Economy Fire and Cas. Co. v. Tri-State Ins. Co. of Minnesota, TRI-STATE

• Decision Date: 28 August 1987
• Docket Number: TRI-STATE,Nos. 86-5392,86-5393 and 86-5394,s. 86-5392
• Citation: 827 F.2d 373
• Parties: ECONOMY FIRE AND CASUALTY COMPANY, Appellee, v.INSURANCE COMPANY OF MINNESOTA, Appellant. ECONOMY FIRE AND CASUALTY COMPANY, Appellee, v. Norma SCHRADER, Don Schrader, Jane Schrader, David Schrader, and Eugene Schrader, Appellants. ECONOMY FIRE AND CASUALTY COMPANY, Appellee, v. Marlys VANDERWERF and Kevin Vanderwerf, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 373

827 F.2d 373

ECONOMY FIRE AND CASUALTY COMPANY, Appellee, v. TRI-STATE INSURANCE COMPANY OF MINNESOTA, Appellant.

ECONOMY FIRE AND CASUALTY COMPANY, Appellee, v. Norma SCHRADER, Don Schrader, Jane Schrader, David Schrader, and Eugene Schrader, Appellants.

ECONOMY FIRE AND CASUALTY COMPANY, Appellee, v. Marlys VANDERWERF and Kevin Vanderwerf, Appellants.

Nos. 86-5392, 86-5393 and 86-5394.

United States Court of Appeals Eighth Circuit.

Submitted May 15, 1987.

Decided Aug. 28, 1987.

Michael J. Shaffer, Sioux Falls, S.D., for appellant.

Gary P. Thimsen, Sioux Falls, S.D., for appellee.

Before ARNOLD, Circuit Judge, WRIGHT ^* and HENLEY, Senior Circuit judges.

ARNOLD, Circuit Judge.

This is an action for a declaratory judgment. The question is whether plaintiff Economy Fire & Casualty Co. is liable on an automobile liability insurance policy it issued to defendant Marlys Vanderwerf for a red Camaro. On July 4, 1985, defendant Kevin Vanderwerf, Marlys Vanderwerf's nineteen-year-old son, was driving the car and was in a traffic accident with defendants Norma, Don, Jane, David, and Eugene Schrader, in which the Schraders suffered personal injuries. That accident precipitated this lawsuit. The other defendant, Tri-State Insurance Co. of Minnesota, carries uninsured- and underinsured-motorist coverage for the Schraders. Its coverage would presumably apply if Economy's doesn't. Federal jurisdiction is based on diversity of citizenship.

Economy Fire claims that Marlys Vanderwerf's application for the policy contained material misrepresentations which bar coverage under a South Dakota statute, S.D. Codified Laws Ann. Sec. 58-11-44. ¹ The alleged misrepresentations are that Marlys Vanderwerf failed to disclose (though asked) that Kevin was a member of her household and would be an occasional driver of the Camaro. Defendants claimed that there were no misrepresentations and that, even if there were, Economy Fire's agent, Chuck Haberer, had reason to know Kevin might drive the Camaro occasionally, so that Economy Fire was estopped to deny coverage.

At trial, the District Court ² propounded three special interrogatories to the jury, asking whether (1) Vanderwerf read the insurance application before she signed it, (2) Haberer in substance asked her if there were any occasional drivers thirteen years old or older in the household, and (3) she failed to disclose that Kevin was a member of her household or an occasional driver thirteen years old or older in the household. The jury answered the first interrogatory "no" and the other two "yes." Based on these answers, the District Court made findings of fact and conclusions of law. Among its legal conclusions, the Court ruled that Marlys Vanderwerf did not act in entire good faith in making the application and that it contained material misrepresentations which enabled Economy Fire to avoid liability under the policy. In these consolidated appeals, defendants argue that the Court erred in refusing to submit an interrogatory on the facts necessary for their estoppel defense and in denying certain requested jury instructions. We affirm.

I.

Under South Dakota law, an insurer is estopped to deny liability on the basis of an insured's material misrepresentations if (1) the insured acted in entire good faith in obtaining the policy and (2) the insurer knows (or can be charged with knowing) facts "which would cause a prudent person to inquire further, when [the truth] could have been ascertained with reasonable convenience." Braaten v. Minnesota Mutual Life Insurance Co., 302 N.W.2d 48, 51 (S.D.1981). Defendants urged this theory at trial as a basis for holding Economy Fire liable on the policy even though material misrepresentations may have been made. They requested special interrogatories on estoppel, but the District Court refused to put the necessary factual elements of the defense, good faith and inquiry notice, to the jury.

Defendants were entitled to an interrogatory on estoppel if it was a valid legal theory and they presented sufficient evidence to support it. Commerford v. Olson, 794 F.2d 1319, 1323-24 (8th Cir.1986). If, as a matter of law, the jury could not have found either good faith or inquiry notice, then there was no error in refusing to propound the interrogatory. That is not the case here, because defendants presented sufficient evidence to make jury questions on both fact issues. But there is a corollary to this rule that we find controlling in this case: If the jury's verdict contains findings of fact that negate a necessary element of a legal theory, then there is no prejudice in the court's refusal to put the factual elements of the theory to the jury, for the theory cannot apply in any event. In the setting of this case, if the jury's findings mean that Marlys Vanderwerf did not act in good faith, then it makes no difference that the District Court refused to present the estoppel theory to the jury, because the absence of entire good faith would itself defeat the theory. See Braaten, supra, at 51-52. In this event, any error in the Court's handling of the special interrogatories must be considered harmless.

The issue of good faith in this case is a matter of state law. When state law supplies the rule of decision in a federal case, it is the duty of the federal court to examine the state law and apply it as it anticipates the highest court of the state would. In such cases, it is our practice to defer to the state-law rulings of a federal district court sitting in the state whose law is controlling. Certainly in this case we defer to the interpretations of South Dakota law made by the able and experienced Senior District Judge, and we will overturn his state-law ruling only if the ruling is fundamentally deficient in analysis, without a reasonable basis, or contrary to a reported state-court opinion. This we cannot do here.

The most recent South Dakota decision on estoppel, and the one most relevant to the issue of good faith presented here, is Braaten, supra. There the insured was asked in a life-insurance application to list the dates of treatment and the names and addresses of doctors who had treated him within the preceding three years. He accurately listed two such occastions, but omitted any reference to two hospitalizations for alcohol addiction. He later died from complications stemming from his alcoholism, and his estate sued for death benefits after the insurer refused to pay under the policy. The trial court had ruled for the estate, holding that the insurer knew that the deceased drank to excess and thus was estopped to deny coverage under the policy. The South Dakota Supreme Court, however, reversed and remanded for entry of a judgment of no liability, holding that, as a matter of law, there was neither good faith nor sufficient inquiry notice to create an estoppel under state law. 302 N.W.2d at 51-52. On the good-faith issue, the Court wrot...