arson." Insureds filed a complaint 

requesting recovery for the losses under the policy, claiming 

breach of "a duty to act in good faith in effecting a fair 

and reasonable settlement . . . without harassment or 

unreasonable delay;" and claiming refusal by the insurer to 

deal with the insured fairly, resulting in insured suffering 

from acute anxiety and. mental suffering. In holding against 

the insurer, the Kentucky appellate court stated: 

[Olnce the policyholder has substantially complied 

with the terms and conditions required by the 

policy, and there is no substantial or credible 

evidence that the policyholder directly or 

indirectly set fire to his property for personal 

gain, then at that point, the insurance com.pany 
becomes akin to a fiduciary as to the sums that may 

-- be owed 

--- 

under - the policy. --- (Emphasis -- supplied. ) 

Feathers, 667 S.W.2d at 696. 

The California Supreme Court has recently reaffirmed its 

holding in Egan v. Mutual of Omaha, supra, stating that the 

relationship between an insured and an insurer is a fiduciary 

one. 

In addition an insurer holds itself out as a 

fiduciary. With the public trust must go private 

responsibility consonant with the trust, including 

qualities of decency and humanity inherent in the 

responsibilities of a fiduciary. 

Frommoethelydo v. Fire Insurance Exchange (Cal. 1986), 721 

These courts are defining fiduciary duties applicable to 

insurers in a different way from the definition that applies 

to the true trust relationship. In the classic trust, the 

trustee considers only the interest of the beneficiary or the 

one for whose protection the trust relationship exists. The 

duties of a trustee under Montana law are defined in 

§§ 72-20-201, et seq., MCA. Not all of those obligations are 

applicable to an insurer who is in the business of providing 

insurance for a profit and must necessarily act in its own 

interest as well as in the interests of its insured. There 

may be times when the interest of the insurer and the insured 

conflict. The provisions of § 72-20-204, MCA, would not seem 

to be appropriate for regulating the relationship between 

insurer and insured. That section provides: 

Conflict of interest prohibited -- exceptions. 

Neither a trustee nor any of his agents may take 

part in any transaction concerning the trust in 

which he or anyone for whom he acts as an agent has 

an interest, present or contingent, a-dverse to that 

of his beneficiary, except as follows: 

(1) when the beneficiary, having capacity to 

contract, with full knowledge of the motives of the 

trustee and of all other facts concerning the 

transaction which might affect his own decision and 
without the use of any influence on the part of the 

trustee, permits him to do so; 

(2) when the proper court, upon the like 

information of the facts, grants the like 

permission, the beneficiary not having capacity to 

contract; or 

(3) some of the beneficiaries, having capacity to 

contract and some not having it, the former grant 

permission for themselves and the proper court for 

the latter, in the manner above prescribed. 

Under this statute, if applicable to the insurance 

relationship, an insurer would always have to act in the best 

interests of the insured disregarding the interests of the 

insurer. This would not be workable. An insurance company 

must consider the interests of both itself and its insured, 

but must act in the highest good faith toward the insured. 

Section 72-20-201, MCA, provides: 

Trustee's obligation of good faith. In all matters 

connected with his trust, a trustee is bound to act 

in the highest good faith toward his beneficiary 

and may not obtain any advantage therein over the 

latter by the slightest misrepresentation, 

concealment, threat, or adverse pressure of any 

kind. 

This statute was essentially given to the jury in 

Instruction No. 26. In Instruction No. 33 the court told the 

jury that the essence of liability under these theories 

depended upon the jury finding that the insurer 

misrepresented or concealed in order to gain an advantage 

over plaintiffs. In doing so, the court properly instructed 

the jury on the duties which are owed by an insurer to an 

insured. Britton v. Farmers Ins. Group (Mont. 1986), 721 

Fiduciary duties, as they have been defined in this 

case, are simply a statement of the kind of good-faith duty 

owed by an insurer to an in.sured. The implied covenant of 

good faith and fair dealing, as recognized in numerous 

insurance cases decided by this Court (see Britton v. Farmers 
Ins., supra. and cases cited therein), proscribes the 

misrepresentation, concealment, threat or adverse pressure, 

referred to in court's Instruction No. 26. ~nstructions No. 

26 and 33 do no more than define the good faith duty owed by 

Bank.ers Life to the Tynes and the giving of those 

instructions was not error. 

VII. 

EMOTIONAL DISTRESS 

Bankers Life contends the jury was improperly 

instructed on emotional distress for two reasons. First, the 

jury was improperly told in Instruction No. 40 that they must 

award damages for emotional distress should they find in 

favor of Tynes . 

If, under the court's instructions, you find that 

either of the plaintiffs is entitled to a verdict 

against ~ankers Life Company, you must then award 

that plaintiff damages in an amount that will 

reasonably compensate him for all loss or harm, 

provided that you find it was suffered by him and 

proximately caused by the defendant's conduct. The 

amount of such award shall include: 

Reasonable compensation for any pain, discomfort, 

fears, anxiety and other emotional distress 

suffered by the plaintiff. 

No definite standard or method of calculation is 

prescribed by law by which to fix reasonable 

compensation for emotional distress. Nor is the 

opinion of any witness required as to the amount of 

such reasonable compensation. In making award for 

emotional distress you shall exercise your 

authority with calm and reasonable judgment and the 

damages you fix shall be just and reasonable in the 

light of the evidence. (Underlining supplied.) 

(Court's Instruction No. 40) 

The word "must" is qualified by the language "provided 

that you find it was suffered by him and proximately caused 

by the defendant's conduct." If the jury found Tynes 

suffered emotional distress as a result of Bankers Life's 

conduct, the jury was required to award damages for that 

emotional distress. The instruction is correct in that 

respect. 
We agree with Bankers Life's second allegation. No 

instruction was given with respect to our requirement in 

Johnson v. Supersave Markets, Inc. (Mont. 1984), 686 P.2d 

209, 213, 41 St.Rep. 1495, 1500, that there must be a 

substantial invasion of a legally protected interest causing 

a significant impact upon plaintiff before damages for 

emotional distress can be awarded. However, Bankers Life did 

not object to the incomplete nature of the instruction at the 

trial court level. Instead, it complained that the evidence 

presented did not meet the standard of proof adopted in 

Johnson, supra. There was sufficient evidence of significant 

emotional distress. We refuse to consider appellant's 

contention that the instruction was incomplete in not 

requiring a substantial invasion and a significant impact 

because no objection was made to this language deficiency. 

The verdict with respect to damages for emotional 

distress is affirmed. 

VIII. 

ATTORNEYS' FEES 

Following trial, Tynes sought and were awarded 

$30,937.39 in costs, $20,126.99 of which was attorneys' fees 

and $9,585.28 of which was deposition costs, including air 

fare. The attorneys' fees awarded are 11% of Tynes' 

counsels' contingency fees. Eleven percent represents that 

portion of the total award attributable to actual medical 

costs. The attorneys' fees award is based on California's 

policy of allowing attorneys' fees attributable to recovery 

of the amount due under the insurance policy. 

When an insurer's tortious conduct reasonably 

compels the insured to retain an attorney to obtain 

the benefits due under a policy, it follows that 

the insurer should be liable in a tort action for 

that expense. 

Brandt v. Superior Court (Cal. 1985), 693 ~.2d 796, 798. 
We have not adopted this policy in Montana and do not 

choose to do so today. The award of $20,126.99 in attorneys' 

fees is vacated. 

We affirm the award of $9,585.28 for expenses associated 

with the taking of depositions. Section 25-10-201(9), MCA, 

allows the recovery of reasonable and necessary expenses. 

The depositions were reasonable and necessary as the 

witnesses were beyond the subpoena power of the court and 

Bankers Life refused to voluntarily produce them in Montana 

for trial. The trial judge did not abuse his discretion in 

awarding the costs associated with the depositions. 

Affirmed in part; vacated in part. 

We Concur: 

Chief Justice 
Mr. Justice Fred J. Weber dissents as follows: 

In part I, the majority opinion deals with the issues on 

statutes of limitation. The majority points out that constructive fraud was defined as fraud by this Court in Purcell 

v. Automatic Gas Distributors (Mont. 1983), 673 P.2d 1246, 

1251, 40 St.Rep. 1997, 2002. Next, reference is made to S 

27-2-203, MCA, which sets a two year statute of limitation 

for actions for relief on the ground of fraud. I agree with 

the conclusion in the majority opinion that Bankers Life 

correctly argued that a cause of action premised on constructive fraud is subject to a two year statute of limitation. 

However, the majority next concludes that plaintiffs did 

not plead constructive fraud and that the jury did not rule 

on constructive fraud, as demonstrated by the special verdict 

form which referred only to the breach of the implied covenant of good faith and fair dealing. I disagree with that 

construction of the special verdict form. The form stated as 

follows : 

SPECIAL JURY VERDICT 

We, the Jury, answer the following questions as follows: 

1. Do you find in favor of [check one] : 

- X - Kelley W. Tynes and Walter E. Tynes, Jr.? 

Bankers Life Company? 

If find in favor of Bankers Life Company, do not 

proceed further, but advise the Bailiff that you have reached 

a verdict. 

2. If you find in favor of Kelley W. Tynes and Walter 

E. Tynes, Jr., what amount of damages, if any, do you assess 

for the following: 

For medical expenses: The sum of $ 49,167.09 ; 

For emotional distress 

and general damages of 

Kelley W. Tynes: The sum of $ 100,000.00; 
For emotional distress of 

Walter E. Tynes, Jr.: The sum of $ 100,000.00; 

3. Do you fj-nd that Bankers Life Company has breached 

the implied covenant of good faith and fair dealing [check 

one] : 

- X - Yes. 

- No. 

If your answer is "No", do not proceed further, but 

advise the Bailiff that you have reached a verdict. 

4. If your answer is "Yes", do you find that Bankers 

Life Company acted with oppression, fraud or malice as defined in the instructions? 

- X - Yes. 

- No. 

If your answer is "Nom, do not proceed further, but 

advise the Bailiff that you have reached a verdict. If your 

answer is "Yes", what amount do you assess as punitive 

damages : 

The sum of $ 200,000.00 

Dated this 11 day of March, 1984. 

S/ 

FOREPERSON 

The verdict demonstrates that the jury found in favor of the 

two plaintiffs and assessed medical expenses, emotional 

distress, and general damages for both plaintiffs at a total 

of $249,167.09 without any reference to the legal theory upon 

which they made that award. 

Court's Instruction No. 13 stated in pertinent part as 

follows: 

Instruction No. 13 

Plaintiffs seek recovery on three [sic] theories of liability as follows: 

1. Breach of contract; 

2. Promissory Estoppel; 

3. Tort of bad faith, based upon either 

(a) an alleged violation of Montana 

Insurance Code; or 

(b) an alleged breach of implied duty of 

good faith to perform insurance contract; 

4. Constructive fraud. 

Court's Instruction No. 33 on constructive fraud was: 

Instruction No. 33 

Constructive fraud is defined in the laws of 

Montana as: 
"any breach of duty which, without an actually 

fraudulent intent, gains an advantage to the 

person in fault or anyone claiming under him 

by misleading another to his prejudice or to 

the prejudice of anyone claiming under him;" 

(528-2-406 (1) , M.C.A. ) 

In order to find liability for constructive 

fraud, you must find that Bankers Life made false 

statements of fact or withheld or concealed facts 

and that such falsely stated or withheld facts 

misled the plaintiffs or one of them to their 

prejudice resulting in an advantage to Bankers 

Life. In order to prove constructive fraud it is 

not necessary to show that Bankers Life acted with 

intent to deceive or mislead. 

I conclude that the issue of constructive fraud was 

barred by the two year statute of limitation and was improperly presented to the jury under the foregoing instructions. 

It is not possible to tell whether any of the damages awarded 

in paragraph 2 of the special verdict form were based on a 

constructive fraud theory. "Where it is impossible to say 

upon what theory or under what part of the court's instructions a verdict is based, error in any one of the instructions which is prejudicial and which may influence the jury 

entitles the unsuccessful party to a new trial." Roberts 

Realty Corp. v. City of Great Falls (1972), 160 Mont. 144, 

159, 500 P.2d 956, 964. I would therefore reverse the District Court and send the matter back for new trial. 

In part 111, the majority deals with court's Instructions No. 10 and 11. I conclude that Instruction No. 11 is 

deficient. It states: 

Instruction No. 11 

You are instructed that the knowledge of 

Laverne Sebens, as agent for Bankers Life Company, 

is considered to be knowledge held by Bankers Life 

Company. 

This instruction requires a conclusion by the jury that - all 

knowledge of Mr. Sebens must be considered knowledge held by 
Bankers Life. I do not believe that is a correct instruction 

under Wells-Dickey Co. v. American Alliance Ins. Co. (1924) , 

69 Mont. 586, 591, 223 P. 489, 490, in which this Court 

stated the law as: 

The rule that knowledge gained by an agent of an 

insurance company as to matters within the general 

scope of his authority is imputable to the company 

does not require the citation of authority. 

The jury was not required to determine whether Sebens' knowled.ge related to matters within the general scope of his 

authority. Bankers Life argues that there is substantial 

evidence to show that Mr. Sebens had acted as the agent 

insuring the plaintiffs for many yea-rs and that he therefore 

had. two hats, the one being when he acted as agent for Bankers Life and the second when he acted for the plaintiffs. 

Under that circumstance, the jury should have been required 

to determine whether or not the knowledge being imputed to 

Bankers Life related to matters within the general scope of 

Sebens' authority. 

In part IV, the majority addresses the question of 

coverage and examines the legal principles of estoppel, 

waiver, and fraud to determine if error was committed. With 

regard to promissory estoppel, the majority refers to ~eil v. 

Glacier Park, Inc. (1980), 188 Mont. 455, 462, 614 P.2d 502, 

506 where this Court defined the elements of promissory 

estoppel as: 

(1) [A] promise clear and unambiguous in its 

terms ; 

(2) reliance on the promise by the party to whom 

the promise is made; (3) reasonableness and foreseeability of the reliance; (4) the party asserting the reliance must be injured by the reliance. 

(Citations omitted.) 
The majority then refers to court's Instruction No. 22 

which stated as follows with regard to promissory estoppel: 

A promise which Bankers Life Company should reasonably expect to induce action on the part of Kel-ley 

Tynes or Walt Tynes, and which does induce such 

action is binding if injustice can be avoided only 

by enforcement of the promise. 

I conclude that the instruction does not adequately address 

the question of whether Bankers Life made a promise which was 

clear and unambiguous in its terms. The majority suggests 

that this may be found because Bankers Life treated Kelley as 

an insured when it paid some of the medical bills and represented to Wilson Center that Kelley was insured. 

The Rankers Life letter to the Wilson Center contained 

the following statement as a last paragraph: 

However this is not a guarantee of benefits, the 

insured must meet the requirements of his policy 

before benefits will be payable on his claim. If 

you should have any further questions, please let 

us know. 

That paragraph is sufficient to raise a factual issue as to 

whether or not there was a clear and unambiguous promise by 

Bankers Life. That element was not included in court's 

Instruction No. 22. I conclude that the jury instruction was 

incomplete and would require a modification of the instruction so that the jury would be required to determine whether 

or not all of the elements of promissory estoppel were 

present. 

The majority next treats the question of waiver and 

concl-udes that because Bankers Life made an independent 

investigation of Kelley's employment status in 1978, Ban.kers 

Life could have been found by the jury to have relinquished 

any defense. The majority mentions that Bankers Life claims 

the facts of employment status were misrepresented. The 
uncontradicted facts are stronger than that. There is no 

dispute that the written application submitted on behalf of 

Kelley to Bankers Life falsely stated fa.cts entitling him to 

coverage. In a.ddition, the undisputed evidence was that 

Kelley was not regularly scheduled to work at least 25 hours 

per week and in fact worked less than 25 hours per week 

during the applicable periods of time. The uncontradicted 

evidence is that Kelley was not under the facts of his employment and the contract in question entitled to coverage as 

a.n employee. Coverage is gained only if Bankers Life was 

estopped from raising, or waived the question of coverage. 

As pointed out in the majority opinion, Kelly v. Lovejoy 

(1977), 172 Mont. 516, 520, 565 P.2d 321, 324, defines waiver 

as follows: 

Waiver is generally defined as a voluntary and 

intentional relinquishment of a known right, claim 

or privilege . . . Waiver may be proved by express 

declarations or by a course or acts or conduct so 

as to induce the belief that the intention and 

purpose was to waive. (Citations omitted.) 

I emphasize that the foregoing definition requires a determination that there has been a voluntary and intentional relinquishment of a known right. The second sentence refers to 

the matter of how that voluntary and intentional relinquishment of a known right is proved. 

Court's Instruction No. 19 stated: 

Instruction No. 

A waiver is defined as the intentional and 

voluntary relinquishment of a known right, claim or 

privilege. A waiver can also arise by conduct, in 

which case it is called an "implied waiver". An 

implied waiver can occur only if the party relies 

on the waiver to his detriment. 

If you find that Bankers Life Company, by its 

conduct, has waived its right to deny coverage to 

Kelley Tynes, and if you find further that Walt and 

Kelley Tynes relied on such waiver to their 
detriment, then Bankers Life has waived its right 

to deny coverage. 

The first sentence is correct. I believe the second sentence 

is an incorrect statement because it apparently allows waiver 

arising from conduct which causes the plaintiffs to rely on 

it, but without any reference to the intentional and voluntary relinquishment of a known right. The evidence demonstrates that Bankers Life did not realize that Kelley in fact 

could not qualify as a.n employee under the terms of the 

policy. As a result I conclude that the giving of the instruction was incorrect under the facts of this case. 

Section 72-20-201, MCA, sets forth the trustee's obligation towards his beneficiary. That section of course pertains to the situation where a trust is present. I will not 

engage in an extended review of the cases discussed in the 

majority opinion. It seems clear to me that the statutory 

provisions set forth the standard which applies to a trustee. 

Bankers Life cannot properly be classed as that type of a 

trustee. I disagree with the conclusion that fiduciary 

duties as defined in the statute are simply a statement of 

the kind of good faith duties owed by an insurer to an insured. I conclude that this instruction should not have been 

given. 

Chief Justice J. A. Turnage and Justice L. C. 

Gulbrandson concur in the foregoing dissent.