Dm & E v. Acuity

• Decision Date: 05 August 2009
• Docket Number: No. 24904.,No. 24892.,24892.,24904.
• Citation: 771 N.W.2d 623,2009 SD 69
• Parties: DAKOTA, MINNESOTA & EASTERN RAILROAD CORPORATION, Plaintiff and Appellant, v. ACUITY, a Mutual Insurance Co. f/k/a Heritage Mutual Insurance Company, d/b/a Heritage Insurance, Defendant and Appellee.
• Court: South Dakota Supreme Court

771 N.W.2d 623

2009 SD 69

DAKOTA, MINNESOTA & EASTERN RAILROAD CORPORATION, Plaintiff and Appellant, v. ACUITY, a Mutual Insurance Co. f/k/a Heritage Mutual Insurance Company, d/b/a Heritage Insurance, Defendant and Appellee.

No. 24892.

No. 24904.

Supreme Court of South Dakota.

Argued January 13, 2009.

Decided August 5, 2009.

Brian J. Donahoe, Meredith A. Moore, William D. Sims of Cutler & Donahoe, LLP, Sioux Falls, South Dakota, Attorneys for plaintiff and appellant.

Jennifer L. Wollman, Gary P. Thimsen of Woods, Fuller, Shultz & Smith PC, Sioux Falls, South Dakota, Attorneys for defendant and appellee.

JENSEN, Circuit Judge.

[¶ 1.] Dakota, Minnesota and Eastern Railroad (DM & E) filed this action claiming that Acuity, f/k/a Heritage Mutual Insurance Co. (Acuity), engaged in bad faith and vexatious failure to pay uninsured motorist (UM) benefits. DM & E appeals the circuit court's entry of summary judgment on the claims. Acuity cross-appeals the circuit court's discovery orders compelling Acuity's attorneys to give a deposition in the case.

FACTUAL BACKGROUND

[¶ 2.] On July 28, 1998, DM & E employee Julian Olson (Olson) was seriously injured in a motor vehicle accident while acting in the scope of his employment. DM & E held a business automobile policy with Acuity, which provided liability and UM coverage. Olson sued DM & E under the Federal Employer's Liability Act (FELA) alleging negligent maintenance of the vehicle's Hy-Rail System.¹ Acuity refused to defend the suit claiming the policy excluded coverage. On the final day of the FELA trial, Olson and DM & E settled for an amount in excess of Acuity's policy limits. Acuity did not participate in or contribute toward the settlement. There was no judicial determination or admission of any fault by any party in the FELA action.

[¶ 3.] DM & E subsequently brought a declaratory judgment action against Acuity claiming that Acuity was obligated to defend and provide coverage for the FELA action. The circuit court granted Acuity's motion for summary judgment concluding that the policy exclusions were valid and barred coverage for Olson's accident. This Court affirmed in DM & E v. Heritage Mut. Ins. Co., 2002 SD 7, 639 N.W.2d 513 (DM & E I).

[¶ 4.] While DM & E I was pending, DM & E filed a suit seeking UM benefits under its policy with Acuity. The suit alleged that the negligence of an unidentified and uninsured motorist was a cause of Olson's injuries, triggering the right to UM benefits under the policy. Later, DM & E amended the complaint to add claims of bad faith and vexatious failure to pay which are the subject of this appeal.

[¶ 5.] During discovery on the UM claim, DM & E obtained an insurance coverage opinion dated August 1, 2000, from Acuity's attorney, Gary Thimsen (Thimsen), to Tom Behrend (Behrend), an Acuity field claims manager.² Thimsen noted that Olson was claiming a phantom vehicle had cut him off causing the accident, which triggered a potential UM claim. Thimsen's letter asserted that the policy afforded no coverage for the UM claim because "[n]o evidence has been provided by an independent witness ... to corroborate the facts of the accident as [Olson] has related them."³ The letter cited the accident report of a state trooper, which noted the existence of knowledgeable witnesses. Thimsen's letter stated that none of the individuals with knowledge had "come forward with information that would verify [Olson's] story." Thimsen also noted the narrative from the accident report which stated: (1) Olson began passing a slower moving vehicle; (2) Olson then drifted left, and overcorrected back to the right and then crossed both lanes of traffic, entered the ditch and rolled.

[¶ 6.] The record shows that three independent witnesses gave statements to DM & E shortly after the accident occurred in 1998. All three witnesses noted the presence of an unusually slow-moving vehicle on the interstate traveling just in front of Olson as he entered onto the highway. One of these witnesses stated her belief that this vehicle caused the accident because it had come to a near stop in front of Olson at the time that Olson was entering onto the interstate.

[¶ 7.] There was no evidence that Acuity considered these statements in August 2000 or at any other time through September 2001 when DM & E filed the UM claim. There was no showing that Acuity made any attempt during this time to gather facts to assess the fault of Olson, the unidentified driver, or any other party. Acuity did not interview Olson concerning the UM claim.

[¶ 8.] DM & E deposed Behrend on November 5, 2004, concerning Acuity's investigation of the UM claim. The deposition transcript shows that Behrend knew little about the investigation by Acuity even though he had sole responsibility for the UM claim in-house. Behrend testified in his deposition that Thimsen and his co-counsel exclusively handled the investigation and made the determination on the UM claim.

Q: Did anyone interview someone from the DM & E railroad in regard to the uninsured motorist claim?

A: In regard to the uninsured motorist claim, that investigation was done by Gary Thimsen and Jennifer Wollman.

Q: When did that take place?

A: I believe it would have been in the summer of 2000, May, June, somewhere in there.

Q: What triggered that investigation?

A: Receipt of possible underinsured or uninsured motorist claim from Julian Olson's attorney....

Q: And what did your investigation reveal?

A: My understanding is that there was no indication that an uninsured motorist was causation of the accident.

Q: What was that based on?

A: Review by the attorneys of discovery documents.

Q: You said discovery documents. You mean lawsuit discovery?

A: Correct.

Q: And what lawsuit was that?

A: The Julian Olson case versus DM & E.

Q: What specifically did they identify as establishing that there was no indication that the uninsured motorist caused the accident?

A: Well, I don't know if I can give you the details. From what I understand, they looked at deposition transcripts that were taken on the various parties.

Q: As we sit here today, could you point to any deposition transcripts in particular that would be the basis for your claim that the uninsured motorist did not cause the accident?

A: No.

* * *

Q: Who else would have knowledge of any investigation that was undertaken by Acuity or Heritage Mutual in this case?

* * *

A: That would just be me.

* * *

Q: Do you know whether they even investigated or attempted to determine whether the unidentified driver may have been at fault in the case?

A: I guess I couldn't really answer that.

Q: As I understand it, the information that you have in regard to whatever happened in the actual accident itself would have come from the attorneys that represent Acuity and Heritage Mutual in this case, correct?

A: Correct.

Q: And is that a common practice for Heritage or Acuity to rely on investigations of attorneys or information from attorneys?

A: It is done periodically — is it done all the time, no. Is it done periodically, yes.

Q: Periodically meaning about how often? Do you have any —

A: Well, I couldn't really give you a percentage. You know, it depends on the circumstances. This is — you know, is an unusual circumstance, I guess you would do it.

* * *

Q: Tell me about any issues that you think were underinvestigated or failed — or DM & E or somebody else failed to investigate about the accident?

A: I guess I'd have to leave that to my attorneys to advise whether or not they feel there was some lack of investigation performed.

[¶ 9.] After Behrend's deposition, DM & E sought to depose Thimsen and James Moore (Moore)⁴ and issued subpoena duces tecums for documents in their possession. DM & E moved to compel the discovery, which Acuity resisted and moved to quash. The circuit court denied Acuity's motion to quash and granted DM & E's motion to compel. Shortly before the circuit court ruled on the motions, Acuity moved to bifurcate the bad faith claim from the UM claim. The bad faith claim was bifurcated and informally stayed by the parties pending resolution of the UM claim.

[¶ 10.] At the UM trial, Acuity did not contest that the damages exceeded the UM policy limits. The sole issue was fault. The jury rendered a verdict in favor of DM & E on the UM claim, finding that the unknown driver was negligent and the cause of Olson's accident. This Court affirmed in DM & E v. Acuity, 2006 SD 72, 720 N.W.2d 655 (DM & E II).

[¶ 11.] After DM & E II was concluded, DM & E's counsel sent a letter to Acuity's counsel requesting that substitute counsel be obtained for Acuity so that the depositions of Thimsen and Moore could proceed consistent with the court's prior order compelling their depositions. It is unclear from the record if Acuity responded to this letter. Subsequently, Acuity's existing counsel filed a motion for summary judgment.

[¶ 12.] At the trial level, DM & E asserted that fact issues existed for trial and also argued that the summary judgment motion was premature until Acuity obtained substitute counsel so that DM & E could take Thimsen's deposition consistent with the circuit court's earlier order to compel the deposition. The circuit court orally granted the motion for summary judgment without giving any reasoning for its decision, or addressing DM & E's request to delay the motion to take Thimsen's previously ordered deposition.

[¶ 13.] DM & E argues that issues of material fact exist regarding the reasonableness of Acuity's denial of the UM claim, including Acuity's investigation. DM & E also argues it should have been afforded an opportunity to develop these issues by deposing Thimsen consistent with the court's prior order. Acuity asserts that summary judgment was properly granted because the UM claim was fairly debatable. Acuity cross appeals the circuit court's discovery rulings arguing that the circuit court abused its discretion by granting DM &...