Farmer's Union Cent. Exchange v. Reliance Ins. Co.

• Decision Date: 10 December 1987
• Docket Number: A1-83-96.,Civ. No. A1-83-79
• Citation: 675 F. Supp. 1534
• Parties: FARMER'S UNION CENTRAL EXCHANGE, INC., a corporation, Plaintiff, v. RELIANCE INSURANCE COMPANY, a corporation, Defendant. and CONOCO, INC., a corporation, Plaintiff, v. RELIANCE INSURANCE COMPANY, a corporation, Defendant.
• Court: U.S. District Court — District of South Dakota

675 F. Supp. 1534

FARMER'S UNION CENTRAL EXCHANGE, INC., a corporation, Plaintiff, v. RELIANCE INSURANCE COMPANY, a corporation, Defendant. and CONOCO, INC., a corporation, Plaintiff, v. RELIANCE INSURANCE COMPANY, a corporation, Defendant.

Civ. Nos. A1-83-79, A1-83-96.

United States District Court, D. North Dakota, Southwestern Division.

December 10, 1987.

Philip L. Bruner and Patrick J. O'Connor, Jr., of Hart & Bruner, Minneapolis, Minn., also James S. Hill, of Zuger & Bucklin, Bismarck, N.D., as local counsel, for defendant Reliance Ins. Co.

Daniel L. Hovland, of Fleck, Mather, Strutz & Mayer, Ltd., Bismarck, N.D., for plaintiff Farmer's Union Central Exchange.

Charles S. Miller, Jr., of Fleck, Mather, Strutz & Mayer, Ltd., Bismarck, N.D., for plaintiff Conoco, Inc.

MEMORANDUM OF DECISION

MAGILL, Circuit Judge^*.

This is a consolidated action by two oil companies against a surety of an asphalt paving contractor. The underlying facts are clearly and thoroughly set forth in a prior memorandum and order of this court,¹ 626 F.Supp. 583 (D.N.D.1985), and are hereby adopted and incorporated by reference. Additional facts will be set forth only as necessary for the discussion.

Farmer's Union Central Exchange, Inc. (Cenex), and Conoco, Inc. (Conoco) (collectively plaintiffs) initially made the following three arguments before this court:

I. Plaintiffs contended they were entitled to payment by Reliance Insurance Company (Reliance) under the terms of various bond contracts, for asphaltic product supplied to its principal, Scherbenske Excavating, Inc. (Scherbenske), in connection with several highway construction projects for the State of North Dakota and a number of its political subdivisions (contract claims).

II. Plaintiffs contended they were entitled to damages for Reliance's alleged violation of North Dakota's Unfair Insurance Practices Act, N.D.C.C. ch. 26.1-04 et seq. (1987 Supp.) (Act violation claims).

III. Plaintiffs contended they were entitled to tort damages for Reliance's alleged failure to deal with them fairly and in good faith in the adjustment of their contract claims (common law tort claims).

Judge Van Sickle granted Reliance's motion for summary judgment and dismissed plaintiffs' contract claims as untimely filed under N.D.C.C. § 48-02-17. 626 F.Supp. at 590-91. Conoco moved for reconsideration of this order on August 4, 1987, and Cenex did likewise on October 21, 1987. This court denied both motions.

On November 6, 1987, this court dismissed with prejudice plaintiffs' Act violation claims, holding that N.D.C.C. ch. 26.1-04 did not afford a private cause of action. Accordingly, only plaintiffs' common law tort claims remained to be resolved at trial.

After hearing and considering all of the evidence adduced at trial, this court concludes that both Conoco and Cenex have failed to prove their tort claims by a preponderance of the evidence.

I. PRIVATE RIGHT OF ACTION UNDER N.D.C.C. CH. 26.1-04.

In a diversity case this court's duty "is not to formulate the legal mind of the state, but merely to ascertain and apply it." Stratioti v. Bick, 704 F.2d 1052, 1054 (8th Cir.1983) (citations omitted). "Where neither the legislature nor the highest court in a state has addressed an issue, this court must determine what the highest state court would probably hold were it called upon to decide the issue." Hazen v. Pasley, 768 F.2d 226, 228 (8th Cir.1985). The North Dakota Supreme Court has expressly declined to determine whether N.D.C.C. ch. 26.1-04 affords a plaintiff a private right of action.² Szarkowski v. Reliance Insurance Co., 404 N.W.2d 502, 504 (N.D. 1987). Therefore, this court must determine how the North Dakota Supreme Court would probably rule on this question.

The states that have considered this issue are split on whether their version of the Model Unfair Trade Practices Act, drafted by the National Association of Insurance Commissioners (NAIC), creates a private cause of action. The majority of states, however, hold that there is no private cause of action.³ Thus this court believes that North Dakota would not allow such a cause of action.⁴ This conclusion is bolstered by the fact that states in North Dakota's geographic proximity deny a private cause of action.

In reaching the conclusion that North Dakota would not recognize such a cause of action, this court considered the following:

A. Statutory Language.

The Model Act provides as follows:

No order of the Commissioner under this Act or order of a court to enforce the same shall in any way relieve or absolve any person affected by such order from any liability under any other laws of this state.

NAIC Model Unfair Trade Practices Act § 9(d) (1971) (amended 1984).

North Dakota has adopted virtually identical language into its act. See N.D.C.C. § 26.1-04-18 (1987 Supp.). States which have denied a private cause of action have relied on this language in their versions of the Model Act (i.e., that a person may be liable under other laws, notwithstanding the operation of this law) to conclude that no private right of action was intended. See, e.g., Kranzush v. Badger State Mutual Casualty Co., 103 Wis.2d 56, 307 N.W. 2d 256, 269 (1981); Tufts v. Madesco Investment Corp., 524 F.Supp. 484, 486-87 (E.D.Mo.1981).

By contrast, in Montana, for example, a state which allows a private cause of action, the statute provides:

This section shall not be deemed to affect or prevent the imposition of any penalty provided by this code or by other law for violation of any other provision of this chapter, whether or not any such hearing is called or held or such desist order issued.

Section 33-18-1004(5), Montana Code Annotated (emphasis added).

Similarly, California's version of the Model Act states that civil actions will be allowed "under the laws of this state arising out of" the unfair or deceptive practices. Cal. Ins.Code § 790.09 (West 1979 Supp.). Thus, this court concludes that the difference in statutory language between the states that deny a private right and the states that allow a right is significant. Because North Dakota's statute closely tracks the Model Act and the statutes of those states which deny a private right of action, it is reasonable to conclude that North Dakota would align itself with those states.

B. Drafters' Intent.

As discussed above, North Dakota's Act substantially tracks the Model Act. The 1980 NAIC Report states unequivocally that the Model Act creates no private cause of action. "In any event, the intent of the NAIC, as evidenced by the language of the Model Act and the NAIC Proceedings, and supplemented by this Report, was clearly not to create a new private right of action for trade practices which are prohibited by the Model Act." Report of Director Robert Ratchford, Jr. of Ohio Regarding a Private Right of Action under Section 4(9) of the NAIC Model Unfair Trade Practices Act, Vol. II NAIC Proc. 344, 350 (1980). Thus one may presume that in adopting the Model Act, in the absence of any evidence to the contrary, the North Dakota legislature intended to abide by the intent of the NAIC drafters.

C. Statutory Construction.

In Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), the Supreme Court set out a four-prong test to decide whether a statute creates a private cause of action. Under the circumstances of this case, the test requires this court to ascertain: (1) whether the plaintiff is a member of the class for whose benefit the Act was enacted; (2) whether there is any indication of legislative intent, explicit or implicit, either to create or deny such a remedy; (3) whether it is consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff; and (4) whether the implication of a private cause of action would intrude upon the regulatory authority delegated to the commissioner of insurance.⁵

In Seeman v. Liberty Mutual Insurance Co., 322 N.W.2d 35 (Iowa 1982), the Iowa Supreme Court applied the four-part test to its version of the Model Act, which contains language similar to North Dakota's statute. The court concluded: (1) That the plaintiff was a member of the class of persons for whose special benefit the statute was enacted, id. at 41; (2) that despite the scant legislative history, that the legislature implicitly intended the insurance commissioner's powers to be the exclusive means of enforcing the statute, id. at 42; (3) that to judicially imply a cause of action would override the inferred legislative intent, id. at 43; and (4) that a private cause of action would intrude upon the authority delegated to the state insurance commissioner, id. This court finds the Seeman analysis equally applicable here, and persuasive in determining that no private cause of action exists.

Application of this test, combined with the explicit statement of the NAIC denying a private cause of action, leads to the conclusion that no private right was intended.

This court therefore concludes, as a matter of law, that North Dakota did not intend to create a private cause of action in N.D.C.C. ch. 26.1-04, its Unfair Insurance Practices Act.

II. COMMON LAW TORT CLAIM.

The North Dakota Supreme Court has recognized the existence of a duty of good faith and fair dealing owed by an insurance company to its insured in the handling of its insured's claim. Szarkowski v. Reliance Insurance Co., 404 N.W.2d 502, 505-06 (N.D.1987); Corwin Chrysler-Plymouth, Inc. v. Westchester Fire Insurance Co., 279 N.W.2d 638, 643-44 (N.D. 1979); see also Smith v. American Family Mutual Insurance Co., 294 N.W.2d 751 (N.D.1980) (both failure to defend insured and failure to pay may result in tort liability if insurer breaches its covenant to act fairly and in good faith). In Szarkowski, supra, the court recognized that a subcontractor who supplied labor and materials on a bonded project was owed a duty by the surety similar to that owed by an insurance company to its insured,...