APPEAL FROM THE CIRCUIT COURT OF THE THIRD JUDICIAL CIRCUIT BEADLE COUNTY, SOUTH DAKOTA. HONORABLE ROBERT L. TIMM. Judge
The opinion of the court was delivered by: Jensen, Circuit Judge
[¶1.] Dakota, Minnesota and Eastern Railroad (DM&E) filed this action claiming that Acuity, f/k/a Heritage Mutual Insurance Co. (Acuity), engaged in bad faith and vexatious failure to pay uninsured motorist (UM) benefits. DM&E appeals the circuit court's entry of summary judgment on the claims. Acuity cross-appeals the circuit court's discovery orders compelling Acuity's attorneys to give a deposition in the case.
[¶2.] On July 28, 1998, DM&E employee JulianOlson (Olson) was seriously injured in a motor vehicle accident while acting in the scope of his employment. DM&E held a business automobile policy with Acuity, which provided liability and UM coverage. Olson sued DM&E under the Federal Employer's Liability Act (FELA) alleging negligent maintenance of the vehicle's Hy-Rail System.*fn1 Acuity refused to defend the suit claiming the policy excluded coverage. On the final day of the FELA trial, Olson and DM&E settled for an amount in excess of Acuity's policy limits. Acuity did not participate in or contribute toward the settlement. There was no judicial determination or admission of any fault by any party in the FELA action.
[¶3.] DM&E subsequently brought a declaratory judgment action against Acuity claiming that Acuity was obligated to defend and provide coverage for the FELA action. The circuit court granted Acuity's motion for summary judgment concluding that the policy exclusions were valid and barred coverage for Olson's accident. This Court affirmed in DM&E v. Heritage Mut. Ins. Co., 2002 SD 7, 639 NW2d 513 (DM&E I).
[¶4.] While DM&E I was pending, DM&E filed a suit seeking UM benefits under its policy with Acuity. The suit alleged that the negligence of an unidentified and uninsured motorist was a cause of Olson's injuries, triggering the right to UM benefits under the policy. Later, DM&E amended the complaint to add claims of bad faith and vexatious failure to pay which are the subject of this appeal.
[¶5.] During discovery on the UM claim, DM&E obtained an insurance coverage opinion dated August 1, 2000, from Acuity's attorney, Gary Thimsen (Thimsen), to Tom Behrend (Behrend), an Acuity field claims manager.*fn2 Thimsen noted that Olson was claiming a phantom vehicle had cut him off causing the accident, which triggered a potential UM claim. Thimsen's letter asserted that the policy afforded no coverage for the UM claim because "[n]o evidence has been provided by an independent witness . . . to corroborate the facts of the accident as [Olson] has related them."*fn3 The letter cited the accident report of a state trooper, which noted the existence of knowledgeable witnesses. Thimsen's letter stated that none of the individuals with knowledge had "come forward with information that would verify [Olson's] story." Thimsen also noted the narrative from the accident report which stated: (1) Olson began passing a slower moving vehicle; (2) Olson then drifted left, and overcorrected back to the right and then crossed both lanes of traffic, entered the ditch and rolled.
[¶6.] The record shows that three independent witnesses gave statements to DM&E shortly after the accident occurred in 1998. All three witnesses noted the presence of an unusually slow-moving vehicle on the interstate traveling just in front of Olson as he entered onto the highway. One of these witnesses stated her belief that this vehicle caused the accident because it had come to a near stop in front of Olson at the time that Olson was entering onto the interstate.
[¶7.] There was no evidence that Acuity considered these statements in August 2000 or at any other time through September 2001 when DM&E filed the UM claim. There was no showing that Acuity made any attempt during this time to gather facts to assess the fault of Olson, the unidentified driver, or any other party. Acuity did not interview Olson concerning the UM claim.
[¶8.] DM&E deposed Behrend on November 5, 2004, concerning Acuity's investigation of the UM claim. The deposition transcript shows that Behrend knew little about the investigation by Acuity even though he had sole responsibility for the UM claim in-house. Behrend testified in his deposition that Thimsen and his co-counsel exclusively handled the investigation and made the determination on the UM claim.
Q: Did anyone interview someone from the DM&E railroad in regard to the uninsured motorist claim?
A: In regard to the uninsured motorist claim, that investigation was done by Gary Thimsen and Jennifer Wollman.
Q: When did that take place?
A: I believe it would have been in the summer of 2000, May, June, somewhere in there.
Q: What triggered that investigation?
A: Receipt of possible underinsured or uninsured motorist claim from Julian Olson's attorney . . . .
Q: And what did your investigation reveal?
A: My understanding is that there was no indication that an uninsured motorist was causation of the accident.
Q: What was that based on?
A: Review by the attorneys of discovery documents.
Q: You said discovery documents. You mean lawsuit discovery?
Q: And what lawsuit was that?
A: The Julian Olson case versus DM&E.
Q: What specifically did they identify as establishing that there was no indication that the uninsured motorist caused the accident?
A: Well, I don't know if I can give you the details. From what I understand, they looked at deposition transcripts that were taken on the various parties.
Q: As we sit here today, could you point to any deposition transcripts in particular that would be the basis for your claim that the uninsured motorist did not cause the accident?
Q: Who else would have knowledge of any investigation that was undertaken by Acuity or Heritage Mutual in this case?
A: That would just be me.
Q: Do you know whether they even investigated or attempted to determine whether the unidentified driver may have been at fault in the case?
A: I guess I couldn't really answer that.
Q: As I understand it, the information that you have in regard to whatever happened in the actual accident itself would have come from the attorneys that represent Acuity and Heritage Mutual in this case, correct?
Q: And is that a common practice for Heritage or Acuity to rely on investigations of attorneys or information from attorneys?
A: It is done periodically-is it done all the time, no. Is it done ...