Trouten v. Heritage Mut. Ins. Co.

• Decision Date: 15 August 2001
• Docket Number: No. 21590.,21590.
• Citation: 632 N.W.2d 856,2001 SD 106
• Parties: G. Robert TROUTEN, Plaintiff and Appellee, v. HERITAGE MUTUAL INSURANCE COMPANY, Defendant and Appellant.
• Court: South Dakota Supreme Court

632 N.W.2d 856

2001 SD 106

G. Robert TROUTEN, Plaintiff and Appellee, v. HERITAGE MUTUAL INSURANCE COMPANY, Defendant and Appellant.

No. 21590.

Supreme Court of South Dakota.

Considered on Briefs April 24, 2001.

Decided August 15, 2001.

James L. Hoy and Carleton R. Hoy of Hoy & Hoy, Sioux Falls, SD, Attorneys for plaintiff and appellee.

Gary P. Thimsen and William G. Beck of Sioux Falls, SD, Attorneys for defendant and appellant.

[¶ 1.] Justice Robert A. Amundson delivers the majority opinion of the Court on Issue One which holds that the trial court erred in permitting the plaintiff to maintain a direct action suit against the defendant as a third party beneficiary of a contract.

[¶ 2.] Circuit Judge Timothy R. Johns delivers the majority opinion of the Court on Issue Two which holds that the trial court erred in permitting the plaintiff to proceed against the defendant for bad faith breach of an obligation to pay under a contract.

AMUNDSON, Justice, writing for the majority on Issue One.

[¶ 3.] Heritage Mutual Insurance Company (Heritage) appeals from a circuit court order denying its motion to dismiss, its motion for a protective order and its motion to sever and granting plaintiff's motion to compel discovery. We granted Heritage's petition for allowance of appeal from the intermediate order on August 10, 2000. We reverse and remand.

FACTS

[¶ 4.] Vicki L. Kenison purchased a business liability insurance contract from Heritage for the period of June 20, 1999 through June 20, 2000. This policy was to provide coverage for her business, Rock Bottom Liquidators, located in Sioux Falls, South Dakota. The policy provided coverage for "medical expenses ... for bodily injury caused by an accident ... [o]n ways next to premises you own or rent ... regardless of fault." The medical expense limits were $5,000.

[¶ 5.] G. Robert Trouten (Trouten) alleges that, on June 30, 1999, he slipped and fell on a sidewalk abutting the building insured by Heritage. Trouten reported the accident to Heritage and made a claim for medical and hospital expenses exceeding $5,000. Heritage denied the claim in its entirety.¹

[¶ 6.] As a result of the denial of his claim, Trouten brought an action for breach of contract against Heritage in January 2000. Trouten later filed an amended complaint seeking compensatory damages for breach of contract, punitive damages for bad faith breach of the insurance policy and attorney's fees.

[¶ 7.] Heritage denied the existence of contractual obligations to Trouten and moved for a judgment on the pleadings. The motion was subsequently denied with the court ruling that the breach of contract and bad faith claims stated viable causes of action.

[¶ 8.] On May 18, 2000, Trouten served Heritage interrogatories and a request for production of its entire claim file relating to the case. Heritage objected to Trouten's discovery request and moved for a protective order and an order severing the bad faith and contract claims. Heritage also served a motion to dismiss for failure to state a cause of action which the trial court treated as a second motion for judgment on the pleadings. On the same day, Trouten filed a motion for an order to compel discovery. A hearing was held and Heritage's motions were denied while Trouten's motion to compel discovery was granted. Heritage then filed a petition for a discretionary intermediate appeal from the trial court's order denying its motions and granting Trouten's discovery request.

ISSUES AND ANALYSIS

[¶ 9.] Although a number of issues have been raised, we need only address two.

ISSUE ONE

[¶ 10.] Whether Trouten can maintain a direct action suit against Heritage when he did not contract with Heritage?

[¶ 11.] This is an issue of first impression in South Dakota. "As a general rule there is no privity between an injured person and the tortfeasor's liability insurer, and the injured person has no right of action at law against the insurer[.]" 44 AmJur2d Insurance § 1445 (1982). However, there are exceptions to this rule where a statute authorizes such suits or where the injured person is considered to be a third party beneficiary of the contract.

[¶ 12.] There is no statute in South Dakota which allows a direct action by an injured person against another's liability insurer absent a judgment having been first obtained against the tortfeasor. See SDCL 58-23-1 (direct action allowed when an execution on a judgment against the insured is returned unsatisfied).

[¶ 13.] As to the exception for third party beneficiaries, SDCL 53-2-6 allows for a suit by a third party beneficiary of a contract. It provides that "[a] contract made expressly for the benefit of a third person may be enforced by him at any time before the parties thereto rescind it."

[W]henever two parties enter into an agreement that appears to have been made expressly for the benefit of a third party, and such agreement has a good and sufficient consideration, the agreement itself creates all the privity there need be between the person for whose benefit the agreement was entered into and the party assuming the obligation, and an action at law should lie regardless of whether there was any obligation existing between the other party to the agreement and the third party. But, before the third party can adopt the agreement entered into and recover thereon, he must show clearly that it was entered into with the intent on the part of the parties thereto that such third party should be benefited thereby. This intent might, in a given case, sufficiently appear from the contract itself, but it must frequently be shown by other proof.

Fry v. Ausman, 29 S.D. 30, 36-37, 135 N.W. 708, 710 (1912) (emphasis original).

[¶ 14.] The issue we must decide is whether the instant contract of insurance contemplates Trouten and all others similarly situated as third party beneficiaries. The policy has two separate coverages: business liability and medical expenses. The medical expense coverage provides:

a. We will pay medical expenses as described below for bodily injury caused by an accident:

(1) On premises you own or rent;

(2) On ways next to premises you own or rent; or

(3) Because of your operations; provided that:

(1) The accident takes place in the coverage territory and during the policy period;

(2) The expenses are incurred and reported to us within one year of the date of the accident; and

(3) The injured person submits to examination, at our expense, by physicians of our choice as often as we reasonably require.

b. We will make these payments regardless of fault. These payments will not exceed the Limit [sic] of Insurance [sic]. We will pay reasonable expenses for:

(1) First aid at the time of an accident;

(2) Necessary medical, surgical, x-ray and dental services, including prosthetic devices; and

(3) Necessary ambulance, hospital, professional nursing and funeral services. (emphasis original).

[¶ 15.] Trouten contends that, because the policy states that the insurer will make medical expense payments regardless of fault, the policy is written for his benefit and he is, ipso facto, a designated beneficiary entitled to sue the insurer to collect those payments. In support of his contention, Trouten cites Harper v. Wausau Ins. Co., 56 Cal.App.4th 1079, 66 Cal.Rptr.2d 64 (1997) and Donald v. Liberty Mut. Ins. Co., 18 F.3d 474 (7th Cir.1994).

[¶ 16.] In Harper, the injured party fell on the insured's property and then brought suit against the insurer for medical expenses under a commercial general liability policy. The medical expense portion of that policy read the same as the one in the instant case including the provision that the insurer would pay up to $5,000 for medical expenses for bodily injury regardless of fault. The issue was whether the injured party was a third party beneficiary under the terms of the insurance policy and in light of California Civil Code § 1559. That provision, like SDCL 53-2-6, stated that "`[a] contract made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.'" Harper, 56 Cal.App.4th at 1086, 66 Cal.Rptr.2d at 68. In speaking of § 1559, the California court noted that it "excludes enforcement of a contract by persons who are only incidentally or remotely benefited by the agreement." Id. We agree with this statement since both statutes require that the contract be made "expressly for the benefit of a third person."

[¶ 17.] In finding that the injured party in Harper was a third party beneficiary, the Harper court reasoned:

Here, the insurance policy contained a liability provision based on fault ("Coverage A") and a medical payment provision, based on injury on the property ("Coverage C"). The express language of "Coverage C" plainly indicates it is meant to directly confer a benefit upon third parties who are injured on the owner's property. The payment is premised on the happening of the event and is not premised on fault. Thus, the insurer undertook a separate and direct obligation to pay to the medical expenses of any persons injured on the owner's property regardless of its insured's negligence. Accordingly, the payments were plainly intended to directly benefit plaintiff and were not incidental or remote.

Harper, 56 Cal.App.4th at 1090, 66 Cal. Rptr.2d at 70. (emphasis original).

[¶ 18.] As authority for its conclusion, the Harper court cited Donald, supra; Hunt v. First Ins. Co. of Hawaii, Ltd., 82 Hawai'i 363, 922 P.2d 976 (App.1996); and Desmond v. American Ins. Co. 786 S.W.2d 144 (Mo.Ct.App.1989). In each of these cases, the court held that the injured person qualified as a third party beneficiary under the medical payment benefit provision of the property owner's insurance policy and could, therefore, maintain a direct action against the owner's insurance company for medical benefits. Donald and Desmond are of particular note since the medical expense coverage provisions of the...