Dakota, Minnesota & Eastern Railroad Corporation, Plaintiff and Appellant v. Acuity, a Mutual Insurance Co. F/k/a… (South Dakota 2009)

Summary

The court reversed summary judgment on DM & E’s bad-faith and vexatious-failure-to-pay claims because the insurer had not shown that its denial was fairly debatable based on the information available when it made the decision, and factual disputes remained about its investigation. It held that post-filing litigation conduct is rarely admissible to prove bad faith, but may be considered when it sheds light on the reasonableness of the insurer’s decision, subject to evidentiary balancing. On the discovery cross-appeal, it reversed the order compelling discovery from an attorney who represented a different client, but affirmed the order as to the insurer’s attorney to the extent consistent with its ruling that an insurer cannot shield claims handling merely by delegating it to outside counsel.

Holding

Whether summary judgment was proper on DM & E’s bad-faith and vexatious-failure-to-pay claims.. Summary judgment was improper because genuine issues of material fact remained regarding the reasonableness and adequacy of Acuity’s investigation and denial, including whether the claim was fairly debatable based on the facts available when Acuity made its decision.

Whether post-filing litigation conduct may be evidence of first-party bad faith.. Post-filing litigation conduct will rarely be admissible to prove bad faith. The circuit court must determine whether the conduct sheds light on the reasonableness of the insurer’s decision or conduct in denying benefits and must weigh its probative value against the danger of unfair prejudice.

Whether the attorney-client privilege barred discovery from the attorney who represented the manufacturer of the Hy-Rail system.. The order compelling that attorney’s deposition and document production was erroneous because his client had not waived the privilege and there was no showing that he had participated in Acuity’s representation or claims investigation.

Whether Acuity could invoke attorney-client privilege for communications with outside counsel who exclusively performed the initial claims investigation and coverage determination.. When an insurer unequivocally delegates its initial claims function to outside counsel and relies exclusively on counsel to investigate and determine coverage, attorney-client privilege does not protect communications made in that claims-handling role. The circuit court must determine on remand which communications instead concern counsel’s separate role as defense counsel and whether any applicable privilege or work-product protection was waived.

Dakota, Minnesota & Eastern Railroad Corporation, Plaintiff and Appellant v. Acuity, a Mutual Insurance Co. F/k/a…

Summary

Holding

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