Court Opinion

ID: 9671743
Source: CourtListenerOpinion
Date Created: 2023-08-24 03:42:49.77873+00
Date Added: 2024-06-11T18:16:11.799543
License: Public Domain

WUEST, Justice.
Floyd and Joyce Leafgreen (Leafgreens) appeal from a grant of summary judgment in an action charging American Family Insurance Company (American Family) with vicarious liability for conversion committed upon the Leafgreens by American Family Insurance Agent Edmund K. Arndt (Arndt). We affirm.
In February 1968, American Family and Arndt entered into an agreement whereby Arndt became an independent agent for the sale of insurance policies issued by American Family. Prior to the agreement, American Family investigated Arndt’s background. Several individuals were interviewed in connection with the investigation, all of whom recommended Arndt for the position. A security check performed by Retail Credit of Minneapolis, Minnesota, indicated Arndt had no criminal record and his driving record showed no offense other than a 1963 speeding violation. After the South Dakota Insurance Department conducted its own investigation, Arndt was issued a license by the State to sell insurance.
From 1968 through 1981, Arndt had an extremely good record for insurance sales and service. During this period, his conduct was exemplary. Affidavits and exhibits reflect that Arndt was one of American Family’s top agents. Not only was he an outstanding sales leader in the Rapid City District and the whole State of South Dakota, but in some months and years Arndt was considered one of the company’s outstanding salesmen throughout the nation.
On May 22, 1981, Arndt went to the Leafgreen residence for the apparent purpose of correcting certain lot descriptions and writing liability insurance for them. In providing the lot descriptions, Leaf-greens produced their hidden lockbox to examine a deed and thereby disclosed to Arndt the existence of their jewelry and other valuables. Leafgreens claim Arndt was really getting this information to assist two professional burglars, who later burglarized the residence.
It is undisputed that Arndt and the Leaf-greens were personal friends. On Friday, June 26, 1981, Leafgreens went to Arndt’s office and invited Arndt and his wife on a trip to Rapid City on Saturday. Floyd Le-afgreen phoned Arndt on Saturday morning, June 27, 1981, and asked if Arndt and his wife had decided to join them. Arndt told Leafgreen he had made other plans. The Leafgreen home was burglarized that day while they were in Rapid City.
On March 3, 1983, Jack DeFea, American Family’s Rapid City District Manager, was advised by Arndt’s secretary, Donna Kem-ery, that a search warrant had been issued for Arndt’s home and that property belonging to Leafgreens had been found in the home. DeFea consulted with American Family executives and counsel and, on May 16, 1983, Arndt was advised that his contract with American Family would terminate on May 31, 1983. On April 1, 1983, a Hughes County Grand Jury filed a three-count indictment against Arndt. On April 4, 1984, Arndt pleaded guilty to Count III of the indictment, aiding and abetting second-degree burglary under SDCL 22-32-3 and SDCL 22-3-3. He is presently incarcerated in the South Dakota Penitentiary.
On April 18, 1984, Leafgreens filed a complaint against American Family, which alleged: Arndt used his status as an American Family insurance agent to gain entry into the Leafgreen home on May 22, 1981; he gathered information concerning Leaf-greens’ valuables with the intent to promote and facilitate the crime of burglary; and used the information to advise two co-conspirators — convicted felons — who *277committed the burglary on Saturday, June 27, 1981. The Leafgreens argued that Arndt’s tortious conduct should be imputed to American Family because it placed Arndt in a position which enabled him, while apparently acting within his authority as an agent of American Family, to commit a fraud1 upon Leafgreens; namely, the June 27, 1981, burglary of their home.2
On June 28, 1985, American Family filed a motion for summary judgment, contending Leafgreens’ complaint contained no genuine issue of material fact and that American Family was entitled to judgment as a matter of law because Arndt was not acting within the scope of his employment when he conspired to burglarize Leaf-greens’ home. The trial court granted summary judgment in favor of American Family on the issue of vicarious liability, stating in its memorandum decision that Arndt’s tortious acts were not reasonably foreseeable by American Family and, consequently, it would be inequitable to impute Arndt’s conduct to the company. Le-afgreens appeal.
The issue for our determination is whether the doctrine of respondeat superior warrants that American Family be held vicariously liable in tort for the burglary of Leafgreens’ home, because Arndt used his status as an American Family insurance agent to gain information regarding the property stolen in the burglary. The issue is one of first impression in South Dakota and we are guided, in part, by various rules set out in the Restatement (Second) of Agency.3
Under general rules of agency law, a principal may be held liable for fraud and deceit committed by an agent within his apparent authority, even though the agent acts solely to benefit himself. American Soc. of Mech. Eng’rs. v. Hydrolevel Corp., 456 U.S. 556, 102 S.Ct. 1935, 72 L.Ed.2d 330 (1982); Gleason v. Seaboard Air Line Ry. Co., 278 U.S. 349, 49 S.Ct. 161, 73 L.Ed. 415 (1929); see also Nat. Acceptance Co., Etc. v. Coal Prod’rs Ass’n, 604 F.2d 540 (7th Cir.1979); 10 W. Fletcher, Cyclopedia of the Law of Private Corporations ¶ 4886, p. 393 (rev. ed. 1978); W. Seavey, Law of Agency § 92 (1964). “Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestations to such third persons.”4 Restatement (Second) of Agency § 8 (1958).
Restatement (Second) of Agency § 261 provides:
A principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such third persons for the fraud.
Comment a to section 261 states:
The principal is subject to liability under the rule stated in this Section although *278he is entirely innocent, has received no benefit from the transaction, and, as stated in Section 262, although the agent acted solely for his own purposes. Liability is based upon the fact that the agent’s position facilitates the consum-. mation of the fraud, in that from the point of view of the third person the transaction seems regular on its face and the agent appears to be acting in the ordinary course of the business confided to him.
While the boundaries of a principal’s liability under this rule are not easily drawn, as the Reporter’s Notes to section 261 suggest, they do exist:
It is difficult to state more definitely than is done in this section the limits of liability. It would seem to be clear that if the agent is purporting to act as an agent and doing the things which such agents normally do, and the third person has no reason to know that the agent is acting on his own account, the principal should be liable because he has invited third persons to deal with the agent within the limits of what, to such third persons, would seem to be the agent’s authority. To go beyond this, however, and to permit the third persons to recover in every case where the agent takes advantage of the standing and position of his principal to perpetuate a fraud would seem to go too far.... In some cases the situation is ambiguous: the agent performs his primary function as an agent ... acting within the scope of his powers as such agent without loss to the other from the transaction itself, but the transaction is used as a means by which the agent may defraud such other. If in such cases the principal benefits from the agent's act, his liability to the extent of the benefits received is clear. If, however, the principal is not benefited, and the transaction which actually causes the loss is not one in which the agent purports to represent the principal, liability should not follow.
The situation in the present case is indeed ambiguous. Arndt entered Leaf-greens’ home and gained information concerning the location of their valuables by purporting to act within the scope of his powers as an American Family insurance agent, without loss to Leafgreens. The transaction, however, was used to facilitate the burglary which occurred approximately five weeks later.
A review of several foreign cases demonstrates the manner in which courts of other jurisdictions have applied the foregoing principles. In Bowman v. Home Life Insurance Company of America, 243 F.2d 331 (3rd Cir.1957), a male field underwriter masqueraded as the company’s physician, and conducted intimate physical examinations upon the female plaintiffs, who had applied for insurance. The insurer furnished the underwriter with the plaintiffs’ application cards, which entitled him to ask many questions. The underwriter obtained a black bag which looked like a physician’s kit, called upon the plaintiffs at their home and made the examinations. Applying Pennsylvania law and the foregoing Restatement rules, the Third Circuit Court of Appeals determined that the underwriter’s conduct could be attributed to his employer. The court noted that even though the agent went further than his instructions and committed a tort upon the plaintiffs, “this was the kind of deceit which was well within the insignia of office with which he had been clothed.” 243 F.2d at 334.
In Lucas v. Liggett & Meyers Tobacco Co., 50 Haw. 477, 442 P.2d 460 (1968), the owner of a supermarket sued a cigarette manufacturer for the value of cigarettes stolen by a cigarette sales representative. The evidence showed that while servicing a cigarette rack in the store, the representative had stolen a quantity of the product over an extended period of time. The stolen cigarettes were billed to the supermarket by the wholesale supplier, to which the supermarket owners had made payments. Rejecting the argument that the tobacco company was not liable because the sales agent was acting outside the scope of his employment when he committed the thefts, the Supreme Court of Hawaii held the com*279pany liable for the acts of its agent. The court relied on the foregoing Restatement rules, and pointed out that the company put the agent in a position to commit the thefts and that from the plaintiffs point of view all of the agent’s activities connected with servicing the cigarette rack were apparently authorized by the principal. The court emphasized that company’s division manager often accompanied the agent and gave no indication that he disapproved of the agent’s activities.
In Dudley v. Estate Life Ins. Co. of America, 220 Va. 343, 257 S.E.2d 871 (1979), two individuals brought an action against a life insurer and its agent for fraud in connection with the agent’s sale of an interest in premiums on a policy sold through his agency. Plaintiffs alleged that during the period of time in question, the agent made certain misrepresentations which induced them to purchase “one unit” of a special type of life insurance policy and to pay large sums of money upon the agent’s promise that they would each receive one-fourth of one percent of all insurance premiums collected from other sales of the special policy. Plaintiffs alleged the representations were in fact part of a scheme by which the agent defrauded them. The Supreme Court of Virginia held the issue on appeal was whether plaintiffs’ evidence established prima facie that the agent acted within the apparent scope of his authority thereby making the insurer liable for the alleged fraud. Applying the foregoing Restatement principles to the facts, the court determined that plaintiffs’ evidence was sufficient to raise a jury issue on the question of whether the agent’s conduct was attributable to his principal. The court noted that the insurer put the agent in a position to perpetrate the fraud and that, from a third person’s point of view, the agent was clothed with all the authority necessary to sell its product and to recruit others to become salesmen for the insurer. Further, the court held the agent’s position facilitated the consummation of the fraud whereby he improperly extracted a total of $12,000 from the two plaintiffs. Under the circumstances, plaintiffs were entitled to rely on statements made by the agent, who was purporting to act and was apparently acting in the interests of the insurer.
In Lou-Con, Inc. v. Gulf Building Services, Inc., 287 So.2d 192 (La.App.1973), the client of a janitorial service brought an action against the service and its insurer for damages to the customer’s building which was burned down by the janitorial company’s employee. The employee was given the keys to the building in connection with his janitorial duties without any restrictions except that he was to use the keys to perform the services agreed to on certain evenings. The plaintiff cited Restatement (Second) of Agency § 261, supra, and several cases applying the section — including Lucas v. Liggett & Myers Tobacco Company, supra,—to support its contention that the janitorial service should be held liable for the arson committed by the employee under the theory of apparent authority. The Louisiana Court of Appeal held that under the facts of the case, section 261 must be read in connection with section 231 of the Restatement.
The fact that the servant intends a crime, especially if the crime is of some magnitude, is considered in determining whether or not the act is within the employment, since the master is not responsible for acts which are clearly inappropriate to or unforeseeable in the accomplishment of the authorized result. The master can reasonably anticipate that servants may commit minor crimes in the prosecution of the business, but serious crimes are not only unexpectable but in general are in nature different from what servants in a lawful occupation are expected to do.[5] ... A servant selling goods for his master may cause the master to be liable in an action of deceit, although the servant was guilty of obtaining property by false pretenses in *280making the sale.... As in other cases, it is a matter of degree, the question being whether or not the conduct is so unlike that authorized that it is a substantially different thing.
Restatement (Second) of Agency § 231 COMMENT a (1958).
The Louisiana Court took the facts of the case and applied section 231 and comment a to section 231. The court held that the janitor’s freedom of access to the building did not form a basis for tort liability on the part of the janitorial service because it was not foreseeable that he would commit the crime of arson simply because he had the keys in his possession and could gain access to the building.
Restatement (Second) of Agency § 231 focuses on startling or outrageous actions of an agent used as a means of achieving an authorized result. The section deals with the foreseeability of an agent’s criminal or tortious conduct from the principal’s point of view. Under section 261 and the theory of apparent authority, however, the agent’s conduct is seen through the eyes of the third party. The principal is estopped from asserting the agent’s lack of authority because he clothed the agent with the authority to act, and the third party reasonably relied on that authority to his detriment. Nevertheless, in ambiguous situations like the case before us, section 231 imparts an element of foreseeability which helps to delineate the limits of liability under the doctrine of respondeat superior for acts done within the scope of an agent’s apparent authority.
The theoretical basis and scope of the doctrine of respondeat superior were reviewed extensively in Rodgers v. Kemper Const. Co., 50 Cal.App.3d 608, 618, 124 Cal.Rptr. 143, 148 (1975).
The doctrine, which departs from the normal tort principle that liability follows fault, is an ancient one but its scope and stated rationale have varied widely from period to period, [citations omitted] It has been aptly stated that ‘Respondeat superior has long been a rule in search of a guiding rationale.’ (Note, 82 Harv.L. Rev. 1568, 1569.) ... In some respects [the] rationale is akin to that underlying the modern doctrine of strict tort liability for defective products, [citations omitted] It is grounded upon ‘a deeply rooted sentiment that a business enterprise cannot justly disclaim responsibility for accidents which may fairly be said to be characteristic of its activities.’ [citations omitted].
The court in Rodgers refined a test of foreseeability for vicarious liability set out in Ira S. Bushey & Sons, Inc. v. United States, 398 F.2d 167 (2nd Cir.1968), stating:
One way to determine whether a risk is inherent in, or created by, an enterprise is to ask whether the actual occurrence was a generally foreseeable consequence of the activity. However, ‘foreseeability’ in this context must be distinguished from ‘foreseeability’ as a test for negligence. In the later sense ‘foreseeable’ means a level of probability which would lead a prudent person to take effective precautions whereas ‘foreseeability’ as a test for respondeat superior merely means that in the context of the particular enterprise an employee’s conduct is not so unusual or startling that it would seem unfair to include the loss resulting from it among other costs of the employer’s business, [citations omitted] In other words, where the question is one of vicarious liability, the inquiry should be whether the risk was one ‘that may fairly be regarded as typical of or broadly incidental’ to the enterprise undertaken by the employer.
Rodgers, 50 Cal.App.3d at 618-19, 124 Cal.Rptr. at 148-49; see also Harris v. Trojan Fireworks Co., 120 Cal.App.3d 157, 174 Cal.Rptr. 452 (1981).
We think it fairly stated that a principal is liable for tortious harm caused by an agent where a nexus sufficient to make the harm foreseeable exists between the agent’s employment and the activity which actually caused the injury; foreseeable is used in the sense that the employee’s conduct must not be so unusual or startling that it would be unfair to include the loss *281caused by the injury among the costs of the employer’s business.
Applying this test to the facts before us, with a view toward the propriety of summary judgment, we believe there was not such a connection between Arndt’s employment as an American Family insurance agent and the burglary which actually caused the harm to Leafgreens, as to make the harm foreseeable. Arndt’s conduct was outrageous and, as the trial court stated, unforeseeable by American Family or anyone else for that matter. It would be unfair to impute liability to American Family for Arndt’s felonious acts for various reasons. First, we note that American Family was defrauded by Arndt as well, inasmuch as the stolen property was covered under American Family policies. Indeed, American Family received no benefit from the transaction; but, rather, it incurred a liability. Second, the burglary occurred some five weeks after Arndt used his employment with American Family as a subterfuge to enter the Leafgreen home and gather information used in the burglary. While it may be said Arndt’s entrance into the home was incidental to his employment with American Family, the burglary clearly was not. Thirdly, Arndt learned that Leafgreens would be in Rapid City the day of the burglary through his friendship with Leafgreens, and not because of his status as an American Family insurance agent. Finally, we believe extending liability to a situation such as this would be prescribing a form of strict liability upon employers under the doctrine of responde-at superior. To hold employers liable in such situations as a cost of doing business would be unfair.
Accordingly, the judgment is affirmed.
FOSHEIM, C.J., and MORGAN, J., concur.
HENDERSON and SABERS, JJ., dissent.

. In their complaint, Leafgreens use the term fraud; however, the facts they state really allege a conversion.

. Leafgreens’ complaint contained a second cause of action alleging that American Family owed them a duty to exercise reasonable care in the selection, retention and review of Arndt, its resident agent, and that American Family breached the duty by negligently retaining Arndt when it knew or should have known he was untrustworthy and dishonest. However, the trial court also granted summary judgment on this cause of action for negligence and appellants did not appeal that portion of the judgment. At oral argument, they made it very plain they had abandoned that theory and were relying upon vicarious liability. Possibly, the "bad conduct” cited by the dissents would have been relevant in the negligence action.

."The Restatement of Agency is a normative statement of principles for determining when a master or principal may be liable for the tor-tious or criminal acts of a servant or other agent when ... the principal has not actually authorized or ratified unlawful conduct.” Kasner v. Gage, 281 Minn. 149, 151, 161 N.W.2d 40, 42 (1968).

. Apparent authority is analogous to "ostensible” authority which is defined in SDCL 59-3-3 as authority “such as a principal intentionally, or by want of ordinary care, causes or allows a third person to believe the agent to possess."

. The Louisiana Court quoted this paragraph and cited it as section 231. This language actually appears in COMMENT a to section 231.