Certification of a Question of Law from the U.S. Dist. Court, Dist. of South Dakota, Western Div., Matter of

• Citation: 399 N.W.2d 320
• Decision Date: 07 January 1987
• Docket Number: A-1,No. 15367,15367
• Parties: § 15-24, and Concerning Federal Action Civ. 85-5086, Titled as Follows. Robert CHAMPION, Plaintiff, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, an Insurance Company, Defendant. Supreme Court of South Dakota
• Court: Supreme Court of South Dakota

Page 320

399 N.W.2d 320

In the Matter of the CERTIFICATION OF A QUESTION OF LAW FROM THE UNITED STATES DISTRICT COURT, DISTRICT OF SOUTH DAKOTA WESTERN DIVISION, Pursuant To the Provisions of SDCL § 15-24A-1, and Concerning Federal Action Civ. 85-5086, Titled as Follows Robert CHAMPION, Plaintiff, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, an Insurance Company, Defendant.

No. 15367.

Supreme Court of South Dakota.

Argued Oct. 22, 1986.

Decided Jan. 7, 1987.

Robert F. LaFleur of LaFleur & LaFleur, Rapid City, for plaintiff.

Terence R. Quinn and Kenneth E. Barker, on brief, of Stephens, Quinn & Buckmaster, Belle Fourche, for defendant.

MORGAN, Justice.

On the 16th day of May, 1986, the Honorable Andrew W. Bogue, Senior Judge, United States District Court, District of South Dakota, Western Division, pursuant to SDCL 15-24A-1, requested that this court answer the question of law contained in a certification order. On June 2, 1986, then Chief Justice Jon Fosheim issued an order accepting the certified question. The question of law to be answered is:

Whether a worker who is covered under the South Dakota Worker's [sic] Compensation Act may assert a claim in court against the employer's Worker's [sic] Compensation insurance carrier for intentional torts which occurred after the employee was injured and during either the processing, payment, or termination of Worker's [sic] Compensation benefits.

The federal district court also supplied the following statement of facts:

Assume for the purpose of this decision the following facts are true. The Plaintiff suffered an injury arising out of and in the course of his employment with his employer. The Plaintiff began receiving Workmen's Compensation benefits at the level prescribed by law. One and one-half years later, his benefits were wrongfully terminated by his employer's insurance carrier. The conduct of the insurance company in terminating the Plaintiff's benefits was intentional, fraudulent and in bad faith. Over one and one-half years later, the Plaintiff and the insurance carrier entered into a stipulation that as a result of his injuries, the Plaintiff was permanently and totally disabled. As a result of the insurance company's actions, the Plaintiff suffered damages. The Plaintiff then filed this lawsuit, seeking compensatory and punitive damages.

The parties in this action are plaintiff Robert Champion (Champion) and defendant United States Fidelity and Guaranty Company (USF & G).

USF & G claims that two different theories prevent Champion from succeeding with a tort action. USF & G claims that the exclusive remedy provisions of the South Dakota Workers' Compensation Act provide the sole remedy for Champion against USF & G. Secondly, USF & G claims in the alternative, that if the workers' compensation exclusive remedy provisions are not the sole remedy of recovery, that Champion's action sounds in contract and that Champion must be limited to contract damages.

While it is unclear whether USF & G seeks to invoke the exclusive remedy provisions of SDCL 62-3-2 or SDCL 62-8-6, the result under either statute would be the same. SDCL 62-3-2 deals with "personal injury or death arising out of and in the course of employment", whereas SDCL 62-8-6 deals with injury or death "from any disease ... in any way contracted, sustained, aggravated, or incurred by such employee in the course of, or because of, or rising out of his employment." We fail to see how the bad faith actions of the insurance carrier caused injuries arising out of and in the course of Champion's employment. Travelers Ins. Co. v. Savio, 706 P.2d 1258 (Colo.1985); Southern Farm Bureau Cas. Ins. v. Holland, 469 So.2d 55 (Miss.1984); Hayes v. Aetna Fire Underwriters, 187 Mont. 148, 609 P.2d 257 (1980); Coleman v. American Universal Ins. Co., 86 Wis.2d 615, 273 N.W.2d 220 (1979). See Annot., 8 A.L.R.4th 902 (1981).

In addition, SDCL 62-3-2 specifically excludes "rights and remedies arising from intentional tort." If the conduct of USF & G amounts to an intentional tort as is stated in the Question of Law to be Answered, then it falls outside the restrictions of SDCL 62-3-2. The result would not change if USF & G were proceeding under SDCL 62-8-6. Under that section, the injury must have been "by accident" which does not appear to be the case here. The Statement of Facts indicates the termination was "intentional, fraudulent and in bad faith."

USF & G argues in the alternative that even if the exclusive remedy provisions do not bar Champion's action his complaint merely states a contract action and is thus indistinguishable from O'Neill v. Blue Cross of Western Iowa & S.D., 366 N.W.2d 816 (S.D.1985). O'Neill follows two similar cases, Thu v. American Family Ins. Co., 292 N.W.2d 109 (S.D.1980) and Ochs v. Northwestern Nat. Life Ins. Co., 254 N.W.2d 163 (S.D.1977). Champion relies upon several cases including Hollman v. Liberty Mut. Ins. Co., 712 F.2d 1259 (8th Cir.1983).

It may be conceded that tort usually signifies a breach of legal duty independent of contract. But such breach of duty may arise out of a relation or state of facts created by contract. [citations omitted] While the matters complained of by plaintiff had their origin in a contract, the gist of the action is for alleged wrongful and tortious acts of defendant.

Smith v. Weber, 70 S.D. 232, 236-37, 16 N.W.2d 537, 539 (1944). "Conduct that is merely a breach of contract is not a tort. The contract, however, may establish a relationship demanding the exercise of proper care and acts and omissions in performance may give rise to a tort liability." Weeg v. Iowa Mutual Insurance Co., 82 S.D. 104, 109, 141 N.W.2d 913, 916 (1966). See Friedhoff v. Engberg, 82 S.D. 522, 149 N.W.2d 759 (1967). Kunkel v. United Security Ins. Co. of New Jersey, 84 S.D. 116, 168 N.W.2d 723 (1969), relying on Smith and Weeg, recognized a cause of action for bad faith failure by an insurance company to settle within policy limits. See Crabb v. National Indemnity Co., 87 S.D. 222, 205 N.W.2d 633 (1973); North River Ins. Co. v. St. Paul Fire & M., 600 F.2d 721 (8th Cir.1979). While Kunkel is primarily an "excess liability" case it also recognized a cause of action for "mental suffering." While the court reversed a jury award of $10,000 for mental suffering, its ruling was based on a lack of evidence and not a lack of a cause of action.

Subsequent to the Kunkel case, this court heard a series of three cases involving the failure of an insurance company to pay under a contract for insurance. See O'Neill, supra; Thu, supra; Ochs, supra. While USF & G relies heavily on these three cases to support its position, we find that each case is distinguishable from the case at hand. Ochs, supra, involved the question of the appealability of a final judgment under SDCL 15-6-54(b). We specifically noted that we did not reach the merits surrounding the insured's bad faith claim. Id. at 168. In Thu, supra, there was no mention in the opinion of any bad faith on the part of the insurer. Furthermore, the facts cited in the opinion tend to give rise to a good faith defense to payment by the insurer. O'Neill, supra, also involved facts that failed to support a bad faith claim. We note that the trial court refused to award attorney's fees under SDCL 58-12-3 since the insurer's refusal to pay was not "vexatious or without reasonable cause." Id. at 820-21.

While we recognize that there is a split of authorities on the issue before us, we believe the correct judicial path to be that which allows a cause of action against an insurance company for bad faith failure to pay a claim.

[T]he better rule is that an insurer's violation of its duty of good faith and fair dealing constitutes a tort, even though it is also a breach of contract. Such tortious conduct is demonstrated where there is unreasonable delay in performing under a contract, including delays in settlement under a liability policy. This tort arises by operation of law, and is not barred by the exclusive remedy provision of a worker's [sic] compensation law. Essentially, there must be present the lack of a reasonable basis on the part of the insurer for its conduct. But when the essential factors are present, a complaint so stating demonstrates a proper cause of action, and a verdict, based upon proper evidence, will not be set aside.

16A J.A. Appleman & J. Appleman, Insurance Law and Practice § 8878.15, at 422-24 (1981).

South Dakota has no case authority dealing specifically with the liability of workers' compensation carriers, nor does our legislature give us much guidance on this matter. SDCL 58-12-3, while not expressly authorizing a cause of action for bad faith failure to pay, acknowledges that such a cause of action may exist. That statute allows the award of attorney's fees against an insurance company under certain circumstances but specifically says that the statute "shall not be construed to bar any other remedy, whether in tort or contract, that an insured may have against the same insurance company arising out of its refusal to pay such loss." SDCL 58-12-3 (emphasis added).

Since there is no controlling South Dakota authority, we may look to other courts to guide our decision. Initially, we note that the Eighth Circuit Court of...