West v. United Servs. Auto. Ass'n

Decision Date09 November 2016
Docket NumberDA 16-0097
Parties Elizabeth West, as Guardian Ad Litem for Peter Lee, Plaintiff and Appellee, v. United Services Automobile Association (USAA), an Unincorporated Reciprocal Inter–Insurance Exchange, and USAA Casualty Insurance Company, Defendants and Appellants.
CourtMontana Supreme Court

For Appellants: David M. McLean (argued), Ryan C. Willmore, McLean & Associates, PLLC, Missoula, Montana.

For Appellee: Alexander (Zander) Blewett, III, Anders Blewett (argued), Hoyt & Blewett PLLC, Great Falls, Montana.

Justice Beth Baker

delivered the Opinion of the Court.

¶ 1 Elizabeth West, acting as Guardian Ad Litem for Peter Lee, and United Services Automobile Association and USAA Casualty Insurance Company (collectively USAA) dispute the effect of TRICARE medical payment liens on USAA's responsibility to promptly pay Lee's liability settlement claim against its insured. Lee asserted that USAA acted in bad faith by conditioning payment on resolving the TRICARE liens. The Eighth Judicial District Court agreed and held USAA liable for its insured's $1,464,000 consent judgment.

¶ 2 We conclude that USAA had a reasonable basis in law to condition its payment of policy limits upon resolution of the TRICARE liens, and we therefore reverse.


¶ 3 In December 2012, Lee and three other passengers were injured in a single vehicle accident. Lee sustained catastrophic injuries. The driver, Julian Perez, held a USAA insurance policy. All of the passengers were military servicemen covered by TRICARE, a government insurance program for military members and their families. TRICARE paid medical benefits for the passengers and therefore had a statutory right to recover the benefits it paid. TRICARE's liens for the passengers' combined medical expenses totaled over $215,000; more than $204,000 of the total were for Lee's expenses alone.

¶ 4 USAA insured Perez under an automobile liability policy with coverage limits of $50,000 per person and $100,000 per accident. After conducting a liability investigation, USAA determined that Perez was 100% at fault for the accident. Because of the extent of Lee's injuries, USAA informed Perez that he may be potentially liable for damages exceeding his coverage limits.

¶ 5 On August 21, 2013, Lee's counsel—who represented all four injured passengers—made a settlement demand on USAA for Perez's $100,000 policy limits. The letter stated that the offer would be withdrawn and that the claimants would seek to recover all of their damages from USAA if USAA did not agree to pay the policy limits in twenty days. One week later, USAA's claims examiner contacted Lee's counsel and offered to pay the full policy limits, provided that the TRICARE liens were addressed. Lee's counsel immediately responded with a letter stating that his clients would indemnify and hold USAA harmless from any responsibility for the TRICARE liens.

¶ 6 On September 9, 2013, USAA responded, stating that the offer to indemnify was not sufficient to protect Perez or USAA from the TRICARE liens. USAA confirmed in writing its offer to pay the policy limits, provided either that TRICARE be included as a payee on the settlement check or that Lee's counsel first secure lien releases from TRICARE. Lee's counsel followed with a letter two days later, stating that his clients would indemnify both USAA and Perez from any responsibility for the TRICARE liens. The letter gave USAA a deadline of September 21. USAA did not respond by the deadline. In the meantime, both USAA and Lee's counsel attempted to determine the status of TRICARE's liens. In early November 2013, USAA received letters from the Air Force providing notice of its claims and requesting payment of the liens pursuant to 42 U.S.C. § 2651

. TRICARE finally agreed to waive its liens at the end of January 2014, and USAA issued a check for the policy limits of $100,000 six weeks later.

¶ 7 Lee had filed suit against Perez in October 2013, and he continued his suit after receiving the policy limits payment from USAA. In January 2015, Perez agreed to a consent judgment in the amount of $1,464,000, and assigned his claims against USAA to Lee. On behalf of Lee, West filed a separate suit that same month alleging bad faith against USAA. The District Court granted West summary judgment, concluding that USAA did not have a reasonable basis in law for conditioning payment of the settlement check. The court held therefore that USAA was liable to Lee for the consent judgment. USAA filed a motion to alter or amend the judgment that was deemed denied when the District Court did not rule. USAA appeals.


¶ 8 We review summary judgment rulings de novo, applying the standards set forth in M. R. Civ. P. 56(c)(3)

. Citizens for a Better Flathead v. Bd. of Cnty. Comm'rs , 2016 MT 256, ¶ 10, 385 Mont. 156, 381 P.3d 555 ; accord

State Farm Mut. Auto. Ins. Co. v. Freyer , 2013 MT 301, ¶ 22, 372 Mont. 191, 312 P.3d 403. Generally, questions of reasonableness are factual matters properly answered by the finder of fact. Estate of Gleason v. Cent. United Life Ins. Co. , 2015 MT 140, ¶ 60, 379 Mont. 219, 350 P.3d 349 ; Freyer , ¶ 48. But an insurer's reasonableness is a question of law for the court to decide when the insurer's basis in law is grounded on a legal conclusion and no issues of fact remain in dispute.1

Estate of Gleason, ¶ 60 ; Freyer, ¶ 48.


¶ 9 Whether the District Court correctly concluded that USAA did not have a reasonable basis in law for conditioning the settlement check upon resolution of the TRICARE liens.

¶ 10 Because insurers have the authority under their policies to settle third-party claims, insurers in Montana have a duty to accept reasonable settlement offers within the policy limits. Freyer , ¶ 46

. When an insurer acts in bad faith and “fails to settle a bona fide third party liability claim against its insured, within policy coverage limits,” that insurer “takes the risk of a judgment by the trier of fact in excess of the coverage limits.” Freyer , ¶ 47 (citation and internal quotations omitted). An insurer does not act in bad faith, however, and therefore is not liable, “for failing to settle within policy limits when it had a reasonable basis in law or fact for contesting coverage.” Freyer , ¶ 47

. In determining whether an insurer has a reasonable basis in law for contesting coverage, “it is first necessary to survey the legal landscape as it existed during the relevant time period.” Freyer , ¶ 48 (citation and internal quotations omitted). The “determinative question” in our inquiry “is whether the law in effect at the time, caselaw or statutory, provided sufficient guidance to signal to a reasonable insurer that its grounds for denying the claim were not meritorious.” Freyer , ¶ 48. We are not to ask whether we agree “with the plaintiff's theories of liability in the underlying suit but, rather, whether the insurer's grounds for contesting those theories were reasonable under existing law.” Freyer , ¶ 48 (citation and internal quotations omitted).

¶ 11 Soon after filing her complaint in this action, West moved for summary judgment. She argued that USAA acted in bad faith by failing to promptly settle the claim. USAA responded, arguing on the authority of Freyer

that it had a reasonable basis in law to condition payment of the settlement upon resolution of the TRICARE liens. USAA contended that federal law—specifically 42 U.S.C. § 2651 —and our decision in Conway v. Benefis Health Systems, Inc. , 2013 MT 73, 369 Mont. 309, 297 P.3d 1200, established TRICARE as a secondary payer and obligated USAA either to include TRICARE as a co-payee or to secure a waiver of the liens before making payment to West. Despite Justice Cotter's assertion to the contrary, Dissent, ¶ 30, USAA has asserted throughout litigation that the principal issue is whether its grounds for conditioning the settlement payment were reasonable under existing law because TRICARE is a secondary payer.

¶ 12 The District Court recognized as much, identifying the issue before it as follows: “Did USAA engage in bad faith settlement practices by refusing to pay an admitted liability settlement unless TRICARE was named as a co-payee on Lee's settlement check or TRICARE waived its statutory lien?” The court ruled that USAA lacked a reasonable basis in law to delay payment of policy limits because of the TRICARE liens. The court focused its analysis on USAA's condition to include TRICARE as a payee on the settlement check. The court first noted that the parties had not identified any cases “addressing this narrow issue.” It rejected USAA's reliance on Conway

, finding the case not directly on point. The court similarly rejected USAA's comparison of TRICARE to Medicare because it concluded that Medicare and TRICARE statutes and regulations are distinct. Specifically, the court noted that “unlike the automatic first payer liability imposed ... on Medicare, there is no corresponding provision under TRICARE.” Finally, the court rejected USAA's reliance on 42 U.S.C. § 2651, which governs the United States' right to recover incurred medical costs from liable third parties and their insurers.

¶ 13 The court determined that the federal statute would apply only if the United States had commenced litigation or intervened to enforce its liens; in that case, “USAA would have a compelling argument it properly included TRICARE on the settlement check.” The court also determined that although TRICARE sent USAA notice of its claim and requested payment of the liens, “there is no obligation in the TRICARE regulations requiring USAA to protect the government lien.” “Most pertinently,” the court specified, “there is no requirement that USAA name TRICARE on Lee's settlement check.” As such, the court concluded that “USAA's unilateral decision [to include TRICARE as a payee on the settlement check] is without...

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