Bayer v. Employers Reinsurance Corp.

• Citation: 383 N.W.2d 858
• Decision Date: 21 May 1985
• Docket Number: No. 14831,14831
• Parties: Barry E. BAYER, RHD Investments, Inc., a South Dakota Corporation and Westport Lanes, Inc., a South Dakota Corporation, Plaintiffs and Appellants, v. EMPLOYERS REINSURANCE CORPORATION, a Missouri Corporation, Defendant and Appellee. . Considered on Briefs
• Court: Supreme Court of South Dakota

Page 858

383 N.W.2d 858

Barry E. BAYER, RHD Investments, Inc., a South Dakota Corporation and Westport Lanes, Inc., a South Dakota Corporation, Plaintiffs and Appellants, v. EMPLOYERS REINSURANCE CORPORATION, a Missouri Corporation Defendant and Appellee.

No. 14831.

Supreme Court of South Dakota.

Considered on Briefs May 21, 1985.

Decided March 26, 1986.

Thomas K. Wilka of Hagen & Wilka, Sioux Falls, for plaintiffs and appellants; Karen E. Bjerke of Hagen & Wilka, Sioux Falls, on brief.

Richard O. Gregerson of Woods, Fuller, Shultz & Smith, Sioux Falls, for defendant and appellee.

MORGAN, Justice.

Plaintiff-assignee Barry Bayer (Bayer) brought an action against Employers Reinsurance Corporation (Employers) alleging: (1) a breach of duty to defend the assignor, Williams Insurance Company (Williams); and (2) a breach of duty of good faith and fair dealing under the insurance contract with Williams. The trial court granted a summary judgment in favor of the defendant, Employers, and the plaintiff appeals. We affirm.

The insurance contract subject to the dispute is an errors and omissions policy issued by Employers to Williams covering conduct of business as general agents, insurance agents, or insurance brokers. Williams is a wholly owned subsidiary of Sioux Agency, Inc. Greg Heineman (Heineman) and Roger Larsen (Larsen) are officers and stockholders of Sioux Agency, Inc. and Williams and were named as defendants in the underlying action. The errors and omissions policy was taken out in 1977. A question on page 2 of the application filled out at that time asked:

Are you engaged in any other business or profession? Explain in detail. Answer should also include reference to operation, if any, as insurance department of bank, savings and loan, mortgage institution, realty property management firm, auto dealership, etc.

Williams answered "No." Even though renewal applications were filled out, Williams did not notify Employers of any expansion of the scope of the services they offered to their customers.

Sometime prior to the transaction underlying this lawsuit, a decision was made within the corporate structure of Sioux Agency, Inc. and Williams that they would enter the business of arranging financing and charge a fee for those services. In order to insure collection of the fees they were going to charge for their services as mortgage brokers, Larsen obtained a mortgage broker's license. ^* Larsen admitted in his deposition that his license to sell insurance or as a broker did not entitle him to operate as a mortgage broker. He stated that he needed a separate license to collect fees as a mortgage broker. Williams did not carry separate insurance to cover their activities as a mortgage broker and they never notified Employers of their activities. Williams had a customary fee for their services as a mortgage broker. Larsen stated in his deposition that they charged "$2500 up front money just to eliminate those people that were not serious, and two percent or 2 points."

The seeds of this lawsuit were sown in the abortive efforts of Bayer to secure financing for a proposed bowling establishment through the efforts of officers and employees of Williams who, at the time, were holding themselves out as mortgage brokers and were indeed licensed to do so. They charged a fee of $2,500 up front and 2% or two points on the amount secured.

The machinations that follow sound like a script from a TV movie. Very succinctly, they boil down to this: Bayer was first put in touch with Al Cochran (Cochran), an Iowa insurance man who was also in the business of arranging financing for commercial buildings; the Williams people had a financial arrangement with Cochran involving sharing the $2,500 up-front money and splitting the 2% commission with Cochran. Bayer was next introduced to Joseph Lamonica of New York City, who allegedly had union connections and who agreed to arrange a loan from union pension and profit-sharing funds at 9.5% annual interest rate. Then the source of the financing was switched to a bank in Antigua and Bayer was required to put up $150,000 as equity to secure a 100% loan of $1.5 million. Bayer signed a note and mortgage for $1.5 million and wired $150,000 to the bank in Antigua, which turned out to be an attorney's office. The money was never seen again. After a two-year delay, Bayer secured financing for his bowling alleys through First Bank of Sioux Falls at a 19% annual interest rate.

Bayer filed an action against Larsen, Heineman, Williams Insurance, Cochran, and Lamonica, alleging (1) breach of contract; (2) negligence; (3) misrepresentation; and (4) fraud and deceit. Bayer sought damages, including the $2,500 paid to Williams, the $150,000 telexed to Antigua, for lost profits during the construction delay, for the difference between the 9.5% interest promised and the 19% he was eventually required to pay First Bank of Sioux Falls, for other sums which he was required to pay and costs incurred in attempting to secure the financing, for attorney fees in defense of a foreclosure action and for his action against Larsen, Heineman, Williams, Cochran, and Lamonica, and for $500,000 punitive damages for the fraudulent and deceitful acts of those defendants.

Larsen, Heineman and Williams tendered their defense to Employers under the errors and omissions policy. Employers notified them that it declined to defend for the reason that the policy did not cover the acts alleged in Bayer's complaint. Larsen and Heineman then entered into a settlement agreement with Bayer. Of the $700,000 to $800,000 Bayer sued for, he settled for $260,000. That figure was reducible to $175,000 if the latter amount was paid by a specific date; however, the amount was never paid on that portion of the settlement. Under another portion of the settlement, Heineman, Larsen, and Williams loaned Bayer $50,000 which Bayer was to pay back in three installments only in the event that he recovered at least $60,000 in the present action against Employers. Larsen and his attorney admitted that the settlement was entered into "principally for the purpose of assigning that claim against the insurance company." Bayer then filed this action.

Bayer first defines the issue before us as follows: Does an insurer have a duty to defend under an errors and omissions policy for an action brought against its insured for losses arising out of the performance of soliciting insurance sales by attempting to secure financing for an insurance client? Employers phrases the issue as follows: Do acts undertaken...