Opinion ID: 664691
Heading Depth: 2
Heading Rank: 1

Heading: Donald's Right to Sue Liberty Mutual

Text: 36 We hold that Donald, a third party beneficiary of the medical payment provision of the University's contract with Liberty Mutual, may sue to enforce that provision in Count Two of his Complaint, and that he may sue Liberty Mutual in Count Three for breaching a duty to deal with him in good faith.
37 The district court granted Liberty Mutual summary judgment on Count Two (breach of contract) of Donald's Complaint because it held that under Indiana law an injured person not party to the contract of insurance cannot sue the insurer directly to recover for his losses. Because this aspect of Indiana law only applies in a tort context, while Donald is suing Liberty Mutual in contract, the district court misapplied Indiana law to Donald's suit. 38 The court was correct that Indiana, unlike several states, is not a so-called direct action state. Indiana has held that a tort action on a contract theory by an injured third party directly against the liability carrier is inappropriate. Cromer v. Sefton, 471 N.E.2d 700, 703 (Ind.Ct.App.1984) (citing Martin v. Levinson, 409 N.E.2d 1239 (Ind.Ct.App.1980)); accord Matter of Hendrix, 986 F.2d 195, 200 (7th Cir.1993). Ordinarily, an injured person must sue either the tortfeasor in tort, or perhaps his own insurance company in contract, in order to recover for his losses. He cannot sue the tortfeasor's insurance company directly--at least before obtaining a judgment against the insured, see, e.g., Cromer, 471 N.E.2d at 703 ([A] successful personal injury plaintiff can bring an action against the liability carrier if it refuses to honor its contract. (citing Bennett v. Slater, 154 Ind.App. 67, 289 N.E.2d 144 (1972)))--either in tort or in contract. In direct action states, by contrast, legislation allows the injured person to sue the tortfeasor's insurer directly, without having first to obtain a judgment against the insured. 8 Appleman, Insurance Law and Practice Sec. 4861 (Revised Vol.1981) (Because direct actions against a liability insurer contravene the common law, such a right must be expressly sanctioned by the legislature and not merely inferentially deduced.). Because Indiana is not a direct action state, therefore, Donald could not sue Liberty Mutual on Count One of his Complaint, which alleged negligence on the part of the University and its employee. 39 It does not follow from this, however, that Donald cannot sue Liberty Mutual to recover the $5,000 medical payment benefits which he claims under Coverage C. The concept of direct action against an insurer applies when an injured party seeks to sue the insurer directly to recover sums for which the insured would otherwise be liable in tort. See, e.g., Verhein v. South Bend Lathe, Inc., 598 F.2d 1061, 1064 (7th Cir.1979) (noting that under the Wisconsin direct action statute, unless the injured third party could allege a valid theory of the insured's liability, there would be no basis upon which to hold the insurer liable). But Coverage C is not limited to damages in the way of medical payments incurred by the injured person on account of a tort committed by the insured; 2 if Donald is entitled to medical payment benefits under Coverage C, it is not due to any liability on the part of the University. Hence Indiana's position on direct action is irrelevant to whether Donald can sue Liberty Mutual directly to recover the medical payment benefits. Cf. Bankers Trust Co. v. Old Republic Insurance Co., 959 F.2d 677, 682 (7th Cir.1992) (When the plaintiff was not suing the insurance company to establish that its insured had committed a tort against the plaintiff, but rather was suing to establish that the insurance policy remained in force, [s]uch a suit is not a direct action suit against an insurer. (citation omitted)). 3 40 Donald's right to sue Liberty Mutual rests, not on whether Indiana has authorized direct actions against a tortfeasor's insurer, but rather on whether he is a third party beneficiary of the contract providing for medical payment benefits. A third party beneficiary contract requires first, that the intent to benefit the third party be clear, second, that the contract impose a duty on one of the contracting parties in favor of the third party, and third, that the performance of the terms necessarily render to the third party a direct benefit intended by the parties to the contract. Mogensen v. Martz, 441 N.E.2d 34, 35 (Ind.App.1982) (citation omitted). The weight of authority suggests that medical payment provisions regarding injured third parties are third party beneficiary contracts. 41 Since ... recovery [by the injured party under the medical payment provision] is completely independent of liability on the part of the insured, insurance under [this provision] is closely akin to a personal accident policy.    Medical provisions ... are a form of ... group accident insurance provided at minimal cost with a named insured as the entity through whom the coverage is issued.    Such coverage ... creates a direct liability to the contemplated beneficiaries. 42 8A Appleman, Insurance Law and Practice Sec. 4902 (Revised Vol.1981) (discussing medical payment provisions in automobile insurance policies). See also Hein v. American Family Mutual Insurance Co., 166 N.W.2d 363, 365 (Iowa 1969) (medical payment provision is a type of third-party beneficiary health insurance contract for which the insurer charges a separate portion of the total premium); cf. Motto v. State Farm Mutual Insurance Co., 81 N.M. 35, 36, 462 P.2d 620, 621 (1969) (medical payment provision creates a direct liability of the insurer); Johnson v. New Jersey Manufacturers Indemnity Insurance Co., 69 N.J.Super. 184, 174 A.2d 4, 8 (1961) (medical payment clauses provide separate accident insurance coverage). 43 We have no reason to believe that Indiana would not follow this line of authority. Indeed, at least one Indiana court has come close to this position. In Snow v. Bayne the court, applying Indiana law, allowed injured third parties to sue the insured's insurer directly, as third party beneficiaries under a no-fault automobile insurance policy, to recover personal protection insurance benefits. 449 N.E.2d 296 (Ind.Ct.App.1983). In that case, as in this one, the contract of insurance provided for the payment of certain benefits without regard to fault. Id. at 299. The court held that an action to recover the personal protection insurance benefits was a contract action, not a tort action, and that the injured parties, who were eligible for the defined benefits, were third party beneficiaries of the contract between the insured and the insurer. Id. at 298, 300. 44 We hold, therefore, that Donald is not barred by Indiana's position on direct actions from bringing suit, in Count Two of his Complaint, directly against Liberty Mutual to recover the medical payment benefits provided by Coverage C. We hold further that Donald is a third party beneficiary of the contract between the University and Liberty Mutual and that he is therefore entitled to sue Liberty Mutual on its contract with the University. See, e.g., Mogensen, 441 N.E.2d at 35 (Third party beneficiaries may directly enforce a contract in Indiana. (citation omitted)).
45 Because the district court held, erroneously as we have seen, that Donald could not maintain an action against Liberty Mutual on Count Two (breach of contract) of his Complaint, it proceeded to hold that Donald also could not maintain an action against Liberty Mutual on Count Three (bad faith dealings). It is true that in Indiana an injured third party cannot sue the tortfeasor's insurer for handling his claim in bad faith. Eichler v. Scott Pools, Inc., 513 N.E.2d 665, 667 (Ind.App.1987). There is no duty running from the insurer to the claimant to settle a claim, nor is the claimant a third-party beneficiary of the duty owed the insured by the insurer. Id. Thus if Donald were merely a claimant for damages owing him on account of an alleged tort committed by the University, as in Count One of his Complaint (alleging negligence on the part of the University and its employee), Liberty Mutual would owe him no duty to settle his claim and he could not sue even if Liberty Mutual acted in bad faith. Because, however, Donald is not claiming the medical payment benefits on account of any liability of the University but rather as a third party beneficiary of the medical payment provision, Liberty Mutual does owe him a duty of good faith dealing. Restatement (Second) of Contract Secs. 205, 304 (1979); cf. Furno v. Citizens Insurance Co. of America, 590 N.E.2d 1137, 1141 (Ind.App.1992) (plaintiff physician was not a third party beneficiary of workman's compensation insurance contract and hence insurer owed him no duty of good faith; implying that a duty of good faith would be owed if the plaintiff were a third party beneficiary). Donald may sue Liberty Mutual in Count Three of his Complaint, then, for breach of the duty, owed him as a third party beneficiary of its contract with the University, to deal with him in good faith. 46 Having settled that Donald may sue Liberty Mutual on Counts Two and Three of his Complaint, we proceed to address the parties' claims to summary judgment. 47