McKenzie v. Farmers Insurance Exchange
MEMORANDUM OPINION AND ORDER. Signed by U.S. District Judge Lawrence L. Piersol on 5/12/17. (DJP)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
FARMERS INSURANCE EXCHANGE,
Defendant Farmers Insurance Exchange has been served with a Summons and Complaint in
this action, but has failed to appear and answer the Complaint. Accordingly, on March 9, 2017,
Plaintiff filed a Motion for Entry of Default under Federal Rule of Civil Procedure 55(a), Doc. 8.
Default was entered by the Clerk on March 9, 2017, Doc. 9. On March 10, 2017, Plaintiff filed a
Motion for Entry ofDefault Judgment under Federal Rule of Civil Procedure 55(b)(2). Doc. 10. A
hearing on Plaintiffs Motion for Default Judgment was held before the Court on Monday, May 8,
2017, at 10:00 A.M., Doc. 12. Plaintiff appeared personally along with her attorneys of record,
Eric T.Preheim and Molly K.Beck. Defendant was not present. The Court has reviewed the record
and pleadings and having heard arguments of Plaintiffs counsel and testimony of witnesses and
having examined the evidence introduced does make these findings offact and conclusions oflaw:
Plaintiffis a woman bom in 1965,single since 2001,and is a college graduate. The Plaintiff
has been employed outside the home but more recently has instead been helping with the care ofher
In June 2014, Ms. McKenzie's home was damaged during hailstorms that went through the
Sioux Falls region. Ms. McKenzie timely submitted a claim to Farmers Insurance Exchange
("Farmers") for the hail damage to her home. She had been their insured for 18 years. After
conducting an initial inspection in November 2014,Farmers notified Ms. McKenzie in a letter dated
January 5, 2015, that it was going to:
emporarily close your claim until we can complete a safe and practical inspection.
When weather eonditions allow for an inspeetion, and your property is clear and dry,
we'll promptly reopen your claim, inspect the damaged property and complete your
Farmers' January 5, 2015 letter went on to specifically prohibit Ms. McKenzie from making the
necessary repairs until it conducted another inspection. Farmers never reopened Ms. McKenzie's
claim and never retumed for another inspection.
Ms. McKenzie became worried about getting the damaged property fixed and contacted
Farmers about the status ofher claim. She had sold the house after the hail damage,and sold it with
the representation that she would have all ofthe hail damage repaired. Ms. McKenzie was worried
that she was going to get sued for non-performance. The home was insured for $1,025,000. Farmers
stated that it would not release the withheld depreciation because the repair work had not been
"eompleted within 365 days of November 3, 2014." But Ms. McKenzie was not able to make the
repairs within 365 days of November 3, 2014, as she was precluded from doing so by Farmers'
January 5, 2015 letter. Even when Farmers was reminded of the January 5, 2015 letter to Ms.
MeKenzie and the reasons for why the repairs were not able to be completed within the 365-day
deadline. Farmers still refused to release the depreciation. Farmers' refusal persisted even after Ms.
McKenzie's repairs were completed at a eost to her of $79,390. The roof was a wood shake roof.
Farmers either knew or recklessly disregarded the faet that Ms. McKenzie would rely on its
representations and admonitions in the January 5, 2015 letter to her detriment. In fact. Farmers'
January 5,2015 letter and subsequent inaction was used to induce Ms. McKenzie to miss the 365-
day deadline for completing repairs,thereby wrongfully depriving her ofthe withheld depreciation,
a benefit owed under the policy..
In a denial letter the insurer claimed that there was $29,466.82 recoverable depreeiation but
that the "time to recover the $29,466.82 recoverable depreciation for the roof and windows was
January 9, 2016," that quote being in the July 11, 2016 denial of benefits letter. Again, in the
January 5, 2015 letter to the insured, the insurer also stated:
Weather conditions during the winter months usually make roof/exterior inspections
unsafe and impractical, so we will temporarily close your claim until we can
complete a safe and practical inspection. When weather conditions allow for an
inspection, and your property is clear and dry, we'll promptly reopen your claim,
inspect the damaged property and complete your claim.
However, if the loss isn't covered, you'll be responsible for any expenses incurred.
We'll need to inspect your home before final repairs are initiated.
There was no excuse for withholding the insured's depreciation payment and the continued
refusal to withhold in view ofthe circumstances was bad faith. See Johnson v. Coss,2003 S.D. 86,
1 15, 667 N.W.2d 701, 706 (quoting 13 Richard A. Lord, Williston on Contracts, § 39:4 (4th ed.
2000))("the nonoccurrence or nonperformance of a condition is excused where the failure of the
condition is caused by the party against whom the condition operates to impose a duty."); j'ee also
Bailey v. Farmers Union Co-op Ins. Co. ofNebraska, 1 Neb. App.408,418,498 N.W.2d 591,598
(1992)(citing Chadd v. Midwest Franchise Corp., 226 Neb. 502, 412 N.W.2d 453 (1987))("A
[contractual] condition is excused ifthe occurrence ofthe condition is prevented by the party whose
performance is dependent upon the condition.") In line with this general principle of eontract law,
"an insured should not be barred from recovery for failure to rebuild within the time constraints of
the policy when the condtict ofthe insurer prevented the insured from rebuilding." Bailey v. Farmers
Union Co-op Ins. Co. ofNebr., 498 N.W.2d 591, 599(Neb. S.Ct. 1992).
The Supreme Court of Maine was presented with this issue where the insurer's own actions
caused the delay in construction in Maine Mut. Fire Ins. Co. v. Watson,532 A.2d 686(Me. 1987).
The Watson Court, in awarding replacement costs and rejecting the insurer's allegations that the
insured was not entitled to replacement costs because the repairs were not completed within a set
time period, reasoned:
The [insurer] was made [a]ware of the misstatement made by its adjuster, and yet
neither the company nor the adjuster took any affirmative steps to correct the error.
The [insured] was allowed to continue to labor under the false impression created by
the adjuster. The [insurer] seems to take the position that its nonfeasance was
allowable because the insured eventually had legal representation. That, of course,
is no excuse whatsoever. Throughout the entire processing ofhis claim the [insured]
was never certain the insurer was going to recognize this claim. The direct result of
this uncertainty was the delay ofthe start ofconstruction. To agree with the [insurer]
would be to allow a party to take advantage of his own wrong, which we will not
Id. at 689 (internal citations omitted).
The same is true here. It was Farmers' own actions that made it impossible for Ms.
McKenzie to make the repairs within one year when Farmers unilaterally closed her claim on
January 5,2015,and instructed her not to begin repairs until it completed another investigation. But
it never reopened her claim and never conducted another investigation. Thus,the condition that the
repairs be completed within 365 days is excused. Plaintiff is entitled to the replacement costs she
was prorriised, and for which coverage she paid for under her policy.
Plaintiffseparately complains of depreciation also being without for pure labor. The South
Dakota Division of Insurance has already told insurance companies that they caimot withhold or
depreciate labor costs. See S.D. Bulletin No. 2003-4 ("It is the Division's position, based on the
policy language, that labor costs are owed whether the vehicle is repaired or not.") This same
practice of depreciating labor costs was also applied to another of Defendant's insureds who also
testified at the evidentiary hearing. That 85 year old insured had been insured by Farmers for about
Punitive Damages Are Appropriate
This action is before the court on diversity grounds and South Dakota state law supplies the
substantive law. In South Dakota, general damages do not normally include exemplary or penal
damages. SDCL 21-1-4. But plaintiffs may,in certain circumstances, recover punitive damages.
Dahl V. Sittner, 474 N.W.2d 897,900(S.D. 1991); SDCL 21-3-2. Under SDCL 21-3-2, a plaintiff
claiming punitive damages must show that "the defendant has been guilty of oppression, fraud, or
malice,actual or presumed." Ifthe plaintiffmakes this showing,punitive damages may be given "for
the sake ofexample,and by way ofpunishing the defendant." SDCL 21-3-2;see also Gross v. Kouf,
349 N.W.2d 652,654(S.D. 1984)("[T]he purpose of awarding punitive damages is to punish the
wrongdoer.... [TJhis [punitive] award should serve as a warning to others").
Before a claim for punitive damages may be submitted to a factfmder, the court must find
that a reasonable basis exists to "believe that there has been willful, wanton or malicious conduct on
the part of the party claimed against." SDCL 21-1-4.1. The party seeking punitive damages must
make this showing by clear and convincing evidence. Id. After the party makes this showing,
however, she must only demonstrate to the faetfinder by a preponderance of the evidence that she
is entitled to punitive damages. Dahl,474 N;W.2d at 902(citing Aschoffv. Mobil Oil Corp., 261
N.W.2d 120,125 (S.D. 1977)).
All punitive damages claims require a showing of either actual or presumed malice. Id. at
900. "Actual malice is a positive state of mind, evidenced by the positive desire and intention to
injure another, actuated by hatred or illwill towards that person." Id. (citing Gamble v. Keyes, 178
N.W. 870, 872(S.D. 1920)). A person acts with actual malice when his actions are intentional.
Moosmeier V. Johnson, 412N.W.2d 887, 890(S.D. 1987).
Plaintiffargues that Farmers Insurance acted with presumed malice. "Presumed,legal malice
... is malice which the law infers from or imputes to certain acts." Dahl,474 N..W. 2d at 900(citing
Hannahs v. Noah, 158 N.W.2d 678,682(S.D. 1968)). An inference of malice may be made when
the person acts willfully or wantonly and injures another. Id. "Willful and wanton misconduct
demonstrates an affirmative, reckless state of rnind or deliberate recklessness on the part of the
defendant." Tranby v. Brodock, 348 N.W.2d 458, 461 (S.D. 1984). This is an objective, not
subjective,standard. Id. The actions ofFarmers Insurance demonstrate,at a minimum,an objective
standard ofa reckless state ofmind. This state ofmind is determined by an objective standard rather
than a subjective state of mind ofthe Defendant. See Tranby at 348 N.W.2d at 461. More than one
employee of Farmers was exposed to this claim and had an opportunity to right this wrong.
Plaintiffhas metthe standard by clear and convincing evidence that Farmers Insurance acted
with presumed malice by its willful actions and inactions. Usually after this showing of clear and
convincing evidence, it would be up to a jury for determination. However, in this case there is a
defaultjudgment because Farmers Insurance did not respond to Plaintiffs pleadings or to subsequent
notification ofthis litigation. Therefore,Plaintiffmust demonstrate to the Court by a preponderance
ofthe evidence that she is entitled to the punitive damages she seeks in the amount of$880,000. In
rough comparison,a South Dakotajury awarded $200,000 in compensatory damages and $6 million
in punitive damages in an insurance bad faith case. McElgunn v. CUNA MutualInsurance Society,
700 F.Supp.2d 1141 (D.S.D. 2010). The punitive damages were reduced to $1.6 million, an 8-to-I
ratio with the observation that the $200,000 for emotional and mental harm had a punitive aspect to
it. There is no punitive aspect to the $50,000 compensatory damage award in the present case for
emotional and mental harm that was less than in the McElgunn case. Also, in Athey v. Farmers
Insurance Exchange-, Illinois Farmers Insurance Company, CIV 96-4238 (D.S.D. 1996) a South
Dakotajury awarded $160,000 for the underinsured motorist claim,$125,000 for the bad faith claim
and $450,000 for the punitive damages claim for a total of $635,000.
The United States Supreme Court has established three"guideposts"for reviewing a punitive
damages award: "(1)the degree ofreprehensibility ofthe defendant's misconduct;(2)the disparity
between the actual or potential harm suffered by the plaintiff and the punitive damages award; and
(3) the difference between the punitive damages awarded by the jury and the civil penalties
authorized or imposed in comparable cases." State Farm Mutual Insurance Co. v. Campbell, 538
U.S. 408, at 418, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003)(citations omitted). South Dakota has
incorporated a five-factor test within these three guideposts. "(1) the amount allowed in
compensatory damages,(2)the nature and enormity of the wrong,(3)the intent ofthe wrongdoer,
(4)the wrongdoer'sfinancial condition,and(5)all ofthe circumstances attendantto the wrongdoer's
actions." Roth v. Farner-Bocken Co., 667 N.W.2d 651,666(S.D. 2003)(citation omitted).
To serve the purpose of punishment and determent, punitive damages must not be so "large
as to shock the sense of fair-minded men, but they may considerably exceed compensatory
damages." Gross, 349 N.W.2d at 654. South Dakota does not apply a precise mathematical ratio
between compensatory and punitive damages,rather "the amount of punitive damages turns on the
particular facts of each case." Id.
With regard to the first factor, the amount of compensatory damages, the out-of-pocket
pajonents to repair the hail damaged property was $79,390, less the $9,600 initially received from
the insurer, and the applicable deductible of$20,500, for $49,290 still owed by Farmers Insurance
to the Plaintiff. In addition, for general damages the Court is awarding $50,000 for the emotional
distress and physical manifestations from that distress.
The insurer continued to refuse to pay the $29,466.82 of recoverable depreciation plus the
withheld labor depreciation.Plaintiffwas in a position where she was prohibited by the insurer from
making the repairs but she was concerned that she would be sued by the purchasers of her house for
failure to make the repairs. The house was sold after the hail damage but as a part ofthe transaction
Plaintiff had to have the hail damage repaired. The Defendant, despite requests for an extension of
time within which to make the repairs, continued to refuse to allow additional time for the repairs
to be made and refused any further payment,so Plaintifftook the money for repair paymentfrom her
money market account which was what she considered to be her retirement account. During all of
this the Plaintiff felt powerless and finally went to lawyers, and also paid for the hail repairs in
August of 2016 in the total amount of $79,390. Plaintiff suffered emotionally and as a result had
abdominal pain on numerous occasions and vomited three times as a result of Defendant's actions
and inactions. The Court awards $50,000for the emotional and physical injury proximately resulting
from the actions and inactions of Farmers Insurance.
The second factor that the Court examined is for the nature and enormity ofthe wrong. We
are not talking about mere negligence in this matter but rather a continued wrong against an insured
that was owed a high duty of care. Even when presented with the fact that the insured did not get
the roofrepaired because the insurer told her not to until the insurer had inspected again,and the fact
that in the winter time in South Dakota roof work could not be done, and despite having numerous
opportunities to recognize the correctness ofPlaintiffs position, the insurer continued to rely upon
their own Catch 22 position to deny payment to its insured.
For the third factor, the intent of the wrongdoer is hard to determine since the wrongdoer
never responded to the lawsuit. More than one person for the insurer persisted in the denial so the
continued denial had to be a company policy. There was no discovery in the ease so the Court does
not know whether this same approach was taken with other insureds. The Plaintiff argues that
Farmers Insurance claims handling practices were at least partially responsible for the $750,000
penalty that was imposed by the South Dakota Division ofInsurance in a Consent Order entered on
June 3, 2015. The Consent Order was entered after the South Dakota Division of Insurance had
numerous violations ofSouth Dakota insurance law including among others,SDCL §§ 58-3-7,47-3-
7.4, 58-12-16(3), 58-33-2, 58-33-26, and 58-33-67(1),(3)and (4). These violations however were
for a period between January 1,2009 and June 30,2012,that being before any ofthe operative facts
ofthis present matter.
The fourth factor is the wrongdoer's financial condition. Plaintiff argues that Farmers
Jnsurance financial condition is demonstrated by the fact that it had billions of dollars worth of
premium. It does indicate a lot of business but it can be that an insurance company can do a lot of
business and lose money on that business. Accordingly,the Court instead looks at the following as
a public record that gives some other indication of the substantial worth of Farmers Insurance
Exchange. FarmersInsurance Exchange is one ofthe insurers comprising Farmers Insurance Group.
At its website. Farmers Insurance Exchange for 2016 explained in part:"The results ofthe Farmers
Insurance Exchange were impacted by the large number ofcatastrophic losses but the company still
maintained a strong capital base with a surplus of$4.2 billion."
The fifth factor is all ofthe eireumstances attendant to the wrongdoer's actions. Even when
the eireumstances ofthis ease were pointed outto the Defendaiit,they continued to persist in denying
paying the benefit the insured was entitled to. The insured suffered from this and ultimately was
fortunate enough to be able to go into her own funds that she considered her retirementfunds to have
the work done so that the people who purchased her house would not sue her for failing to make the
repairs that she had agreed to make once she sold her house after the hailstorm. There is no
mathematical formula for the awarding of punitive damages under South Dakota law but there are
constitutional limitations. In this case under the five factors and viewing the circumstances in total,
the Court is awarding punitive damages on a 4-to-l ratio, that being four times the actual damages
of$99,290,that being $49,290 the insurer should have paid plus the $50,000 damages times four for
apunitive damage award of$397,160. See Craig Outdoor Adver.,Inc. v. Viacom Outdoor,528 F.3d
1001,1021 n. 9(8th Cir. 2008)(rejecting the "argument that a 4:1 multiplier is the constitutional
maximum in every eommercial case."(citation omitted)). This is a reasonable amount to pumsh
Farmers Insurance Exchange and to deter others from similar conduct.
Plaintiffrequested attorney fees and the attorneys fees are awarded in the amount of$15,300
plus 6.5% sales tax of$994.50,for a total amount of$16,294.50. Attorney time, generally at $200
an hour resulted in $22,000 worth of charges, but counsel voluntarily reduced that amount prior to
the hearing due to some duplication in the work. Prejudgmentinterest is also awarded on contractual
damages in the amount of$4,807.46, with prejudgment interest ftom May 17,2016,at the statutory
rate of 10% per annum,that being $4,807.46. Plaintiff had requested January 5, 2015 as the date
from which interest should accrue. The Court chose May 17,2016 as that was not the first nor the
last demand from Plaintiff to her insurer, but it was a clear demand which should have been
accepted. (Ex. 21).
IT IS ORDERED:
That Default Judgment is entered in favor of Plaintiff Julie McKenzie and
against Defendant Farmers Insurance Exchange.
That Plaintiffis awarded contractual damages in the amoimt of$49,290,plus
prejudgment interest thereon from May 17,2016,at the statutory rate of10%
per annum under SDCL §§ 21-1-13.1 and 54-3-16 in the amount of
That Plaintiffis awarded attorneys' fees in the amount of$l5,300, plus 6.5%
sales tax of$994.50,for a total amount of $16,294.50.
That Plaintiff is awarded bad faith damages in the amount of $50,000 for
emotional distress and physical manifestations from that distress.
That Plaintiffis awarded punitive damages in the amount of$397,160,a ratio
of4-to-l, four times $99,290($49,290 + $50,000),for a total award against
Defendant Farmers Insurance Exehange in the amount of $517,551.96.
Dated this I
day of May,2017.
BY THE COURT:
JOSEPH HAAS,CLERK A
kwrence L. Piersol
United States District Judge
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