Court: Court of Appeals for the Seventh Circuit; March 9, 1994; Federal Appellate Court
Milton Donald, the plaintiff-appellant, suffered severe injury to his right arm on June 25, 1990, while attempting to retrieve his clothes from laundry equipment at the University of Evansville, which he had improperly left on. Following the incident, Donald initially sued the University and an employee for negligence, settling that claim. He also pursued legal action against the University's insurer, Liberty Mutual Insurance Company, for breach of contract and breach of good faith regarding Liberty Mutual's refusal to pay him $5,000 in medical payment benefits.
The case was under the jurisdiction of the district court due to the parties’ diverse citizenship and the amount in controversy exceeding $50,000, with Indiana law governing the action. The district court granted summary judgment in favor of Liberty Mutual, asserting that Indiana law prevents direct suits against insurers to recover benefits from policies issued to third parties.
Donald’s appeal centers on Liberty Mutual's denial of his claim for medical payment benefits under Coverage C of the insurance policy, which covers bodily injury resulting from accidents occurring on premises owned or rented by the insured. The policy requires that claims be reported within one year of the accident and that the injured party submit to medical examination by doctors chosen by the insurer.
Payments will be made regardless of fault, not exceeding insurance limits. Covered expenses include first aid at the accident scene, necessary medical services (surgical, x-ray, dental, prosthetics), and ambulance, hospital, nursing, and funeral services. Exclusions from coverage for bodily injury include injuries to insured individuals, workers of insureds, individuals occupying rented property, those entitled to workers' compensation benefits, athletes, injuries related to products-completed operations, those excluded under Coverage A, and injuries due to war. The applicable limit for medical payment benefits under Coverage C is $5,000. Coverage C specifically excludes "insured" persons, with "insureds" defined as executives, directors, stockholders, and employees of the named insured, the University through its Board of Higher Education. This distinction has caused confusion, as Donald's attorney mistakenly referred to him as an "insured," leading Liberty Mutual to believe he was not eligible for medical benefits under Coverage C. During negotiations, Liberty Mutual denied any negligence on the part of the University and Buente, asserting that Donald's tort claim was weak. Liberty Mutual subsequently provided a Release and Settlement form for $5,000, releasing the University from all claims related to the incident on June 25, 1990, signifying a complete settlement of liability.
Donald’s counsel rejected a settlement offer from Liberty Mutual but proposed that Donald would release Liberty Mutual from liability for medical payment benefits in exchange for $5,000, which Liberty Mutual declined. In November 1991, Donald initiated a lawsuit against the University and Buente for negligence, and against Liberty Mutual for breach of contract and bad faith. After settling with the University and Buente, Donald's claims against Liberty Mutual continued. Liberty Mutual filed for summary judgment on the bad faith claim, while Donald cross-moved for summary judgment on both claims.
Regarding the breach of contract claim, Donald maintained, and Liberty Mutual did not dispute, that he qualified for medical payment benefits under Coverage C due to his bodily injury occurring on the University’s premises during the policy period. Liberty Mutual contested Donald's eligibility, mainly asserting he had not completed required paperwork and argued he lacked standing to enforce the contract between Liberty Mutual and the University.
Most arguments concentrated on the bad faith claim, where Donald asserted it was bad faith for Liberty Mutual to condition the $5,000 payment on a release of all his claims against the other defendants. Liberty Mutual countered that Donald's eligibility for benefits was ambiguous, influenced by his attorney's claim that he was an 'insured,' and maintained that his negligence claims were insubstantial.
The district court denied Donald’s summary judgment motion and granted Liberty Mutual summary judgment on both claims, despite Liberty Mutual only seeking it on the bad faith claim. The court ruled under Indiana law that Donald could not sue Liberty Mutual for breach of contract as he was not a party to the contract, nor could he claim bad faith as a non-insured claimant. Donald appealed this decision, and the reviewing court reversed the summary judgment, determining that Donald, as a third-party beneficiary of the medical payment provision, had the right to sue Liberty Mutual on both counts.
The district court granted Liberty Mutual summary judgment on Count Two (breach of contract) of Donald's Complaint, stating that under Indiana law, an injured person who is not a party to an insurance contract cannot directly sue the insurer for losses. This principle is applicable in tort contexts, but Donald's suit is based on contract law, indicating a misapplication of Indiana law by the district court. Indiana does not allow direct actions against liability carriers by injured third parties without first securing a judgment against the insured tortfeasor. However, Donald can pursue a claim for $5,000 in medical payment benefits under Coverage C of his policy, as this claim does not require establishing the University's liability. The concept of direct action against an insurer pertains specifically to recovery for tort-related damages, which does not apply to medical payments that are not contingent on liability. Donald's ability to sue Liberty Mutual hinges on whether he is a third party beneficiary entitled to those medical benefits, which is determined by demonstrating clear intent to benefit him, a contractual duty owed to him, and that the contract's performance directly benefits him, consistent with the interpretation of medical payment provisions as third party beneficiary contracts under Indiana law.
Recovery under the medical payment provision operates independently of the insured's liability, resembling a personal accident policy. This provision functions as low-cost group accident insurance with a named insured, establishing direct liability to the intended beneficiaries. Indiana law likely supports this interpretation, as demonstrated in *Snow v. Bayne*, where an Indiana court permitted injured third parties to sue the insured's insurer directly for no-fault insurance benefits, recognizing them as third-party beneficiaries of the insurance contract.
Consequently, Donald is not precluded by Indiana law from suing Liberty Mutual directly for medical payment benefits under Count Two of his Complaint. He is deemed a third-party beneficiary of the contract between the University and Liberty Mutual, granting him the right to enforce this contract.
Regarding Count Three, the district court incorrectly concluded that Donald could not pursue a breach of contract claim against Liberty Mutual, which also impacts his bad faith claim. Under Indiana law, a third party cannot sue an insurer for bad faith handling of a claim if they are simply a claimant regarding an alleged tort. However, since Donald is claiming benefits as a third-party beneficiary rather than as a tort claimant, Liberty Mutual has an obligation to deal with him in good faith. Therefore, Donald can pursue a claim against Liberty Mutual for breach of the good faith duty owed to him as a third-party beneficiary under Count Three of his Complaint.
With these conclusions established, the document proceeds to evaluate the parties' motions for summary judgment.
Liberty Mutual sought summary judgment on Count Three of Donald's Complaint, alleging bad faith for failing to pay him $5,000 in medical payment benefits. Donald cross-moved for summary judgment on both Count Two (breach of contract) and Count Three.
For Count Two, the applicable standard for reviewing the denial of summary judgment requires a clear absence of genuine material fact disputes to reverse the decision. The parties agree that Donald was eligible for medical benefits under Coverage C following his injury on the University's property, as he sustained a bodily injury from an accident and did not meet the policy's exclusions. Liberty Mutual's main contention against summary judgment was that Donald failed to report his expenses within one year of the accident. However, Liberty Mutual did not raise this argument in its appeal, effectively waiving it. The record shows Donald timely reported his expenses as requested. Consequently, Donald is entitled to summary judgment on Count Two.
Regarding Count Three, Donald requests a remand for further proceedings but does not claim entitlement to summary judgment on this count. The court will review the summary judgment granted to Liberty Mutual de novo, considering the facts favorably for Donald.
To recover punitive damages for a breach of contract under Indiana law, a plaintiff must establish an independent tort for which such damages can be awarded. This principle aims to prevent the recovery of punitive damages without an established tort. Indiana recognizes a cause of action for the tortious breach of an insurer's duty to deal in good faith with its insured. Although Donald is a third-party beneficiary of an insurance contract and not the insured, he is owed the same duty of good faith and fair dealing by Liberty Mutual. While Liberty Mutual breached its contract by refusing to pay Donald's medical benefits, this breach does not automatically imply that a tort was committed. Indiana law allows insurance companies to challenge claims in good faith, and merely showing that a claim was incorrectly denied is insufficient to establish bad faith. The Indiana Supreme Court has indicated that the obligation of good faith includes refraining from unfounded refusals or delays in payment, deceiving the insured, or exerting unfair pressure regarding settlements. Donald claims that Liberty Mutual's refusal to pay was unfounded and that it improperly pressured him to release the University from liability before paying the benefits. If he can prove either claim by a preponderance of the evidence, he may establish that Liberty Mutual committed the tort of bad faith dealing.
Donald is not fully resolved in his legal battle, particularly regarding his claims against Liberty Mutual for punitive damages under Count Three. While he will receive contract damages from a summary judgment in his favor on Count Two, Indiana law requires more than just a preponderance of evidence to award punitive damages; there must be clear and convincing evidence of malice, fraud, gross negligence, or oppressiveness, excluding mistakes or mere negligence. Donald has raised a genuine issue of material fact regarding whether Liberty Mutual's offer of $5,000 for a release of liability indicates bad faith, as established in Indiana case law. Liberty Mutual contends that Donald was not entitled to medical payment benefits and that his liability claim against the University was not in dispute. However, these claims are not the only reasonable interpretations of the evidence. The court found that Liberty Mutual failed to prove its entitlement to summary judgment regarding its good faith in settlement discussions. Consequently, the court reversed the summary judgment in favor of Liberty Mutual on Counts Two and Three, remanding the case for further proceedings on Count Three and directing that summary judgment be entered in Donald’s favor on Count Two.
Coverage A is applicable to damages that the insured is legally obligated to pay due to 'bodily injury,' excluding those liabilities incurred through contractual assumptions. It encompasses liability arising from torts, including negligence and strict liability. Coverage C guarantees medical payment benefits without regard to fault, implying that benefits will be provided irrespective of the insured’s liability. This interpretation aligns with established understandings of medical payment provisions, which prioritize the payment of medical expenses rather than protecting the insured from legal liability.
The document notes that many states prohibit direct actions against a tortfeasor's insurer to avoid prejudice in trials related to the insured's negligence. This principle is upheld in Illinois, where the disclosure of liability coverage during such trials is considered prejudicial. However, it allows for declaratory judgment actions against the insurer to clarify the extent of coverage without implicating the insured’s liability.
In the specific case, an accident occurred on June 25, 1990, and inquiries about medical payment benefits were made in December of the same year. Liberty Mutual confirmed that the University of Evansville had premises medical payment coverage, which activates after other coverages have been utilized. The insurer requested documentation of any payments made by other carriers but did not provide copies of the policy to the injured party's attorney. By March 1991, the attorney submitted the necessary documentation, revealing over $5,000 in medical expenses that had not been covered by the injured party’s insurer.
