Eugene Schwartz and Pamela Schwartz v. State Farm Mutual Automobile Insurance Company and Robert E. Comte
Docket: 98-2448
Court: Court of Appeals for the Seventh Circuit; April 15, 1999; Federal Appellate Court
The case involves Eugene and Pamela Schwartz, who appealed a summary judgment favoring State Farm Mutual Automobile Insurance Company. The Schwartzes claimed that the under-insured vehicle provision in their State Farm policy was illusory and that State Farm acted in bad faith by denying their claim following a car accident in which they sustained injuries. The accident involved another driver, Everitt C. McMillin, who had minimal insurance coverage, which the Schwartzes accepted. Their claim to State Farm for additional damages was denied on the basis that McMillin's coverage was not under-insured and that their recovery from him offset any potential claim under their own policy.
The Schwartzes sued State Farm and its agent, Robert E. Comte, in Indiana state court, alleging bad faith and challenging the validity of the under-insured provision. State Farm removed the case to federal court, citing diversity jurisdiction despite the Schwartzes' motion to remand due to Comte's Indiana residency. The district court ruled that Comte was not a legitimate defendant, thus maintaining federal jurisdiction. It granted summary judgment to State Farm, concluding that the under-insured provision was valid and not illusory, and found no evidence of bad faith on State Farm's part. The Schwartzes appealed, disputing the district court's jurisdiction and the characterization of the policy provision.
Issues of removal from state to federal court and summary judgment are reviewed de novo. Evidence is interpreted in favor of the non-moving party, but only reasonable inferences need to be drawn, not every conceivable one. Summary judgment is warranted when no genuine issue exists regarding any material fact, allowing the moving party to prevail as a matter of law.
The Schwartzes contest the district court's ruling on federal jurisdiction, claiming that Comte was fraudulently joined as a defendant. The court determined that an in-state defendant cannot be joined solely to defeat federal diversity jurisdiction, a practice considered fraudulent if the out-of-state defendant demonstrates no reasonable possibility of a state court ruling against the in-state defendant. Therefore, it is necessary to assess whether the Schwartzes have a reasonable possibility of recovering from Comte under Indiana law.
The Schwartzes assert that Comte acted in bad faith by denying their insurance claim, which is recognized as a tort under Indiana law but has traditionally only been applied to insurance companies, not individual employees. They argue that Indiana’s respondeat superior doctrine permits them to sue both the employer and the individual tortfeasor when an employee commits a tort. Given that Comte denied the insurance claim, the Schwartzes believe they should be able to pursue claims against him alongside his employer if bad faith is established.
The Schwartzes failed to provide any legal precedent, particularly from Indiana, that supports individual liability for bad faith denial of an insurance claim. The court finds it unreasonable to expect an Indiana court to establish such a precedent in this case. The Schwartzes did not present facts indicating that Comte acted in bad faith beyond following the terms of State Farm's policy, meaning any liability would be derivative of his employer's, contradicting the traditional respondeat superior doctrine. Additionally, there is no recognized tort duty owed by Comte to the Schwartzes, as established by the Indiana Supreme Court, which clarified that the duty arises from the contractual relationship between insurer and insured. Since Comte is not in privity of contract with the Schwartzes, he does not owe them a special duty related to the bad faith tort. Citing various cases, the court concludes that an employee of an insurance company, who is not a party to the insurance contract, cannot be held liable for breaching the duty of good faith and fair dealing. The court dismisses the possibility of the Schwartzes recovering damages from Comte under current Indiana law, affirming the district court's decision to not remand the case due to fraudulent joinder.
On the issue of the insurance policy's under-insured provision, the plaintiffs argue it is illusory, meaning they paid a premium for coverage that would not pay benefits under expected circumstances. However, the court defines an illusory provision as one that does not cover any reasonably anticipated risk. Since the under-insured provision does cover at least one risk, the court agrees with the district court's determination that it is not illusory.
The Schwartzes' insurance policy defines an underinsured motor vehicle (UIMV) as a motor vehicle that, at the time of the accident, is insured for bodily injury liability but has limits lower than the Schwartzes' underinsured motor vehicle coverage or has had its liability limits reduced by payments to others. Vehicles falling under the policy's uninsured provision, which covers those with liability limits below state-mandated amounts, are excluded from the UIMV definition.
The Schwartzes argue they could not recover under the UIMV provision section 2a because their coverage limit ($25,000 per person, $50,000 per occurrence) matches Indiana's minimum liability requirement, meaning all liable drivers in Indiana would either meet or exceed their limits. Although lower limits exist in other states, those drivers would be classified as uninsured, thus precluding recovery under the UIMV provision.
Despite this, the UIMV provision is not entirely ineffective. Section 2b provides coverage if a liable driver cannot pay their policy limit due to obligations to multiple claimants, allowing the Schwartzes to recover the difference from their UIMV coverage. The Schwartzes acknowledge that this interpretation of section 2b is likely intended but argue that it excludes coverage since it references reductions in limits that would categorize drivers as uninsured, thus disqualifying them from the UIMV provision. They assert that any ambiguity must be resolved against the insurer, a stance the court rejects.
The plaintiffs' interpretation of the insurance provision is flawed, as it fails to logically connect payment to others with a reduction in pre-set insurance liability limits. The argument regarding ambiguity in the policy language is counterproductive; ambiguity must show that reasonable individuals could differ in their understanding of the contract. The courts interpret any ambiguous language in favor of coverage for the insured, as established in several cases. Therefore, if the Schwartzes pursued a claim under the ambiguous section, a court would likely rule in their favor regarding coverage. The underinsured provision is valid and not illusory, meaning the Schwartzes' claim was correctly denied. Federal jurisdiction remains intact following the joinder of Comte, and both underinsured and uninsured vehicle coverages are distinct yet similarly protective. The liability of the employer under respondeat superior is grounded in the individual tortfeasor's duty to avoid causing harm. The term "fraudulent" in the context of joinder does not imply bad faith by the plaintiffs. State Farm's argument that coverage distinction is irrelevant is invalid since the Schwartzes paid separate premiums for each provision, and each must cover distinct risks to avoid being considered illusory. The rejection of the underinsured provision's illusory status also negates the Schwartzes' bad faith claim, which relies solely on the assertion that State Farm denied a claim on an illusory provision.
