Daniel Athey v. Farmers Insurance ( 2000 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 00-1206
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Daniel Athey, *
*
Plaintiff - Appellee, *
* Appeal from the United States
v. * District Court for the
* District of South Dakota.
Farmers Insurance Exchange; *
Illinois Farmers Insurance Company, *
*
Defendants - Appellants. *
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Submitted: October 19, 2000
Filed: December 6, 2000
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Before HANSEN, MURPHY, and BYE, Circuit Judges.
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MURPHY, Circuit Judge.
Daniel Athey was injured in December 1993 when his automobile was hit by
Robert Hajek, who had failed to stop at a stop sign and was underinsured. Athey
sustained soft tissue damage to his back and made a claim on his underinsurance policy
with Farmers Insurance Exchange. Farmers Insurance Exchange and Athey could not
agree on a settlement, and Athey brought this diversity action against his insurer and
Illinois Farmers Insurance Company (collectively Farmers), alleging that Farmers had
breached its contract in bad faith. The district court1 denied defense motions to
bifurcate the breach of contract and bad faith claims and for summary judgment, and
the case went to trial. The jury returned a verdict in favor of Athey and awarded him
$60,000 for breach of contract, as well as $125,000 compensatory damages on the bad
faith claim and $450,000 in punitive damages. Farmers moved for a new trial or
judgment as a matter of law. The district court 2 denied the motion, and Farmers
appeals. We affirm.
I.
The driver who hit Athey was only 14 years old and was covered by a $25,000
liability insurance policy from Dairyland Insurance Company (Dairyland). Athey's own
insurance policy with Farmers provided $20,000 no fault coverage and $100,000
underinsured motorist coverage. Between March 1994 and September 1996, Athey
collected $12,536.30 from Farmers in no fault benefits to pay his medical bills.
Shortly after his injury, Athey hired Sioux Falls attorney James Hertz to help him
recover. Hertz obtained medical information from his client and his doctors and hired
an expert to calculate the vocational loss that resulted from his injuries. After
examining the records and reports, Hertz concluded that Athey's losses exceeded the
policy limits of Dairyland and Farmers. Hertz sent the insurance companies a letter
requesting $25,000 from Dairyland and $75,000 from Farmers' underinsured motorist
policy. The letter detailed Athey's losses and included copies of medical records and
related reports.
1
The Honorable Lawrence L. Piersol, Chief United States District Judge for
the District of South Dakota.
2
The Honorable John B. Jones, United States District Judge for the District of
South Dakota, who also presided at trial.
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Charles Schechter, a resident representative in Farmers' Shoreview, Minnesota claims
office, responded that the underinsured motorist claims were premature because
Dairyland's policy limits had not been exhausted.
Dairyland offered to pay Athey $25,000, which represented the limit of the other
driver's liability coverage, but it conditioned payment on the release of further claims
by him and Farmers. Hertz wrote Farmers and requested that it either release the
underinsured driver and Dairyland so that Athey could accept Dairyland's offer, or it
could pay him the $25,000. George Liegakos, the Shoreview Claims Manager,
informed Hertz that Farmers would not make the $25,000 payment, but that it would
release its claims against the other driver. It refused to waive its right to reimbursement
with respect to the no fault benefits it had already paid, however.
Schechter later wrote Hertz that Farmers had evaluated Athey's claim to be in the
$25,000 range and would waive its right to seek reimbursement if Athey would release
his underinsured motorist claim against Farmers. A release of the underinsured
motorist claim against Farmers would have prevented Athey from recovering any losses
in excess of $25,000, and he would have had to return the benefits Farmers had already
paid once he obtained the $25,000 from Dairyland. Schechter informed Hertz that if
the offer was unacceptable to Athey, he should “follow the dictates of South Dakota
law in this regard.”
Two days after Hertz received Farmers' evaluation of Athey's claim, Hertz also
received a release form and a $25,000 check copayable to Farmers and Athey from
Dairyland. Hertz sent the Dairyland check and release form on to Farmers and
demanded that it waive its right to seek reimbursement and endorse the check. He
threatened to bring a bad faith action if Farmers did not comply. Since Liegakos was
unfamiliar with South Dakota law, he forwarded the check to Dave Thue, a claims
representative in Farmers' South Dakota claims office. After he evaluated the claim,
Thue informed Hertz that Farmers had changed its position. It would no longer allow
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Athey to release his claims against the other driver, but it would substitute its draft for
$25,000 in place of the Dairyland check. Hertz wrote Thue that the offer was contrary
to his agreement with the Farmers office in Minnesota and turned it down. Thue
endorsed the Dairyland check and sent it to Hertz but said that Farmers wanted to
conduct an independent medical examination of Athey and would not release its
subrogation rights until it had reviewed the results. Hertz called Thue to complain that
Athey could not cash the check without a complete release of the underinsured driver
and Dairyland, but Thue refused to waive Farmers' subrogation rights.
Negotiations apparently had reached a standstill. Hertz filed this action on
August 22, 1996, and on the same day Farmers was served with a summons and
complaint. Count I alleged that Farmers had breached its contract by failing to pay
Athey $75,000 (the policy limits less the $25,000 sought from Dairyland). Count II
requested a declaratory judgment that Farmers had waived its subrogation rights
against Hajek and Dairyland. Count III alleged that Farmers’ failure to pay Athey
underinsured motorist benefits was vexatious and without reasonable cause and entitled
him to attorney fees under S.D.C.L. § 58-12-3. Count IV alleged that Farmers had
acted in bad faith by failing to investigate Athey’s claims and by delaying his
settlement.
After litigation began, Farmers allowed Athey to settle with Dairyland but
eventually terminated his no fault benefits. Farmers had scheduled an independent
medical examination of Athey, but it suspended his no fault benefits after he missed
the appointment and soon waived its right to seek reimbursement. Athey then
completed his settlement with Dairyland and the underinsured driver, and he submitted
to an independent medical examination by Dr. Robert Fielden. After Dr. Fielden
reported that Athey should stop all medical and chiropractic treatment, Farmers
terminated his no fault benefits.
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Farmers moved for partial summary judgment on the grounds that Athey's bad
faith claim was premature and that his request for declaratory judgment was moot.
Farmers also moved to bifurcate his claims so that the bad faith claim would be tried
after that for breach of contract. The district court allowed Athey to file an amended
complaint without the request for declaratory relief, but it denied the motions to dismiss
the bad faith claim and to bifurcate. Shortly after its motion for summary judgment was
denied, Farmers reevaluated the underinsured motorist claim and sent Athey an
additional $15,000. On February 4, 1997, United States Magistrate Judge Mark
Marshall conducted a settlement conference between Athey and Farmers. Farmers
refused to offer any amount to settle the underinsured motorist claim unless Athey
agreed to abandon his bad faith claim. Athey refused, and the conference ended
without a resolution of any of the claims. Later, after a substantial amount of discovery
had been completed, Farmers again moved unsuccessfully for summary judgment.
Shortly before trial, Hertz concluded that he would have to testify in order to
prove the bad faith claim so he moved to withdraw as trial counsel. The motion was
granted, and Hertz wrote Athey a letter explaining the contingency fee arrangement
between himself and new trial counsel. The letter stated, "even though I cannot
represent you at trial, I will continue to be involved and provide assistance to you and
your new counsel." During the trial Hertz did not act as trial counsel or sit at counsel
table. He testified at length about his negotiations with Farmers, including its refusal
to settle the underinsured motorist claims without the abandonment of Athey's bad faith
claim. The jury also heard evidence that an attorney representing Farmers had
recommended that the independent medical examination be conducted by Dr. Fielden
because that doctor had a reputation for regularly recommending the cessation of
medical treatment for patients who had suffered back injuries.
After a two day trial the jury returned its special verdict that Farmers had
breached its contract with Athey and had acted in bad faith. Athey was awarded
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$60,000 on the breach of contract claim and $125,000 in compensatory and $450,000
in punitive damages on the bad faith claim. Farmers moved for a new trial or judgment
as a matter of law which the district court denied.
Farmers appeals, arguing that it was prejudiced by having to try the breach of
contract and bad faith claims together because evidence admitted on the latter inflamed
the jury. Farmers also asserts that the refusal to bifurcate put it at a disadvantage
because its claim files were made discoverable and that there was insufficient evidence
to support the jury findings of bad faith, compensatory damages for emotional distress,
and punitive damages. Farmers also argues that the admission of evidence of the
settlement conference violated Fed. R. Evid. 408 and that Hertz’s testimony
disregarded a South Dakota law that prohibits an attorney from acting as both advocate
and witness. Athey responds that Farmers was not prejudiced by having to try the
claims at the same time; that there was sufficient evidence to support the jury’s
determination that Farmers acted in bad faith and the award of punitive and
compensatory damages; and that the district court did not err in its evidentiary rulings.
II.
A.
The denial of a motion to bifurcate under Fed. R. Civ. P. 42(b) is reviewed for
abuse of discretion. See Equal Employment Opportunity Comm'n v. HBE Corp., 135
F.3d 543, 551 (8th Cir. 1998). Farmers has not shown that Athey's access to its claim
files prejudiced its case. The district court did not abuse its discretion when it did not
bifurcate the claims.
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B.
Although evidence of conduct during settlement negotiations generally is
inadmissible to prove a party's liability for the underlying claim, it may be admitted
"when the evidence is offered for another purpose, such as proving bias or prejudice
of a witness, negativing a contention of undue delay, or proving an effort to obstruct
a criminal investigation or prosecution." FED. R. EVID. 408. Under South Dakota law,
an insurer's attempt to condition the settlement of a breach of contract claim on the
release of a bad faith claim may be used as evidence of bad faith. See Harter v. Plains
Ins. Co., Inc., 579 N.W.2d 625, 634 (S.D. 1998); Isaac v. State Farm Mut. Auto. Ins.
Co., 522 N.W.2d 752, 761(S.D. 1994); see also Crabb v. Nat'l Indem. Co., 205
N.W.2d 633, 637 (S.D. 1973) (insurer's refusal to enter into meaningful settlement
negotiations is bad faith). Evidence of Farmers' conduct during the settlement
conference was not inadmissible under Rule 408 because it was "offered for another
purpose," and the district court did not abuse its discretion by admitting it.
Farmers also claims that Hertz's testimony was inadmissible because he had not
completely withdrawn from the case, and South Dakota law prohibits an attorney from
participating in a trial in which he also testifies. See S.D. CODIFIED LAWS § 19-1-3
(Michie 1995). Farmers did not object during trial on this basis, but included this
argument in its motion for a new trial when it offered evidence that Hertz spent 198.5
hours assisting in preparation of the case after his withdrawal. A new trial should not
be granted on the basis of the erroneous admission of evidence unless a timely
objection is made at trial or the evidentiary ruling was plain error. See FED. R. EVID.
103(a); Qualley v. Clo-Tex Int'l, Inc., 212 F.3d 1123, 1127 (8th Cir. 2000); HBE Corp.,
135 F.3d at 551. The admission of Hertz's testimony was not plain error, and the
district court did not abuse its discretion when it denied the motion for a new trial.
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C.
Denial of a motion for judgment as a matter of law is reviewed de novo. See
Peerless Corp. v. United States, 185 F.3d 922, 926 (8th Cir. 1999). A jury verdict
should not be overturned unless there is a complete absence of facts to allow the jury
to reach its conclusion. See Henderson v. Simmons Foods, Inc., 217 F.3d 612, 615
(8th Cir. 2000). In considering such a motion, a court should "assume as proven all
facts that the nonmoving party's evidence tended to show, give [him] the benefit of all
reasonable inferences, and assume that all conflicts in the evidence were resolved in
[his] favor." Id. (citations omitted).
There was sufficient evidence to support the jury's verdicts of bad faith and
punitive damages. Under South Dakota law, a plaintiff may show that an insurer acted
in bad faith by showing that the it denied policy benefits without a reasonable basis and
with a reckless indifference to proofs submitted by the insured. See Walz v. Fireman's
Fund Ins. Co., 556 N.W.2d 68, 70 (S.D. 1996); Champion v. United States Fidelity and
Guar. Co., 399 N.W.2d 320, 324 (S.D. 1987). There is ample evidence in the record
that Farmers ignored proofs of losses incurred by Athey and denied his claim without
a reasonable basis. Furthermore, conditioning the settlement of an underinsurance
policy on the release of a bad faith claim has been found sufficient to support an award
of punitive damages against an insurer in South Dakota. See Harter, 579 N.W.2d at
634; Isaac, 522 N.W.2d at 761-62; see also Helmbold v. LeMars Mut. Ins. Co., 404
N.W.2d 55, 57 (S.D. 1987) ("A covenant is implied in an insurance contract that
neither party will do anything to injure the rights of the other in receiving the benefits
of the agreement. This covenant includes a duty to settle claims without litigation in
appropriate cases." (citation omitted)).
The award of compensatory damages for emotional distress was also supported
by sufficient evidence. To recover damages for emotional distress in South Dakota, a
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plaintiff must establish that he sustained a pecuniary loss because of the bad faith of an
insurer. See Kunkel v. United Sec. Ins. Co. of N.J., 168 N.W.2d 723, 734 (S.D. 1969).
Athey proved that Farmers' refusal to release Hajek and Dairyland prevented him from
finalizing the $25,000 settlement with Dairyland, and Athey was forced to pay for his
own medical treatment after his independent medical review and Farmers' termination
of no fault benefits. The jury also could have inferred from the testimony of Patricia
Athey that her husband had to forego certain medical treatment because of lack of
funds. The jury could reasonably find that the pecuniary loss Athey endured caused
him mental anguish.
III.
Farmers has not shown that it is entitled to judgment as a matter of law or to a
new trial. Accordingly, we affirm the judgment of the district court.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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