Deonier & Assoc. v. Paul Revere Life Ins.

• Citation: 9 P.3d 622,301 Mont. 347,2000 MT 238
• Decision Date: 31 August 2000
• Docket Number: No. 99-115.,99-115.
• Parties: MARIE DEONIER & ASSOCIATES, Plaintiff and Appellant, v. The PAUL REVERE LIFE INSURANCE COMPANY, Defendant, Respondent, and Cross-Appellant.
• Court: United States State Supreme Court of Montana

9 P.3d 622

2000 MT 238

301 Mont. 347

MARIE DEONIER & ASSOCIATES, Plaintiff and Appellant, v. The PAUL REVERE LIFE INSURANCE COMPANY, Defendant, Respondent, and Cross-Appellant.

No. 99-115.

Supreme Court of Montana.

Submitted and Argued January 20, 2000.

Decided August 31, 2000.

Donald L. Harris (argued), L.B. Cozzens (argued), Colette Baumgardner-Davies, Crowley, Haughey, Hanson, Toole & Dietrich, P.L.L.P., Billings, Montana, For Appellant.

James L. Jones and Robert L. Sterup (argued), Dorsey & Whitney LLP, Billings, Montana, For Respondent. L. Randall Bishop (argued), Jarussi & Bishop, Billings, Montana (Montana Trial Lawyers Association), For Amicus.

Justice TERRY N. TRIEWEILER delivered the Opinion of the Court.

¶ 1 The original Plaintiff, Kathryn Vestal, brought this action in the District Court for the Thirteenth Judicial District in Yellowstone County to recover disability insurance benefits and other damages from Defendants, The Paul Revere Life Insurance Company and Marie Deonier & Associates, Vestal's insurance agent, as a result of Paul Revere's denial of Vestal's disability claim. Deonier asserted cross-claims against Paul Revere for indemnity and breach of fiduciary duties. Vestal subsequently settled with Paul Revere and dismissed her claims against Paul Revere and Deonier. The parties were then realigned-Deonier as the Plaintiff and Paul Revere as the Defendant. The District Court dismissed Deonier's claim for breach of fiduciary duty by summary judgment. Following a nonjury trial on Deonier's claim for indemnity, the District Court entered judgment against Paul Revere. Deonier appeals the District Court's summary judgment and Paul Revere cross-appeals the District Court's judgment in favor of Deonier. We reverse the judgment of the District Court in part and affirm in part.

¶ 2 The following issues are presented on appeal by Deonier:

¶ 3 1. Did the District Court err when it dismissed Deonier's claim for breach of fiduciary duty by summary judgment?

¶ 4 2. Did the District Court err when it refused to decide the legality of Paul Revere's disability policy?

¶ 5 The following issue is presented on cross-appeal by Paul Revere:

¶ 6 3. Did the District Court err when it required Paul Revere to indemnify Deonier?

FACTUAL BACKGROUND

¶ 7 The Plaintiff, Marie Deonier, was a licensed disability and life insurance agent. In 1986, Paul Revere appointed Deonier as one of its independent agents and expressly authorized Deonier to solicit applications, deliver policies, collect premiums, and service Paul Revere's clients. Deonier did not have an exclusive relationship with any disability insurance carrier, nor was Paul Revere the primary company for which Deonier sold insurance policies.

¶ 8 The original Plaintiff, Kathryn Vestal, enrolled in the University of Montana School of Law in 1988. On May 24, 1989, Vestal sought medical help from the University of Montana Student Health Services for insomnia that she was experiencing. Vestal was prescribed low dose antidepressants over the next several months.

¶ 9 In 1990, Vestal accepted employment as a staff attorney in the Billings Office of Hearings and Appeals of the Social Security Administration. Vestal met with Deonier in June 1991 to discuss Vestal's desire to purchase a disability insurance policy. Because of Vestal's special needs as a federal employee, Deonier recommended a Paul Revere policy. Deonier completed the insurance application based on information provided by Vestal. The insurance application expressly disclosed the fact that Vestal had suffered insomnia for a period of time during law school.

¶ 10 On June 27, 1991, Paul Revere issued Vestal a disability insurance policy which did not exclude any preexisting conditions. Vestal's policy contained the following provisions pertinent to this case:

9.2 INCONTESTABLE

a. After your policy has been in force for two years, excluding any time You are Disabled, We cannot contest the statements in the application.

b. No claim for Disability beginning after two years from the Date of Issue will be reduced or denied because a disease or physical condition that existed before the Date of Issue unless it is excluded by name or specific description.

3.2 PRE-EXISTING CONDITION LIMITATIONS

We will not pay benefits for a Pre-Existing Condition if it was not disclosed on Your application. You are responsible for verifying the accuracy of each and every statement on Your application. Also, We will not pay benefits for any loss We have excluded by name or specific description.

DEFINITIONS

"Sickness" means sickness or disease which first manifests itself after the Date of Issue and while Your Policy is in force. "Pre-existing Condition" means a Sickness or physical condition for which, prior to the Date of Issue:

a. Symptoms existed that would cause an ordinarily prudent person to seek diagnosis, care, or treatment; or

b. Medical advice or treatment was recommended by or received from a Physician.

¶ 11 In 1975, the Fifth Circuit Court of Appeals decided Massachusetts Casualty Insurance Company v. Forman (5th Cir.1975), 516 F.2d 425. In Massachusetts Casualty Insurance Company, the insurance company asserted a legal defense to the incontestable clause in its policy based on its definition of "sickness" which excluded disabilities that manifested themselves prior to the issue date of the policy. This legal position is presently known as the "Forman defense."

¶ 12 In 1981, a Montana Federal District Court decided the case of Doettl v. Colonial Life & Accident Insurance Company (D.Mont.1981), 505 F.Supp. 127. The Doettl case discussed an insured's reliance on an incontestable clause, citing Massachusetts Casualty Insurance Company, 516 F.2d 425, and stating that "[t]he almost universal rule is that incontestable clauses do not abrogate defenses going to coverage." Doettl, 505 F.Supp. at 128.

¶ 13 In 1987, counsel for Paul Revere presented a paper to the Association of Life Insurance Counsel entitled: "The Forman Defense in Disability Insurance." The paper outlined Paul Revere's position as follows:

The Forman defense permits a company to deny beyond the two-year contestable period, a disability claim for a disease which had clearly manifested itself prior to the policy date, on the ground that it is not a covered sickness under the policy. It is available in approximately 40 states and can be asserted in the remaining states with the right set of facts or by filing for declaratory relief and continuing to pay the claim. However, in many of these states, there is no clear authority pro or con and the company will be making new and hopefully favorable law. Accordingly, it is imperative that corporate counsel review carefully each claim where the Forman defense would be involved and select only those which have "clean" facts for the company and amply demonstrate the insured's duplicity.

Id. at 779.

¶ 14 Based on the Montana Federal District Court's decision in Doettl, 505 F.Supp. 127, Montana was listed as a state with favorable authority in support of the Forman defense. Paul Revere Life Insurance Co., The Forman Defense in Disability Insurance at 777. However, Paul Revere did not inform any of its insurance agents of its intention to assert the Forman defense in Montana. Following the Doettl decision in 1981, no Montana state or federal court has discussed the application of the Forman defense in Montana.

¶ 15 On February 18, 1992, Vestal was admitted to the emergency room at Billings Deaconess Hospital for treatment of depression and suicidal tendencies. In September 1993, Vestal was diagnosed with major depression and was unable to work. On November 9, 1993, Vestal submitted an application for social security disability benefits. Vestal was awarded social security benefits following her appeal to an administrative law judge.

¶ 16 On November 29, 1993, Vestal filed a disability claim with Paul Revere. Paul Revere initially paid disability benefits, but after obtaining Vestal's University of Montana health services medical records, Paul Revere denied Vestal's claim. In a letter to Vestal dated June 16, 1994, Paul Revere stated:

A review of your records indicated that you received treatment from February 4, 1989 to May 16, 1989 at the University of Montana Student Health Center. These records also indicate that you received treatment for depression and that you were treated with low doses of anti-depressants....

In reviewing your application for insurance which was signed on June 27, 1991, we find no indication of any treatment for depression. Paul Revere had no prior knowledge of your depression.

Your policy defines sickness as a sickness or disease which first manifests itself after the date of issue and while your policy is in force. Since your condition manifested itself prior to the issuance of this coverage, it would not be a covered sickness under your contract. Therefore, we are unable to consider any further benefits with regard to this claim.

¶ 17 On August 28, 1995, Vestal filed a complaint against Paul Revere and Deonier. Vestal alleged that Paul Revere breached the disability insurance contract and acted in bad faith, and that both Paul Revere and Deonier negligently misrepresented the policy provisions to Vestal. On October 30, 1995, Deonier filed an answer and cross-claim against Paul Revere which alleged that Paul Revere breached its duty to indemnify Deonier.

¶ 18 On February 6, 1998, Deonier filed an amended answer and cross-claim against Paul Revere. The amended cross-claim further alleged that Paul Revere breached its fiduciary duties to Deonier, and in doing so, Paul Revere acted with actual malice and committed actual fraud, entitling Deonier to punitive damages.

¶ 19 On April 23, 1998, Vestal's claims were dismissed pursuant to a settlement agreement reached between the parties. The District Court realigned the remaining parties-Deonier as the Plaintiff and Paul Revere a...