Source: http://www.butler.legal/fairly-debatable
Timestamp: 2019-04-21 11:14:16+00:00

Document:
August 27, 2009 | Publication| Fairly Debatable?
On August 5, 2009, the South Dakota supreme court joined an exceedingly small minority of courts in the United States that have imposed a duty to conduct a reasonable investigation into first-party claims in order to avoid "bad-faith" liability.2 As they say, the road to Hell is paved with good intentions. This decision certainly affirms the truth of that old saw.
In Dakota, Minnesota & Eastern Railroad Corporation v. Acuity,3 the court considered an appeal from the trial court's grant of summary judgment in favor of Acuity, a mutual insurance company, finding that it had not committed bad faith in the adjustment of an uninsured/underinsured motorist claim. Finding that material fact issues existed, the court reversed and remanded for a trial of the factual issues.
At first glance, that disposition seems innocuous enough - issues of fact exist; therefore, let the jury decide. However, upon close examination, it becomes clear that, rather than simply narrowing the scope of the "fairly debatable" doctrine, the court added an unnecessary and wasteful layer of complexity to an area of the law that needs simplification.
Olson initially sued DM & E under the Federal Employers Liability Act7 based upon negligent maintenance of the truck. Following that action, Olson brought a successful UIM claim against Acuity, which was affirmed on appeal.8 On remand, he asserted a bad faith claim, based upon Acuity's failure to conduct a proper investigation of the claim.
Obviously, this provision was intended to prohibit the insured from fabricating an accident involving a "phantom vehicle" in order to recover UIM benefits. Therefore, the existence of corroborating third-party witnesses was critical to recovering UIM benefits.
[F]or proof of bad faith, there must be an absence of a reasonable basis for denial of policy benefits [or failure to comply with a duty under the insurance contract] and the knowledge or reckless disregard [of the lack] of a reasonable basis for denial, implicit [sic] in that test is our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless disregard of a lack of reasonable basis for denial or a reckless indifference to facts or to proofs submitted by the insured.
Under these tests of the tort of bad faith, an insurance company, however, may challenge claims which are fairly debatable and will be found liable only where it has intentionally denied (or failed to process or pay) a claim without a reasonable basis.
So far, so good. The court acknowledged that, under South Dakota law, first-party bad faith is an intentional tort. Moreover, for the insurer to escape liability, it only must show that, based upon the information available to it at the time, its decision to deny the claim was "fairly debatable." From this point, the court took clear precedent and, not only dispensed with the intent requirement, but turned what is otherwise a clear question of law into a question of fact.
The court based its decision to "punt" the issue back to the trial court on the supposed lack of a fully developed factual record. However, in doing so, it utterly ignored the prior precedent, which it previously quoted.
The record was abundantly clear. It demonstrated that the insured obtained statements from three separate disinterested witnesses, all of whom corroborated Olson's contention that the phantom vehicle caused the accident. Therefore, those facts were both known and knowable. Under the court's cited precedent, such facts "may be inferred and imputed to an insurance company where there is a lack of reasonable basis for denial...."16 Why then did the court not simply impute knowledge of these facts to Acuity, and decide as a matter of law that the basis for its denial was not "fairly debatable?" After all, it is abundantly clear from the opinion that the court did not find Acuity's position to be fairly debatable. Why then require a jury to decide facts which were already established?
The concept of imputed knowledge is one that was created to prohibit those who turn a blind eye to facts that are readily ascertainable from claiming lack of knowledge as a defense. "A person cannot avoid being charged with constructive knowledge, as in this case, by hiding her head in the sand like an ostrich, and proclaim lack of actual knowledge."17 In this case, however, the court, while acknowledging that its precedent required imputation of such knowledge to the insurer, nevertheless sidestepped that remedy, choosing instead to create a jury question. Certainly, the court's intentions were good - prohibit an insurer from conducting no investigation, or a deliberately superficial one, in order to avoid knowledge of facts creating coverage - but the method it chose to remedy that problem was not only contrary to precedent, but created a needless layer of complication to first-party bad faith claims.
The court's disposition raises more questions than it answers. For example, on remand, how is the trial court now to instruct the jury on the fairly debatable standard? Will the jury be asked to decide whether Acuity intentionally denied coverage? Or will it be asked to decide whether Acuity recklessly disregarded facts available to it? Perhaps the jury will consider only whether Acuity conducted a "reasonable" investigation before denying the claim. Unfortunately, the court's decision offers no guidance in this regard.
Following the decision, will it ever be possible for either party to obtain summary judgment in a first-party bad faith case? On remand, the trial court could attempt to grant summary judgment in favor of the insured, relying on the court's statement that Acuity must be charged with constructive knowledge of facts it chose to ignore. But does the mere imputation of knowledge resolve the intent inquiry? Probably not. The question of intent was always a jury question, and will remain so following the Acuity decision.
It is that aspect of the decision which is the most troublesome. In an effort to penalize Acuity, the court took a relatively simple inquiry - was the insurer's position fairly debatable? - and turned it into a fact question. Given that unnecessary extension of precedent, is there any chance that an insurer in South Dakota will ever be able to defend a first-party bad faith claim by dispositive motion? The Acuity decision suggests that it will be a rarer case which is decided as a matter of law.
The Nebraska court recognized the fallacy of adding a layer of fact-finding to the fairly debatable analysis. All a court need do is look at the information available to the insurer at the time of the denial, and resolve whether it had a legitimate basis to deny the claim.
In the Acuity case, that inquiry would have been simple. The only fact that needed to be considered is the fact that three independent witnesses corroborated the insured's account of a phantom vehicle causing the accident, which was, by South Dakota law, imputed to the insurer. That being the case, the only basis for denial of the claim did not exist.
The Acuity decision illustrates the general trend in the law, and in particular, the law of bad faith, away from simplicity and toward complexity. The case could have been decided under existing law without adding an additional layer of analysis. Unfortunately, however, in attempting to ensure that insurers adequately investigate claims, the South Dakota supreme court took an unnecessary detour and added a needless layer of complication to an area of the law that needs simplification.
The other lesson from the Acuity decision is that insurers cannot simply delegate the investigation of a first-party claim to outside counsel as a failsafe insulation from bad faith liability. While it seems backward to require the insurer to attempt to discover facts which would create coverage (a burden that in any other context would properly belong to the other party to the contract), some courts will continue to impose this requirement on insurers in one form or another. Even in jurisdictions which adhere to the majority "fairly debatable" doctrine, an insurer who puts its head in the sand to avoid discovering facts adverse to coverage will be charged with knowledge of those facts nonetheless. Therefore, the "head-in-the-sand" approach is ill-advised in any jurisdiction.
1. George Carman, date unknown.
2. See Dakota, Minnesota & Eastern R. Co. v. Acuity, --- N.W.2d ---, 2009 WL 2412140 (S.D. 2009).
3. , --- N.W.2d ---, 2009 WL 2412140 (S.D. 2009).
4. Neither the opinion, nor a predecessor opinion involving the same dispute elaborates on how the employee qualified as an insured for UIM coverage. Typical commercial automobile policies do not provide such coverage.
5. The truck was equipped with a "Hy-Lift" device, a pair of wheels which, when lowered, keep the truck centered on railroad tracks.
6. The facts are taken from both the 2009 opinion, and its predecessor, Dakota, Minnesota & Eastern R. Co. v. Acuity, 720 N.W.2d 655 (S.D. 2006).
7. 45 U.S.C. § 51, et. seq.
8. See Dakota, Minnesota & Eastern R. Co. v. Acuity, 720 N.W.2d 655 (S.D. 2006).
9. Dakota, Minnesota & Eastern R. Co. v. Acuity, --- N.W.2d ---, 2009 WL 2412140 at 15, n. 3.
10. Acuity's retention of counsel to provide a coverage opinion was considered by the Court to be a request for the attorney to undertake the insurer's duty of investigation and therefore a complete delegation of Acuity's claims handling function. That portion of the Court's opinion is not considered herein.
11. Id., --- N.W.2d at ---, 2009 WL 2412140 at 1 (internal footnote omitted).
13. That finding formed the basis for a second part of the court's opinion, i.e., that Olson was entitled to take the deposition of Thimsen and obtain correspondence between Thimsen and Acuity despite Acuity's claim of privilege. Id., --- N.W.2d at ---, 2009 WL 2412140, pp. 12-15. That portion of the court's opinion is not discussed herein.
14. See, e.g., Trinity Evangelical Lutheran Church & School-Freistadt v. Tower Ins. Co., 661 N.W.2d 789 (Wis. 2003); Skaling v. Aetna Ins. Co., 799 A.2d 997 (R.I. 2002); Farmland Mut. Ins. Co. v. Johnson, 36 S.W.3d 368 (Ky. 2000); Ailisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276 (Ariz. 2000); S.W. Energy Corp. v. Continental Ins. Co., 974 P.2d 1239 (Utah 1999); Dolan v. Aid Ins. Co., 431 N.W.2d 790 (Iowa 1988).
15. Dakota, Minnesota & Eastern R. Co. v. Acuity, --- N.W.2d ---, 2009 WL 2412140 at 8.
16. Dakota, Minnesota & Eastern R. Co. v. Acuity, --- N.W.2d ---, 2009 WL 2412140 at 4, citing Champion v. United States Fidelity & Guar. Co., 399 N.W.2d 320, 324 (S.D. 1987).
17. City of Daytona Beach v. Bush, 742 So. 2d 335 (Fla. 5th DCA 1999).
18. Unfortunately, the court's opinion contains little detail regarding the procedural posture of the case. In the event the appellant had not sought summary judgment in the trial court, the supreme court obviously could not grant that relief on appeal. However, it could and should have decided the legal question, leaving the remedy to the trial court.
19. Tara Hills Villas, Inc. v. Columbia Ins. Group, 2008 WL 2839036 (Neb. Ct. App. 2008)(unreported).

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