Bertelsen v. Allstate Insurance Co.

#26442-aff in part, rev in pt & rem-SLZ
2013 S.D. 44
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
BONNIE J. BERTELSEN, Plaintiff and Appellee,
v.
ALLSTATE INSURANCE COMPANY,
AN INSURANCE CORPORATION, Defendant and Appellant.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA
****
THE HONORABLE PATRICIA C. RIEPEL
Judge
****
MICHAEL W. STRAIN of
Morman Law Firm
Sturgis, South Dakota
and
PAUL T. BARNETT
SCOTT G. HOY
JAMES L. HOY of
Hoy Trial Lawyers, Prof., LLC
Sioux Falls, South Dakota Attorneys for plaintiff
and appellee.
CATHERINE M. SABERS
THOMAS G. FRITZ of
Lynn, Jackson, Shultz & Lebrun, PC
Rapid City, South Dakota Attorneys for defendant
and appellant.
****
ARGUED FEBRUARY 12, 2013
OPINION FILED 06/12/13
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ZINTER, Justice
[¶1.] Bonnie Bertelsen sued Allstate Insurance Company for breach of
contract and bad faith arising out of Allstate’s failure to timely pay medical benefits
under Bertelsen’s personal automobile insurance policy. On the breach of contract
claim, the circuit court granted a judgment as a matter of law for $33,000. On the
bad faith claim, the jury awarded $150,000 in compensatory damages and
$1,500,000 in punitive damages. Allstate appeals. We affirm in part, reverse in
part, and remand for a new trial.
Facts and Procedural History
[¶2.] This case has been before us on two prior occasions: Bertelsen v.
Allstate Insurance Co. (Bertelsen I), 2009 S.D. 21, 764 N.W.2d 495, and Bertelsen v.
Allstate Insurance Co. (Bertelsen II), 2011 S.D. 13, 796 N.W.2d 685. As we noted in
those opinions, Bertelsen was employed by Universal Pediatric Services (UPS) as an
in-home registered nurse. On December 26, 2005, she was injured in an automobile
accident while driving her employer’s vehicle to a patient’s home to perform her
nursing duties. Bertelsen spent six weeks in the hospital recovering from life-
threatening injuries. She underwent numerous surgeries, lost eight months of
work, and incurred $382,849.92 in medical expenses as a result of the accident.
[¶3.] Bertelsen filed a claim for worker’s compensation benefits (including
medical expenses) with American International Group (AIG), her employer’s
worker’s compensation carrier. AIG denied the claim on January 10 and February
7, 2006. AIG contended that Bertelsen’s injuries had not arisen out of and in the
course of her employment with UPS.
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[¶4.] Bertelsen had a personal automobile insurance policy with Allstate
that provided $100,000 in medical payments coverage. In February 2006, Bertelsen
advised Allstate that AIG had denied her worker’s compensation claim, and she
filed a medical payments claim with Allstate. Bertelsen provided Allstate with her
AIG claim number as well as the AIG claims adjuster’s name and contact
information. Allstate subsequently spoke with AIG’s claims adjuster, confirmed the
denial, and noted the basis for AIG’s denial in Allstate’s claim file. Allstate then
requested written proof of loss. Bertelsen provided Allstate with her medical
records and bills, which by that time exceeded Allstate’s policy limits. Bertelsen
demanded the $100,000 policy limits for medical payments, but Allstate continued
to investigate Bertelsen’s claim into the spring of 2006.
[¶5.] Contrary to its claims manual, Allstate raised a worker’s compensation
exclusion in its policy for the first time in a June 2006 letter to Bertelsen. 1 By that
time, Bertelsen’s medical expenses were approaching $300,000. The letter also
contained another request for the AIG claims adjuster’s name and contact
information. Allstate indicated that it was going to investigate AIG’s denial of
Bertelsen’s worker’s compensation claim. The letter stated: “Rest assured, once
investigation is complete and all available coverage is exhausted, Allstate will move
quickly to resolve [Bertelsen’s] claim.”
1. Allstate’s claims manual required immediate notice to policyholders of any
coverage issue.
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[¶6.] Bertelsen’s attorney at that time, Thomas Blake, promptly sent
Allstate the AIG claims adjuster’s name and contact information. 2 At trial, the
parties disputed whether Allstate contacted Bertelsen following receipt of this
information. Bertelsen alleged that Allstate failed to further investigate AIG’s
denial and did not contact her until approximately one year later. Allstate denied
these allegations. Norm Tierney, an Allstate claims adjuster, testified that he
contacted Blake on June 26, 2006. He contended that Blake agreed to suspend
Bertelsen’s claim with Allstate to pursue the worker’s compensation claim.
Although Allstate conceded that the phone call was not documented in its claim file,
Allstate introduced a call log indicating that a call was placed from Randall Blake’s 3
office to Allstate’s 800 telephone number on July 13, 2006. Thomas Blake, however,
denied that any phone conversation occurred with Tierney.
[¶7.] By the spring of 2007, Bertelsen had not received medical payments
benefits from Allstate, and she was experiencing increasing demands for payment
from medical providers. On December 19, 2007, Bertelsen filed a petition with the
South Dakota Department of Labor formally seeking worker’s compensation
benefits. AIG answered Bertelsen’s petition on January 22, 2008, and for the first
time admitted coverage for “all past, present, and future medical, hospital, and
2. Thomas Blake did not represent Bertelsen in these breach of contract and
bad faith suits.
3. Randall Blake, Thomas Blake’s brother, was an attorney who handled
personal injury cases in Sioux Falls. Although Randall Blake and Thomas
Blake shared a fax line prior to March 2005, they had separate offices and
telephone lines.
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health care expenses for her work-related injury.” Bertelsen later settled her
worker’s compensation claim with AIG for $150,000.
[¶8.] Bertelsen also settled claims with other insurers. She received medical
payments benefits in the amount of $30,000 (the policy limits) from UPS’s
automobile insurer, Hartford Insurance Company. She also settled an
underinsured motorist claim with Hartford for $900,000. Bertelsen settled a
liability claim with State Farm, the negligent tortfeasor’s automobile insurance
company, for $100,000. Additionally, she received $157,433.87 in medical expense
coverage from Avera Health, her health insurer. Bertelsen’s other health insurers,
Sanford Health Plan and Blue Cross of California, paid additional health benefits.
Ultimately, Bertelsen recovered approximately $1.2 million from these insurers.
After subrogation and the payment of medical bills, she retained approximately
$660,000. Bertelsen, however, claimed that she was also entitled to the $100,000
policy limits from Allstate under the medical payments provision of Allstate’s
automobile policy.
[¶9.] In December 2007, Bertelsen initiated this breach of contract and bad
faith action. Relying on SDCL 62-1-1.3, 4 she alleged that Allstate breached the
4. SDCL 62-1-1.3 provides:
If an employer denies coverage of a claim on the basis that the
injury is not compensable under this title due to the provisions
of subsection 62-1-1(7)(a), (b), or (c), such injury is presumed to
be nonwork related for other insurance purposes, and any other
insurer covering bodily injury or disease of the injured employee
shall pay according to the policy provisions. If coverage is
denied by an insurer without a full explanation of the basis in
the insurance policy in relation to the facts or applicable law for
(continued . . .)
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insurance contract by failing to pay medical benefits immediately after learning
that AIG initially denied her worker’s compensation claim. Bertelsen contended
that Allstate’s failure to immediately pay medical benefits was “frivolous,”
“unfounded,” and constituted bad faith. She also contended that Allstate’s alleged
bad faith caused her emotional distress up to the point in time when she began
receiving settlements from the other insurance carriers.
[¶10.] In Bertelsen I, we reversed a circuit court decision granting summary
judgment in favor of Allstate. 2009 S.D. 21, ¶ 22, 764 N.W.2d at 501. On the
breach of contract claim, we held that “Allstate breached its contractual and
statutory duty to immediately pay medical benefits for bodily injury after
[Bertelsen]’s workers’ compensation claim was denied.” Id. On the bad faith claim,
we held that Allstate’s duty was not fairly debatable because “Allstate’s obligation
was clear from the statutory language alone[.]” Id. ¶ 20. Because genuine issues of
material fact remained, we remanded the matter for a trial to determine contract
damages and Allstate’s intent in failing to pay benefits. Id. ¶ 22.
[¶11.] On remand, a jury awarded Bertelsen $33,000 for breach of contract,
but the jury rejected her bad faith claim. 5 Bertelsen appealed that decision, and in
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(. . . continued)
denial, the director of the Division of Insurance may determine
such denial to be an unfair practice under chapter 58-33. If it is
later determined that the injury is compensable under this title,
the employer shall immediately reimburse the parties not liable
for all payments made, including interest at the category B rate
specified in § 54-3-16.
5. In June 2010, Allstate paid Bertelsen $51,127.36, which included the $33,000
award, prejudgment interest, and costs. According to an agreement entered
(continued . . .)
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Bertelsen II we concluded that instructional and evidentiary errors required a new
trial. 2011 S.D. 13, ¶ 62, 796 N.W.2d at 705-06. We held that the jury should have
been instructed that Allstate breached its contractual and statutory duty to pay
medical benefits immediately after it learned AIG had denied Bertelsen’s worker’s
compensation claim. Id. ¶ 32. With respect to bad faith, we concluded that genuine
issues of material fact remained regarding Allstate’s intent in failing to timely pay
benefits. Id. ¶ 62. We also held that Bertelsen should have been allowed to develop
an evidentiary record on punitive damages. Id. ¶ 41. We remanded for a new trial
on the issues of contract damages, bad faith, and punitive damages. Id. ¶ 62.
[¶12.] On remand from Bertelsen II, the matter was assigned to Judge Riepel.
The contract and bad faith claims were bifurcated from the punitive damages claim.
Over Allstate’s objection, the circuit court refused to allow the jury to hear evidence
that in 2008, AIG accepted the worker’s compensation claim. The court also refused
to allow the jury to hear evidence of the settlements with other insurers and
Bertelsen’s pre-accident bankruptcy. At the close of evidence, the court granted
Bertelsen’s motion for judgment as a matter of law on contract damages and
awarded $33,000. Allstate’s motions for judgment as a matter of law on the bad
faith and punitive damages claims were denied. The jury returned a verdict of
$150,000 in compensatory damages and $1,500,000 in punitive damages.
[¶13.] After trial, Bertelsen argued that as a matter of law she was entitled to
an additional $67,000 on the breach of contract claim. She contended that the
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(. . . continued)
by the parties, the purpose of paying the judgment was to stop the accrual of
post-judgment interest.
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additional amount was necessary to reach a total award of the $100,000 policy
limits because Allstate was estopped from asserting its subrogation rights.
Bertelsen also moved for attorney’s fees of $534,230. Allstate renewed its motions
for judgment as a matter of law. In the alternative, Allstate moved for a new trial
or remittitur. The circuit court denied Allstate’s motions, granted Bertelsen’s
request for a judgment equivalent to the $100,000 policy limits, and awarded
Bertelsen $180,561.51 in attorney’s fees.
[¶14.] Allstate raises numerous issues on appeal. We address: (1) whether
the circuit court erred in denying Allstate’s motions for judgment as a matter of law
on the bad faith and punitive damages claims; (2) whether the circuit court erred in
excluding evidence that AIG accepted the worker’s compensation claim in 2008; and
(3) whether the circuit court erred in awarding Bertelsen attorney’s fees. Because
we are remanding for a new trial, we also address some evidentiary and
instructional issues that are likely to arise again. In light of the new trial, we do
not reach Allstate’s other issues. 6
6. One of those other issues is the circuit court’s award of $100,000 in contract
damages. Allstate argues that the court erred in supplementing the $33,000
jury award to reach the $100,000 policy limits. The court reasoned that
Allstate waived or was estopped from asserting its subrogation rights. In
Bertelsen II, we determined that in certain instances an insurer may waive
its right to subrogation or be estopped from asserting its right to subrogation
if it unreasonably delayed payment.
We agree that an insurer should not escape liability for breach
of contract when it has acted in bad faith or unreasonably
delayed the payment of benefits. An insurer may thus waive the
right to subrogation or be estopped from asserting it when it has
unreasonably delayed the payment of benefits.
(continued . . .)
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Decision
Allstate’s Motions for Judgment as a Matter of Law
[¶15.] Allstate argues that the circuit court abused its discretion in denying
Allstate’s renewed motion for judgment as a matter of law on the bad faith claim.
Allstate contends that there was insufficient evidence to support bad faith. Allstate
specifically contends that Bertelsen’s evidence only reflected mistakes, errors in
judgment, sloppy business practices, or negligence. It further contends that it could
not have acted in bad faith because its primary claims adjuster was unaware of
SDCL 62-1-1.3, the statute requiring immediate payment from Allstate. Allstate
also challenges the court’s ruling on its motion for judgment as a matter of law on
the punitive damages claim. Allstate argues that there was insufficient evidence of
malice to support punitive damages.
[¶16.] This Court reviews both a motion for judgment as a matter of law and
a renewed motion for judgment as a matter of law for an abuse of discretion.
Jacobs v. Dakota, Minn. & E. R.R. Corp., 2011 S.D. 68, ¶ 9, 806 N.W.2d 209, 212;
Selle v. Tozser, 2010 S.D. 64, ¶ 14, 786 N.W.2d 748, 752. We “view the evidence and
________________________
(. . . continued)
...
The issue of contract damages is thus related to [Bertelsen’s]
bad faith claim. . . . Allstate’s intent in failing to pay medical
benefits is an important factor in deciding whether Allstate is
estopped from asserting its subrogation rights.
2011 S.D. 13, ¶¶ 23-24, 796 N.W.2d at 694. Because we are remanding
Bertelsen’s bad faith claim for a new trial, and because Allstate’s intent in
failing to pay medical benefits is an important factor in determining waiver
and estoppel, we do not reach Allstate’s argument on the court’s $100,000
breach of contract award.
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testimony in a light most favorable to the verdict.” Jacobs, 2011 S.D. 68, ¶ 9, 806
N.W.2d at 212. “Then, ‘without weighing the evidence, the [C]ourt must decide if
there is evidence which would have supported or did support a verdict.’” Selle, 2010
S.D. 64, ¶ 14, 786 N.W.2d at 752 (quoting Alvine Family Ltd. P’ship v. Hagemann,
2010 S.D. 28, ¶ 18, 780 N.W.2d 507, 512). “If sufficient evidence exists so that
reasonable minds could differ, [judgment as a matter of law] is not appropriate.”
Roth v. Farner-Brocken Co., 2003 S.D. 80, ¶ 8, 667 N.W.2d 651, 659 (quoting In re
Estate of Holan, 2001 S.D. 6, ¶ 9, 621 N.W.2d 588, 591). “In resolving sufficiency of
evidence issues on appeal, this [C]ourt should examine the record to determine only
if there is competent and substantial evidence to support the verdict.” Id. ¶ 20
(quoting Kjerstad v. Ravellette Publ’ns, Inc., 517 N.W.2d 419, 424 (S.D. 1994)). “All
conflicts are resolved and all reasonable inferences are drawn in favor of the
prevailing party.” Id.
Bad Faith
[¶17.] To prevail on a bad faith cause of action, “a claimant must demonstrate
that the claim was denied with knowledge of the absence of a reasonable basis for
the denial or in reckless disregard of whether a reasonable basis existed.”
McDowell v. Citicorp U.S.A., 2007 S.D. 53, ¶ 15, 734 N.W.2d 14, 19 (citing
Champion v. U.S. Fid. & Guar. Co., 399 N.W.2d 320, 324 (S.D. 1987)). However,
“an insurance company . . . 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.” Dakota, Minn. & E. R.R. Corp. v. Acuity,
2009 S.D. 69, ¶ 17, 771 N.W.2d 623, 629 (quoting Walz v. Fireman’s Fund Ins. Co.,
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1996 S.D. 135, ¶ 7, 556 N.W.2d 68, 70). When evaluating whether an insurer has
engaged in bad faith, we must look to “the facts and law available to [the] [i]nsurer
at the time it made the decision to deny coverage.” Id. ¶ 19 (alteration in original).
“The question of whether an insurer has acted in bad faith is generally a question of
fact.” Id.
[¶18.] In Bertelsen I, we determined that Allstate’s statutory duty to
Bertelsen was not “fairly debatable.” 2009 S.D. 21, ¶ 20, 764 N.W.2d at 501 (“[T]he
language of SDCL 62-1-1.3 is plain, unambiguous, and not susceptible to debate. . . .
Allstate’s obligation was clear from the statutory language alone, and an
interpretive decision from this Court was not necessary for Allstate to have
determined its duty under its policy.”). Thus, we must review the factual record to
determine whether there was sufficient evidence for the jury to find that Allstate
delayed payment with knowledge of the absence of a reasonable basis to delay
payment or in reckless disregard of the absence of a reasonable basis to delay
payment.
[¶19.] The evidence was sufficient to support the bad faith verdict. Bertelsen
introduced evidence showing that she advised Allstate of AIG’s denial and provided
Allstate with AIG’s claims adjuster’s name and contact information. Thereafter,
Allstate contacted AIG’s claims adjuster, confirmed the denial, and noted the basis
for the denial in its claim file. There is also record evidence that Bertelsen provided
proof of loss information and Allstate promised to promptly investigate the claim.
Yet, under Bertelsen’s version of the evidence, there were no further
communications between the parties for approximately one year. This was
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sufficient evidence for the jury to find that Allstate knew of or recklessly
disregarded its obligation to immediately process and pay the claim after it learned
of AIG’s denial.
[¶20.] Allstate, however, points out that while Blake was communicating
with Tierney, Blake never claimed that Allstate engaged in inappropriate delay or
wrongful conduct, and Blake never mentioned SDCL 62-1-1.3. These facts do not
support Allstate’s argument. In Walz v. Fireman’s Fund Insurance Co., we held
that an “[i]nsurer cannot rely upon claimants to provide a copy of legal authority,
especially in the absence of a request.” 1996 S.D. 135, ¶ 13, 556 N.W.2d at 72. We
further observed that the insurer “could have contacted legal counsel or even
consulted a table of cases to obtain the [controlling law].” Id. Accordingly, Allstate
cannot escape liability solely because it may have been unaware of SDCL 62-1-1.3.
Because there was sufficient evidence to support the bad faith verdict, the circuit
court did not err in denying Allstate’s motion for judgment as a matter of law.
Punitive Damages
[¶21.] Allstate argues that there was insufficient evidence of malice to
support the punitive damages verdict. Allstate contends that Bertelsen failed to
present evidence that Allstate acted with “a conscious realization that [its] conduct
would in all probability . . . harm [Bertelsen].”
[¶22.] “Malice is an essential element of a claim for punitive damages.” Selle,
2010 S.D. 64, ¶ 30, 786 N.W.2d at 757 (quoting Isaac v. State Farm Mut. Auto. Ins.
Co., 522 N.W.2d 752, 761 (S.D. 1994)). “Malice can be actual (malice in fact) or
presumed (legal malice).” Id. “A showing of either type is sufficient to support
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punitive damages.” Id. Whereas, “[a]ctual malice is a positive state of mind,
evidenced by the positive desire and intention to injure another, actuated by hatred
or ill-will towards that person[;]” presumed malice can be “infer[ed] from or
impute[d] to certain acts.” Id. Accordingly, even in the absence of hatred or ill-will,
“malice may . . . be imputed if [Allstate] act[ed] willfully or wantonly to the injury of
[Bertelsen].” See id. Although merely engaging in an “injurious act is not sufficient
to constitute presumed malice[,] . . . [a] claim for presumed malice can be shown by
demonstrating a disregard for the rights of others.” Id. (internal citation and
quotation marks omitted).
[¶23.] At trial, Bertelsen presented evidence that Allstate did not contact her
for one year after it promised to investigate AIG’s denial and promptly resolve her
claim. Allstate responded, claiming that Tierney contacted Blake in late June 2006.
To support its argument, Allstate introduced a call log, which indicated that a call
was placed from Randall Blake’s office to Allstate’s 800 telephone number on July
13, 2006. Bertelsen disputed Allstate’s response, noting that the call log showed the
alleged phone call was placed from the wrong line on the wrong date. Whether
Tierney timely contacted Blake was important in determining whether there was
presumed malice. It was also a dispute of fact for the jury. “Factual disputes
generally prohibit granting a judgment as a matter of law.” Alvine Family Ltd.
P’ship, 2010 S.D. 28, ¶ 19, 780 N.W.2d at 513. Accordingly, the circuit court did not
abuse its discretion in denying Allstate’s motion for judgment as a matter of law on
the punitive damages claim.
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AIG’s Acceptance of Bertelsen’s Worker’s Compensation Claim
[¶24.] Allstate argues that the circuit court abused its discretion in excluding
evidence that AIG accepted Bertelsen’s worker’s compensation claim in January
2008. 7 Allstate points out that Bertelsen repeatedly argued and presented
testimony to support her bad faith claim that “[t]o this day [the time of trial in
2012], Allstate ha[d] not paid a dime towards [Bertelsen]’s medical bills.”
(Emphasis added.) To respond, Allstate attempted to introduce evidence
establishing that by January 2008, AIG had accepted the worker’s compensation
claim and agreed to pay all of Bertelsen’s past, present, and future medical
expenses. Under Allstate’s policy, AIG’s acceptance of the worker’s compensation
claim would have relieved Allstate of any further duty to pay medical benefits.
Therefore, AIG’s acceptance of the worker’s compensation claim would have
justified Allstate’s failure to pay medical benefits during the four years between
AIG’s acceptance of the claim in 2008 and the time of trial in 2012.
[¶25.] The circuit court denied Allstate’s offer. The court ruled that the
parties could only mention that the worker’s compensation claim had been
“resolved” (at an undisclosed time) and that Bertelsen’s medical bills were paid by
other insurers. To the court, the date and details of AIG’s acceptance were
7. “[W]e afford broad discretion to circuit courts in deciding whether to admit or
exclude evidence.” Surgical Inst. of S.D., P.C. v. Sorrell, 2012 S.D. 48, ¶ 16,
816 N.W.2d 133, 139 (quoting Ronan v. Sanford Health, 2012 S.D. 6, ¶ 8, 809
N.W.2d 834, 836). “The trial court’s evidentiary rulings are presumed correct
and will not be overturned absent a clear abuse of discretion. An abuse of
discretion refers to a discretion exercised to an end or purpose not justified
by, and clearly against reason and evidence.” Id. (quoting St. John v.
Peterson, 2011 S.D. 58, ¶ 10, 804 N.W.2d 71, 74).
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irrelevant because the breach occurred when Allstate did not pay benefits to
Bertelsen in 2006, as required by SDCL 62-1-1.3. But Allstate maintains that the
court’s ruling erroneously allowed the jury, in determining whether Allstate acted
in bad faith, to believe that it could consider Allstate’s failure to pay for the four
years from 2008 through the 2012 trial. We agree with Allstate.
[¶26.] Allstate’s policy specifically excluded medical payments coverage “to
the extent that the treatment [was] covered under any workers’ compensation law.”
Accordingly, once AIG accepted liability and agreed to pay all of Bertelsen’s past
and future medical expenses in January 2008, Allstate was no longer violating any
duty to pay Bertelsen’s medical expenses. Yet Bertelsen repeatedly asserted that
“[t]o this day, Allstate has not paid a dime towards [Bertelsen]’s medical bills.”
Although AIG’s acceptance of the worker’s compensation claim in 2008 may not
have been relevant to Allstate’s initial breach of contract, the evidence was critical
to the issue whether Allstate acted in bad faith and was liable for punitive damages
for its conduct from 2008 through the 2012 trial. The court abused its discretion in
excluding AIG’s January 2008 acceptance of the worker’s compensation claim. We
reverse and remand for a new trial. 8
8. Allstate also appeals the circuit court’s exclusion of evidence of Bertelsen’s
pre-accident bankruptcy and settlements with other insurers. Allstate claims
Bertelsen’s pre-accident bankruptcy was relevant to impeach Blake’s denial
that he led Allstate to believe it could withhold payment while Blake pursued
the worker’s compensation claim. Allstate also claims that the bankruptcy
was relevant to impeach Blake’s credibility and explanation why he held a
$100,000 check from State Farm in his desk drawer for approximately one
year. Allstate finally claims that Bertelsen’s settlements with other insurers
were relevant to prove that Bertelsen was fully compensated for the injuries
she sustained in the accident. Although this evidence was admitted in the
(continued . . .)
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Attorney’s Fees
[¶27.] The circuit court granted a judgment as a matter of law for $33,000 in
contract damages, and Allstate does not appeal that decision. Allstate does,
however, appeal the court’s award of attorney’s fees incurred in obtaining the
contract damages. Allstate contends the court erred in awarding Bertelsen any
attorney’s fees. In the alternative, Allstate contends the award was excessive.
[¶28.] “[A]ttorney fees may only be awarded by contract or when specifically
authorized by statute.” Biegler v. Am. Family Mut. Ins. Co., 2001 S.D. 13, ¶ 56, 621
N.W.2d 592, 606. “The party requesting an award of attorneys’ fees has the burden
to show its basis by a preponderance of the evidence.” Arrowhead Ridge I, LLC v.
Cold Stone Creamery, Inc., 2011 S.D. 38, ¶ 25, 800 N.W.2d 730, 737.
[¶29.] Bertelsen requested attorney’s fees under SDCL 58-12-3, which
authorizes the recovery of attorney’s fees if the insurer’s refusal to pay was
________________________
(. . . continued)
first trial, the court excluded the evidence in the second trial. The court ruled
that Bertelsen’s pre-accident bankruptcy was more prejudicial than
probative, and it could not be used for impeachment because there was no
expert testimony explaining the effect that the bankruptcy might have had
on holding the State Farm check. The court finally ruled that Bertelsen’s
settlements with other insurers were not relevant and/or were inadmissible
under SDCL 19-12-10 (Rule 408).
We have concerns with the circuit court’s SDCL 19-12-10 (Rule 408) ruling.
Allstate did not offer evidence of Bertelsen’s settlements with other insurers
“to prove liability for or invalidity of the [bad faith claim] claim or its
amount.” See id. With respect to the court’s other rulings, the admissibility
of Bertelsen’s pre-accident bankruptcy and her settlements with other
insurers is dependent upon the issues presented and the nature of the
evidence introduced at trial. On remand, the court will have to determine the
relevancy and the prejudice versus probative value questions in the context of
the evidence presented.
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“vexatious or without reasonable cause.” “[T]he obvious objective of SDCL 58-12-3
is to discourage contesting insurance coverage and to reimburse an insured for any
reasonable attorney’s fees necessarily incurred in defending or enforcing a valid
insurance contract right.” Tripp v. W. Nat’l Mut. Ins. Co., 664 F.3d 1200, 1205 (8th
Cir. 2011) (quoting All Nation Ins. Co. v. Brown, 344 N.W.2d 493, 494 (S.D. 1984)).
The statute is “given a liberal construction with a view to effect its objects and to
promote justice.” Id.
[¶30.] “Before attorney’s fees may be awarded under [SDCL 58-12-3], the
trial court must find ‘that the insurance company refused to pay the full amount of
the insured’s loss and that [the] refusal was either vexatious or without reasonable
cause.’” Sawyer v. Farm Bureau Mut. Ins. Co., 2000 S.D. 144, ¶ 29, 619 N.W.2d
644, 651-52 (quoting Brooks v. Milbank Ins. Co., 2000 S.D. 16, ¶ 17, 605 N.W.2d
173, 178). The court must also determine “what is a reasonable charge for the work
performed . . . .” Biegler, 2001 S.D. 13, ¶ 56, 621 N.W.2d at 606.
[¶31.] Proof of bad faith does not necessarily entitle a claimant to recover
attorney’s fees under SDCL 58-12-3. Id. ¶ 58 (“[A] finding of bad faith on the part of
an insurance company does not mean ‘ipso facto’ that its conduct was vexatious or
without reasonable cause[.]”); Crabb v. Nat’l Indem. Co., 87 S.D. 222, 233, 205
N.W.2d 633, 639 (1973) (“[A] finding that an insurer lacked good faith does not
signify its conduct was ‘vexatious or without reasonable cause,’ as a matter of law.”).
Moreover, “[p]ursuant to SDCL 58-12-3, attorney’s fees are allowed only in an
action against an insurer based upon the policy.” Sawyer, 2000 S.D. 144, ¶ 31, 619
N.W.2d at 652. Consequently, “the portion of attorney’s fees related to the bad faith
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claim, as opposed to the contractual claim, should [be] excluded.” Isaac, 522 N.W.2d
at 763.
[¶32.] In this case, Bertelsen initially submitted a request for $534,230 in
attorney’s fees. This request did not segregate the time spent pursuing the
contract, bad faith, and punitive damage claims. The circuit court subsequently
ordered Bertelsen to submit an itemized billing and instructed Allstate to submit
specific objections. Bertelsen submitted an itemized billing totaling 121 pages. The
itemization contains time entries showing the hours expended and services
performed by Bertelsen’s attorneys. Allstate’s response includes a specific objection
for each time entry challenged. The court reviewed the submissions and issued a
memorandum decision, findings of fact and conclusions of law, and order awarding
Bertelsen a reduced fee award of $180,561.51. In concluding that Bertelsen was
entitled to attorney’s fees under SDCL 58-12-3, the court found that Allstate’s
breach was without reasonable cause and that the fees awarded were reasonable.
[¶33.] Allstate first argues that the evidence was insufficient to find that its
refusal to pay benefits was without reasonable cause. Allstate contends the
attorney’s fees award improperly “hinged on the bad faith verdict.”
[¶34.] In Bertelsen II, we concluded that Allstate breached the insurance
contract as a matter of law. 2011 S.D. 13, ¶ 21, 796 N.W.2d at 694. We must now
determine whether the circuit court clearly erred in finding that Allstate’s breach
was without reasonable cause. See Biegler, 2001 S.D. 13, ¶ 58, 621 N.W.2d at 606
(“Whether [the insurer]’s conduct was vexatious or without reasonable cause is a
question of fact, reviewed by this [C]ourt under the clearly erroneous standard.”).
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[¶35.] In determining that Allstate’s refusal to pay was without reasonable
cause, the circuit court examined Allstate’s pre-litigation conduct, noting that
“Bertelsen notified Allstate that other insurance coverage had been exhausted and
[that] [Bertelsen] sought the $100,000 under her policy with Allstate.” The court
also listened to the evidence and judged the credibility of the witnesses supporting
and opposing Allstate’s justification for its failure to immediately pay benefits.
Considering the conflicting evidence and the court’s superior position to resolve
those conflicts, we find no clear error in the court’s finding that Allstate did not
have reasonable cause to fail to timely pay benefits.
[¶36.] Allstate also argues that the circuit court’s award was excessive.
Allstate contends that Bertelsen’s documentation was insufficient and that the
individual time entries are vague and generally do not segregate fee-recoverable
claims from non-fee-recoverable claims. Allstate also contends that the court should
not have awarded fees incurred after June 2010, when Bertelsen first obtained a
verdict on the breach of contract claim and received $33,000 plus interest from
Allstate. Alternatively, Allstate contends that Bertelsen should not have recovered
attorney’s fees incurred after this Court decided Bertelsen II. Allstate points out
that, at that point, the breach of contract issue was resolved, Bertelsen pursued no
additional discovery on contract damages in preparation for the second trial, and
the same contract damage evidence was presented in both trials. Allstate finally
contends that Bertelsen should not have recovered attorney’s fees incurred after
December 27, 2012, because Allstate offered Bertelsen a $225,000 settlement.
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[¶37.] We review “[t]he trial court’s fee award . . . under the abuse of
discretion standard.” Biegler, 2001 S.D. 13, ¶ 60, 621 N.W.2d at 607. If fees are
awarded, they are limited to a “reasonable sum.” SDCL 58-12-3.
[¶38.] The circuit court awarded a reasonable sum. The court first found that
$250 per hour was a reasonable rate. The court observed that this was “a highly
contentious case,” in which “a great deal of time [had been] expended by Bertelsen’s
attorneys.” The court also considered the case to be relatively complex, which
required skill and experience and likely precluded other employment by the
attorneys. The court further considered: the experience, reputation, and ability of
the attorneys; the fees customarily charged in the locality; the amount involved; and
the results obtained.
[¶39.] The circuit court then examined Bertelsen’s attorneys’ itemized
statement and limited the attorney’s fees to those incurred pursuing the breach of
contract claim. Where the itemized statement did not reflect work related solely to
the contract claim, Bertelsen was only awarded one-third of the requested amount.
The court explained:
Where Bertelsen’s attorneys have not specifically stated that
time for work unrelated to the breach of contract has not been
charged, I have reduced the amount sought by [two-thirds] in
those cases where the work is so intertwined with the non-fee
recoverable claims that it cannot be otherwise separated. It is
my finding that it is equitable and fair to attribute one-third of
that such time to the breach of contract claim and two-thirds to
the bad faith and punitive damages claims.
The court also included a spreadsheet reflecting a ruling on each itemized request.
[¶40.] The circuit court’s analysis demonstrates that it considered the
reasonableness factors required by this Court. See Crisman v. Determan
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Chiropractic, Inc., 2004 S.D. 103, ¶ 28, 687 N.W.2d 507, 514 (setting forth factors
for the circuit court to consider in awarding attorney’s fees). The court also
painstakingly analyzed and ruled on each itemized request. The court did not
abuse its discretion in awarding attorney’s fees relating to the breach of contract
claim. Moreover, attorney’s fees were awardable after the verdict was rendered on
the breach of contract claim in June 2010, after our decision in Bertelsen II, and
after the settlement offer. Notwithstanding those occurrences, Bertelsen’s claim to
$100,000 in contract damages was not resolved in Bertelsen II and Bertelsen was
required to re-prove contract damages in the last trial. Based on our review of the
record, the court did not abuse its discretion in awarding attorney’s fees.
Jury Instructions
[¶41.] Allstate contends that the circuit court abused its discretion in
instructing the jury. Our standard of review for jury instructions is well-
established:
A trial court has discretion in the wording and arrangement of
its jury instructions, and therefore we generally review a trial
court’s decision to grant or deny a particular instruction under
the abuse of discretion standard. However, no court has
discretion to give incorrect, misleading, conflicting, or confusing
instructions; to do so constitutes reversible error if it is shown
not only that the instructions were erroneous, but also that they
were prejudicial.
Bertelsen II, 2011 S.D. 13, ¶ 26, 796 N.W.2d at 695. “Erroneous instructions are
prejudicial when in all probability they produced some effect upon the verdict and
were harmful to the substantial rights of a party.” Id.
[¶42.] Allstate first argues that the second paragraph of Jury Instruction 14
improperly allowed the jury to speculate whether Allstate had paid Bertelsen. This
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paragraph advised the jury that “the Court has determined that Allstate breached
its contractual and statutory duty to pay as a matter of law[,]” and that the jury did
not need to address the issue of contract damages. 9 To Allstate, the circuit court
should have included the amount of the breach of contract award ($33,000) and the
date of payment (June 2010). We agree. Although the jury was presented with the
breach of contract evidence, the judgment as a matter of law eliminated the need for
the jury to determine contract damages. However, the payment amount and the
payment date were relevant to the jury’s consideration of bad faith and punitive
damages. Additionally, without knowledge of the payment, the jury was free to
believe Bertelsen’s argument that to the time of trial in 2012, Allstate, in bad faith,
had not “paid a dime towards [Bertelsen’s] medical bills[.]” On retrial, the court
should modify Instruction 14 to include the $33,000 breach of contract award and
the payment date.
[¶43.] Next, Allstate argues that the circuit court abused its discretion in
refusing to supplement Jury Instruction 15 with Allstate’s Proposed Jury
9. Jury Instruction 14 provided:
At all times material to this case, South Dakota law provided
that when a workers’ compensation claim is denied, other
insurers have a statutory duty to pay their contractual benefits
and resolve workers’ compensation coverage and subrogation
issues at a later date.
The Court has already determined that Allstate breached its
contractual and statutory duty to pay as a matter of law. The
breach of contract claim has been resolved and you need not
determine the issue of damages for the breach of contract.
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Instructions 16 10 and/or 17A. 11 Jury Instruction 15 informed the jury that: “Every
insurance contract includes the duty of good faith and fair dealing. This duty
means that neither party will do anything to injure the rights of the other in
receiving the benefits of the agreement. The breach of that duty is called bad faith.”
(Emphasis added.) Allstate argues that absent further explanation – and in
particular the substance of Allstate’s proposed instructions – the jury could take
Instruction 15 to mean that breaches of duties other than bad faith (for instance
negligence) could constitute bad faith regardless of the insurer’s intent. We agree.
[¶44.] This was a suit for first-party bad faith. “First-party bad faith . . . is
an intentional tort and typically occurs when an insurance company consciously
engages in wrongdoing during its processing or paying of policy benefits to its
insured.” Hein v. Acuity, 2007 S.D. 40, ¶ 10, 731 N.W.2d 231, 235.
For 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 in
10. Allstate’s Proposed Jury Instruction 16 provided:
An insurance company, such as Allstate, is not liable for bad
faith where its decision on a claim constitutes an error in
judgment, a mistake, or simply negligent [sic].
11. Allstate’s Proposed Jury Instruction 17A provided:
An insurer does not breach its duty of good faith simply because
it makes a mistake or acts negligently. A person or entity acts
negligently when it fails to conduct itself as a reasonable
prudent person or entity would under the same or similar
circumstances. For an insurance company’s conduct to
constitute bad faith its actions must be intentional, or
accompliashed [sic] with knowledge of or reckless disregard of a
lack of reasonable basis for its actions.
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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.
Dakota, Minn. & E. R.R. Corp., 2009 S.D. 69, ¶ 17, 771 N.W.2d at 629. Thus, an
insurance company “will be found liable [for bad faith] only where it has
intentionally denied (or failed to process or pay) a claim without a reasonable basis.”
Id.
[¶45.] But Instruction 15, and particularly the last two sentences, permitted
the jury to award damages for bad faith based on “anything [that would] injure the
rights of the other in receiving the benefits of the agreement.” Thus, under
Instruction 15, the jury could have found bad faith based on breaches of duties
arising from a mere error in judgment, mistake, or negligence. Accordingly, on
retrial, the circuit court should qualify Instruction 15 along the lines suggested by
Allstate.
[¶46.] Allstate next contends that Jury Instruction 18 unduly emphasized
one piece of Bertelsen’s evidence at trial. In Instruction 14, the circuit court
instructed that Allstate breached its contract with Bertelsen. In Instruction 18, the
court instructed that: “A clear breach of contract is strong evidence of bad faith.”
Citing Wallahan v. Black Hills Elec. Co-op, Inc., 523 N.W.2d 417, 423 (S.D. 1994),
Allstate argues that “[a] trial court errs when, through its instructions, it places
undue emphasis on one piece of evidence.” This Court has stated that “it is
improper for the trial court to unduly emphasize one party’s position or evidence.”
Id. Bertelsen, however, contends that this instruction was proper because it was a
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statement taken from this Court’s decision in Bertelsen II, 2011 S.D. 13, ¶ 32, 796
N.W.2d at 697 (“And because a clear breach of contract is strong evidence of bad
faith, the trial court’s failure to properly instruct the jury on Bertelsens’ breach of
contract claim prejudiced their substantial rights.”).
[¶47.] Although Instruction 18 restated this Court’s conclusion in Bertelsen
II, we did not indicate that our legal analysis on whether prejudice resulted from
instructional error should be given as a jury instruction. Wallahan correctly states
the law that prohibits emphasizing a party’s position or evidence. Contrary to
Wallahan, Instruction 18 improperly emphasized Bertelsen’s position and evidence.
The instruction should not be given on retrial.
[¶48.] Allstate also argues that the circuit court erred in denying Allstate’s
requested instruction on the liability of a principal for punitive damages arising
from the acts of an agent. Allstate requested South Dakota Pattern Jury
Instruction 50-100-40, which provides:
Punitive damages may be awarded against a principal because
of an act by an agent only in the following circumstances:
(1) The principal or a managerial agent authorized the doing
and the manner of the agent’s act; or
(2) The agent was unfit and the principal or a managerial
agent was reckless in employing or retaining the agent; or
(3) The agent was employed in a managerial capacity and
was acting in the scope of employment; or
(4) The principal or managerial agent of the principal ratified
or approved the agent’s act.
Allstate contends this instruction should be “given as a fundamental aspect of the
law of punitive damages.”
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[¶49.] Allstate relies on Farmers Insurance Exchange v. Shirley, 958 P.2d
1040 (Wyo. 1998) and Jannotta v. Subway Sandwich Shops, Inc., 125 F.3d 503 (7th
Cir. 1997) (applying Illinois law). In Wyoming and Illinois, as well as in numerous
other jurisdictions, punitive damages cannot be assessed against a corporation for
acts of its agents or employees under the theory of respondeat superior. This Court
adopted that view in Dahl v. Sittner, 474 N.W.2d 897 (S.D. 1991).
[¶50.] In Dahl, this Court noted that there are generally “two theories of
recovery: the scope of employment rule [respondeat superior], and the complicity
rule.” Id. at 902. After examining the justifications for the competing views, we
adopted the complicity rule. Id. at 903. Under that rule:
Punitive damages can properly be awarded against a master or
other principal because of an act by an agent if, but only if,
(a) the principal or a managerial agent authorized the doing
and the manner of the act, or
(b) the agent was unfit and the principal or a managerial
agent was reckless in employing or retaining him, or
(c) the agent was employed in a managerial capacity and was
acting in the scope of employment, or
(d) the principal or a managerial agent of the principal
ratified or approved the act.
Id. (quoting Restatement (Second) of Torts § 909) (1979).
[¶51.] Allstate’s requested instruction followed the rule adopted in Dahl. 12
Because Allstate’s requested instruction correctly restated the law of punitive
12. We acknowledge that Dahl involved an “agent” who was not an “employee” of
a corporation. Nevertheless, our analysis and supporting authorities reveal
that the rule adopted applies to both.
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damages in South Dakota, the circuit court erred in refusing to give that
instruction.
[¶52.] Finally, in its argument to this Court, Allstate suggests that Bertelsen
I, Bertelsen II, and the jury instructions in these cases have created ambiguity in
the law on insurance bad faith. As previously stated, first-party bad faith is an
intentional tort, requiring proof of “an absence of a reasonable basis for denial of
policy benefits” and “the knowledge or reckless disregard of the lack of a reasonable
basis for denial.” Dakota, Minn. & E. R.R. Co., 2009 S.D. 69, ¶ 17, 771 N.W.2d at
629. But Allstate emphasizes that “an insurance company . . . may challenge claims
which are fairly debatable and will be found liable [for bad faith] only where it has
intentionally denied (or failed to process or pay) a claim without a reasonable basis.”
Id.
[¶53.] In Bertelsen I, we concluded that Allstate’s legal duty to pay was not
fairly debatable after AIG denied worker’s compensation coverage. 2009 S.D. 21, ¶
20, 764 N.W.2d at 500-01 (“Allstate’s obligation was clear from the statutory
language alone, and an interpretive decision from this Court was not necessary for
Allstate to have determined its duty under its policy.”). However, we also concluded
that a disputed issue of fact remained regarding Allstate’s intent in failing to pay
benefits, and we remanded for a new trial. Id. ¶¶ 21-22. Those factual issues were
tried in Bertelsen II.
[¶54.] Bertelsen I and II should only be understood to mean that upon AIG’s
denial of the worker’s compensation claim, Allstate’s legal duty was not fairly
debatable. A statute clearly controlled. However, the question of Allstate’s actual
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intent in delaying payment was a factual matter that was left open should Allstate
claim that its breach of duty occurred for reasons other than fairly
misunderstanding its legal obligation under the statute. In other words, Allstate
remained free to assert factual matters such as negligence in processing the claim,
an inadequate proof of loss, or an agreement by the insured to delay payment.
What our prior decisions prohibited was an argument that Allstate reasonably
believed it had no statutory duty to pay upon AIG’s denial of worker’s compensation
coverage.
Conclusion
[¶55.] We affirm the award of attorney’s fees and the court’s ruling denying
Allstate’s motions for judgment as a matter of law on the bad faith and punitive
damages claims. The circuit court erred in excluding Allstate’s evidence of AIG’s
acceptance of the worker’s compensation claim, and the exclusion of that evidence
prejudiced Allstate’s ability to defend the bad faith and punitive damages claims.
This matter is reversed and remanded for a new trial consistent with this opinion.
[¶56.] GILBERTSON, Chief Justice, and KONENKAMP, SEVERSON and
WILBUR, Justices, concur.
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