Leafgreen v. American Family Mut. Ins. Co.

• Decision Date: 03 September 1986
• Docket Number: No. 15156,15156
• Citation: 393 N.W.2d 275
• Parties: Floyd "Bud" LEAFGREEN and Joyce M. Leafgreen, Plaintiffs and Appellants, v. AMERICAN FAMILY MUTUAL INSURANCE CO., American Family Life Insurance Co., and American Standard Insurance Co., Defendants and Appellees.
• Court: South Dakota Supreme Court

Page 275

393 N.W.2d 275

Floyd "Bud" LEAFGREEN and Joyce M. Leafgreen, Plaintiffs and Appellants, v. AMERICAN FAMILY MUTUAL INSURANCE CO., American Family Life

Insurance Co., and American Standard Insurance

Co., Defendants and Appellees.

No. 15156.

Supreme Court of South Dakota.

Argued March 19, 1986.

Decided Sept. 3, 1986.

Paul A. Mueller, Chamberlain, for plaintiffs and appellants.

Warren W. May of May, Adam, Gerdes & Thompson, Pierre, for defendants and appellees.

WUEST, Justice.

Floyd and Joyce Leafgreen (Leafgreens) appeal from a grant of summary judgment in an action charging American Family Insurance Company (American Family) with vicarious liability for conversion committed upon the Leafgreens by American Family Insurance Agent Edmund K. Arndt (Arndt). We affirm.

In February 1968, American Family and Arndt entered into an agreement whereby Arndt became an independent agent for the sale of insurance policies issued by American Family. Prior to the agreement, American Family investigated Arndt's background. Several individuals were interviewed in connection with the investigation, all of whom recommended Arndt for the position. A security check performed by Retail Credit of Minneapolis, Minnesota, indicated Arndt had no criminal record and his driving record showed no offense other than a 1963 speeding violation. After the South Dakota Insurance Department conducted its own investigation, Arndt was issued a license by the State to sell insurance.

From 1968 through 1981, Arndt had an extremely good record for insurance sales and service. During this period, his conduct was exemplary. Affidavits and exhibits reflect that Arndt was one of American Family's top agents. Not only was he an outstanding sales leader in the Rapid City District and the whole State of South Dakota, but in some months and years Arndt was considered one of the company's outstanding salesmen throughout the nation.

On May 22, 1981, Arndt went to the Leafgreen residence for the apparent purpose of correcting certain lot descriptions and writing liability insurance for them. In providing the lot descriptions, Leafgreens produced their hidden lockbox to examine a deed and thereby disclosed to Arndt the existence of their jewelry and other valuables. Leafgreens claim Arndt was really getting this information to assist two professional burglars, who later burglarized the residence.

It is undisputed that Arndt and the Leafgreens were personal friends. On Friday, June 26, 1981, Leafgreens went to Arndt's office and invited Arndt and his wife on a trip to Rapid City on Saturday. Floyd Leafgreen phoned Arndt on Saturday morning, June 27, 1981, and asked if Arndt and his wife had decided to join them. Arndt told Leafgreen he had made other plans. The Leafgreen home was burglarized that day while they were in Rapid City.

On March 3, 1983, Jack DeFea, American Family's Rapid City District Manager, was advised by Arndt's secretary, Donna Kemery, that a search warrant had been issued for Arndt's home and that property belonging to Leafgreens had been found in the home. DeFea consulted with American Family executives and counsel and, on May 16, 1983, Arndt was advised that his contract with American Family would terminate on May 31, 1983. On April 1, 1983, a Hughes County Grand Jury filed a three-count indictment against Arndt. On April 4, 1984, Arndt pleaded guilty to Count III of the indictment, aiding and abetting second-degree burglary under SDCL 22-32-3 and SDCL 22-3-3. He is presently incarcerated in the South Dakota Penitentiary.

On April 18, 1984, Leafgreens filed a complaint against American Family, which alleged: Arndt used his status as an American Family insurance agent to gain entry into the Leafgreen home on May 22, 1981; he gathered information concerning Leafgreens' valuables with the intent to promote and facilitate the crime of burglary; and used the information to advise two co-conspirators--convicted felons--who committed the burglary on Saturday, June 27, 1981. The Leafgreens argued that Arndt's tortious conduct should be imputed to American Family because it placed Arndt in a position which enabled him, while apparently acting within his authority as an agent of American Family, to commit a fraud ¹ upon Leafgreens; namely, the June 27, 1981, burglary of their home. ²

On June 28, 1985, American Family filed a motion for summary judgment, contending Leafgreens' complaint contained no genuine issue of material fact and that American Family was entitled to judgment as a matter of law because Arndt was not acting within the scope of his employment when he conspired to burglarize Leafgreens' home. The trial court granted summary judgment in favor of American Family on the issue of vicarious liability, stating in its memorandum decision that Arndt's tortious acts were not reasonably foreseeable by American Family and, consequently, it would be inequitable to impute Arndt's conduct to the company. Leafgreens appeal.

The issue for our determination is whether the doctrine of respondeat superior warrants that American Family be held vicariously liable in tort for the burglary of Leafgreens' home, because Arndt used his status as an American Family insurance agent to gain information regarding the property stolen in the burglary. The issue is one of first impression in South Dakota and we are guided, in part, by various rules set out in the Restatement (Second) of Agency. ³

Under general rules of agency law, a principal may be held liable for fraud and deceit committed by an agent within his apparent authority, even though the agent acts solely to benefit himself. American Soc. of Mech. Eng'rs. v. Hydrolevel Corp., 456 U.S. 556, 102 S.Ct. 1935, 72 L.Ed.2d 330 (1982); Gleason v. Seaboard Air Line Ry. Co., 278 U.S. 349, 49 S.Ct. 161, 73 L.Ed. 415 (1929); see also Nat. Acceptance Co., Etc. v. Coal Prod'rs Ass'n, 604 F.2d 540 (7th Cir.1979); 10 W. Fletcher, Cyclopedia of the Law of Private Corporations p 4886, p. 393 (rev. ed. 1978); W. Seavey, Law of Agency Sec. 92 (1964). "Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other's manifestations to such third persons." ⁴ Restatement (Second) of Agency Sec. 8 (1958).

Restatement (Second) of Agency Sec. 261 provides:

A principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such third persons for the fraud.

Comment a to section 261 states:

The principal is subject to liability under the rule stated in this Section although he is entirely innocent, has received no benefit from the transaction, and, as stated in Section 262, although the agent acted solely for his own purposes. Liability is based upon the fact that the agent's position facilitates the consummation of the fraud, in that from the point of view of the third person the transaction seems regular on its face and the agent appears to be acting in the ordinary course of the business confided to him.

While the boundaries of a principal's liability under this rule are not easily drawn, as the Reporter's Notes to section 261 suggest, they do exist:

It is difficult to state more definitely than is done in this section the limits of liability. It would seem to be clear that if the agent is purporting to act as an agent and doing the things which such agents normally do, and the third person has no reason to know that the agent is acting on his own account, the principal should be liable because he has invited third persons to deal with the agent within the limits of what, to such third persons, would seem to be the agent's authority. To go beyond this, however, and to permit the third persons to recover in every case where the agent takes advantage of the standing and position of his principal to perpetuate a fraud would seem to go too far.... In some cases the situation is ambiguous: the agent performs his primary function as an agent ... acting within the scope of his powers as such agent without loss to the other from the transaction itself, but the transaction is used as a means by which the agent may defraud such other. If in such cases the principal benefits from the agent's act, his liability to the extent of the benefits received is clear. If, however, the principal is not benefited, and the transaction which actually causes the loss is not one in which the agent purports to represent the principal, liability should not follow.

The situation in the present case is indeed ambiguous. Arndt entered Leafgreens' home and gained information concerning the location of their valuables by purporting to act within the scope of his powers as an American Family insurance agent, without loss to Leafgreens. The transaction, however, was used to facilitate the burglary which occurred approximately five weeks later.

A review of several foreign cases demonstrates the manner in which courts of other jurisdictions have applied the foregoing principles. In Bowman v. Home Life Insurance Company of America, 243 F.2d 331 (3rd Cir.1957), a male field underwriter masqueraded as the company's physician, and conducted intimate physical examinations upon the female plaintiffs, who had applied for insurance. The insurer furnished the underwriter with the plaintiffs' application cards, which entitled him to ask many questions. The underwriter obtained a black bag which looked like a physician's kit, called upon the plaintiffs at their home and made the examinations. Applying Pennsylvania law and the foregoing Restatement rules, the Third Circuit Court of Appeals determined that the underwriter's conduct could be attributed to his employer. The court noted that even though the agent went further than his instructions and committed a tort upon the plaintiffs, "this...