The opinion of the court was delivered by: Karen E. Schreier Chief Judge
ORDER GRANTING PLAINTIFFS' MOTION FOR ATTORNEY FEES
Plaintiffs, Cindy Tripp and Lyle Tripp, move for attorney fees under SDCL 58-12-3. Defendant, Western National Mutual Insurance Company, resists the Tripps's motion.
On September 12, 2004, Cindy, while driving her automobile, was hit from behind by Jeffrey Christensen. The Tripps were insured by Western National. They informed Western National of Cindy's accident in a timely manner and initiated a negligence action against Christensen. On October 8, 2008, the Tripps settled the claim against Christensen for $87,500.*fn1
On January 15, 2009, the Tripps submitted to Western National a settlement demand in the amount of $150,000, which represented the policy limits of the Tripps's underinsured motorist benefits.*fn2 Western National responded with a $10,000 offer to settle the Tripps's underinsured motorist claim. Shortly after receiving Western National's settlement offer of $10,000, the Tripps filed suit against Western National, alleging a breach of contract claim and a first-party bad faith insurance claim.
The jury returned a verdict in favor of the Tripps with regard to the breach of contract claim and awarded $150,000, which was the full amount of the insurance policy's limits for underinsured motorist benefits. With regard to the bad faith insurance claim, however, the jury returned a verdict in favor of Western National. The Tripps now move for attorney fees.
Under SDCL 58-12-3, "if it appears from the evidence that [an insurer] has refused to pay the full amount of such loss, and that such refusal is vexatious or without reasonable cause,... the trial court... shall, if judgment... is rendered for plaintiff, allow the plaintiff a reasonable sum as an attorney's fee[.]" The court must determine three issues before it can award attorney fees. "First, whether the insurance company refused to pay the full amount of a loss. Second, whether the refusal was vexatious or without reasonable cause. And third, what is a reasonable charge for the work performed to enforce the insurance contract claim, vis-à-vis any other claims jointly brought." Biegler v. Am. Family Mut. Ins. Co., 621 N.W.2d 592, 606 (S.D. 2001) (citations omitted). The Tripps and Western National agree that whether an award of attorney fees is warranted in this case is a question of fact to be determined by the court.
With regard to the first element, Western National argues that the Tripps are not entitled to attorney fees under SDCL 58-12-3 because it made an offer of judgment under Rule 68(a)*fn3 in the amount of $140,500 on April 26, 2010. SDCL 58-12-3, however, precludes an award of attorney fees "when a tender is made by such insurance company... before the commencement of the action... and the amount recovered is not in excess of such tender[.]" SDCL 58-12-3 (emphasis added). Here, the only offer Western National made prior to the commencement of this action was for $10,000. The subsequent offer of $140,500 was made well after the commencement of the action. Thus, Western National's subsequent offer of $140,500 on the eve of trial does not preclude an award of attorney fees. Because Western National refused to pay the full amount of the Tripps's loss prior to commencement of the action, the Tripps have proven the first element.
With regard to the second element, whether the refusal was vexatious or without reasonable cause, Western National argues that it had the right to challenge the amount of the Tripps's damages because the amount of damages was fairly debatable. The Tripps argue that the evidence proves that Western National's actions constitute vexatious conduct or an unreasonable refusal of an otherwise valid claim.
The South Dakota Supreme Court observed that the South Dakota statutes in this area are to be given liberal construction and "[t]he obvious objective of SDCL 58-12-3 is to discourage contesting insurance coverage and to reimburse an insured for any reasonable attorney's fees necessarily incurred in defending or enforcing a valid insurance contract right." All Nation Ins. Co. v. Brown, 344 N.W.2d 493, 494 (S.D. 1984) (citation omitted). Western National's own files reveal that the Tripps incurred attorney's fees to enforce their contract right to payment for their loss. As noted in Western National's claim file, its insurance adjuster, Jolene Craemer, "look[ed] at this claim as having a range of $120,000-150,000." Docket 37, Ex. G at 2. The only claim the Tripps had against Western National was for underinsured motorists benefits. Thus, the reference to "this claim" by Craemer logically pertains to the Tripps's claim for underinsured motorist benefits. Because Western National valued the Tripps's underinsured motorist benefits claim at $120,000 to $150,000, Western National's settlement offer of $10,000 had no reasonable basis.
Western National contends that its "evaluation applied to Tripps' claim as a whole and not additional money beyond that being received in settlement from the at-fault driver." Docket 74 at 1 (citing Docket 37, Ex. G). Western National further contends that the "plan [was] to present a $10,000 cash offer along with a waiver of Western National's $5,000 subrogation claim with an eye toward a negotiated compromise settlement in the $25,000 range[.]" Docket 102 at 2 (emphasis added). According to the trial testimony though, the only actual offer conveyed to the Tripps, prior to the commencement of the lawsuit, was an offer of $10,000 with no reference to the waiver of the $5,000 subrogation claim.
If Western National's explanation is true, then according to Western National's own calculation of Tripps's losses, the Tripps were entitled to between $20,000*fn4 and $50,000. As a result, Western National's offer of $10,000 was half of the bottom end of the Tripps's losses. The Tripps purchased underinsured motorist coverage from Western National to cover losses that exceeded a tortfeasor's policy limits. Western National determined this amount to be at least $20,000. The Tripps did not purchase underinsured motorist coverage from Western National so that Western National could nickel and dime them and try to get its own insured to accept half of what it calculated the Tripps's losses to be. Simply put, if Western National determined that the Tripps suffered at least $20,000 in excess of the tortfeasor's policy limits, then the offer with regard to the Tripps's underinsured motorist claim should have been at least $20,000. The court finds that the offer of $10,000 under these circumstances constitutes vexatious conduct that entitles the Tripps to reasonable attorney fees under SDCL 58-12-3. See Firemen's Ins. Co. v. Bauer Dental Studio, Inc., 626 F. Supp. 1365, 1367 (D.S.D. 1986) (awarding insured attorney fees partly because the insurer "tendered a settlement offer far below the amount due"), aff'd, 805 F.2d 324, 326 (8th Cir. 1986) (upholding the district court's finding of "vexatious conduct in the manner in which [the insurer] conducted the settlement negotiations").
Western National argues that the court should not award attorney fees because the jury rejected the Tripps's bad faith insurance claim. Western National, however, does not cite any authority to support the proposition that an award for attorney fees must be preceded by a finding of bad faith by the jury. In fact, the federal district court in South Dakota has reached the opposite conclusion. In Bjornestad v. Progressive Northern Insurance Co., 08-4105 (Docket 118) (D.S.D. 2010), Judge Jones awarded attorney's fees under SDCL 58-12-3 on the underinsured motorist breach of contract claim even though the jury found in favor of the insurer on the bad faith claim. And in Brooks v. Milbank Insurance Co., 605 N.W.2d 173 (S.D. 2000), the South Dakota Supreme Court upheld the trial court's award of attorney fees under SDCL 58-12-3 despite the fact that the trial court had dismissed the bad faith insurance claim. Id. at 178. While the South Dakota Supreme Court reversed the trial court's dismissal of the bad faith insurance claim and remanded the issue back to the trial court, ...