INSURERS' USE OF S.D.C.L. § 21-1-1.4 (PUNITIVE DAMAGES HEARING) TO PRECLUDE DISCOVERY
By Mike Abourezk and Marialee Neighbours
In a bad faith action, insurers often argue that discovery should be precluded until a hearing has been held pursuant to S.D.C.L. § 21 1 4.1. However, S.D.C.L. § 21 1 4.1 does not preclude discovery of relevant information necessary to establish plaintiff's underlying substantive claim of bad faith. The following discussion examines the applicable law and policy underlying S.D.C.L.§ 21 1 4.1.
South Dakota Codified Law § 21 1 4.1 provides:
In any claim alleging punitive or exemplary damages, before any discovery relating thereto may be commenced and before any such claim may be submitted to the finder of fact, the court shall find, after a hearing and based upon clear and convincing evidence, that there is a reasonable basis to believe that there has been willful, wanton or malicious conduct on the part of the party claimed against.
The statute does not preclude discovery of relevant information that relates to the underlying subject matter of plaintiff's causes of action. Punitive damages is not a cause of action, but simply an added element of recovery on the underlying causes of action. In other words, punitive damages assert entitlement to an additional element of damages. (See Justice Sabers' dissent in Risse v. Meeks, 585 N.W.2d 875, 882 (S.D. 1998)).
The insurer interpretation of the statute confuses discovery related to the remedy of punitive damages with discovery needed to establish the elements of the underlying claim of insurance bad faith. This interpretation would preclude any discovery on a bad faith claim prior to a § 21 1 4.1 hearing. It would produce the absurd result of requiring the plaintiff to prove his bad faith case before being allowed to conduct discovery on the case.
Scope of Civil Discovery and S.D.C.L. § 21 1 4.1
The insurers' application of S.D.C.L. § 21 1 4.1 is inconsistent with the liberal construction rationale underlying civil discovery. Under S.D.C.L. § 15 6 26(b), parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter of the pending action. Information is discoverable even though it may be inadmissible at trial when the requested information is reasonably calculated to lead to discovery of admissible evidence. See State By and Through Dept. of Transportation v. Grudnik, 243 N.W.2d 796, 797 (S.D. 1976).
In Kaarup v. St. Paul Fire and Marine Ins. Co., the Court affirmed its decision in Grudnik, stating that the scope of pretrial discovery should be broadly construed. 436 N.W. 2d 17, 19 20 (S.D1989), citing Hickman v. Taylor, 329 U.S. 495, 67 S. Ct. 385, 91 L.Ed 451(1947) and Grudnik at 797.
Quoting from Hickman, the Court stressed that all relevant matters are discoverable unless privileged:
No longer can the time honored cry of "fishing expedition" serve to preclude a party from inquiring into the facts underlying his opponent's case. Mutual knowledge of all relevant facts gathered by both parties is essential to proper litigation. To that end, either party may compel the other to disgorge whatever facts he has in his possession. The deposition discovery procedure simply advances the stage at which disclosure can be compelled from the time of trial to the period preceding it, thus reducing the possibility of surprise. But discovery, like all matters of procedure, has ultimate and necessary boundaries.
Id., quoting Hickman v. Taylor, 329 U.S. at 507, 67 S. Ct. at 392, 91 L.Ed. at 460.
The legislative history of S.D.C.L. § 21 1 1.4 is described in a South Dakota Law Review article by Robert E. Driscoll entitled Statutory Restrictions on the Discovery and Trial of Punitive and Exemplary Damage Claims in South Dakota, 33 SD L.Rev. 247, 250 51 (1988). The article indicates that S.D.C.L. § 21 1 1.4 was part of a legislative response to a perceived "litigation crisis." Introduced on behalf of the Governor, at the urging of the South Dakota Medical Association, the statute was a response to physicians' concerns that punitive damage claims were being used to harass doctors by compelling production of income tax records, net worth statements, and other financial information. Therefore, S.D.C.L. § 21 1 1.4 was intended to establish an appropriate threshold to insure a reasonable basis for punitive damages.
Judicial statements regarding the purpose of the statute accord with legislative intent. In Ammann v. Massey Ferguson, Ltd., 933 F.Supp. 840 (D.S.D.1996), the Court said:
This Court agrees with the concurrence of former Supreme Court Justice Wuest in Brandriet v. Norwest Bank South Dakota, N.A., 499 N.W.2d 613 (S.D. 1993), that the obvious purpose of S.D.C.L. § 21 1 1.4 is to prevent discovery as to income tax records, net worth statements, and other financial information of a defendant without first demonstrating that there is a reasonable basis to believe that punitive damages are warranted, (Vreugdenhil v. First Bank of South Dakota, N.A., 467 N.W.2d 756, 760 (S.D.1991)), or that there is a prima facie case of punitive damages, (Flockhart v.Wyant, 467 N.W.2d 473, 475 (S.D. 1991)); the statute adds nothing to South Dakota substantive law. (emphasis added).
Id. at 842.
In his concurring opinion in Brandriet, Justice Wuest said that "S.D.C.L. § 21 1 1.4 was enacted to prevent the harassment of defendants by compelling production of income tax records, net worth statements, and other financial information by insuring the claimant has a reasonable basis for the punitive damage claim." 499 N.W.2d 613, 619, citing Dahl v. Sittner, 474 N.W.2d 897, 901 02 (S.D.1991); Robert E. Driscoll, Statutory Restrictions on the Discovery and Trial of Punitive and Exemplary Damage Claims in South Dakota, 33 S.D. L.Rev. 247, 251 (1988).
In Dahl, the Court indicated that "[t]he purpose of the statute is to prevent the use of claims for punitive damages as a means for harassment, by establishing a threshold to insure that there is a reasonable basis for such claims." 474 N.W. 2d 897, 901 02, citing Driscoll, Statutory Restrictions on the Discovery and Trial of Punitive and Exemplary Damage Claims in South Dakota, 33 S.D. L.Rev. at 251.
Timing of S.D.C.L. § 21 1 1.4 Hearing
Moreover, there is no requirement that a hearing pursuant to S.D.C.L. § 21 1 1.4 be a pretrial hearing. In Boomsma v. Dakota, Minnesota&Eastern R.R. Corp., 651 N.W.2d 238 (S.D. 2002) (overruled on other grounds), the South Dakota Supreme Court discussed the timing of a S.D.C.L. § 21 1 1.4. hearing. In that case, the Court held that "there is no requirement that the required hearing take place before trial; it may be held at the close of evidence." Id. at 246, citing Kieser v. Southeast Properties, 566 N.W.2d 833 (S.D. 1997). The holding in Boomsma relates to the issue of whether punitive damages should be submitted to the jury. However, the Court's decision would apply equally to discovery under S.D.C.L. § 21-1-1.4. See also Schuldies v. Millar, 555 N.W.2d 90, 99 (S.D.1996)(overruled on other grounds)(no absolute requirement for pre-trial hearing under S.D.C.L. § 21-1-1.4).
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