Dzintarses v. Fireman’s Fund Ins., Illinois Union Ins., Allied World Ins.

INSURANCE BAD FAITH: 3rd-party common law claims stemming from delayed payment of settlement of DUI bicycle death not barred under MCA 33-18-242(4) (2023)… Court adopts majority federal rule allowing pleading of punitives in initial complaint even though contrary to MCA… Morris.

Leverich Partners Inc. (“SAV”) held its holiday party 12/14/19 at an event center in Bozeman run by Baxter Main LLC. Bartenders from the Robin Bar served alcohol. SAV employee Chad Basaites consumed alcohol to intoxication and left in his Jeep around 10:30. He drifted across the fog line and struck Alexa Dzintars who was riding home from work on her bicycle. She died at the scene.

Fireman’s Fund issued a commercial liability policy to Baxter. Illinois Union issued a liquor liability policy that covered Robin Bar. Allied World issued an additional policy that covered Robin Bar.

Alexa’s parents Egon & Rita Dzintars sued Baxter, Robin Bar, Basaites, and SAV in State Court. Illinois Union and Allied World retained counsel to defend Robin Bar. The parties settled in mediation 8/17/22.

Egon Dzintars signed the release and sent it to the parties. Baxter and Robin Bar responded a week later with a new release with a term that the parties had not discussed prohibiting Dzintarses from pursuing other proceedings and restricting them from using any information in the suit to Defendants’ detriment. The mediator and Dzintarses’ counsel advised that the new term posed ethical and logistical problems.

SAV sent a settlement check 8/26/22 pursuant to the release signed by Dzintarses. Baxter, Robin Bar, and Plaintiffs agreed on 9/12/22 to a modified version of the term proposed by Baxter and Robin Bar. Dzintarses’ counsel wrote the insurers 9/14/22 and 9/19/22 advising them of their obligation to pay the settlement by 9/21/22 pursuant to the agreement. They failed to make payment by that date. Dzintarses’ counsel wrote the insurers 9/22 advising that pressuring them to agree to the new, unbargained-for release terms by delaying payment constituted bad faith.

Baxter and Robin Bar represented at a hearing on the motion to enforce the agreement that no settlement had been reached. Judge John Brown took the motion to enforce the settlement under advisement 9/27/22. Robin Bar and Baxter sent an email 2/1/24 offering to settle with the standard release previously proposed by Dzintarses. Illinois Union and Allied World sent settlement checks 2/13/24. Fireman’s Fund sent its check 3/6/24. Plaintiffs now have sued the insurers alleging unfair trade practices in violation of MCA 33-18-201, common law bad faith, NIED, IIED, and punitives.

Fireman’s Fund and Illinois Union move to dismiss for failure to state a claim. The Court held a hearing 8/26/24.

I. Whether MCA 33-18-242(4) bars Plaintiffs’ claims for common law bad faith, NIED, and IIED

MCA 33-18-242(4) (2023) reads:

A third-party claimant who has suffered damages as a result of the handling of an insurance claim may bring an action against the insurer for fraud or pursuant to this section, but not under any other theory or cause of action. A third-party claimant may not bring an action for bad faith in connection with the handling of an insurance claim.

Plaintiffs are 3rd-party claimants because they are suing the insurers of another party rather than their own insurer. Their common law bad faith claim is based on the insurers’ handling of their claim. Their claims for infliction of emotion distress likewise relate to the insurers’ handling of the claim and their failure to make the settlement payment.

Plaintiffs argue that the Legislature did not enact 33-18-242(4) until 2023 and it was not in effect at the time of the failure to settle under the agreement. They argue that the Legislature did not explicitly make it retroactive. They argue that a presumption against retroactivity supports denial of the motion to dismiss.

“No law contained in any of the statutes of Montana is retroactive unless expressly so declared.” MCA 1-2-109 (2023). A presumption against retroactive application of statutes exists under Montana law. Neel (Mont. 1984); Boettcher (Mont. 2007) (citing Anderson (Mont. 1998) (“We will not apply a statute retroactively unless the Legislature clearly expresses its intention of such retroactive application.”)). “Substantive rights between parties to an action are determined by the law in effect on the date of the injury.” Anderson (citing Cadwell (Mont. 1987)).

§33-18-242(4) was enacted in 2023. Its language does not specify that the Legislature intended it to apply retroactively. The new law prohibits the assertion of common law bad faith and infliction of emotional distress claims against 3rd-party insurers. Plaintiffs’ bad faith and infliction claims are based on conduct and injuries that occurred in 2022. Montana law did not bar 3rd parties from bringing common law bad faith or other claims based on handling of insurance claims until 10/1/23. Plaintiffs’ claims are not barred by §33-18-242(4).

The insurers alternately argue that Plaintiffs’ claims are barred under MCA 33-18-242(7)(b) & 33-18-242(8)(b). §33-18-242(7)(b) reads: “A third-party claimant may not file an action under this section until the underlying claim has been settled or a judgment entered in favor of the claimant on the underlying claim.” The insurers contend that settlement occurred when the parties signed the settlement release and payment was made in 2024.

Claims accrue when the parties exchanged the oral settlement agreement, not when payment or release was executed. Carlson (D.Mont. 1999) (aff’d 9th Cir. 2001). The parties reached a settlement agreement 8/17/22. Any claims originating from the settlement thus accrued in 2022. Plaintiffs’ claims are not barred by §33-18-242(7)(b).

§33-18-242(8)(b) limits 3rd-party claimants in “an action under this section to 1 year from the date of the settlement of or the entry of judgment on the underlying claim.” (Emphasis added.) The insurers argue that the 1-year statute bars Plaintiffs’ claims if they accrued in 2022.

§33-19-242(8)(b) “does not apply to the common law tort of bad faith.” Brewington (Mont. 1999). §27-2-204(1) governs common law bad faith and breach of the covenant of good faith & fair dealing. Id. (quoting Egeland (Mont. 1999). The statute remains 3 years. Id.; §27-2-204(1). Plaintiffs’ claims are common law claims and accrued 8/17/22. They are not barred because the 3-year statute has not run.

II. Whether Plaintiffs have improperly pled their punitives claim

MCA 33-18-242(5) permits recovery of punitives for statutory bad faith claims. However, §27-1-221(5) provides that “a request for an award of punitive damages may not be contained within an initial pleading filed by a party with the court.” A party may move to amend their pleadings to add a claim for punitives “any time after the initial pleading is filed and discovery has commenced.” Id. The party must “submit affidavits and documentation supporting the claim for punitive damages.” Id. The Court may allow the claim only if that supporting documentation “sets forth specific facts supported by admissible evidence adequate to establish the existence of a triable issue on all elements of a punitive damages claim.” Id.

Plaintiffs argue that §27-1-221(5) represents a procedural rule that does not apply under the Erie doctrine in this Court. “Under the Erie doctrine, federal courts sitting in diversity apply state substantive law and federal procedural law.” Gasperini (US 1996). Several district courts have addressed whether a state law regarding pleading of punitives proves substantive or procedural. Most of them have concluded that a state law barring pleading of punitives in the initial pleading proves procedural and conflicts with the FRCivP. (Citing 4 cases.) TRC (D.Colo. 2007) concluded the opposite and applied state law to dismiss punitive claims raised in an initial pleading.

This Court joins the majority of federal district courts in concluding that §27-1-221(5) represents a procedural rule. “When confronted with an Erie question, we first ask whether a Federal rule of Civil Procedure or a federal law governs.” Orange Co. (CD Cal. 2017). If a FRCivP governs, the Court “will apply that rule — even in the face of a countervailing state rule — as long as it is constitutional and within the scope of the Rules Enabling Act.” Id.

FRCivP 8(a)(3) permits the claimant to seek punitives in the initial pleading. It requires claimants to include in their complaint “a demand for the relief sought, which may include relief in the alternative or different types of relief.” This rule is permissible and does not require a claimant to plead punitives expressly in their complaint. MCA 27-1-221(5) prohibits something that FRCivP 8(a)(3) allows. The FRCivP governs whether a claimant may assert a punitives claim in their initial pleading. Blazer (10th Cir. 1952) (“While the substantive right to recover on his claim is governed by state law, the form or mode of his claim for relief is a matter of Federal procedure, under which no technical forms of pleading are required.”) The Court must apply that rule unless it violates the Constitution or the Rules Enabling Act. A FRCivP does not violate the Enabling Act so long as it “really regulates procedure.” Shady Grove (US 2010). “If it governs only ‘the manner and the means’ by which the litigants’ rights are ‘enforced,’ it is valid; if it alters ‘the rules of decision by which the court will adjudicate those rights,’ it is not.” Id. (quoting Murphree (US 1946).

Rule 8(a)(3) governs how parties can plead a claim for punitives. It does not govern whether punitives are available, the burden of proof, or other substantive concerns. It permits the assertion of a punitives claim in an initial pleading and does not violate the Rules Enabling Act. It accordingly governs and MCA 27-1-221(5) does not bar Plaintiffs’ claim.

Dzintarses v. Fireman’s Fund Ins., Illinois Union Ins., Allied World Ins., 45 MFR 4, 9/30/24.

John Amsden, Justin Stalpes, and Sydney Best (argued) (Beck, Amsden & Stalpes), Bozeman, for Dzintarses; Jean Faure (argued) (Faure Holden), Great Falls, for Fireman’s Fund; Elizabeth Lund (Berg Lilly), Bozeman, for Illinois Union; Randy Nelson & Tom Bancroft (Nelson Law Firm), Billings, for Allied.