Case Name: Dakota, Minnesota & Eastern Railroad Corporation v Acuity, a Mutual Insurance Co. f/k/a/ Heritage Mutual Insurance Company, d/b/a Heritage Insurance
Date Decided: August 5, 2009
Court: Supreme Court of South Dakota
Judge: Judge Jensen
Citation: 2009 WL 2412140

Background:
Dakota, Minnesota and Eastern Railroad (“DM & E”), filed this action claiming that Acuity Heritage Mutual Insurance Co. (“Acuity”), engaged in bad faith and vexatious failure to pay uninsured motorist benefits. DM & E appealed the circuit court’s summary judgment on the claims and Acuity cross-appealed the circuit court’s discovery orders compelling Acuity’s attorneys to give deposition in the case.

On July 28, 1998, a DM & E employee was seriously injured in a motor vehicle accident while acting in the scope of his employment. DM & E had a business automobile policy with Acuity which provided liability and uninsured motorist coverage.

The employee sued under the Federal Employers’ Liability Act (“FELA”) alleging negligent maintenance of the vehicle’s Hy-Rail System. Acuity refused to defend the suit claiming the policy excluded coverage. DM & E finally settled for an amount in excess of Acuity’s policy limits.

DM & E subsequently brought a declaratory judgment action against Acuity claiming that Acuity was obligated to defend and provide coverage for the FELA action. The lower court granted summary judgment in favor of Acuity concluding the policy exclusions were valid and barred coverage for the employee’s accident.

During the  uninsured motorist claim, DM & E sought to depose Acuity’s attorneys which Acuity responded with a motion to quash. The lower court denied Acuity’s motion and granted DM & E’s motion to compel. A jury rendered a verdict in favor of DM & E finding an unknown driver was negligent and the cause of the employee’s accident.

Acuity appealed the denial of their motion to quash and DM & E appealed the granting of summary judgment in favor of Acuity.

Issue:
Did the Trial Court err in granting summary judgment in favor of Acuity, finding their policy excluded the employee’s accident, and denying Acuity’s motion to quash the deposition of their attorneys in a separate uninsured motorist claim?

Held:
DM & E claimed there are genuine issues of material fact concerning Acuity’s initial handling and denial of the uninsured motorist claim. Moreover, DM & E also argued that questions of fact were created by Acuity’s refusal to re-evaluate the uninsured motorist claim and in its litigation tactics.

This Court has stated that first-party bad faith is an intentional tort and typically occurs when an insurance company consciously engages in wrongdoing during its processing or paying of policy benefits to its insured. Bad faith conduct may include the failure to conduct a reasonable investigation concerning the claim.

The uninsured motorist claim was denied by Acuity because they concluded there were not independent witnesses to support the employee’s claim. Acuity failed to conduct any more investigation based upon this conclusion. Moreover, Acuity failed to show that it made any attempts to interview the eye-witnesses to the accident or investigate any actual facts of the accident. Accordingly, this Court held granting summary judgment was inappropriate because there are genuine issues of material fact whether Acuity’s action constituted bad faith.

The Circuit Court’s discovery order was reviewed under an abuse of discretion standard. This Court held that where an insurer unequivocally delegates its initial claims function and relies exclusively upon outside counsel to conduct the investigation and determination of coverage, the attorney-client privilege does not protect the communication.

Accordingly this Court reversed the granting of summary judgment in favor of Acuity and affirmed the Superior Court’s decision to deny Acuity’s motion to quash.

Comment:
If an insurance company does not conduct a reasonable investigation then it may be liable for first-party bad faith. Here, Acuity failed to investigate facts and interview eye-witnesses before denying GM & E’s claim.

Moreover, if an insurer relies solely upon outside counsel to investigate and determine its coverage liability, the communication is not protected by the attorney client privilege.

Steve Gordon
http://www.Gordon-Elias.com