Railsback v. Mid-Century Ins. Co.

• Decision Date: 12 May 2004
• Docket Number: No. 22956.,22956.
• Citation: 2004 SD 64,680 N.W.2d 652
• Parties: Tina RAILSBACK, Plaintiff and Appellant, v. MID-CENTURY INSURANCE COMPANY, Defendant and Appellee.
• Court: South Dakota Supreme Court

680 N.W.2d 652

2004 SD 64

Tina RAILSBACK, Plaintiff and Appellant, v. MID-CENTURY INSURANCE COMPANY, Defendant and Appellee.

No. 22956.

Supreme Court of South Dakota.

Considered on Briefs on March 22, 2004.

Decided May 12, 2004.

Mark E. Salter of Cutler & Donahoe, Sioux Falls, South Dakota, Attorneys for plaintiff and appellant.

Kathryn J. Hoskins of Siegel, Barnett & Schutz, Sioux Falls, South Dakota, Attorneys for defendant and appellee.

SABERS, Justice.

[¶ 1.] Tina Railsback brought suit against Mid-Century Insurance Company alleging fraud, deceit, and misrepresentation. The trial court granted summary judgment in favor of Mid-Century and Railsback appeals. She argues that the trial court erred in holding that 1) the liability insurer did not have a duty to speak truthfully to an injured third-party claimant; and that 2) her claim was a prohibited direct action against an insurer. We reverse both 1 and 2.

FACTS

[¶ 2.] Early in 1996, Railsback was injured in an automobile accident. She was a passenger in a vehicle driven by Tom Hauglin. Hauglin lost control of the car when he hit a patch of ice. Railsback suffered injuries to her neck and back in the resulting collision. Hauglin was cited for careless driving.

[¶ 3.] Mid-Century was Hauglin's liability insurance carrier. At the time of the accident, Hauglin's policy limit was $50,000.00 per person and $100,000.00 per occurrence. Railsback made a claim against the policy for the injuries she suffered in the accident. She filed the claim and negotiated a settlement with the company without the aid of legal counsel.

[¶ 4.] Diana Austin and Steve Weiler were claims adjusters employed by and acting as agents for Mid-Century. Railsback alleges that Austin and Weiler misrepresented the amount of liability coverage available under Hauglin's policy. She asserts that they led her to believe that the policy limit was $25,000.00 rather than $50,000.00. She claims that they misled her in an effort to induce her to release her claim for $25,000.00.^* Specifically, she asserts that the adjusters knew that she was misinformed about the policy limits and that they reinforced that misinformation with ambiguous communications. Entries in the insurer's investigation log by Weiler and Austin indicate that liability coverage was discussed with Railsback. The logs also indicate that the adjusters were aware that Railsback was misinformed. In negotiations, on several occasions, Railsback demanded the "policy limits." Austin told Railsback she would not authorize "policy limits" but then offered $20,000.00 in settlement. Railsback ultimately released her claim for $25,000.00 and did not find out until July 2000 that the policy limit was actually $50,000.00. She asserts that had she known the policy limit was greater than $25,000.00 she would not have entered into the settlement. She further asserts that through their written and verbal communications, the adjusters intentionally reinforced her misunderstanding of the policy limits.

[¶ 5.] Railsback brought suit against Mid-Century alleging fraud, deceit and misrepresentation. The trial court granted Mid-Century's motion for summary judgment and Railsback appeals, raising two issues:

1. Whether a liability carrier owes a claimant, who is not their insured, a duty to speak truthfully about the insured's policy limits.

2. Whether the trial court erred in its determination that Railsback's suit was an impermissible direct action against an insurer.

STANDARD OF REVIEW

[¶ 6.] Our standard of review for summary judgment is well settled. Summary judgment is proper where, the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. SDCL 15-6-56(c).

We will affirm only when there are no genuine issues of material fact and the legal questions have been correctly decided. [] We view all reasonable inferences drawn from the facts in the light most favorable to the non-moving party.

[] In addition, the moving party has the burden of clearly demonstrating an absence of any genuine issue of material fact and an entitlement to judgment as a matter of law.

Roden v. General Cas. Co. of Wisconsin, 2003 SD 130, ¶ 5, 671 N.W.2d 622, 624 (internal citations and quotations omitted).

[¶ 7.] 1. WHETHER A LIABILITY CARRIER OWES A CLAIMANT, WHO IS NOT THEIR INSURED, A DUTY TO SPEAK TRUTHFULLY ABOUT THE INSURED'S POLICY LIMITS.

[¶ 8.] At the hearing on the motion for summary judgment, the trial court held that the insurer had no duty to disclose the policy limits. Railsback argues that this decision "effectively licenses misrepresentations by claims adjusters."

[¶ 9.] The relationship between an insurer and a third party claimant is not a fiduciary or confidential relationship. In fact, we have noted that the insurer stands in the shoes of the insured and therefore, the relationship between the claimant and the insurer is adversarial. Trouten v. Heritage Mut. Ins. Co., 2001 SD 106, ¶ 32, 632 N.W.2d 856, 864. The parties deal at arms length and there is no duty on the part of the insurer to disclose the policy limits during settlement negotiations. Therefore, to the extent the trial court held that there is generally no duty to disclose policy limits, it was correct. However, the question here is narrower. Specifically, whether an insurer may knowingly cause or further a claimants misunderstanding of the policy limits to her detriment.

[¶ 10.] Mid-Century concedes that South Dakota law allows a claimant to affirm a settlement agreement and bring a fraud action against an insurance company without obtaining judgment against the insurance company. See Tucek v. Mueller, 511 N.W.2d 832, 835-36 (S.D.1994). It argues that 1) it did not have a duty to disclose policy limits or 2) correct Railsbacks mistaken belief and that 3) "the trial court's decision [ ]does not preclude [ ]a direct action against an insurance company where the company actually engages in fraud."

[¶ 11.] The trial court relied on Smith v. Safeco Ins. Co., 112 Wash.App. 645, 50 P.3d 277 (2002) to come to the conclusion that an insurer need only disclose its insured's policy limits if a reasonable person in the same or similar circumstances would believe that the disclosure would be in the insured's best interest. Id. at 282. Mid-Century argues that since an insurer has no duty to disclose policy limits, even if the third party is known to have been operating under a mistaken belief, there can be no breach of duty giving rise to a fraud action.

[¶ 12.] We disagree with the trial court's analysis of this issue. In Tucek, we overruled a trial court's entry of summary judgment in favor of an insurance company alleged to have defrauded a third-party claimant. In that case, we noted that the claimant was entitled to sue for damages for fraud and deceit. Tucek, 511 N.W.2d at 835. We noted more specifically that the claimant could rely on SDCL 20-10-1, 20-10-2(2) and (3), statutes defining deceit, as a basis for her claims. Furthermore, we noted that "questions of fraud and deceit are generally questions of fact and are to be determined, ordinarily, by a jury." Id. at 836. We stated, [e]very participant in a fraud and each one who assists another in the perpetration of the fraud is liable to the injured party. Id. (Emphasis in the original.) Acknowledging that the "insurer knew it could reach a settlement favorable to itself albeit unfavorable to Tucek," we reiterated that every participant in a fraud is liable to the injured party. Id. at 837. We made no distinction between other parties involved in the fraud and the insurance company.

[¶ 13.] In Maybee v. Jacobs Motor Co., Inc., 519 N.W.2d 341, 343 (S.D.1994), we noted:

An action for deceit requires proof that the misrepresentation was material to the formation of the contract and that the other party relied on the misrepresentation to her detriment. [] Such misrepresentations include true statements which the maker knows or believes to be materially misleading because of his failure to state additional or qualifying matter.

Id. (citing Restatement (Second) of Torts 229 (1977) (internal citation omitted)). We have applied the Restatement (Second) of Torts § 551(2). Section 551(2)(b) provides in part that a party to a business transaction has a duty to "exercise reasonable care to disclose to the other before the transaction is consummated":

(b) matters known to him that he knows to be necessary to prevent his partial or ambiguous statement of the facts from being misleading.

Restatement (Second) of Torts § 551(2)(b) (1977). Assuming all facts in favor of Railsback, there is a genuine issue of material fact whether the insurer deceived or defrauded her or made misrepresentations in the settlement negotiations. Railsback argues that the conversations and letters between her and the adjusters led her to believe, to her detriment, that the policy limits were half of what they actually were. Drawing inferences from the facts in the record in favor of Railsback, it could be reasonably inferred that the adjusters were aware of and exploited her misinformation regarding the policy limits. Furthermore, one could infer that the exploitation amounted to affirmative representations of facts they knew were untrue. Mid-Century argues that the claims adjuster's reference to "policy limits" was not ambiguous and that Railsback "attempts to mischaracterize the letter ... sent to [ ]Railsback." These factual assertions merely emphasize the error in the trial court's determination that summary judgment was appropriate. There are questions of material fact whether the claims adjusters' knowledge of Railsback's mistaken belief and manipulation of that belief for the company's benefit amounted to fraud, deceit or misrepresentation.

[¶ 14.] We do not accept the...