Jack Hammonds v. Hartford Fire Ins.

Jack Hammonds appeals the district court's1 grant of summary judgment to
Hartford Fire Insurance Company (Hartford). Hammonds claims that Hartford acted
in bad faith by delaying payments due to him under a settlement agreement and filing
a petition to terminate current benefits. Because Hammonds cannot establish loss
arising from the only basis for bad faith that he might be able to prove, we affirm.

I. Background

In October 1990, Hammonds fell from a roof while working for his employer,
Megman Corporation. Having suffered serious injuries, Hammonds filed a worker's
compensation claim on a policy issued by Hartford. Hammonds and Hartford entered
into a settlement agreement in July 1993 (the 1993 Agreement) which was approved
by the South Dakota Department of Labor later that month, as required by state
statute. S.D. Codified Laws § 62-7-5.2

The 1993 Agreement contained two provisions relevant to this litigation. The
first provision, Section 2.B, titled "Attendant Care" and subtitled "Future Care" stated
that:

From and after the date of the execution of this Agreement and
continuing for so long as Angela Hammonds continues to provide fulltime
attendant care to Jack Hammonds, Angela agrees to accept and
Hartford agrees to pay Angela for twenty four (24) hours of care per day,
at the rate of $6.00 per hour ($144.00 per day), and for seven (7) days
per week.

This totaled $4,180.92 per month. Section 2.D, again titled "Attendant Care" and
subtitled "Continuing Jurisdiction" stated:

The parties acknowledge and agree that the [South Dakota] Department
of Labor shall have continuing jurisdiction in the future with regard to
attendant care and may, upon a change of circumstances and proper
application, consider requests by either party to change the foregoing.

The Agreement also included various payment and release clauses that have no
bearing on the relevant legal inquiry in this case.

After a few years, the Hammonds began experiencing difficulty in their
marriage. In August 1996, Angela and Jack separated and Angela moved out of the
house.3 Jack found other individuals–normally employees from his roofing
business–to provide the care that Angela was no longer providing.

Shortly thereafter, Hammonds notified Hartford that his wife was no longer
providing his attendant care as the 1993 Agreement anticipated and that he would
prefer the checks be sent directly to him, so that he could select his own care givers.
As he affirmed under oath in his Statement of Material Facts, Hammonds was
amenable at this time to "whatever the insurance company want[ed] him to do" for
attendant care going forward. Hartford App. 131. Hartford reviewed the request and,
in February 1997, agreed to write the checks directly to Hammonds. Hartford
contends that this decision was conditioned upon Hammonds' willingness to provide
documentation of his attendant care. While nothing in the record definitively confirms
the existence of this condition, there appears to be no dispute that Hammonds was
advised that selecting his own attendant care givers would require a large amount of
record keeping and other documentation.

At some point in 1997–perhaps as early as February–Hartford began requesting
documentation from Hammonds to prove he was using the checks for attendant care.
Despite Hammonds' earlier assurances that he would do "whatever the insurance
company want[ed] him to do," in a subsequent July 1999 phone conversation, he told Hartford he would not provide the documentation because he preferred to pay his
attendants in cash. Hartford never received any documentation.

In October 1998, Hartford began a program called the "large case initiative" or
the "large loss initiative" which administered claims over $1 million. This was an
attempt to produce "an overall savings on loss costs." Hammonds argues that this
program (which he calls the "million dollar list") was the impetus for Hartford's
alleged bad faith handling of his claim.

Having received no documentation concerning Hammonds' attendant care
needs, Hartford initiated an investigation in early 1999. This included requesting
Nurse Frances Nichols to outline Hammonds' attendant care requirements. In doing
so, she contacted Hammonds' attending physician and learned that attendant care was
"not needed." Nurse Nichols, however, felt that six hours of attendant care per day
was appropriate, rather than the twenty-four hour care currently provided under the
1993 Agreement.4 Hartford also hired a private investigator to perform surveillance
on Hammonds to determine how much care Hammonds actually used.

Having received no documentation for two years, and having been told in the
July 1999 telephone conversation that Hammonds did not intend to provide
documentation, Hartford withheld Hammonds' September 1999 attendant care check
until November 1999. Hartford also withheld Hammonds' October 1999 check until
February 2000. The district court found that Hammonds had admitted these delays
were caused by his refusal to provide documentation. Hammonds v. Hartford Fire Ins.
Co., No. 04-5055, Order at 9 (D. S.D. Sept. 14, 2006).

On October 27, 2000, Hartford petitioned the South Dakota Department of
Labor for review, citing both the provision that gave the Department of Labor
jurisdiction in cases of changed circumstances and the provision that Angela
Hammonds was to be paid for the attendant care. The petition alleged that neither
Angela Hammonds nor anyone else provided full-time attendant care and that fulltime
attendant care was not medically necessary. Hartford requested an order
"terminating [Hartford's] obligation to pay the attendant care benefit currently paid to
[Hammonds]."

Hartford later filed an amended petition that was similar to the original petition
but instead sought a determination of the amount of attendant care required by
Hammonds rather than an outright termination of Hartford's obligation to pay the
current benefits specified in the 1993 Agreement. Hammonds moved for summary
judgment, arguing that there was no genuine dispute of material fact over whether
there had been a change of circumstances. The administrative law judge denied
Hammonds' motion for summary judgment, finding, among other things, that the
cessation of Angela's services amounted to a significant change of circumstances. In
January 2003, Hammonds and Hartford entered into a new settlement agreement (the
2003 Agreement) which included a new attendant care plan that provided Hammonds
$3500 per month. This new agreement was also formally approved by the South
Dakota Department of Labor.

Eighteen months later, Hammonds instituted this federal diversity action against
Hartford, alleging seven causes of action. The district court determined that all seven
claims addressed only one central issue–Hartford's bad faith.5 The district court
granted Hartford's motion for summary judgment, finding that Hammonds failed to establish any denial of required benefits whatsoever or, in the alternative, failed to
identify any action taken by Hartford without reasonable cause. This appeal followed.

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Both this circuit, Ulrich v. St. Paul Fire & Marine Insurance Co., 912 F.2d 961,
963 (8th Cir. 1990), and the South Dakota Supreme Court, In re Champion v. United
States Fidelity and Guaranty Co., 399 N.W.2d 320, 322-24 (S.D. 1987), have
recognized a cause of action in tort for bad faith failure to pay an insurance claim.6
South Dakota first recognized the cause of action in Champion, holding that "'for
proof of bad faith, there must be an absence of a reasonable basis for denial of policy
benefits and the knowledge or reckless disregard of [the lack of] a reasonable basis
for denial.'" Id. at 324 (quoting Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1275
(Colo. 1985)).

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