#25647-aff in pt, rev in pt & rem-GAS

2011 S.D. 13

                           IN THE SUPREME COURT
                                   OF THE
                          STATE OF SOUTH DAKOTA

                                        * * * *

BONNIE J. BERTELSEN and
PAUL D. BERTELSEN,
husband and wife,                                  Plaintiffs and Appellants,

v.

ALLSTATE INSURANCE COMPANY,
an Insurance Corporation,                          Defendant and Appellee.

                                        * * * *

                   APPEAL FROM THE CIRCUIT COURT OF
                      THE SECOND JUDICIAL CIRCUIT
                   MINNEHAHA COUNTY, SOUTH DAKOTA

                                        * * * *

                    HONORABLE WILLIAM J. SRSTKA, JR.
                                Judge

                                        * * * *
PAUL T. BARNETT
SCOTT G. HOY of
Hoy Trial Lawyers, Prof., LLC
Sioux Falls, South Dakota                          Attorneys for plaintiffs
                                                   and appellants.

CATHERINE M. SABERS
THOMAS G. FRITZ of
Lynn, Jackson, Shultz & Lebrun, PC
Rapid City, South Dakota                           Attorneys for defendant
                                                   and appellee.

                                        * * * *
                                                  ARGUED JANUARY 10, 2011

                                                  OPINION FILED 04/06/11
#25647

SEVERSON, Justice

[¶1.]        Paul and Bonnie Bertelsen brought this action against Allstate

Insurance Company for breach of contract and bad faith arising out of Allstate’s

failure to pay medical benefits under the Bertelsens’ personal automobile insurance

policy. On cross-motions for summary judgment, the trial court dismissed their

complaint. The Bertelsens appealed, and this Court reversed and

remanded for trial. After a five-day jury trial, the trial court did not submit the

Bertelsens’ punitive damages claim to the jury. The jury ultimately returned a

verdict awarding the Bertelsens $33,000 for breach of contract but rejecting their

bad faith claim. We affirm in part, reverse in part, and remand with directions for

proceedings consistent with this opinion.

                                    Background

[¶2.]        The underlying facts of this case are set forth in Bertelsen v. Allstate

Ins. Co., 2009 S.D. 21, 764 N.W.2d 495. Bonnie worked as an in-home registered

nurse for Universal Pediatric Services (UPS). On December 26, 2005, Bonnie was

severely injured in an automobile accident while driving a UPS vehicle to a

patient’s home to perform her nursing duties. As a result of the accident, Bonnie

spent six weeks in the hospital recovering from her life-threatening injuries,

underwent numerous surgeries, lost eight months of work, and incurred

$382,849.92 in medical expenses.

[¶3.]        Bonnie subsequently filed a claim for workers’ compensation benefits

with AIG, UPS’s workers’ compensation carrier. AIG denied the claim on January

10, 2006, and again on February 7, 2006. AIG asserted that Bonnie’s injury did not


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arise out of and in the course of her employment with UPS. AIG sent a copy of its

denial letter to the South Dakota Department of Labor.

[¶4.]         The Bertelsens’ personal automobile insurance policy with Allstate

provided $100,000 in medical payments coverage:

              Allstate will pay to or on behalf of an insured person all
              reasonable expenses actually incurred by the insured person for
              necessary medical treatment, medical services, or medical
              products actually provided to the insured person by a state
              licensed health care provider.

The policy contained a workers’ compensation exclusion: “This coverage does not

apply to any person to the extent that the treatment is covered under any workers’

compensation law.” And the policy contained a conformity-to-state-statutes

provision: “When any policy provision is in conflict with the law of the state in

which the insured auto is principally garaged, the minimum requirements of the

law of the state apply.”

[¶5.]         In February 2006, the Bertelsens advised Allstate that AIG denied

Bonnie’s workers’ compensation claim and gave Allstate notice of a potential

medical payments claim. The Bertelsens provided Allstate with their AIG claim

number and the AIG claims adjuster’s name and contact information. Allstate

spoke with AIG’s claims adjuster and confirmed the denial. Allstate noted the basis

for AIG’s denial in its claims file:

              [T]he employees are not on the payroll while en route to an
              assignment. They don’t start getting paid until they arrive at
              the job. Linda therefore denied coverage under work comp.
              Coverage was denied a week ago. She will fax a copy of the
              denial.




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Allstate requested written proof of loss for Bonnie’s medical payments claim. The

Bertelsens provided Allstate with Bonnie’s medical records and bills far exceeding

the policy limits and demanded payment of the $100,000 under the medical

payments provision of the policy. Allstate continued to investigate Bonnie’s claim

through spring 2006. By May 2006, Bonnie’s medical expenses were approaching

$300,000.

[¶6.]         Although Allstate’s claims manual requires immediate notice to

policyholders of any coverage issue, Allstate wrote to the Bertelsens in June 2006,

raising the workers’ compensation exclusion in the policy for the first time:

              A review of Bonnie Bertelsen’s auto policy shows in
              circumstances where an insured is driving a non-owned vehicle
              or in this case a vehicle owned by the company she works for, all
              available medical payment[s] coverage and worker[s’]
              compensation coverage must be exhausted before Allstate
              Medical Coverage applies.

The letter again requested the AIG claims adjuster’s name and contact information.

It further indicated, “Rest assured, once the investigation is complete and all

available coverage is exhausted, Allstate will move quickly to resolve [Bonnie’s]

claim.”

[¶7.]         Allstate’s medical payments benefits were not forthcoming. By

summer 2007, the Bertelsens experienced medical providers’ increasing demands

for payment. On December 19, 2007, Bonnie filed a petition with the South Dakota

Department of Labor, seeking workers’ compensation coverage. 1 AIG answered



1.      An Allstate claims adjuster testified at trial that he contacted Thomas Blake,
        the Bertelsens’ attorney, several days after the Bertelsens received the letter
        from Allstate raising the workers’ compensation exclusion. He contends that
                                                               (continued . . .)
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Bonnie’s petition on January 22, 2008, and for the first time admitted coverage for

“all past, present, and future medical, hospital, and health care expenses for her

work-related injury.” The Bertelsens later settled their claim with AIG for

$150,000.

[¶8.]        The Bertelsens also settled claims with various other insurers. The

Bertelsens sought medical payments benefits from Hartford Insurance Company,

UPS’s automobile insurer. Hartford paid its $30,000 limits in April 2006. The

Bertelsens also settled their underinsured motorist claim with Hartford for

$900,000. The Bertelsens settled their claim with State Farm, the negligent

tortfeasor’s automobile insurance company, for $100,000. Additionally, they sought

payment of their medical expenses from Avera Health, Bonnie’s health insurer.

Avera paid the Bertelsens $157,433.87. The Bertelsens’ other health insurers,

Sanford Health Plan and Blue Cross of California, paid additional health benefits.

In sum, various insurers eventually paid the Bertelsens approximately $1.2 million.

After subrogation and the payment of medical bills, the Bertelsens retained

approximately $660,000. Although various insurers ultimately paid most of

Bonnie’s medical expenses, the Bertelsens allege that they suffered approximately

$33,000 in contract damages as a result of Allstate’s failure to pay medical benefits.

[¶9.]        In December 2007, the Bertelsens initiated this breach of contract and

bad faith action against Allstate. The Bertelsens alleged that Allstate breached its


________________________
(. . . continued)
         Blake agreed to pursue the workers’ compensation claim at that time. This
         conversation is not noted in Allstate’s claims file, and Blake denies that it
         took place.

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insurance contract by failing to pay medical benefits with knowledge that AIG

denied Bonnie’s workers’ compensation claim. The Bertelsens primarily relied on

SDCL 62-1-1.3:

             If an employer denies coverage of a claim on the basis that the
             injury is not compensable under this title . . . , such injury is
             presumed to be nonwork related for other insurance purposes,
             and any other insurer covering bodily injury or disease of the
             injured employee shall pay according to the policy provisions. . . .
             If it is later determined that the injury is compensable under
             this title, the employer shall immediately reimburse the parties
             not liable for all payments made[.]

Because Allstate did not comply with SDCL 62-1-1.3, the Bertelsens contended that

Allstate’s failure to pay medical benefits was “frivolous,” “unfounded,” and

constituted bad faith.

[¶10.]       The Bertelsens moved for summary judgment on their breach of

contract claim, and Allstate moved for summary judgment on both claims. Relying

on the workers’ compensation exclusion in the policy, the trial court granted

Allstate’s motion for summary judgment. The trial court held that because AIG

ultimately paid Bonnie’s workers’ compensation claim, Allstate had an “articulable

and reasonable basis for the denial of benefits.” The trial court further held that “a

denial of a claim that is fairly debatable and is found to be not compensable under

the policy terms should not constitute bad faith.”

[¶11.]       The Bertelsens appealed, and we reversed and remanded for trial. On

the breach of contract claim, we held that “Allstate breached its contractual and

statutory duty to immediately pay medical benefits for bodily injury after Bonnie’s

workers’ compensation claim was denied.” Bertelsen, 2009 S.D. 21, ¶ 22, 764

N.W.2d at 501. We also addressed the Bertelsens’ bad faith claim, holding that

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Bonnie’s claim was not fairly debatable because “Allstate’s obligation was clear from

the statutory language alone[.]” Id. ¶ 20. Because genuine issues of material fact

remained, we remanded for trial to address the issues of contract damages and

Allstate’s intent in failing to pay medical benefits. Id. ¶ 22.

[¶12.]       On remand, the Bertelsens again moved for summary judgment on

their breach of contract claim. They argued that Bertelsen is controlling law and

required the trial court to grant judgment as a matter of law on their breach of

contract claim. The trial court denied the motion, and the case proceeded to trial on

the Bertelsens’ breach of contract and bad faith claims. Throughout trial, the trial

court blocked the Bertelsens’ attempts to present evidence that Allstate breached its

contractual and statutory duty to pay and that Bonnie’s medical payments claim

was not fairly debatable. At the close of the evidence, the Bertelsens moved for

directed verdict on their breach of contract claim. Their motion was denied. On

Allstate’s motion, the trial court did not submit the Bertelsens’ punitive damages

claim to the jury. The trial court also refused to instruct the jury in accordance with

Bertelsen. The jury ultimately returned a verdict awarding the Bertelsens $33,000

for breach of contract but rejecting their bad faith claim. The Bertelsens appeal.

                               Analysis and Decision

[¶13.]       1.     Whether the trial court erred by denying the Bertelsens’
                    motion for summary judgment on their breach of
                    contract claim.

[¶14.]       At issue in Bertelsen was the trial court’s grant of Allstate’s motion for

summary judgment on the Bertelsens’ breach of contract claim. In addressing that

issue, we first noted that SDCL 62-1-1.3 plainly requires insurers covering bodily


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injury to pay medical benefits when workers’ compensation coverage is denied.

Bertelsen, 2009 S.D. 21, ¶ 13, 764 N.W.2d at 499. Allstate had a duty under that

statute and the policy, which incorporated state coverage requirements, to pay

medical benefits immediately when it learned that AIG denied Bonnie’s workers’

compensation claim. Id. ¶ 14. It could “resolve workers’ compensation coverage and

subrogation issues at a later date.” Id. We held that, as a matter of law, “Allstate

breached its contractual and statutory duty to immediately pay medical benefits for

bodily injury after Bonnie’s workers’ compensation claim was denied.” Id. ¶ 22.

Because genuine issues of material fact existed regarding contract damages, we

remanded for trial. Id. ¶¶ 18, 22.

[¶15.]       On remand, the trial court rejected our analysis of SDCL 62-1-1.3 as

mere dicta and denied the Bertelsens’ motion for summary judgment on their

breach of contract claim. This Court’s standard of review of a grant or denial of a

motion for summary judgment is well settled. “In reviewing a grant or a denial of

summary judgment under SDCL 15-6-56(c), we determine whether the moving

party has demonstrated the absence of any genuine issue of material fact and

showed entitlement to judgment on the merits as a matter of law.” Advanced

Recycling Sys., L.L.C. v. Se. Prop., Ltd., 2010 S.D. 70, ¶ 10, 787 N.W.2d 778, 783

(quoting Janis v. Nash Finch, Co., 2010 S.D. 27, ¶ 6, 780 N.W.2d 497, 500). In

considering a trial court’s grant or denial of summary judgment, this Court “will

affirm only if all legal questions have been decided correctly.” Id. (quoting Gehrts v.

Batteen, 2001 S.D. 10, ¶ 4, 620 N.W.2d 775, 777).




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[¶16.]       The trial court’s rejection of Bertelsen prejudiced the Bertelsens’ ability

to fully and fairly present their case to the jury. The trial court thwarted the

Bertelsens’ attempts to introduce evidence at trial that insurers covering bodily

injury must pay medical benefits when workers’ compensation coverage is denied.

Yet the trial court permitted Allstate to present evidence that all involved in this

case, including the Bertelsens, believed that Bonnie was acting within the course

and scope of her employment when the accident occurred. Despite the plain

language of SDCL 62-1-1.3, Allstate argued to the jury that it properly denied

Bonnie’s claim under the workers’ compensation exclusion in the policy.

Accordingly, Allstate also argued that it could not be held liable for bad faith

because Bonnie’s claim was “fairly debatable.”

[¶17.]       Indeed, the trial court’s rejection of Bertelsen pervaded the entire trial.

Before opening statements, the Bertelsens’ attorney inquired if the jury would

decide whether Allstate breached its contractual and statutory duty to pay. The

trial court responded:

             I tell you what, as soon as the Supreme Court presides on this
             case, then the ruling that they made will stand, but as long as
             I’m presiding and it’s my rules, and so far I haven’t ruled that
             anybody has breached anything, okay. So let’s get this Supreme
             Court business behind us. All that decision says is that we’re
             going to have a trial, all right. So that’s what we’re having right
             now.

And the trial court repeatedly refused to instruct the jury that Allstate breached its

contractual and statutory duty to pay:

             All right. I just want to make one final comment about Bertelsen
             v. Allstate, the Supreme Court opinion, on the record. And that
             is my opinion that was a summary judgment that was reversed,
             and anything in there stated about who was who and what was,

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               that is strictly obiter dictum and not applicable to this – and it
               doesn’t apply to this case and I don’t – I don’t consider it
               controlling. I think there’s a question of fact as to whether there
               was a breach, and that’s why I’ve instructed this the way I have.

[¶18.]         The Bertelsens argue that Bertelsen is controlling law and required the

trial court to grant summary judgment on their breach of contract claim on remand.

We have said that “a question of law decided by [this Court] on a former appeal

becomes the law of the case in all its subsequent stages and will not ordinarily be

considered or reversed on a second appeal when the facts and the questions of law

presented are substantially the same.” In re Estate of Siebrasse, 2006 S.D. 83, ¶ 16,

722 N.W.2d 86, 90 (quoting Jordan v. O’Brien, 70 S.D. 393, 396, 18 N.W.2d 30, 31

(1945)). “The ‘law of the case’ doctrine is intended to afford a measure of finality to

litigated issues.” Id. ¶ 17 (quoting W. States Land & Cattle Co. v. Lexington Ins.

Co., 459 N.W.2d 429, 435 (S.D. 1990)).

[¶19.]         Allstate argues that this Court’s analysis of SDCL 62-1-1.3 in Bertelsen

is mere dicta. 2 The relevant portions of Bertelsen are controlling law. This Court’s

analysis of SDCL 62-1-1.3 was the basis for overturning the trial court’s grant of

summary judgment on the breach of contract claim. The language of that statute is

as clear today as it was when we decided Bertelsen. It plainly requires insurers

covering bodily injury to pay medical benefits immediately when workers’

compensation coverage is denied. Bertelsen, 2009 S.D. 21, ¶ 13, 764 N.W.2d at 499.




2.       “Dicta are pronouncements in an opinion unnecessary for a decision on the
         merits.” Moeller v. Weber, 2004 S.D. 110, ¶ 44 n.4, 686 N.W.2d 1, 15 n.4.


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[¶20.]         We clarify, however, that the duty to pay under SDCL 62-1-1.3 does

not defeat an insurer’s duty to investigate a claim. An insurer may request an

insured’s medical records and bills relating to a claim and may conduct any other

necessary investigation. But at the point that workers’ compensation coverage is

denied, and an insurer has completed its investigation of the claim, it has a duty to

pay medical benefits immediately. SDCL 62-1-1.3; Bertelsen, 2009 S.D. 21, ¶ 13,

764 N.W.2d at 499.

[¶21.]         We therefore recognize Allstate’s need to conduct an appropriate

investigation of Bonnie’s medical payments claim. But Allstate knew as early as

February 2006 that AIG denied Bonnie’s workers’ compensation claim. And it is

undisputed that by spring 2006, Allstate had completed its investigation of Bonnie’s

claim. It had, in hand, Bonnie’s medical records and bills far exceeding the policy

limits. At that point, Allstate had a duty under SDCL 62-1-1.3 and the policy,

which incorporated state coverage requirements, to pay medical benefits

immediately for Bonnie’s bodily injuries. Id. ¶ 14. When Allstate persisted in its

failure to pay, it breached its contractual and statutory duty to pay immediately as

a matter of law. Id. ¶¶ 17, 22. On remand, the trial court should instruct the jury

accordingly.

[¶22.]         Although we conclude that Allstate breached its contractual and

statutory duty to pay, the issue of contract damages remains. See Bowes Constr. v.

S.D. Dep’t of Transp., 2010 S.D. 99, ¶ 21, 793 N.W.2d 36, 43 (citations omitted)

(“[T]he elements of a breach of contract are (1) an enforceable promise; (2) a breach

of the promise; and, (3) resulting damages.”). The Bertelsens argue that because


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Allstate unreasonably delayed the payment of medical benefits, it is estopped from

asserting its subrogation rights. They thus conclude that they are entitled to a

contract damages award of $100,000, the full amount of the medical payments

benefits due under the policy, as a matter of law.

[¶23.]       We agree that an insurer should not escape liability for breach of

contract when it has acted in bad faith or unreasonably delayed the payment of

benefits. An insurer may thus waive the right to subrogation or be estopped from

asserting it when it has unreasonably delayed the payment of benefits. W. Am. Ins.

Co. v. Cates, 865 N.E.2d 1016, 1022 (Ind. Ct. App. 2007) (internal citations omitted).

See Sexton v. Cont’l Cas. Co., 1991 OK 84, 816 P.2d 1135, 1137 (“An act of an

insurer may cause it to waive its subrogation rights or estop the insurer from

asserting those rights.”). See also Hart v. State Farm Mut. Auto. Ins. Co., 248

N.W.2d 881 (S.D. 1976).

[¶24.]       The issue of contract damages is thus related to the Bertelsens’ bad

faith claim. In Bertelsen, we remanded for trial because genuine issues of material

fact remained regarding Allstate’s intent in failing to pay medical benefits. 2009

S.D. 21, ¶ 21, 764 N.W.2d at 501. Because the trial court thwarted the Bertelsens’

ability to fully and fairly present their case on remand, those questions of fact

remain today. Allstate’s intent in failing to pay medical benefits is an important

factor in deciding whether Allstate is estopped from asserting its subrogation rights.

With that factual dispute unresolved, we cannot decide whether the Bertelsens are

entitled to a contract damages award of $100,000 as a matter of law. We thus

remand for trial on the issue of contract damages. If the Bertelsens establish that


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Allstate is estopped from asserting its subrogation rights, they may be entitled to a

contract damages award of $100,000, the full amount of medical payments benefits

due under the policy, as a matter of law.

[¶25.]       2.     Whether the trial court abused its discretion by
                    improperly instructing the jury.

[¶26.]       The Bertelsens argue that the trial court abused its discretion by

improperly instructing the jury. We have previously clarified our standard of

review for jury instructions:

             A trial court has discretion in the wording and arrangement of
             its jury instructions, and therefore we generally review a trial
             court’s decision to grant or deny a particular instruction under
             the abuse of discretion standard. However, no court has
             discretion to give incorrect, misleading, conflicting, or confusing
             instructions; to do so constitutes reversible error if it is shown
             not only that the instructions were erroneous, but also that they
             were prejudicial.

Wangsness v. Builders Cashway, Inc., 2010 S.D. 14, ¶ 10, 779 N.W.2d 136, 140

(quoting State v. Cottier, 2008 S.D. 79, ¶ 7, 755 N.W.2d 120, 125). “Erroneous

instructions are prejudicial when in all probability they produced some effect upon

the verdict and were harmful to the substantial rights of a party.” Id. (citing SDCL

15-6-61).

Statement of the Case and Preliminary Instruction

[¶27.]       The Bertelsens first argue that the wording of the trial court’s

statement of the case in its preliminary instructions was an abuse of discretion.

The settlement of that instruction included the following exchange:

             COURT:              It is 8:42. We’re in courtroom 5B. Counsel is
                                 present. This is the time to settle
                                 preliminary instructions. Any objections on
                                 behalf of the plaintiff?

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         PLAINTIFF:   The plaintiffs do not have any objections to
                      the preliminary instructions 1 through 20.
                      We do have a preliminary instruction to
                      submit to the court, which I did on Friday
                      afternoon.

         COURT:       I saw that.

         PLAINTIFF:   That was Preliminary Instruction Number 1
                      I think.

         COURT:       Any objections on behalf of the defendant?

         DEFENDANT:   None, Your Honor.

         COURT:       Preliminary instructions are settled.

         DEFENDANT:   Your Honor, we did have a preliminary
                      instruction on claims of the parties that we
                      had submitted to you as well.

         COURT:       Yeah. You don’t seem like – it’s on the
                      statement of the case, right?

         DEFENDANT:   Right.

         COURT:       You don’t seem like you agree.

         DEFENDANT:   That seemed to be fair.

         COURT:       So I’ll just make my own preliminary
                      instruction.

         DEFENDANT:   Okay.

         COURT:       So I’ll have to pull it up and look at it.

         PLAINTIFF:   Well, Your Honor, is the court going to
                      provide some type of –

         COURT:       Yeah, I’m going to tell the jury, yeah, this is
                      the case and blah, blah, blah and blah and
                      blah, blah, blah and blah.

         PLAINTIFF:   When are we going to get to see that?


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             COURT:               I haven’t figured out what I’m going to say
                                  though.

             PLAINTIFF:           We’ll see that before it gets read to the jury?

             COURT:               It’s not going to be read to the jury. If you
                                  want something read to the jury, you agree
                                  to it. If you don’t want something read to the
                                  jury, that’s too bad.

[¶28.]       Immediately before reading the settled preliminary instructions, the

trial court advised the jury:

             This case involved the plaintiff. The lady who’s the plaintiff was
             involved in a car accident, and she had a contract of insurance
             with the defendant, Allstate Insurance Company, and she
             claims that Allstate did not pay certain benefits that they
             contracted to do, and so therefore she is suing for a breach of
             contract with Allstate Insurance Company. And she’s also
             stating that Allstate’s actions were vexatious and therefore she
             has been damaged. Also, her husband is alleging certain
             damages. That’s what the lawsuit is about. The law is about
             suing for damages.

It is unclear whether the trial court intended this statement to be an overview for

the jury, a part of the preliminary instructions, or a statement of the case.

[¶29.]       If merely an overview for the jury, the statement was error. In it, the

trial court not only distorted the issues in the trial by ignoring this Court’s ruling in

Bertelsen, but it also incorrectly stated that the Bertelsens were alleging that

Allstate’s actions were “vexatious,” which is not an element of a bad faith claim. See

Champion v. U.S. Fid. & Guar. Co., 399 N.W.2d 320, 324 (S.D. 1987). “[A] finding

that an insurer lacked good faith does not signify [that] its conduct was ‘vexatious

or without reasonable cause’ as a matter of law.” Crabb v. Nat’l Indem. Co., 87 S.D.

222, 233, 205 N.W.2d 633, 639 (1973). Because the statement was the jury’s first

exposure to the issues presented in this case, it was not inconsequential. Although

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the statement alone may not be sufficient to constitute reversible error, it must be

considered in the totality of the events at trial.

[¶30.]       We next consider whether the remarks would have been appropriate as

a part of the preliminary instructions. Counsel must be given an opportunity to

examine written instructions, including preliminary instructions, and to present

and argue objections to them before they are presented to the jury. Riggs v.

Syrovatka, 75 S.D. 338, 339, 64 N.W.2d 297, 298 (1954). SDCL 15-6-51(b) sets forth

the procedure for settling jury instructions:

             The court:
             (1)   Must inform the parties of its proposed instructions and
                   proposed action on the requests before instructing the
                   jury and before final jury arguments;
             (2)   Must give the parties an opportunity to object on the
                   record and out of the jury’s hearing to the proposed
                   instructions and actions on requests before the
                   instructions and arguments are delivered; and
             (3)   May instruct the jury at any time after trial begins and
                   before the jury is discharged.

This procedure “may not be waived, and failure to comply with [it] is reversible

error.” Riggs, 75 S.D. at 340, 64 N.W.2d at 298 (citing Heyl v. Waggoner, 58 S.D.

420, 236 N.W.2d 375 (1931); State v. Good, 58 S.D. 444, 237 N.W. 565 (1931)).

[¶31.]       Finally, we review whether the trial court’s statement would have been

appropriate as a statement of the case. “A statement of the case is neither a general

nor a preliminary instruction.” Kappenman v. Stroh, 2005 S.D. 96, ¶ 22, 704

N.W.2d 36, 42. The submission of a statement of the case to the jury is governed by

SDCL 15-14-1:

             In civil jury cases, prior to the jury having been selected and
             sworn, the court may read a written statement of the case
             agreed upon by the parties to the prospective jurors. The

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             statement may include a summary of the uncontested facts of
             the case, the claims of the parties and the issues presented. Any
             such statement of the case shall be submitted to the parties and
             agreed to by them before being read to the jury panel. . . .

Here, the trial court could have foregone giving a statement of the case because the

parties did not agree to one. But if the trial court’s remarks are viewed as a

statement of the case, it failed to follow the procedure set forth in SDCL 15-14-1,

which requires that the statement be written and submitted to and agreed upon by

the parties before being read to the jury.

Breach of Contract Instructions

[¶32.]       The Bertelsens challenge each of the trial court’s instructions

regarding their breach of contract claim. They argue that submitting the issue of

breach of contract to the jury was an abuse of discretion in light of Bertelsen. We

agree. And because a clear breach of contract is strong evidence of bad faith, the

trial court’s failure to properly instruct the jury on the Bertelsens’ breach of

contract claim prejudiced their substantial rights. See SDCL 15-6-61. On remand,

the trial court should instruct the jury that Allstate breached its contractual and

statutory duty to pay and that the only issue for its determination on the breach of

contract claim is the amount of damages proximately caused by that breach.

Bad Faith Instructions

[¶33.]       The Bertelsens also challenge several of the trial court’s instructions

regarding their bad faith claim. They first challenge Final Instruction No. 31:

             Every contract of insurance in South Dakota includes a duty
             that both parties act and deal in good faith with one another.
             This duty means that neither party will do anything to injure
             the rights of the other in receiving the benefits of the agreement.


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The Bertelsens argue that this instruction should have included one final sentence:

“The breach of that duty is called bad faith.” While the wording of Final Instruction

No. 31 may not have been ideal, it was not an abuse of discretion. See State v.

Brim, 2010 S.D. 74, ¶ 15, 789 N.W.2d 80, 86.

[¶34.]       The Bertelsens challenge two other instructions regarding their bad

faith claim. The first is Final Instruction No. 33:

             Bad faith may be established by proving that:
             (a)   defendant did not have a reasonable basis for denying or
                   withholding policy benefits or for failing to comply with
                   the insurance contract; and
             (b)   defendant knew it did not have a reasonable basis for
                   denying or withholding policy benefits, or acted with
                   reckless disregard in determining whether it had a
                   reasonable basis.
             (c)   plaintiff suffered damages by defendant’s acts.

             You may conclude that defendant did not have a reasonable
             basis for its acts or inaction if you find that the defendant
             recklessly disregarded available facts or law or failed to make a
             reasonable investigation of the claim.

             The law provides that defendant may challenge claims that are
             fairly debatable and can be held liable only where it knowingly
             and recklessly denied or failed to pay a claim without a
             reasonable basis.

The Bertelsens finally challenge Final Instruction No. 35: “Conduct is reckless when

a person consciously disregards a substantial risk. A person cannot be reckless if

they are unaware of the risk their behavior creates.”

[¶35.]       The Bertelsens argue that these instructions were error in light of

Bertelsen. In that case, Allstate argued that Bonnie’s medical payments claim was

fairly debatable because the application of SDCL 62-1-1.3 to an automobile insurer

was a case of first impression. Yet we said that “the language of SDCL 62-1-1.3 is


                                         - 17 -
#25647

plain, unambiguous, and not susceptible to debate.” Bertelsen, 2009 S.D. 21, ¶ 20,

764 N.W.2d at 501. “Allstate’s obligation was clear from the statutory language

alone, and an interpretative decision from this Court was not necessary for Allstate

to have determined its duty under [the] policy.” Id. Because a disputed issue of

material fact remained regarding Allstate’s intent in failing to pay medical benefits,

we remanded for trial on the Bertelsens’ bad faith claim. Id. ¶ 21.

[¶36.]       We agree that the trial court’s instructions on the Bertelsens’ bad faith

claim were an abuse of discretion. The trial court should have instructed the jury

that Bonnie’s medical payments claim was not fairly debatable and that the only

issue for its determination on the bad faith claim was Allstate’s intent in failing to

pay benefits. See id. ¶¶ 20-21. Because the denial of a claim that is not fairly

debatable is strong evidence of bad faith, the trial court’s failure to properly instruct

the jury prejudiced the Bertelsens’ substantial rights. See SDCL 15-6-61. On

remand, the trial court should instruct the jury in a manner consistent with our

analysis of the Bertelsens’ bad faith claim.

[¶37.]       3.     Whether the trial court erred by not submitting the
                    Bertelsens’ punitive damages claim to the jury.

[¶38.]       The Bertelsens argue that the trial court erred by not submitting their

punitive damages claim to the jury. SDCL 21-1-4.1 establishes a threshold to

ensure that there is a reasonable basis for punitive damages claims:

             In any claim alleging punitive or exemplary damages, before any
             discovery relating thereto may be commenced and before any
             such claim may be submitted to the finder of fact, the Court
             shall find, after a hearing and based upon clear and convincing
             evidence, that there is a reasonable basis to believe that there
             has been willful, wanton, or malicious conduct on the part of the
             party claimed against.

                                         - 18 -
#25647

“The trial court’s determination that there was a reasonable basis to submit the

issue of punitive damages to the jury will not be disturbed absent a showing that

the trial court’s findings of fact are clearly erroneous.” Harter v. Plains Ins. Co.,

1998 S.D. 59, ¶ 36, 579 N.W.2d 625, 634 (citing Isaac v. State Farm Mut. Auto. Ins.

Co., 522 N.W.2d 752, 761 (S.D. 1994)).

[¶39.]       Malice is an essential element of a punitive damages claim:

             In any action for the breach of an obligation not arising from
             contract, where the defendant has been guilty of oppression,
             fraud, or malice, actual or presumed, or in any case of wrongful
             injury to animals, being subjects of property, committed
             intentionally or by willful or wanton misconduct, in disregard of
             humanity, the jury, in addition to the actual damage, may give
             damages for the sake of example, and by way of punishing the
             defendant.

SDCL 21-3-2.

[¶40.]       The required malice may be actual or presumed. Biegler v. Am. Family

Ins. Co., 2001 S.D. 13, ¶ 45, 621 N.W.2d 592, 605 (citing Kjerstad v. Ravellette

Publ’n, Inc., 517 N.W.2d 419, 425 (S.D. 1994)). “Actual malice is a positive state of

mind, evidenced by a positive desire and intention to injure one another, actuated

by hatred or ill-will towards that person.” Id. (quoting Case v. Murdock, 488

N.W.2d 885, 891 (S.D. 1992)). By contrast, presumed malice is “malice which the

law infers from or imputes to certain acts.” Harter, 1998 S.D. 59, ¶ 36, 579 N.W.2d

at 634 (quoting Holmes v. Wegman Oil Co., 492 N.W.2d 107, 112-13 (S.D. 1992)).

Presumed malice may not “be motivated by hatred or ill-will but is present when a

person acts willfully or wantonly to the injury of others.” Biegler, 2001 S.D. 13, ¶

45, 621 N.W.2d at 605 (quoting Case, 488 N.W.2d at 891).



                                          - 19 -
#25647

[¶41.]       An insurer’s clear breach of contract or denial of a claim that is not

fairly debatable may indicate malice. Yet the trial court repeatedly blocked the

Bertelsens’ attempts to present evidence that Allstate breached its contractual and

statutory duty to pay and that Bonnie’s medical payments claim was not fairly

debatable. By doing so, the trial court thwarted the Bertelsens’ efforts to establish

a reasonable basis for their punitive damages claim. On remand, the trial court

should allow the Bertelsens to develop a record on their punitive damages claim. If

the Bertelsens present evidence establishing a reasonable basis for their claim, it

should be submitted to the jury.

[¶42.]       4.     Whether the trial court abused its discretion by
                    concluding that the attorney-client and work-product
                    privileges protect coverage opinions outside counsel
                    prepared for Allstate during the investigation of Bonnie’s
                    medical payments claim.

[¶43.]       In early 2008, the Bertelsens requested production of Allstate’s

complete claims file. Allstate provided its claims file but redacted some portions of

it, asserting the attorney-client and work-product privileges. The Bertelsens filed a

motion to compel. The trial court conducted an in camera review of the documents

and issued an order granting the Bertelsens access to some, but not all, the

information they requested. In late 2009, the Bertelsens learned that Allstate had

not produced its complete claims file and filed another motion to compel. The trial

court again conducted an in camera review of the documents. It concluded that the

coverage opinions outside counsel prepared for Allstate during the investigation of

Bonnie’s medical payments claim were confidential communications protected by

the attorney-client privilege. The trial court thus found it appropriate to redact the


                                        - 20 -
#25647

portions of the claims file containing the coverage opinions as well as

correspondence notes between Allstate and its outside counsel.

[¶44.]       SDCL 15-6-26(b)(1) provides that “[p]arties may obtain discovery

regarding any matter, not privileged, which is relevant to the subject matter

involved in the pending action[.]” Confidential communications between an

attorney and his client are not subject to discovery:

             A client has a privilege to refuse to disclose and to prevent
             any other person from disclosing confidential communications
             made for the purpose of facilitating the rendition of professional
             legal services to the client:
             (1)    Between himself or his representative and his lawyer or
                    his lawyer’s representative;
             (2)    Between his lawyer and the lawyer’s representative;
             (3)    By him or his representative or his lawyer or
                    a representative of the lawyer to a lawyer or a
                    representative of a lawyer representing another party in a
                    pending action and concerning a matter of common
                    interest therein;
             (4)    Between representatives of the client or between the
                    client and a representative of the client; or
             (5)    Among lawyers and their representatives representing
                    the same client.

SDCL 19-13-3. Statutory privileges “are to be strictly construed to avoid

suppressing otherwise competent evidence.” Dakota, Minn. & E. R.R. Corp. v.

Acuity (DM&E), 2009 S.D. 69, ¶ 57, 771 N.W.2d 623, 639 (quoting State v. Catch the

Bear, 352 N.W.2d 640, 646-47 (S.D. 1984)).

[¶45.]       The Bertelsens argue that the coverage opinions Allstate obtained

from outside counsel while investigating Bonnie’s medical payments claim are not

confidential communications protected by the attorney-client privilege. They

contend that Allstate had a fiduciary duty to investigate and evaluate Bonnie’s

claim and that an attorney hired to assist in that investigation was necessarily

                                         - 21 -
#25647

consulted on a matter of common interest. Because they are joint clients of the

counsel Allstate retained, the Bertelsens conclude that Allstate may not invoke the

privilege to prevent them from obtaining the coverage opinions.

[¶46.]        In addressing the Bertelsens’ argument, we begin by recognizing that

insurance bad faith actions are classified as either first-party or third-party claims.

Hein v. Acuity, 2007 S.D. 40, ¶ 9, 731 N.W.2d 231, 235. A first-party coverage

situation arises when an insurance company contracts to pay benefits directly to an

insured. Id. ¶ 10. First-party bad faith occurs “when an insurance company

consciously engages in wrongdoing during its processing or paying of policy benefits

to its insured.” Id. (citing Champion, 399 N.W.2d at 324) (additional citation

omitted). By contrast, a third-party coverage situation arises when an insurance

company contracts to indemnify an insured against liability to third parties. Id. ¶

9. And third-party bad faith occurs “when an insurer breaches its duty to give equal

consideration to the interests of its insured when making a decision to settle a case”

brought against its insured by a third party. Id. (citing Kunkel v. United Sec. Ins.

Co. of New Jersey, 84 S.D. 116, 121, 168 N.W.2d 723, 726 (1969); Crabb, 87 S.D. at

229-30, 205 N.W.2d at 637).

[¶47.]       The contours of the attorney-client privilege vary depending on the

nature of the bad faith claim. In a third-party coverage situation, the relationship

of an insurer to its insured is like that of a fiduciary because the insurer must give

as much consideration to its insured’s interests as it does its own. Trouten v.

Heritage Mut. Ins. Co., 2001 S.D. 106, ¶ 32, 632 N.W.2d 856, 864 (citing Long v.

McAllister, 319 N.W.2d 256, 262 (Iowa 1982)). In a subsequent third-party bad


                                         - 22 -
#25647

faith suit, the insurer may not invoke the privilege to prevent its insured from

obtaining communications with the attorney it hired to represent their joint

interests. See SDCL 19-13-5(5) (Rule 502(d)). 3 But an insurer and insured are

adversaries in a first-party coverage situation. Hein, 2007 S.D. 40, ¶ 10, 731

N.W.2d at 235. Because the interests of the insurer and insured conflict, the

insurer may retain outside counsel. Hartford Fin. Servs. Group, Inc. v. Lake Cnty.

Park & Rec. Bd., 717 N.E.2d 1232, 1235-36 (Ind. Ct. App. 1999). The insurer’s

retention of counsel is a “classic example of a client seeking legal advice from an

attorney.” Id. at 1236 (quoting Aetna Cas. & Sur. Co. v. San Francisco Superior

Court, 153 Cal. App. 3d 467, 476, 200 Cal. Rptr. 471, 476 (1984)). The attorney-

client privilege thus protects the insurer’s communications with counsel in the same

manner as any other client seeking legal advice from an attorney.

[¶48.]         And so it is here. Under the medical payments provision in the policy,

Allstate contracted to pay medical benefits directly to the Bertelsens, creating an

adversarial first-party coverage situation. See Hein, 2007 S.D. 40, ¶ 10, 731 N.W.2d

at 235. When the Bertelsens notified Allstate of Bonnie’s claim, Allstate retained

outside counsel to obtain a professional legal opinion on what it considered a novel

question of coverage. Allstate’s retention of counsel was for the “purpose of

facilitating the rendition of professional legal services,” which is a “classic example



3.       SDCL 19-13-5(5) (Rule 502(d)) provides that “[t]here is no privilege under . . .
         19-13-3 . . . [a]s to a communication relevant to a matter of common interest
         between or among two or more clients if the communication was made by any
         of them to a lawyer retained or consulted in common, when offered in an
         action between or among any of the clients.”


                                           - 23 -
#25647

of a client seeking legal advice from an attorney.” 4 See SDCL 19-13-3; Hartford,

717 N.E.2d at 1236. The Bertelsens were not joint clients of the counsel Allstate

retained. It thus appears that the attorney-client privilege protects the coverage

opinions outside counsel prepared for Allstate during the investigation of Bonnie’s

claim. 5 See Hartford, 717 N.E.2d at 1235-36.

[¶49.]         The Bertelsens nonetheless argue that the coverage opinions fall

within the advice-of-counsel exception to the attorney-client privilege. We have

recognized that “a party cannot affirmatively assert reliance upon an attorney’s

advice and then refuse to disclose such advice.” Kaarup v. St. Paul Fire & Marine

Ins. Co., 436 N.W.2d 17, 22 (S.D. 1989) (citing Duplan Corp. v. Moulinage et

Retorderie de Chavnoz, 509 F.2d 730, 735 (4th Cir. 1974); 8 Wigmore, Evidence, §



4.       We recently recognized the legal capacity exception to the attorney-client
         privilege in insurance bad faith cases. In DM&E, we 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 such
         communications.” 2009 S.D. 69, ¶ 56, 771 N.W.2d at 638. See First Aviation
         Servs., Inc. v. Gulf Ins. Co., 205 F.R.D. 65, 69 (D. Conn. 2001); Allendale Mut.
         Ins. Co. v. Bull Data Sys., Inc., 152 F.R.D. 132, 137-38 (N.D. Ill. 1993);
         Mission Nat’l Ins. Co. v. Lilly, 112 F.R.D. 160, 163 (D. Minn. 1986). When
         attorneys act as claims adjusters, their communications to clients and
         impressions about the facts are treated as the ordinary business of claims
         investigation, which is outside the scope of the attorney-client privilege.
         DM&E, 2009 S.D. 69, ¶ 55, 771 N.W.2d at 638. Here, the evidence has, as
         yet, not shown that outside counsel acted as a claim adjuster rather than as a
         legal advisor. Thus, on the record before us, the coverage opinions Allstate
         obtained while investigating Bonnie’s medical payments claim do not appear
         to fall within the legal capacity exception to the attorney-client privilege.

5.       Because it appears that the coverage opinions outside counsel prepared for
         Allstate during the investigation of Bonnie’s medical payments claim are
         protected by the attorney-client privilege, we do not address whether they are
         also protected by the work-product privilege.

                                           - 24 -
#25647

2327 (McNaughten ed. 1961)). Allstate argues that it did not raise an advice-of-

counsel defense as it did not argue at trial that its actions were in good faith

because it followed the advice of its counsel.

[¶50.]         An insurer need not expressly rely upon the advice of counsel to waive

the attorney-client privilege. Allstate Ins. Co. v. Clancy, 936 N.E.2d 272, 276 (Ind.

Ct. App. 2010). Indeed, “[m]ost sophisticated litigants will know better than to dig

that hole for themselves.” State Farm Mut. Ins. Co. v. Lee, 199 Ariz. 52, 64, 13 P.3d

1169, 1181 (2000) (en banc). While express waivers of the privilege are easy to

identify, courts widely dispute at what point a client impliedly waives the privilege

by injecting privileged communications into a case. 6 In Hearn v. Rhay, a federal

district court set forth three criteria to determine whether a party impliedly waived

the privilege:



6.       Three general approaches have emerged to determine whether a client has
         waived the attorney-client privilege by asserting an advice-of-counsel
         defense. Steven Plitt, The Elastic Contours of Attorney-Client Privilege and
         Waiver in the Context of Insurance Company Bad Faith: There’s a Chill in the
         Air, 34 Seton Hall L. Rev. 513, 534 (2004). The first approach provides that a
         litigant waives the attorney-client privilege if, and only if, he directly puts his
         attorney’s advice at issue in the case. Id. at 535. See, e.g., Rhone-Poulenc
         Rorer, Inc. v. Home Indem. Co., 32 F.3d 851, 863-64 (3d Cir. 1994); Palmer by
         Diacon v. Farmers Ins. Exch., 261 Mont. 91, 861 P.2d 895 (1993); Aetna Cas.
         & Sur. Co., 153 Cal. App. 3d at 474, 200 Cal. Rptr. at 475. The second
         approach provides that a litigant automatically waives the privilege upon
         assertion of a claim, counterclaim, or affirmative defense that raises an issue
         to which privileged material is relevant. Plitt, supra, at 534. See, e.g., In re
         Bergeson, 112 F.R.D. 692 (D. Mont. 1986); Silva v. Fire Ins. Exch., 112 F.R.D.
         699 (D. Mont. 1986); Boone v. Vanliner Ins. Co., 91 Ohio St. 3d 209, 744
         N.E.2d 154 (2001). Finally, the third approach balances the need for
         discovery with the importance of maintaining the attorney-client privilege.
         Plitt, supra, at 534-35. See, e.g., Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash.
         1975); Lee, 199 Ariz. at 60, 13 P.3d at 1177; Tackett v. State Farm Fire & Cas.
         Ins. Co., 653 A.2d 254 (Del. 1995).

                                            - 25 -
#25647

               (1) assertion of the privilege was a result of some affirmative act,
               such as filing suit [or raising an affirmative defense], by the
               asserting party; (2) through this affirmative act, the asserting
               party put the protected information at issue by making it
               relevant to the case; and, (3) application of the privilege would
               have denied the opposing party access to information vital to his
               defense.

68 F.R.D. 574, 581 (E.D. Wash. 1975). See Lee, 199 Ariz. at 56, 13 P.3d at 1173.

“[W]here these three conditions exist, a court should find that the party asserting

[the] privilege has impliedly waived it through his own affirmative conduct.”

Hearn, 68 F.R.D. at 581. Because it balances the need for discovery with the

importance of maintaining the privilege, a majority of jurisdictions have since

adopted this test. 7 Plitt, supra, at 538.

[¶51.]         Any standard for determining whether a client has impliedly waived

the attorney-client privilege must produce predictable results. After all, the

privilege serves the interests of justice by encouraging full and frank

communication between an attorney and his client. Upjohn v. United States, 449

U.S. 383, 389, 101 S. Ct. 677, 682, 66 L. Ed. 2d 584 (1981). To achieve that end, the

privilege must be predictable. Rhone-Poulenc Rorer, 32 F.3d at 863. A privilege

that depends on widely varying applications by courts is not predictable and thus




7.       We have said that “[w]e are not particularly impressed with characterizations
         of a doctrine as the ‘majority’ or ‘minority.’ We will give due consideration to
         all decisions of other jurisdictions but will be persuaded only by the
         soundness of their reasoning and their consistency with our State’s law.” Am.
         Fam. Mut. Ins. Co. v. Auto-Owners Ins. Co., 2008 S.D. 106, ¶ 33, 757 N.W.2d
         584, 594 (quoting Koch v. Spann, 193 Or. App. 608, 616 n.2, 92 P.3d 146, 150
         n.2 (2004)).


                                             - 26 -
#25647

little better than no privilege at all. Id. (quoting In re von Bulow, 828 F.2d 94, 100

(2d Cir. 1987)).

[¶52.]       Application of the Hearn test alone provides insufficient guidance to be

just and workable. In Lee, for example, an insurer argued that it acted in subjective

good faith based on its evaluation of state law. While the insurer did not expressly

raise an advice-of-counsel defense, the claims adjusters’ knowledge of the law

consisted entirely of the advice of counsel. Because the insurer’s evaluation of state

law necessarily included the advice of counsel, the Arizona Supreme Court applied

the Hearn test and held that the insurer affirmatively injected the advice of its

counsel into the case. Id. at 62, 13 P.3d at 1179. The court thus ordered the

disclosure of communications between the insurer and its counsel. We believe that

Lee goes too far, demonstrating that the Hearn test does not strike an appropriate

balance of the need for discovery with the importance of maintaining the privilege.

[¶53.]       We supplement the Hearn test to emphasize further the importance of

protecting the attorney-client privilege. First, the analysis of this issue should

begin with a presumption in favor of preserving the privilege. Second, a client only

waives the privilege by expressly or impliedly injecting his attorney’s advice into the

case. A denial of bad faith or an assertion of good faith alone is not an implied

waiver of the privilege. Clancy, 936 N.E.2d at 277-78 (citing Nat’l Union Fire Ins.

Co. v. Dominguez, 873 S.W.2d 373, 375 (Tex. 1994)). “Rather, the issue is whether

Allstate, in attempting to demonstrate that it acted in good faith, actually injected

its reliance upon such advice into the litigation.” Id. at 278. The key factor is

reliance of the client upon the advice of his attorney. Id. (citing Harter v. Univ. of


                                         - 27 -
#25647

Indianapolis, 5 F. Supp. 2d 657, 664 (S.D. Ind. 1998)). Finally, a client only waives

the privilege to the extent necessary to reveal the advice of counsel he placed at

issue. DM&E, 2009 S.D. 69, ¶ 54, 771 N.W.2d at 638 (citing Kaarup, 436 N.W.2d at

21).

[¶54.]       Because we remand for a new trial, we need not decide whether

Allstate waived the attorney-client privilege by reliance on an advice-of-counsel

defense. But depending on the pleadings, pre-trial proceedings, and the parties’

presentation of the evidence on remand, Allstate may waive the privilege by

expressly or impliedly injecting its counsel’s advice into the case. It is for the trial

court to make this determination based on the pleadings, pre-trial proceedings, and

the parties’ presentation of the evidence on remand.

[¶55.]       5.     Whether the trial court abused its discretion by granting
                    Allstate a protective order for its claims manuals,
                    training materials, and salary administration materials.

[¶56.]       In early 2008, the Bertelsens requested production of Allstate’s claims

manuals, training materials, and salary administration materials. In September

2009, Allstate moved for a protective order regarding those materials. The

Bertelsens filed a motion to compel. In January 2010, the trial court not only

granted the Bertelsens’ motion to compel, but it also granted Allstate’s motion for a

protective order. While the trial court required Allstate to produce the materials, it

ordered that the materials be “used only in connection with, and in preparation for,

the trial of this action.” The trial court initially left open the question whether the

materials would be admissible at trial but ultimately admitted some training

materials into evidence.


                                          - 28 -
#25647

[¶57.]         The Bertelsens argue that the trial court abused its discretion by

granting Allstate a protective order for its claims manuals, training materials, and

salary administration materials. SDCL 15-6-26(c) authorizes a court to grant a

protective order upon a showing of good cause. Good cause is established on a

showing that disclosure will work a clearly defined and serious injury. Gen.

Dynamics Corp. v. Selb Mfg. Co., 481 F.2d 1204, 1212 (8th Cir. 1973). The injury

must be shown with specificity. Id. Broad allegations of harm will not suffice. Id.

Because the grant or denial of a protective order is a matter within the trial court’s

discretion, we review the trial court’s ruling on this discovery matter under the

abuse of discretion standard. Maynard v. Heeren, 1997 S.D. 60, ¶ 5, 563 N.W.2d

830, 833 (citing Weisbeck v. Hess, 524 N.W.2d 363, 364 (S.D. 1994)).

[¶58.]         Allstate argues that its claims manuals, training materials, and salary

administration materials contain confidential trade secrets. SDCL 15-6-26(c)(7)

specifically contemplates the issuance of a protective order for a “trade secret and

other confidential research, development, or commercial information[.]”8 And



8.       SDCL 15-6-26(c) provides in relevant part:

               Upon motion by a party or by the person from whom discovery is
               sought or has been taken, or other person who would be
               adversely affected, accompanied by a certification that the
               movant has in good faith conferred or attempted to confer with
               other affected parties in an effort to resolve the dispute without
               court action, and for good cause shown, the court in which the
               action is pending, on matters relating to a deposition,
               interrogatories, or other discovery, or alternatively, the court in
               the circuit where the deposition is to be taken may make any
               order which justice requires to protect a party or person from
               annoyance, embarrassment, oppression, or undue burden or
               expense, including one or more of the following:
                                                                (continued . . .)
                                           - 29 -
#25647

SDCL 37-29-1(4), a provision of the Uniform Trade Secrets Act, defines “trade

secret”:

               [I]nformation, including a formula, pattern, compilation, program,
               device, method, technique, or process, that:
               (i)    Derives independent economic value, actual or potential,
                      from not being generally known to, and not being readily
                      ascertainable by proper means by, other persons who can
                      obtain economic value from its disclosure or use; and
               (ii)   Is the subject of efforts that are reasonable under the
                      circumstances to maintain its secrecy.

“The existence of a trade secret is a mixed question of law and fact.” Paint Brush

Corp., Parts Brush Div. v. Neu, 1999 S.D. 120, ¶ 14, 599 N.W.2d 384, 389 (quoting

Weins v. Sporleder, 1997 S.D. 111, ¶ 16, 569 N.W.2d 16, 20). While the first prong

of the test is a legal question, the second prong is a factual determination. Id.

(citing Weins, 1997 S.D. 111, ¶ 16, 569 N.W.2d at 20).

[¶59.]         We thus consider whether the trial court abused its discretion by

granting Allstate a protective order for its claims manuals, training materials, and

salary administration materials on the ground that they contain trade secrets or

other confidential information. 9 Initially, the burden rests on the party opposing


________________________
(. . . continued)
               ...
               (7) That a trade secret or other confidential research,
                   development, or commercial information not be disclosed
                   or be disclosed only in a designated way[.]

9.       Several courts have concluded that insurers’ claims manuals contain trade
         secrets and have therefore granted protective orders for them. See, e.g.,
         Hamilton v. State Farm Mut. Auto. Ins. Co., 204 F.R.D. 420 (S.D. Ind. 2001).
         But other courts have denied insurers’ motions for protective orders of their
         claims manuals because they did not present sufficient evidence to establish
         that the manuals contained trade secrets. See, e.g., A.P.L. Corp. v. Aetna
         Cas. & Sur. Co., 91 F.R.D. 10, 14-15 (D. Md. 1980); McCallum v. Allstate
                                                              (continued . . .)
                                          - 30 -
#25647

discovery to show that the information is a trade secret or other confidential

commercial information and that disclosure would be harmful to that party’s

interest in the information. In re Remington Arms Co., Inc., 952 F.2d 1029, 1032

(8th Cir. 1991). Once the party opposing discovery makes that showing, “the

burden then shifts to the party seeking discovery to show that the information is

relevant to the subject matter of the lawsuit and is necessary to prepare the case for

trial.” Id. (citation omitted). If the party seeking discovery shows both relevance

and need, a court must weigh the injury that disclosure might cause against the

need for the information. Id. (citation omitted). A court may issue a protective

order to safeguard the rights of the parties if both satisfy their respective burdens of

proof. Id.

[¶60.]       Allstate presented evidence establishing that its claims manuals,

training materials, and salary administration materials contain trade secrets or

other confidential commercial information. At least two of the requested manuals

contain the following statement:

                           STATEMENT OF CONFIDENTIALITY
             This material has been compiled exclusively for internal use and
             is not for distribution outside of Allstate Insurance Company. It
             contains trade secrets and confidential information which are
             proprietary to Allstate Insurance Company. The use,
             reproduction, transmission, or disclosure of this material, in
             whole or part, without the express written permission . . .



________________________
(. . . continued)
         Prop. & Cas. Ins. Co., 149 Wash. App. 412, 204 P.3d 944 (2009); Woo v.
         Fireman’s Fund Ins. Co., 137 Wash. App. 480, 486-92, 154 P.3d 236, 239-42
         (2007). See also Adams v. Allstate Ins. Co., 189 F.R.D. 331, 332-33 (E.D. Pa.
         1999).

                                         - 31 -
#25647

Additionally, Allstate presented evidence that it “does not voluntarily disseminate

[these materials] outside of the company” and that it has “requested and

successfully sought protective orders in other cases where claims manuals and

training materials [were] requested.” See SDCL 37-29-1(4). On these facts, the

trial court did not err by concluding that Allstate’s claims manuals, training

materials, and salary administration materials contain trade secrets or other

confidential commercial information.

[¶61.]       But the Bertelsens were also able to satisfy their burden of proof. It

was clear to the trial court that the materials were relevant to their bad faith claim

or were at least “reasonably calculated to lead to the discovery of admissible

evidence.” See SDCL 15-6-26(b)(1). The trial court thus granted both the

Bertelsens’ motion to compel and Allstate’s motion for a protective order. See

Remington Arms Co., 952 F.2d at 1032. It allowed the Bertelsens to access the

materials while preserving the confidentiality of Allstate’s commercially valuable

information. Ultimately, we conclude that the trial court did not abuse its

discretion by granting Allstate’s motion for a protective order for its claims

manuals, training materials, and salary administration materials.

                                     Conclusion

[¶62.]       As we indicated in Bertelsen, Allstate breached its contractual and

statutory duty to pay medical benefits for bodily injury immediately after AIG

denied Bonnie’s workers’ compensation claim. 2009 S.D. 21, ¶ 22, 764 N.W.2d at

501. Furthermore, Bonnie’s medical payments claim was not fairly debatable. Id. ¶

20. The jury should have been so instructed on remand, and the failure to do so


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prejudiced the Bertelsens’ ability to fully and fairly present their case to the jury.

We therefore remand for a new trial on the Bertelsens’ punitive damages claim, on

their breach of contract claim to determine contract damages, and on their bad faith

claim to determine intent. We further direct the presiding judge of the Second

Judicial Circuit to reassign this case to a different circuit judge within that circuit

on remand. See State v. Bult, 1996 S.D. 20, 544 N.W.2d 214; Sarver v. Dathe, 479

N.W.2d 913 (S.D. 1992).

[¶63.]       Affirmed in part, reversed in part, and remanded with directions for

proceedings consistent with this opinion.

[¶64.]       GILBERTSON, Chief Justice, and KONENKAMP, ZINTER and

MEIERHENRY, Justices, concur.




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