Kremer v. American Family Mutual Insurance Co.

501 N.W.2d 765, 1993 WL 195320

• Court: South Dakota Supreme Court
• Decided: June 21, 1993
• Docket: 17738
• Status: Published

Opinions

ERICKSON, Circuit Judge.

American Family Insurance (American) appeals an amended declaratory judgment resolving the rights and duties of the parties and a money judgment to its insured Lois Kremer (Kremer) and Robert Kremer. We affirm.

FACTS

Kremer was involved in an automobile accident with Gary P. Schmit (Schmit) on February 13, 1986. She promptly notified her American insurance agent and informed him that Schmit was uninsured. That information was forwarded to American. American’s investigator interviewed Kremer on March 5, 1986, and again the information that Schmit was uninsured was furnished to American. American paid certain medical bills, as well as collision loss.

On February 8, 1989, Kremer called American and spoke with a casualty claims specialist who was authorized to settle her suit and specifically requested settlement under the “uninsured motorist” provisions of her American policy. This specialist told her that the claim would be denied because American felt both she and Schmit were negligent. Kremer told him that she would see her own attorney.

On February 13, 1989, Kremer filed a lawsuit against Schmit for damages resulting from the accident. An American internal memorandum records that at least as early as June 28, 1989, American was well aware of Kremer’s action against Schmit. Additionally, the memo acknowledges that American knew Schmit was uninsured; knew Kremer had been told her “uninsured motorist” claim would not provide coverage; knew Kremer’s attorney had asked for and was provided a recap of monies paid by American to prove her damages in the lawsuit; and that the claims specialist had discussed the company’s subrogation rights with American’s in-house attorney.

In April 1989, Kremer’s original attorney, Peter A. Fuller (Fuller), met with Schmit, who was not represented. Schmit was asked to confess judgment and was told that the judgment would not be executed on since Kremer would proceed to obtain “uninsured motorist” benefits from American. Schmit refused to confess judgment.

On October 16, 1989, the date set for a default judgment hearing, one of Kremer’s attorneys called American’s representative to update information concerning Kremer’s medical bills that American had paid. At that hearing, Schmit appeared, unrepresented, and contested the default. Default judgment was granted, and, on November 23, 1989, the default judgment against Schmit was entered.

Fuller purposely waited seventy-eight days after taking the default judgment before notifying American that default judgment had been entered and requesting $100,000 under the “uninsured motorist” provisions of the policy. The claim was denied.

On March 20, 1990, Kremer brought this declaratory judgment action to declare the rights and responsibilities of the parties under the “uninsured motorist” provisions of the American policy.

Trial before an advisory jury in May 1991, determined that American had sufficient notice of the Kremer/Schmit lawsuit to allow it to protect its interests. Subsequently, the trial court entered findings of fact, conclusions of law and an order adopting the jury’s findings. Pursuant to SDCL 21-24-12 the trial court entered a money judgment in the amount of $100,000 plus interest.

American appeals from that judgment, citing eight issues, three of which deal with the findings of sufficient notice. The remainder deal with the issues of collusion, hearsay testimony, amendment of the pleadings, instruction to the advisory jury, and computation of pre-judgment interest.

I.SUFFICIENCY OF NOTICE AND “CONSENT TO BE BOUND” UNDER THE POLICY PROVISIONS

American argues that the policy provisions regarding notice of lawsuits were not followed, and thus it should not be bound.

At the beginning of the American policy, a general provision entitled “Other Duties” states:

A person claiming any coverage of this policy must also:

* * * * * sjc

2.Send us any legal papers received relating to any claim or suit, (emphasis provided).

A more specific policy provision found in “Part III Uninsured Motorists,” merely states that a person bringing suit to determine liability against an uninsured motorist must:

1. Name the owner or operator of the vehicle as the defendant.

2. Notify the company of the suit.

3. Receive the company’s written consent to be bound by the resulting judgment.

A. SUFFICIENCY OF NOTICE TO AMERICAN OF THE UNDERLYING SUIT

Under South Dakota law, “notice may be either actual or constructive.” SDCL 17-1-1. At issue is whether or not American had notice of circumstances sufficient to put a prudent person upon inquiry as to the existence of the Kremer/Schmit lawsuit. SDCL 17-1-4. Both the advisory jury and the trial court agreed that American had sufficient notice.

A trial court’s finding of fact must be upheld unless it is clearly erroneous. Smith v. Sponheim, 339 N.W.2d 899, 901 (S.D.1987). The function of this court under that standard is:

[T]o determine whether the decision of the lower court lacks the support of substantial evidence, evolves from an erroneous view of the applicable law, or whether considering the entire record, we are left with a definite and firm conviction that a mistake has been made, (citation omitted). In making this determination, we review the evidence in a light most favorable to the trial court’s decision.

State v. Baysinger, 470 N.W.2d 840, 843 (S.D.1991).

American’s policy has two notice provisions. The first is a “general” notice provision while the second is a “specific” notice provision relating to “uninsured motorists.” American insists that both provisions must be read together.

Notice provisions are to be strictly construed against the insurer. Breeden v. Etna Life Ins. Co., 23 S.D. 417, 122 N.W. 348, 349 (1909). “[WJhere the provisions of an insurance policy are fairly susceptible of different interpretations, the interpretation most favorable to the insured should be adopted.” Prokop v. North Star Mut. Ins. Co., 457 N.W.2d 862, 864 (S.D.1990).

American’s policy set out specific conditions precedent to be used in relation to “Part III — Uninsured Motorists.” This more specific provision, Part III, governs this lawsuit. If an insured brings suit to determine liability against an uninsured motorist, the owner or driver must be named as the defendant and the company must be notified. No specifics are set out as to how this notice is to be made. Reference back to the general notice provisions is not made. Written notice is not specified. Thus, oral notice would suffice. Wolff v. Royal Ins. Co. of America, 472 N.W.2d 233, 236 (S.D.1991).

American knew as early as March 5, 1986, that Schmit was uninsured. Prior to filing suit, Kremer made an oral claim for “uninsured motorist” coverage to American which was orally refused. American knew she was consulting her own attorney. As early as June 28, 1989, almost five months before default was taken, American had discussed the Kremer/Schmit lawsuit with its local agent. American provided Kremer’s attorneys with a recap of medical damages paid under the policy for use in the lawsuit. It also discussed with in-house counsel its subrogation rights if Kremer was to recover.

Based upon these facts, American has not demonstrated that the trial court’s findings and conclusions on this issue are clearly erroneous.¹

B. THE “CONSENT TO BE BOUND” PROVISION

The trial court held that the “consent to be bound” provision of the insurance contract was void as against public policy.

The legislative intent of an “uninsured motorist” statute is “to protect the insurance consumer, not the policy vender.” Rodman v. State Farm Mutual Automobile Ins. Co., 208 N.W.2d 903, 909 (Ia.1973).

The purpose of the uninsured motorist statute is to provide the same insurance protection to the insured party who is injured by the uninsured or unknown motorist that would have been available to him had he been injured as a result of negligence of a motorist covered by the minimum amount of liability insurance.

Clark v. Regent Ins. Co., 270 N.W.2d 26, 29 (S.D.1978).

American acknowledges that a “consent to be sued” provision would be void, but argues this provision is necessary to prevent collusion between the insured and the “uninsured motorist.” Additionally, it argues a “consent to be bound” provision is different than a “consent to be sued” provision because it does not preclude coverage; rather, it merely precludes payment.

Generally, “consent to be sued” provisions have been held to be void, in the absence of an enforceable arbitration clause, because it is against public policy to preclude a court determination of fault and damage in a suit against an uninsured motorist. Allstate Insurance Company v. Pietrosh, 85 Nev. 310, 454 P.2d 106, 109-110 (1969). Additionally, an insurance company could unreasonably and arbitrarily withhold consent.

The court in reviewing a policy provision in light of statutory law treats the statute as if it were actually written into the policy. “The terms of the policy are to be construed in light of the purposes and intent of the applicable statute.” Veach v. Farmer’s Ins. Co., 460 N.W.2d 845, 847 (Ia.1990). Whether it is “consent to be sued,” or a “consent to be bound,” the operative concept is that of “consent” by the insurance company. It is not a question of whether coverage versus payment is precluded, but rather that both provisions are designed to preclude the binding effect of a judgment against the “uninsured motorist” upon the insured’s insurance company. Pietrosh, supra, at 109.

The “consent to be bound” provision erects an arbitrary barricade which allows an insurance company to eliminate all claims from accidents involving “uninsured motorists,” despite the intent of the statute. While prevention of collusion is a laudable goal, other less arbitrary procedural safeguards protect the company. Notice provisions coupled with the company’s intervention rights (SDCL 15-6-24(a)(2)) accomplish the same goal in a less onerous manner. Thus, the “consent to be bound” provision like its predecessor the “consent to be sued” provision is not only unnecessary, but contravenes the “uninsured motorist” statute.

C. WHEN IS IT NECESSARY TO PROVE A MOTORIST IS UNINSURED

American, citing Griffith v. Farm and City Ins. Co., 324 N.W.2d 327 (la.1982), and Ogle v. Long, 551 So.2d 914 (Ala.1989), argues that in order to recover Kremer must have proven Schmit was uninsured in the original Kremer/Schmit lawsuit. All agree that Kremer did not do so at the original default judgment hearing.

The trial court ruled that proving that Schmit was uninsured was a burden Kremer had to meet as a condition precedent to the declaratory judgment action, not the original tort action. A close reading of Griffith, supra, discloses that the necessity of proving that the motorist was uninsured was a requirement only in the action against the insurance company, which was filed before the action against the uninsured motorist. In Ogle, supra, evidence of non-insurance became an element of the plaintiff’s proof only after the insurance company was allowed to intervene, thus focusing the lawsuit on the insured status of the “uninsured motorist.”

Here, the trial court was correct. In the absence of intervention, the plaintiff carries the burden of proving the operator of a vehicle was uninsured as an element of the declaratory judgment action, not the original tort action.

II. EXCLUSION OF EVIDENCE

In response to Kremer’s motion in limine, and again at trial, American offered to present evidence which it felt proved there was collusion between attorney Fuller and Schmit, which could have been used to argue that the default judgment was a sham. The trial court excluded this evidence.

In Wolff, supra, 472 N.W.2d at 235-236, this Court determined that when an insurer has declined coverage and the insured then settles the case rather than proceeding to trial, bad faith through collusion is a bar to recovery of damages in a subsequent suit brought against the insurance company. “Collusion” is an agreement, often secret, “between two or more persons, whose interests are apparently conflicting, to make use of the forms and proceedings of the law to defraud a third person.” Black’s Law Dictionary 331 (Rev’d 4th ed. 1968).

It is virtually undisputed that Fuller met with Schmit in April 1989. Schmit was unrepresented. Fuller advised Schmit that he (Schmit) could confess judgment; he would suffer no pecuniary loss; his property would not be executed upon; and Kremer would proceed to obtain “uninsured motorist” benefits from American. Apparently, Schmit indicated he would not contest the matter, but unlike Wolff, supra, Schmit refused to sign the confession of judgment document. A follow up letter, relating to the motion for default judgment repeated much the same promises. Despite the promises, Schmit appeared unrepresented and, in some manner, unsuccessfully opposed the entry of default judgment.

The issue is not the reasonableness of American’s concerns nor the credibility of the evidence. Nor is it Fuller’s intent at the time he talked with Schmit. The question presented to this Court is whether this evidence, if believed by the trier of the fact, would have shown collusion between Fuller and Schmit. State v. Boettcher, 443 N.W.2d 1, 3 (S.D.1989). No collusion has been shown. American has failed to meet its burden of proving that collusion was an appropriate bar to recovery in light of all the circumstances.²

III.AMENDMENT OF THE PLEADINGS

At the end of the first day of testimony, American moved to amend its pleadings to allege collusion between Fuller and Schmit. The trial court denied the motion. The decision to allow amendments to the pleadings is within the discretion of the court. Beyer v. Cordell, 420 N.W.2d 767 (S.D.1988). Since American failed to show collusion, there was no abuse of discretion in denying this motion.

IV.HEARSAY TESTIMONY

Attorney Fuller was called as an adverse defense witness. On direct examination, American’s attorney asked about Fuller’s first contact with Kremer. In response to questions, Fuller admitted he never served legal papers on the company, and never specifically notified them of the lawsuit. On cross-examination, he was asked why service and notice were never given. Over objections, Fuller responded saying that it was based upon Kremer’s conversation with American’s claims analyst. He then was asked what his understanding was of what Kremer had been told. Again, over objection he explained “his understanding.”

Otherwise inadmissible evidence, including hearsay evidence, may become admissible if the objecting party “opened the door” on direct examination. American’s examination of Fuller made these explanations relevant, despite their hearsay nature. State v. Dale, 439 N.W.2d 98 (S.D.1989).

V.INSTRUCTIONS TO THE JURY

American complains that Advisory Jury Instruction # 13 is erroneous because it failed to correctly state the law. It stated:

No specific requirement exists for the notification specified in the policy. The only requirement is that Kremer[s] notify American Family Insurance Company that they have brought suit against the uninsured motorist.

The general rule is that error cannot be predicated upon the giving or refusing of instructions to the advisory jury, unless that error is inextricably tied to the trial court’s erroneous conclusion of law. Lounsberry v. Kelly, 32 S.D. 160, 142 N.W. 180, 181 (S.D.1913), modified on rehearing, 32 S.D. 456, 143 N.W. 369 (1913); Lee v. Schultz, 425 N.W.2d 380, 383, n. 4 (S.D.1988). This is not such a case. The instruction and the conclusion of law, in light of all the circumstances concerning the policy notice provisions are substantially correct. The trial court did not abuse its discretion.

VI. THE APPROPRIATE INTEREST RATE

The trial court concluded that interest on this judgment should be computed at 15% per annum, pursuant to either SDCL 54-3-4 or SDCL 54-3-5. American contends that interest should be computed at 12% per annum pursuant to SDCL 54-3-5.1.

This is a declaratory action brought to determine the rights and duties of the parties under an insurance contract, which is an “instrument of writing.” Therefore, SDCL 54-3-5, which applies in part to interest due “on any instrument of writing,” is controlling. The 15% interest rate is correct.

The trial court is affirmed on all issues.

MILLER, C.J., and HENDERSON, J., specially concur with writings. WUEST and SABERS, JJ., dissent. ERICKSON, Circuit Judge, for AMUNDSON, J., disqualified.

1 . The dissent concludes that “[t]his case should go back to square one.” Unfortunately, that is not within our authority. SDCL 15-26A-6 limits the Supreme Court’s authority to only that case which is specifically before it on appeal. In this instance, that case is Kremer v. American Family Mutual Insurance Company, Lawrence County Civ. # 90-127. If this court finds, as a matter of law, that there was insufficient notice, this case is then over. There is no “square one” to go back to. To go back to “square one,” this court would have to order that Kremer v. Schmit, Lawrence County Civ. # 89-31, be re-opened.

Hypothetically, had American Family moved to intervene and set aside the default judgment in Kremer v. Schmit at any reasonable time after Fuller gave them actual notice of the default judgment; had been denied; and that denial was now on appeal, I would have been inclined to relieve the default and order a new trial. But American Family chose not to do that. So that option is not within our power to grant.

2 . The dissent brands Attorney Fuller’s conduct a “concealment, deception and a planned violation of due process.” Such a conclusion is overblown. While not condoning Attorney Fuller’s actions, he was caught in that age-old predicament facing lawyers for years. How do you make reasonable efforts to expedite your client's case (particularly when she has limited finances) and be fair to her insurance company (who with little thought concerning due process has summarily denied her uninsured motorist claim and has, in essence abandoned her, unless of course she recovers and then can press their subrogation rights).

In this instance, American Family's protests ring hollow. "Notice” is not synonymous with service of process. American Family wrote the policy and failed to specify "written notice” of lawsuits against “uninsured motorists,” which would have been reasonable. (Instead, they styled it a written “consent to be bound"). From the day of the accident, when it was first reported to their agent, and immediately thereafter, independently investigated by their adjuster, American Family had notice that Schmit was uninsured. Days before the Kremer v. Schmit lawsuit was commenced, American Family knew Mrs. Kremer had made an oral claim to uninsured motorist benefits under their policy. American Family had denied coverage. For months before the default was taken American Family had knowledge that the lawsuit was filed. During the pendency of the lawsuit, American Family's agents cooperated with, spoke with and discussed the progress of the case with Kremer’s attorneys. Additionally, American Family’s agents and employees packed up their files and trudged into their lawyer's office and planned what to do if Kremer recovered. Then, American Family made a conscious decision to sit and wait. As in Wolff, supra, 472 N.W.2d at 238, American Family “was not prejudiced by the lack of written notice.” American Family should have intervened.