Bushey v. Allstate Insurance Co.

BUSHEY_V_ALLSTATE_INSURANCE_CO.95-069; 164 Vt 399; 670 A.2d 807

[Opinion Filed 27-Oct-1995]

[Motion for Reargument Denied 5-Dec-1995]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                           No. 95-069


Timothy Bushey                               Supreme Court

                                             On Appeal from
     v.                                      Chittenden Superior Court

                                             June Term, 1995
Allstate Insurance Company


Linda Levitt, J.

       Gareth H. Caldbeck of Caldbeck & Schweitzer, Shelburne, for
  plaintiff-appellant

       Bret P. Powell and Christopher O'Brien of Wilson Powell Lang & Faris,
  Burlington, for defendant-appellee 


PRESENT:  Gibson, Dooley, Morse and Johnson, JJ.



       GIBSON, J.   Plaintiff sued his insurer, defendant Allstate Insurance
  Company, for bad-faith failure to pay his underinsured motorist claim,
  following an automobile accident in which the other driver's insurance
  covered only part of plaintiff's damages.  He appeals from an order of the
  Chittenden Superior Court granting defendant's summary judgment motion.  We
  affirm.

       Plaintiff was in a two-car accident in December 1989.  The other
  driver's insurance company paid plaintiff its policy limit of $20,000 in
  settlement of his claim, to which defendant, plaintiff's insurer,
  consented.  Defendant's insurance policy covered plaintiff for underinsured
  motorist (UIM) claims, with a limit of $100,000, and provided that if
  plaintiff and defendant could not agree on the amount of damages, either
  party had the right to demand arbitration.  The policy also provided
  medical payments coverage with a limit of $10,000.

       Following the accident, plaintiff did not immediately seek medical
  attention, but five days thereafter went to a chiropractor, who noted that
  plaintiff's symptoms were severe neck and back 

   

  pain and headaches.  In January 1990, the chiropractor noted that
  plaintiff was 50% improved and that muscle strength in the upper
  extremities was normal.  Later that month, he reported an 80% improvement
  over plaintiff's original condition and found muscle strength in the upper
  extremities was normal and symmetrical.  

       Plaintiff continued to experience pain and reported his claim to
  defendant, which began paying medical bills under the medical payments
  coverage.  The intake report in defendant's file described the injury as
  "whiplash."  Next, plaintiff sought treatment from a second chiropractor,
  who referred him to an orthopedist, who at first suspected that plaintiff's
  pain resulted from a low-grade separated shoulder, but thereafter suspected
  a more serious, partial tear of the rotator cuff.  Several tests, including
  one surgical procedure, failed to reveal the existence of a rotator cuff
  tear, but a surgical procedure in January 1991 detected a one centimeter
  tear.

       In April 1991, plaintiff's counsel advised defendant that plaintiff's
  injuries were not just the "whiplash" first experienced, but that
  plaintiff's rotator cuff had been torn in the accident.  In June 1991,
  counsel advised defendant that plaintiff sought the UIM policy limit of
  $100,000, including compensation for medical expenses, pain and loss of
  income.  In August, defendant requested copies of plaintiff's medical bills
  and tax returns, and informed plaintiff's counsel that it wanted to have an
  independent medical examination performed on plaintiff.  Although
  plaintiff's doctors were unanimous that the rotator cuff tear and the
  resultant pain were related to the accident, defendant's medical expert,
  who examined plaintiff in October 1991, disagreed. 

       In November 1991, defendant offered plaintiff $5000 over and above the
  $10,000 medical payments.  Plaintiff rejected the offer and filed suit in
  December 1991 for full policy coverage, alleging that defendant had denied
  his claim in bad faith.  Defendant moved to compel arbitration in
  accordance with the policy terms, and the trial court ultimately granted
  this motion.  The arbitrators issued their award in May 1993, which, after
  offsets for the liability payment of $20,000, medical payments of about
  $10,000, and an advance under the UIM coverage for medical bills requested
  by plaintiff, resulted in a net award to plaintiff of $67,361.44. 

   

  Defendant paid the full amount of the award within a month of the
  arbitration decision. 

       Thereafter, defendant moved for summary judgment as to plaintiff's
  bad-faith claim, which the trial court granted, concluding that the
  question of defendant's liability had been "fairly debatable" within the
  meaning of the test set forth in Booska v. Hubbard Ins. Agency, Inc., 160
  Vt. 305, 312, 627 A.2d 333, 337 (1993) and that defendant had not acted in
  bad faith.  The court also concluded that because there had been no bad
  faith, there was no cause of action for intentionally inflicted mental
  distress.  The present appeal followed.

           I. Recognition of Bad-Faith Cause of Action

       Although we have long recognized a cause of action against an
  insurance company for bad faith in handling third-party claims brought
  against its insured, see Myers v. Ambassador Ins. Co., 146 Vt. 552, 555,
  508 A.2d 689, 690 (1986); Johnson v. Hardware Mutual Casualty Co., 109 Vt.
  481, 490-91, 1 A.2d 817, 820 (1938), we have not explicitly recognized a
  cause of action for bad-faith failure of an insurer to pay a claim filed by
  its insured (sometimes called a "first-party claim").  See Booska, 160 Vt.
  at 312, 627 A.2d  at 336.  We now hold that such an action lies in Vermont,
  within the parameters noted in Booska.  To establish a claim for bad faith,
  a plaintiff must show that (1) the insurance company had no reasonable
  basis to deny benefits of the policy, and (2) the company knew or
  recklessly disregarded the fact that no reasonable basis existed for
  denying the claim.  See id.  An insurance company may challenge claims that
  are "`fairly debatable'" and "`will be found liable only where it has
  intentionally denied (or failed to process or pay) a claim without a
  reasonable basis.'"  Id. (quoting Anderson v. Continental Ins. Co., 271 N.W.2d 368, 377 (Wis. 1978)).  Thus, the rule limits recovery to instances
  in which an insurer not only errs in denying coverage but does so
  unreasonably.  

       A majority of jurisdictions recognize the first-party, bad-faith tort. 
  See Dolan v. Aid Ins. Co., 431 N.W.2d 790, 791 n.1 (Iowa 1988) (listing
  cases).  Reasons cited in support thereof include the superior bargaining
  position of insurers, the vulnerability of insureds, the public interest
  nature of the insurance industry, the similarity to the tort of bad faith
  in claims involving 

   

  a third-party tortfeasor's insurer, and the failure of other penalties
  -- such as interest that must be remitted when claims are ultimately paid
  -- to discourage bad-faith conduct by insurers.  See id. at 791-92; Mary E.
  Phelan, The First-Party Dilemma: Bad Faith or Bad Business?, 34 Drake L.
  Rev. 1031, 1035-37 (1985-86).  We find these reasons persuasive.

       A minority of jurisdictions have expressly declined to recognize a
  first-party, bad-faith tort, citing, among other reasons, that the
  insurance industry is like any other commercial enterprise and not imbued
  with a particular public interest, that many states have statutory remedies
  that are exclusive and eliminate the need for other remedies, that
  traditional compensatory damages for breach of contract are adequate, and
  that the tort of bad faith is no different from other torts, such as
  outrage and intentional infliction of emotional distress, which eliminate
  any need for the bad-faith tort remedy.  See Dolan, 431 N.W.2d  at 792;
  Phelan, supra, at 1037-38.  Under the majority rule, however, no insurer
  will be liable for a good-faith error in denying or delaying a claim, and
  consumers will have a remedy whenever a company's conduct evinces a
  conscious disregard for its duty under the policy or such recklessness in
  evaluating the facts and circumstances of a claim that it never gives the
  claim due and fair consideration.

      II. Summary Judgment Analysis of the Bad-Faith Claim

       Plaintiff claims there are genuine issues of fact disputed by the
  parties, and therefore, the court erred in granting summary judgment to
  defendant.

       Summary judgment under V.R.C.P. 56 should be granted only in the
  absence of genuine issues of material fact, when all allegations in
  opposition to the motion supported by evidence are regarded as true, and
  the benefit of all reasonable inferences is given to the party opposing the
  motion.  Messier v. Metropolitan Life Ins. Co., 154 Vt. 406, 409, 578 A.2d 98, 99-100 (1990).   As stated above, there are two elements to the tort --
  whether the insurer had a reasonable basis to withhold payment and, if not,
  whether the insurer knew or recklessly disregarded the fact that it had no
  reasonable basis to withhold payment.  Insurers may challenge 

   

  claims that are fairly debatable.  Thus, if a realistic question of
  liability exists, an insurer may withhold payment while it determines
  whether there is a reasonable basis for the claim or the amount demanded. 
  See Wilson v. State Farm Mutual Auto. Ins. Co., 795 F. Supp. 1077, 1080 (D.
  Wyo. 1992); Dolan, 431 N.W.2d  at 794; Anderson, 271 N.W.2d  at 377.

       A motion for summary judgment by an insurer compels a court to
  consider both elements of the bad-faith tort.  If the insurer prevails on
  either prong, the court must grant the insurer's motion.  Even if the court
  determines that denial of payment was unreasonable as a matter of law, it
  might still find a genuine issue of material fact as to whether denial was
  intentional, and thus deny the motion.  See Washington v. Group
  Hospitalization, Inc., 585 F. Supp. 517, 520-21 (D.D.C. 1984) (insurer's
  summary judgment motion denied where defendants conceded that their denial
  of claim was mistaken, and there was genuine issue of material fact as to
  whether defendants knew or recklessly disregarded their lack of basis for
  denial of claim).When a court decides that an insurer's actions were
  reasonable because the claim was fairly debatable 

   

  as a matter of law, it must grant the summary judgment motion without
  reaching the question of the insurer's knowledge.  See Oulds v. Principal
  Mut. Life Ins. Co., 6 F.3d 1431, 1445 (10th Cir. 1993) (insurer entitled to
  summary judgment because no genuine issue of material fact regarding
  insurer's legitimate dispute about insured's claim where insured had
  misrepresented medical history on insurance application); Wilson, 795 F. Supp.  at 1081 (on claim of bad faith, insurer was entitled to summary
  judgment where claims for medical payments were "fairly debatable");
  Calenda v. Allstate Ins. Co., 518 A.2d 624, 628-29 (R.I. 1986) (when there
  was substantial and genuine question with respect to coverage, there can be
  no bad-faith issue for jury to decide); see also Dunn v. State Farm Fire &
  Casualty Co., 927 F.2d 869, 873 (5th Cir. 1991) (whether insurer had
  arguable reason to deny insured's claim was issue of law for court; because
  insured would not have been entitled to directed verdict on contract claim,
  insurer clearly had arguable reasons to deny claim).

       In the present case, the court determined that plaintiff's claim was
  fairly debatable because numerous tests conducted over an extended period
  of time had failed to show the rotator cuff tear, which was not confirmed
  until more than a year after the accident, and defendant was entitled to
  investigate (1) whether the torn rotator cuff was an after-acquired injury
  received during a surgical procedure performed in 1990 or an injury caused
  by the auto accident, (2) the extent of the injury, and (3) whether the
  amounts already received by plaintiff had adequately compensated him.  The
  court's ruling was correct, particularly in light of plaintiff's demand for
  payment of the full policy amount of $100,000 and the doubt as to the
  nature and origin of plaintiff's shoulder injury.

       Plaintiff emphasizes evidence he calls "voluminous," indicating that,
  whether or not the extent of his injuries was clear from the outset, by
  August 1991 defendant was aware that both of plaintiff's surgeons, who had
  been treating him for approximately one year and had performed surgery on
  him, were of the opinion that the shoulder injury resulted from the
  accident.  The evidence, however, supports the judgment that there was a
  valid reason for an independent medical examination by defendant, whose
  expert reported that he was unable to discern a clear cause-and-effect
  relationship between the auto accident and the rotator cuff tear, and a
  fair dispute about the amount of plaintiff's damages. The court properly
  concluded that plaintiff's claim was fairly debatable as a matter of law. 
  Consequently, there was no occasion for the court to consider defendant's
  possible bad faith.

       Finally, plaintiff argues that the court should not have granted
  defendant's summary judgment motion when the parties had not completed
  discovery and further discovery might have provided relevant information,
  including in-house memoranda that defendant had been ordered to produce. 
  Rule 56 does not require that summary judgment motion decisions await
  completion of discovery, and to so require would defeat the purpose of the
  rule.  See Pizza Management, Inc. v. Pizza Hut, Inc., 737 F. Supp. 1154,
  1169 (D. Kans. 1990) (requiring that summary judgment await completion of
  discovery frustrates its usefulness as tool to weed out claims that do not
  merit trial).  The court need only permit an adequate time for discovery. 
  Poplaski v. 

   

  Lamphere, 152 Vt. 251, 254, 565 A.2d 1326, 1329 (1989).  

       In the instant case, plaintiff's discovery had produced a substantial
  amount of information: the claim file, medical records relied on by the
  insurer, depositions of defendant's personnel and its legal and medical
  experts, and responses to written interrogatories.  Moreover, plaintiff
  acknowledges that the memoranda he sought were relevant to defendant's
  intent, an issue the trial court did not need to address because it
  determined that no genuine issue of fact existed regarding the fairly
  debatable nature of plaintiff's insurance claim.  There was no error.

       Plaintiff's other arguments are without merit.

       Affirmed.


                                        FOR THE COURT:


                                        ___________________________
                                        Associate Justice