Smith v. American Family Mut. Ins. Co.

Decision Date20 June 1980
Docket NumberNo. 9635,9635
Citation294 N.W.2d 751
PartiesKenneth A. SMITH, Plaintiff and Appellee, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY and James Erickson, Defendants and Appellants. Civ.
CourtNorth Dakota Supreme Court

Lowell A. O'Grady, of O'Grady & Morley, Grand Forks, and Cameron D. Sillers, Langdon, for plaintiff and appellee; argued by Lowell O'Grady, Grand Forks.

Robert B. Hunter, Grand Forks, for defendants and appellants.


American Family Mutual Insurance Company ("American Family") appeals from a judgment entered against it upon a jury verdict in favor of Kenneth A. Smith. It also appeals from the trial court's order denying its motions for judgment notwithstanding the verdict or, in the alternative, a new trial. We affirm.

In February 1976, American Family, through James Erickson as agent, sold an automobile insurance policy to Smith providing liability and collision coverage for Smith's 1970 automobile. At that time Smith was working as a contract deputy sheriff in Wildrose, North Dakota. There is some dispute in the testimony as to whether or not Erickson was informed that Smith used his automobile in his police work although Smith's automobile was specially equipped for police work. Subsequently, Smith accepted employment as chief of police at Pembina, North Dakota. On June 10, 1976, Smith, while off duty and driving his own automobile, answered an assistance call from a deputy sheriff in Cavalier County. The deputy was pursuing a van and, according to Smith's testimony, he asked the deputy if he (Smith) should set up a roadblock. Smith testified that the officer replied in the affirmative and Smith did drive his car crosswise on the two-laned highway, blocking the northbound lane. Smith placed a revolving red light on the top of his car and waited on the side of the road. The driver of the van which was being pursued did not stop and ran into Smith's car, demolishing it. Smith reported the loss to Erickson but Erickson told Smith the loss was not covered. 1

Smith and his wife, Joyce, lived in Langdon; Joyce worked in Cavalier and Smith also needed a car to drive to work in Pembina. Because they both needed automobiles to drive to work, Smith was anxious to have his claim settled. Smith asked Erickson on several occasions when an insurance adjuster would come to investigate the claim. Erickson told Smith the adjusters were busy. On June 24, an independent adjuster did investigate the accident. He agreed on the amount of the loss but requested that Smith sign a nonwaiver agreement, which the adjuster also executed on behalf of American Family, wherein Smith and American Family agreed that any action taken by American Family in investigating the accident would not operate to invalidate any of the provisions of the policy and that if a suit were filed as a result of the accident and American Family elected to defend the suit, such action would not be construed as a waiver of any of the conditions of the policy. The agreement further provided:

"It is the intention of this agreement to preserve all the rights of the parties hereto and provide for an investigation of the said accident without in any way affecting, impairing or adding to the liability of the Company under said policy or under any statutes or the common law, and no act of the Company hereunder shall be construed as an admission of its liability or coverage."

Although Smith was asked to execute and did execute the agreement, he testified the agent told him that in his opinion the collision was covered and Smith should get a check in a week or two. When Smith contacted Erickson inquiring why the check was not forthcoming, Erickson told him the reason could be that the loss was not covered. Smith had another car he owned, which had motor problems, repaired for $770 in order that he and his wife would have cars to drive to their places of employment. American Family paid the claim for the loss of Smith's car some two months later. Prior to the time the check arrived, Erickson, when asked about the delay, gave various excuses including the response that there was no coverage under the policy. When the check did arrive, Erickson told Smith the only reason American Family paid the loss was that the adjusters had determined that a badly hurt passenger (Herzog) in the van which collided with Smith's automobile had decided not to sue Smith.

Herzog did sue Smith later. Smith immediately delivered the papers to Erickson. Erickson told Smith that American Family was not named in the lawsuit and therefore the company did not have to defend Smith, and that Smith must secure his own attorney to defend the suit because American Family was not liable. Smith became very upset and contacted an attorney (Sillers) who agreed to represent Smith for $50 per hour.

Sillers contacted Harrington, American Family's claim counsel, by telephone on September 29, 1976, inquiring as to what American Family was going to do on the defense of the Herzog lawsuit. Harrington informed Sillers he had called Herzog's attorney and asked for an extension to file an answer. He also told Sillers the matter was being forwarded to the Letnes & Marshall law firm in Grand Forks to commence a declaratory-judgment action to determine American Family's liability under the insurance contract. Harrington told Sillers it was American Family's position that when Smith agreed with the deputy sheriff of Pembina County to use Smith's car as a roadblock it came within the provision of the policy excluding liability assumed by the insured under any contract or agreement.

In October 1976, Sillers called American Family and asked for an immediate decision by American Family on the matter of defending Smith in the action brought against him by Herzog. Sillers spoke with Harrington, who told Sillers he would deny the claim. Harrington then wrote a letter on October 11, 1976, to Sillers denying coverage on the part of American Family. Sillers commenced this lawsuit against American Family on Smith's behalf on October 18, 1976. Subsequently, Sillers received a copy of a letter from American Family's claim counsel, Harrington, addressed to the Letnes & Marshall law firm of Grand Forks, requesting that firm to defend American Family and Erickson in the lawsuit filed by Smith against them. In that letter Harrington suggested filing a counterclaim against Sillers for abuse of process in the amount of $1,000,000. Because of that letter Sillers advised Smith there might be a conflict of interest if he were sued by American Family and continued to represent Smith in the lawsuit against American Family. Smith requested Sillers to continue in the lawsuit but, at Sillers's suggestion, another attorney was retained to work with Sillers in the matter.

In January 1977, Sillers told Smith that American Family had reversed its position and would take over Smith's defense in the action brought by the passenger in the van, but the company refused to pay Sillers the full $50 per hour. Sillers advised Smith that if he accepted American Family's offer, Smith would still owe him the difference between the $50 per hour agreed upon as his fee and the amount American Family agreed to pay. Smith told Sillers to use his best judgment. American Family did take over defense of the lawsuit against Smith but made no direct contact with Smith prior to the trial of this action. At the time this action was tried the action against Smith was still pending. The evidence at trial indicated that Smith was upset and worried over the pending action against him, whether or not American Family would defend the action, and whether or not, if a verdict was rendered against Smith, American Family would pay the judgment to the limits of the insurance policy.

In his action against American Family, Smith alleged breach of contract of his automobile liability insurance policy, tortious breach of the implied covenant of good faith and fair dealing, malice, oppression, and fraud, and intentional infliction of severe emotional distress on the part of American Family. After trial to a jury, the jury found that Smith failed to prove he suffered severe emotional distress caused by the conduct of American Family; the jury dismissed any claim against American Family's agent, James Erickson; but found against American Family in the sum of $4,120 for breach of contract, $3,000 for breach of an implied covenant of good faith and fair dealing, and $50,000 for exemplary damages. American Family moved for judgment notwithstanding the verdict or, in the alternative, a new trial. The motion was denied by the district court and American Family took this appeal. In its appeal American Family raises several issues, some of which we will consider separately and others together.


In its first issue American Family argues that the trial court erred in refusing to dismiss Smith's action in tort because it failed to state a claim upon which relief could be granted. American Family's position is that a failure to defend an insured as required by the insurance policy is a breach of contract on the part of the insurer and does not constitute a tort on the part of the insurer. In support of its position American Family cites Prince v. Universal Underwriters Insurance Co., 143 N.W.2d 708 (N.D.1966), in which this court held that a failure to defend was a breach of the insurer's obligation under the policy which renders the insurer liable to the insured to the extent of the insured's costs and expenses incurred in defending the action. The decision in Prince is not applicable to the issue raised by American Family. In Prince the insured brought an action against the insurer for failure to defend under a liability policy but the action brought by the insured sought only the maximum amount of the property-damage coverage under the liability policy plus the amount of attorney fees and costs incurred by the insured in the...

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