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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Allstate Insurance Company v. Kenick (1/25/2019) sp-7331

Allstate Insurance Company v. Kenick (1/25/2019) sp-7331

          Notice:   This opinion is subject to correction before publication in the P                    ACIFIC  REPORTER.  

          Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts,  

                                                                                                                 

          303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email  

                                                                                                                   

          corrections@akcourts.us.  



                     THE  SUPREME  COURT  OF  THE  STATE  OF  ALASKA  



ALLSTATE  INSURANCE  COMPANY   )  

and  KATHY  BERRY,                                               )     Supreme  Court  No.  S-16509  

                                                                 )  

                                                                                                                             

                              Appellants,                        )     Superior Court No. 4BE-04-00103 CI  

          v.                                                     )  

                                                                                          

                                                                 )     O P I N I O N  

                                   

MARY KENICK and ANGELINA                                         )  

TRAILOV,                                                                                                    

                                                                 )    No. 7331 - January 25, 2019  

                                                                 )  

                              Appellees.                         )  

                                                                 )  



                                                                                                   

                    A            

                       ppeal  from  the  Superior  Court  of  the  State  of  Alaska,  

                                                                                                         

                    Fourth  Judicial  District,  Bethel,  Charles  W.  Ray  Jr.  and  

                                                       

                    Bethany S. Harbison, Judges.  



                                                                                      

                    Appearances:  Gary A. Zipkin and Kristin E. Bryant, Guess  

                                                                                                  

                    & Rudd,  P.C.,  Anchorage;  Rebecca  J.  Hozubin,  Hozubin  

                                                                                                        

                    Moberly Lynch & Associates, Anchorage; and Peter H. Klee,  

                                                                                             

                    Sheppard,  Mullin,  Richter  &  Hampton,  LLP,  San  Diego,  

                                                                                                                 

                    California,   for   Appellant   Allstate  Insurance   Company.  

                                                                                                            

                    Alfred Clayton, Jr., Clayton & Diemer, LLC, Anchorage, for  

                                                                                                            

                    Appellant Kathy Berry.  Mark A. Sandberg, Law Office of  

                                                                                  

                    Mark A. Sandberg, Anchorage; Dennis Mestas, Law Office  

                                                                                              

                    of  Dennis  Mestas,  Anchorage;  and  Myron  E.  Angstman,  

                                                                                                     

                    Angstman Law Office, Bethel, for Appellees Mary Kenick  

                                          

                    and Angelina Trailov.  



                                                                                                    

                    Before:  Stowers, Chief Justice, Winfree, Maassen, Bolger,  

                                        

                    and Carney, Justices.  



                                       

                    CARNEY, Justice.  


----------------------- Page 2-----------------------

I.        INTRODUCTION  



                                                                                                                     

                    We are asked to determine the preclusive effect of a declaratory judgment  



                                                                                                                            

in favor of an insurance company against its insured in federal court in a subsequent state  



                                                                                                                               

court proceeding.  The superior court concluded that the declaratory judgment had no  



                                                                                                                     

preclusive effect on a negligent adjustment action brought in state court by the insured's  



                                                                                                                         

assignees  against  the  insurance  company  and  its  claims  adjuster.                                 The  state  action  



                                                                                                                              

proceeded to an 11-day jury trial ending with a multi-million dollar verdict against the  



                                                                    

insurance company and its claims adjuster.  



                                                                                                                        

                    The insurance company and the adjuster raise a number ofissues on appeal,  



                                                                                                                       

but  it  is  necessary  for  us  to  decide  only  one:                    the  preclusive  effect  of  the  federal  



                                                                                                                     

declaratoryjudgment. Thedeclaratory judgment determined that theinsurancecompany  



                                                                                                                   

and the adjuster acted reasonably when they offered policy limits to settle the underlying  



                                                                                                                  

claim   against   the   insured.                 Because   the   insurance   company's   and   adjustor's  



                                                                                                                     

reasonableness in adjusting the insurance claim is a necessary element of a negligent  



                                                                                                                          

adjustment  tort,  we  hold  that  the  assignees  of  the  insured  were  precluded  from  



                                                                                                                    

relitigating  this issue.            The superior  court therefore erred  in  denying  the insurance  



                                                                                                                              

company's and claims adjuster's motions for summary judgment, and we vacate the  



                                     

judgment against them.  



                                  

II.       FACTS AND PROCEEDINGS  



          A.        Facts  



                                                                                                                                

                    In mid-September 2002 Charles Herron, who was under the influence of  



                                                                                                                  

alcohol and not old enough to legally possess or consume it, was involved in a single- 



                                                                                                                     

vehicle accident in Bethel.   A 15-year-old passenger in Herron's vehicle, Angelina  



                     

Trailov, was injured.  



                                                                                                                      

                    Herron was insured by Allstate Insurance Company.  The policy provided  



                                                                                                                      

liability  coverage  of  up  to  $100,000  per  person/$300,000  per  occurrence,  medical  



                                                               -2-                                                        7331
  


----------------------- Page 3-----------------------

                                                                                                                      

payments coverage of $25,000 per person, and underinsured motorist (UIM) coverage  



                                                                                       

of up to $100,000 per person/$300,000 per occurrence.  



                                                                                                                               

                    Shortly after the accident Allstate was notified of Trailov's injuries and her  



                                                                                                                              

liability claim against Herron.  By the end of September Allstate received notice that  



                                                                                                                      

attorney Michele Power represented Trailov in the matter.  Allstate assigned Trailov's  



                                                                                                                              

bodily injury claim to its in-house claims adjuster, Kathy Berry.   Over the next few  



                                                                                                                            

months  Berry  and  Power  corresponded  regarding  Trailov's  claim;  much  of  their  



                                                                                                                                  

communication related to obtaining medical records documenting Trailov's injuries.  



                                                                                                                             

                    Power  made  a  "policy  limits  demand  plus  attorney's  fees,  costs  and  



                                                                                                                   

interest" for Trailov's claim in a February 14, 2003, letter to Berry.  In the same letter  



                                                                                                                         

Power also for the first time asserted a separate negligent infliction of emotional distress  



                                                                                                                           

(NIED) claim on behalf of Mary Kenick, Trailov's mother. Power made "a policy limits  



                                                                                                                   

demand plus attorney's fees, costs and interest" for Kenick's NIED claim.  



                                                                                                                           

                    In March Berry responded to Power's February demand letter.   Berry  



                                                                                                                               

requested additional information about any treatment Trailov had received since the  



                                                                                                            

accident.  She also asked for information about Kenick's NIED claim.  



                                                                                                                               

                    Power responded in April that Kenick had taken a new job because of her  



                                                                                                                     

emotional distress from the accident (and had taken a substantial pay cut); however,  



                                                                                                                              

Power noted that Kenick had not sought counseling.  Power asserted that Trailov had  



                                                                                                                              

been absent-minded and forgetful since the accident and disclosed for the first time that  



                                                                                                                               

Trailov was suffering back pain from the accident.  In closing Power wrote:  "While the  



                                                                                                                              

offer dated February 14, 200[3], remains open, it will be revoked on May 16, 2003, and  



                                                                                                                                     

acomplaint will be filed, unless there is somediscussionregarding pre-filingresolution."  



                                                                                                                                

                    On May 9 Berry responded  to Power that "[w]e are in the process of  



                                                                                                                             

completing our evaluation of Angelina Trailov's claimand anticipate responding to your  



                                                               -3-                                                         7331
  


----------------------- Page 4-----------------------

                                                                                                                                

demand by your May 16, 2003 deadline." Berry stated she needed additional support for  



                                    

Kenick's NIED claim.  



                                                                                                                               

                    On May 15 Power sent Berry two pay stubs for Kenick as proof of her  



                                                                                                                                

NIED claim; there was no mention of the May 16 deadline in the letter.  On May 16  



                                                                                                                               

Berry sent another letter to Power requesting additional information about Kenick's job  



                                                                                                                     

change  and  its  relationship  to  the  NIED  claim.                         Berry  also  advised  that  Allstate's  



                                                                                                                                

evaluation of Trailov's claim was not complete:  "Our evaluation will be completed by  



                                                                                                                                 

the end of the month, and I am hoping to respond to your demand sooner than that."  



                                                                                                                               

                    Berry referred the entire claim to a higher-ranking claims adjuster for  



                                                                                                                           

evaluation. That adjuster directed Berry to open a UIM claim for Trailov because, based  



                                                                                                                                

upon her knowledge of similar claims in the Bethel area, Trailov would likely receive the  



                                                                                                                                

$100,000 policy limit on the UIM claim as well as the underlying liability limit of  



                                                                                                                           

$100,000.   But the second adjuster suggested offering $10,000 for the NIED claim  



                                                                                                                               

because she did not believe there was sufficient information to determine its value.  



                                                                                                                           

                    On May 29, 2003, an attorney fromthe Law Office of Dennis Mestas wrote  



                                                                                                                              

to Berry that he had been retained as co-counsel to file suit on behalf of Kenick and  



                                                                                                                                

Trailov.  The letter stated that the policy limits offer had lapsed on May 16 and that no  



                                                                                                                           

further policy limits offers would be made or accepted.  The following day Berry wrote  



                                                                                                              

to Power offering to settle Trailov's bodily injury claim for $112,500, encompassing  



                                                                                                                               

policy limits plus attorneys' fees.  Berry also offered to settle Kenick's NIED claim for  



                                                                                                                             

$10,000 in an effort to resolve the matter expeditiously, but she advised that if the offer  



                                                                                                                 

was not accepted she would need additional documentation for the claim.  



          B.        Proceedings  



                                                                                                                         

                    Three pleadings, and the proceedings related to them, define the current  



                                                                                                                     

appeal. The first pleading is Kenick's and Trailov's personal injury and NIED complaint  



                                                                                                                                 

against  Herron  filed  in  June  2003  in  the  superior  court  in  Bethel.                                The  second  is  



                                                               -4-                                                         7331
  


----------------------- Page 5-----------------------

                                                                                                                               

Allstate's March 2004 federal complaint against Herron for declaratory relief.  And the  



                                                                                                                         

third pleading is the complaint filed by Kenick and Trailov as Herron's assignees against  



                                                                                  

Allstate in April 2004 in the superior court in Bethel.  



                    In their June 2003 personal injury complaint against Herron, Kenick and  



                                                                                                                        

Trailov  sought  both  compensatory  and  punitive  damages  for  injuries  and  distress  



                                                                                                                      

resulting from the September 2002 accident.   Herron resolved Kenick and Trailov's  



                                                                                                                    

personal injury action against him in early April 2004 by signing a consent to entry of  



                                                                                                                          

judgment.  Herron consented to judgment in favor of Kenick, on behalf of her minor  



                                                                                                                              

daughter Trailov, for $1,750,000 on Trailov's liability claims and attorneys' fees and  



                                                                                                                             

consented  to  judgment  in  favor  of  Kenick  for  $187,500  on  her  NIED  claim  and  



                                                                                                                             

attorneys' fees.  The total judgment entered against Herron was $1,937,500.  He also  



                                                                                                                                     

assigned to Kenick and Trailov any and all legal claims he possessed against Allstate.  



                                                                                                                       

Herron and Kenick, individually and on behalf of Trailov, also entered into a covenant  



                                                                                                                               

not to execute on any of Herron's assets other than the potential proceeds from the  



                                                   

assigned claims against Allstate.  



                                                                                                                   

                    Meanwhile in early March 2004 Allstate filed a complaint for declaratory  



                                                                                                                         

relief in the U.S. District Court for the District of Alaska in anticipation of Herron  



                                                                                                                                  

confessing judgment in the accident-related personal injury suit.  Allstate requested a  



                                                                                                                                

declaration that "its good faith attempt to settle Trailov and Kenick's claims satisfied its  



                                                                                                                               

obligation to its insured, and a further declaration that Allstate [wa]s not obligated to pay  



                                                                                                                          

any portion of the confessed judgment that exceed[ed] the limit of the bodily injury  



                                                                                                            

coverage afforded Herron under the [p]olicy."   In late May, due to Herron's April  



                                                                                                                     

confessionofjudgment and assignment of claims, Allstate amended itsfederal complaint  



                                                                                                                              

for declaratory relief.  The only material addition was the statement that Herron had  



                                                                                             

confessed judgment and assigned his rights against Allstate.  



                                                                -5-                                                        7331
  


----------------------- Page 6-----------------------

                                                                                                                              

                    In April 2004, shortly after Herron's confession of judgment, Kenick and  



                                                                                                                         

Trailov, as his assignees, filed a complaint against Allstate and Berry in the Bethel  



                                                                                                                              

superior court.  Kenick and Trailov asserted that Allstate and Berry had negligently and  



                                                                                                                              

recklessly  adjusted  the  claims  arising  from  the  accident  and  by  doing  so  they  had  



                                                                                                                                 

exposed Herron to a large nondischargeable liability. Kenick and Trailov argued that as  



                                                                                                                          

Herron's assignees they were entitled to compensatory damages in the amounts agreed  



                                                                                                                   

to in the confessed judgments and to punitive damages in an amount to be determined  



                                                                                                                         

by a jury.   The superior court action was stayed during the pendency of the federal  



                               

declaratory action.  



                                                                                                                         

                    InlateJune2004HerronansweredAllstate's declaratory complaint; Kenick  



                                                                                                                   

and Trailov were not parties to that action.  Herron asserted a number of affirmative  



                                                          

defenses, including an allegation that "the plaintiff's damages, if any, are the result, in  



                                                                                                                               

whole or in part, of its negligence, or that of others for whom the defendant is not  



                                                                                                                           

responsible."  He also alleged that Allstate had breached the insurance contract.  



                                                                                                                               

                    In early December 2004 Allstate filed a second amended complaint for  



                                                                                                                            

declaratoryrelief,seekingdeclarations thatHerron breachedtheinsurancecontract when  



                                                                                                                                

he confessed judgment and assigned his rights and that his "breach was not excused by  



                                                                                                                            

any prior material breach by Allstate" and thus "voided the insurance contract."  Later  



                                                                                                                        

that month Allstate filed a notice ratifying Berry's conduct and actions as an Allstate  



                  

employee.  



                                                                                                                                     

                    Berry was Allstate's first witness in the federal trial, held in June 2008.  



                                                                                                                      

After describing her employment in 2002-03, she discussed her evaluation of Kenick's  



                                                                                                                               

and Trailov's claims.  She was cross-examined about actions she took relating to her  



                                                                                                                               

determination of the claims' reserves, company standards and legal requirements for  



                                                                                                                            

documenting  her  file,  and  the  language  of  her  communications  with  Power  from  



                                                                                                                     

February to May 2003.  Berry was also questioned about alleged delays in obtaining  



                                                               -6-                                                         7331
  


----------------------- Page 7-----------------------

                                                                                                              

medical  records  relevant  to  evaluating  Trailov's  claim;  her  delay  in  responding  to  



                                                                                                                       

Power'scommunications;thelack of documentationabout when sheevaluated Trailov's  



                                                                                                                             

claim; and the lack of an apparent reason why Trailov's claim could not have been  



                                                                                                                                  

evaluated by May 16, Power's purported deadline to avoid a lawsuit.  In response to  



                                                                                                                        

questioning about the meaning of Power's April letter, Berry testified that she believed  



                                                                                                                                 

it  required  either  that  Allstate  agree  to  settle  for  policy  limits  or  that  it  engage  in  



                                                                                                                                  

settlement discussions.  Berry testified that she believed that discussion of settlement in  



                                                                                                        

her May 9 and May 16 letters satisfied the terms of the April letter.  



                                                                                                                                      

                    Allstate called Charles Bean as an expert in handling insurance claims.  



                                                                                                                     

Bean testified that Allstate's claims handling from February 14 to May 31, 2003, met  



                                                                                                           

industry standards.   Bean also testified to his understanding of the communications  



                                                                                                                          

between Berry and Power, including the meaning of Power's April letter.  Bean opined  



                                                                                                                         

that  Berry's  evaluation  of  Trailov's  claim  was  of  a  high  quality  and  that  Berry's  



                                                                                                                             

documentation in the claims log was acceptable.  Bean also believed Allstate had acted  



                                                                                                                               

appropriately to protect Herron's interests.   On cross-examination Bean agreed that  



                                                                                                                                   

Allstate had a duty to protect Herron and conduct an investigation.  He conceded that it  



                                                                                                  

was unclear when Berry performed her evaluation of Trailov's claim and that Allstate  



                                                                                

"could" have done the evaluation prior to May 16.  



                                                                                                                            

                    Allstate also called Power as a witness.  Power conceded that her April  



                                                                                                                                      

letter was too imprecise for Berry to rely on and that the letter's meaning was unclear.  



                                                                                                                                

                    At the close of evidence, after instructing the jury that Allstate had the  



                                                                                                 

burden of proof in the matter, the court further instructed that:  



                                                                                                             

                    An insurer is bound to exercise that degree of care which an  

                                                                                                               

                    insurer of ordinary prudence would exercise.  Insurance is a  

                                                                                                             

                    profession with skill in the investigation and settlement of  

                                                                                                            

                    liability claims.  It is not an extraordinary degree of care, but  



                                                                -7-                                                         7331
  


----------------------- Page 8-----------------------

                                                                                                        

                    the care that a reasonable insurer is required to exercise under  

                                                   

                    the circumstances.  



                                              

The court next instructed the jury:  



                                                                                                         

                    In response to a policy limits demand, an insurer owes a duty  

                                                                                                            

                    to its insured to offer the full policy limits available when the  

                                                                                               

                    insurer  knows  or  should  know  that  there  is  a  substantial  

                                                                                                     

                    likelihood of an excess verdict against that insured.  



                                                                                                                         

These were the only substantive legal instructions given to the jury in the 13 closing  



                     

instructions.  



                                                                                                                              

                    Only a single question was submitted to the jury: "Considering all the facts  



                                                                                                                               

and  circumstances  contained  in  the  evidence  submitted  to  you,  did  Allstate  act  



                                                                                                                        

reasonably by offering policy limits on May 30, 2003?" The jury answered the question  



                                                                               

"yes" and returned the verdict in favor of Allstate.  



                                                                                                                                 

                    The federal court entered judgment that "Allstate did act reasonably by  



                                                                                                                                

offering policy limits on May 30, 2003."  Allstate moved to amend the judgment; the  



                                                                                                                                      

federal court granted Allstate's motion in February 2009. The amended judgment stated:  



                                                                                                            

                     1. The jury returned a verdict in favor of Allstate on June 11,  

                                                                                          

                    2008,  finding  that  under  all  the  facts  and  circumstances  

                                                                                                           

                    Allstate  acted  reasonably  by  offering  policy  limits  on  

                                             

                    May 30, 2003.  



                                                                                                 

                    2.     It  is  undisputed  that  Herron  breached  the  insurance  

                                                                                                            

                    contract by consenting to entry of judgment and assigning his  

                                                                         

                    rights without Allstate's consent.  



                                                                                                           

                    3.  Pursuant to the jury's verdict, Herron's breach was not  

                                                                                    

                    excused by any prior breach by Allstate.  



                                                                                                    

                    4.   Herron's breach voided the insurance policy's liability  

                                     

                    coverage.  



                                                                                                              

                    5.  Herron's assignment of rights to Trailov and Kenick is  

                                                                                                            

                    null and void because Herron had no rights to assign as of the  

                                                         

                    date of the assignment.  



                                                                -8-                                                         7331
  


----------------------- Page 9-----------------------

                                 Herron appealed to the Ninth Circuit Court of Appeals in March 2009. He                                                                                                   



 argued that the district court's exercise of jurisdiction was improper, the court erred in                                                                                                                  



 not granting Herron's motions for summary judgment or directed verdict, the court erred                                                                                                              



 in excluding evidence concerning other claimed breaches by Allstate, and the judgment                                                                                                     



 was improperly amended.                                          



                                 The Ninth                  Circuit ruled                     in   March  2011   that the district court had                                                             not  

                                                                                                                                                                                               1     After  

 improperly exercised its jurisdiction over Allstate's suit for declaratory relief.                                                                                                                 



 addressing  Herron's  argument  that  the  district  court  had  improperly  exercised  

                                                                                                                                                                                         



jurisdiction, the Ninth Circuit stated:  

                                                                          



                                 The issues in this suit and the tort suit overlap solely because  

                                                                                                                                                               

                                 Kenick  and  Trailov's  rights  against  Allstate  are  entirely  

                                                                                                                                                              

                                 derivative of Herron's rights under his insurance agreement.  

                                                                                                                                                                                   

                                 The jury's declaration of Allstate's reasonableness pertains  

                                                                                                                                                              

                                 to Alaska law defining an insurer's contractual obligations to  

                                                                                                                                                                             

                                 its insured, not tort law. That declaration may well be fatal to  

                                                                                                                                                                             

                                 Kenick and Trailov's tort claims against Allstate, but only  

                                                                                                                                                                      

                                 because an unexcused breach of the contract by Herron may  

                                                                                                                                                                       

                                 have thus prevented him from assigning any rights against  

                                                                                                                                                                

                                 Allstate to Kenick and Trailov in the first place.  At bottom,  

                                                                                                                                                               

                                 Allstate's suit sounds in contract, not tort, regardless whether  

                                                                                                                                                               

                                 the  merits  of  this  action  have  become  entwined  with  a  

                                                                                                                                                                             

                                 defenseAllstatemay potentiallyraisetoKenick and Trailov's  

                                                                                                                                                            

                                                                                     [  ]  

                                 derivative tort action. 2 

                                                                     



                                 The Ninth Circuit held that the district court had abused its discretion by  

                                                                                                                                                                                                            

 amending the judgment to include paragraphs 4 and 5.3                                                                                      The jury had not considered  

                                                                                                                                                                                       



                 1              Allstate Ins. Co. v. Herron                                      , 634 F.3d 1101, 1108 (9th Cir. 2011).                                                        



                 2              Id.  (citing Cont'l Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 293  

                                                                                                                                                                                                        

 (Alaska 1980)).  

                                         



                 3              Id. at 1112-13.  

                                                                      



                                                                                                      -9-                                                                                             7331
  


----------------------- Page 10-----------------------

whether Herron's                breach prejudiced Allstate enough to void the insurance policy's                                   



                              4  

liability coverage.                                                                                                                           

                                 And without a finding of prejudice, Allstate was not relieved of its  

                                                   5  The appeals court then found that entering paragraph 5  

                                                                                                                                               

                                         

liability up to the policy limits. 



of the judgment was an abuse of discretion, stating:  "[B]ecause Allstate remains liable  

                                                                                                                                        



to Herron within the insurance policy's limits, Herron retained assignable rights against  

                                                                                                                                      

Allstate to the extent of that liability."6  

                                                                   



                      On remand the district court granted partial summary judgment on the issue  

                                                                                                                                         



of prejudice in  favor  of Herron.   The district court found that, as a matter of law,  

                                                                                                                                          



Herron's confession of judgment had not prejudiced Allstate and thus had not voided  

                                                                                                                                      



Allstate's obligation to indemnify himup to the policy limits. The court entered a second  

                                                                                                                                      



amended final judgment  in  July  2012.   It removed paragraphs 4 and 5 of the first  

                                                                                                                                          



amended  final judgment and added  a new  paragraph 4:                                               "Herron's breach  did  not  

                                                                                                                                           



prejudice Allstate, therefore it did not void the liability portion of the insurance policy."  

                                                                                                                                                   



                      Following the conclusion of the federal case, the superior court lifted its  

                                                                                                                                             



stay of the state proceedings. In July 2012 Allstate moved to dismiss the state court case,  

                                                                                                                                          



arguing that Herron's assignment of claims to Kenick and Trailov was invalid and that  

                                                                                                                                           



Kenick's and Trailov's claims had been conclusively determined in the federal case.  

                                                                                                                                                   



Berry joined Allstate's motion.  Kenick and Trailov responded that the federal court's  

                                                                    



holding that Allstate was not prejudiced by Herron's breach meant that the assignment  

                                                                                                                               



had not been voided.  They filed a cross-motion for summary judgment, arguing they  

                                                                                                                                          



were not precluded from litigating their negligent adjustment claim because this claim  

                                                                                                                   



           4          Id.   



           5          Id.  at 1113.   



           6          Id.   



                                                                     -10-                                                               7331
  


----------------------- Page 11-----------------------

had not been adjudicated on the merits to a final judgment in the federal declaratory                                                                                    



action.   



                              In March 2013 the superior court denied Allstate's motion - which it                                                                                              

                                                                                                  7   -  and  granted  Kenick  and  Trailov's  

treated  as  a   summary   judgment   motion                                                                                                                                 



cross-motion for summary judgment. The court found that identical issues had not been  

                                                                                                                                                                                         



decided in the federal declaratory action; it therefore held that issue preclusion did not  

                                                                                                                                                                                            



preclude litigation of the negligent adjustment claim.  The court stated that the federal  

                                                                                                                                                                           



court had not "decide[d] any issues of Alaska law outside of that defining Herron and  

                                                                                                                                                                                           



Allstate's contractual relationship" and that the issue of negligence was not identical to  

                                                                                                                                                                                               

any issue decided in the federal declaratory action.8  

                                                                                                                      



                              Allstate and Berry both appeal the superior court's ruling; they argue that  

                                                                                                                                                                                           



the determination of their reasonableness - and by implication whether they were  

                                                                                                                                                                                        



negligent - was precluded by the federal declaratory judgment.  Because we hold that  

                                                                                                                                                                                           



Kenick and Trailov were precluded from relitigating the issue of Allstate and Berry's  

                                                                                                                                                                        



reasonableness as it relates to the negligent adjustment claim, we do not discuss any later  

                                                                                                                                                                                          



superior court proceedings.  

                                  



               7              The court noted that because matters outside of pleadings were presented                                                                        



in Allstate's motion to dismiss, it was treating it as a motion for summary judgment.                                                                                                      See  

Alaska R. Civ. P. 12(b).                 



               8              Allstate and Berry continued to raise arguments throughout the subsequent  

                                                                                                                                                                          

state  court  proceedings  that  Kenick  and  Trailov's  negligent  adjustment  claim  was  

                                                                                                                                                                                         

precluded  by  the  federal  decision.                                               None  of  the  court's  later  rulings  disturbed  the  

                                                                                                                                                                                           

reasoning outlined in the court's order denying Allstate's motion to dismiss and granting  

                                                                                                                                                                                 

Kenick and Trailov's cross-motion for summary judgment.  

                                                                                                                                       



                                                                                             -11-                                                                                       7331
  


----------------------- Page 12-----------------------

III.	     STANDARD OF REVIEW           



                    The   applicability   of   issue   preclusion  "is   a   question   of   law   subject   to  



                                 9  

independent review."                                                                                                       

                                    "We therefore review de novo whether the elements of [issue  



                                10  

                         

preclusion] are met." 



IV.	      DISCUSSION  



                    Issue preclusion  "bars the relitigation  of issues actually determined  in  

                                                                                                                                

[earlier] proceedings."11             Issue preclusion prohibits a party from relitigating an issue of  

                                                                                                                                 



fact if the following four factors are met:  

                                                        



                    (1) the party against whom the preclusion is employed was a  

                                                                                                              

                    party to or in privity with a party to the first action;  

                                                                                        



                    (2) the issue precluded from relitigation is identical to the  

                                                                                                           

                    issue decided in the first action;  

                                                           



                    (3)  the  issue  was  resolved  in  the  first  action  by  a  final  

                                                                                                        

                    judgment on the merits; and  

                                                          



                    (4) the determination of the issue was essential to the final  

                                                                                                        

                    judgment. [12]  



          A.	       Kenick And Trailov Are In Privity With Herron, Who Was A Party  

                                                                                                                           

                    To The Federal Action.  

                                                            



                    Kenick and Trailov concede that they are in privity with Herron as his  

                                                                                                                               



assignees and that he was a party to the federal declaratory judgment action.  The first  

                                                                                                                      



          9         Lane  v.  Ballot,  330  P.3d  338,  341  (Alaska  2014).  



          10        Id.     



          11        Latham  v.  Palin,  251  P.3d  341,  344  (Alaska  2011)  (alteration  in  original)  



(quoting  Jeffries  v.  Glacier  State  Tel.  Co.,  604  P.2d  4,  8  n.11  (Alaska   1979)).  



          12        Id .  (quoting  Midgett  v.  Cook  Inlet  Pre-Trial  Facility,  53  P.3d   1105,   1110  



(Alaska  2002)).  



                                                              -12-	                                                        7331
  


----------------------- Page 13-----------------------

factor is therefore satisfied. Their concession is also in accord with the approach adopted                                                                                                               

by the Restatement (Second) of Judgments.                                                                       13  



                                                                                                                                                                                                                  

                 B.	              The Issue Of "Reasonableness" Is Identical In Both The Federal And  

                                                                                      

                                  State Proceedings.  



                                                                                                                                                                                                                                

                                  We now consider the second issue preclusion factor:  identity of the issue.  



                                                                                                                                                                                                               

In the federal proceeding, the jury was asked to determine whether Allstate and Berry  



                                                                                                                                                                                                                     

acted reasonably by offering policy limits on May 30.  The jury was instructed on the  



                                                                                                                                                                                                         

standard of care for an insurer in adjusting claims and on an insurer's duties to respond  



                                                                              

to a policy limits demand and protect its insured.  The jury made a factual finding that  



                                                                                                                                                                                                             

Allstate acted reasonably by offering the policy limits on May 30.  The question before  



                                                                                                                                                                                                                        

us is whether this determination of reasonableness is identical to the determination of  



                                                                                                           

reasonableness required in the state court action.  



                                                                                                                                                                                                                       

                                  In  evaluating  this  factor  we  have  applied  the  analysis  suggested  in  



                                                                                                                                                                                                                         14  

                                                                                                                                                                                                                                

commentary to the Restatement (Second) of Judgments for resolving identity issues. 



To determine whether the issue resolved in the federal action is identical to the issue in  

                                                                                                                                                                                                                        



the state action, we weigh a number of considerations, including:  

                                                                                                                                             



                                  Is  there  a  substantial  overlap  between  the  evidence  or  

                                                                                                                                                                                    

                                  argument to be advanced in the second proceeding and that  

                                                                                                                                                                                  

                                  advanced in the first?  Does the new evidence or argument  

                                                                                                                                                                   



                 13               "A judgment in an action that determines interests in . . . personal property                                                                                         



. . . [h]as preclusive effect upon a person who succeeds to the interest of a party to the                                                                                                                            

same extent as upon the party himself."                                                                RESTATEMENT  (SECOND)  OF  JUDGMENTS   43   

(AM. L            AW  INST . 1982).                          "A judgment in an action by either the assignee or the assignor                                                                            

against the obligor of an obligation that has been assigned precludes a subsequent action                                                                                                                     

on the obligation by the other of them if the person maintaining the action had power to                                                                                                                                 

discharge the obligation."                                          Id.   55.               



                 14               Powercorp Alaska, LLC. v. Alaska Energy Auth., 290 P.3d 1173, 1182  

                                                                                                                                                                                                                

(Alaska 2012), as amended on reh'g (Jan. 7, 2013) (citing RESTATEMENT  (SECOND)  OF  

                                                                                                                                                      

JUDGMENTS   27 cmt. c (A                                            M. L        AW  INST . 1982)).                           



                                                                                                          -13-	                                                                                                  7331
  


----------------------- Page 14-----------------------

                            involve application of the same rule of law as that involved                                                 

                            in   the   prior   proceeding?     Could   pretrial   preparation   and  

                            discovery relating to the matter presented in the first action                                                    

                            reasonably be expected to have embraced the matter sought                                                        

                            to be presented in the second?                                      How closely related are the                          

                            claims involved in the two proceedings?                                               [15]  



                            No party has identified, nor can we discern, any difference between the  

                                                                                                                                                                                 



pretrial preparation and discovery for the federal action and what could reasonably be  

                                                                                                                                                                                  

expected in the state court action.16  

                                                                            



                            The federal jury was tasked with deciding a single issue of fact:  it found  

                                                                                                                                         



that Allstate had acted reasonably by offering the policy limits on May 30.  This factual  

                                                                                                                                                                         



finding allowed the federal court to conclude that Herron's breach of the contract was  

                                                                                                                                                            



not excused.  But the jury instructions indicate that the determination of reasonableness  

                                                                                                                                                        



foreclosed any possibility of a claim that Allstate had breached the covenant of good  

                                                                                                                                                                             



faith and fair dealing.  

                                                



                            As wediscussed in Lockwoodv. Geico General InsuranceCo., all contracts  

                                                                                                                                                                     

carry an implied duty of good faith and fair dealing.17                                                                 This gives the insured both a  

                                                                                                                                                        

cause of action that sounds in contract and one that sounds in tort.18                                                                              In Lockwood we  

                                                                                                                                                                                 



stated that "our precedent makes clear that the element of breach at least requires the  

                                                                                                                                                                                 



insured  to  show that the insurer's actions were objectively  unreasonable under  the  

                                                                                                                                                                                



              15            Id.  (quoting R              ESTATEMENT (SECOND) OF  JUDGMENTS   27 cmt. c (A                                                             M.L      AW  



INST . 1982)).                



              16             Cf. id.        at 1182-83.                During the state court trial it was clear there was a                                               



                                                                                                                                                                                         

tremendous  amount  of  overlap  of  discovery  and  the  evidence  that  was  presented.  

However, in analyzing this issue, we place ourselves in the same position as the superior                                                                             

                                                                                                                                                           

court at the time of the motion to dismiss and cross-motion for summary judgment.  



              17            323 P.3d 691, 697 (Alaska 2014).  

                                                                                       



              18            Id. at 697 n.19.  

                                                  



                                                                                       -14-                                                                                  7331
  


----------------------- Page 15-----------------------

                                      19  

circumstances."                              The   parties   do  not   appear   to   dispute   that   the   federal   jury's  



determination   that   Allstate   acted  reasonably   in   offering   a   policy   limits   demand   on  



May 30 forecloses Kenick and Trailov from pursuing a tort claim based on a breach of                                                                                                                   



the duty of good faith and fair dealing.                                                     



                               Butthejury's finding that                                   Allstateacted                   reasonably likewiseforecloses                                           any  



claim for negligent adjustment.                                               To find that Allstate or Berry committed the tort of                                                                     



negligent adjustment, a fact finder would need to find that Berry had been negligent -                                                                                                                

that she had breached the tort duty of reasonable or ordinary care                                                                                        20 - by not agreeing  



to settle for policy limits before May 30.  A finding that she was negligent would be  

                                                                                                                                                                                                      



inconsistent with the federal jury's determination that Allstate, which had ratified its  

                                                                                                                                                                                                      



employee Berry's conduct, acted reasonably by offering policy limits on May 30.  

                                                                                                                                                                                         



                               While the evidence and argument for each involve application of different  

                                                                                                                                                                                        



rules of law, Kenick's and Trailov's two claims and legal theories remain entwined. The  

                                                                                                                                                                                                   



tort of negligent adjustment is an independent cause of action that may be separate from  

                                                                                                                                                                                                 



a claim based on the insurance contract, but a negligent adjustment claim stems in part  

                                                                                                                                                                                                   

from the contractual relationship between an insured and an insurance company.21                                                                                                                    An  

                                                                                                                                                                                                    



                19             Id.  at 697.   



                20             See C.P. ex rel. M.L. v. Allstate Ins. Co.                                                        , 996 P.2d 1216, 1220 (Alaska                           



2000) (quoting Cont'l Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 287 (Alaska  

                                                                                                                                                                                         

 1980)) (stating that an insurance adjuster "could be held liable for negligence arising out  

                                                                                                                                                                                                     

of a breach of the general tort duty of ordinary care").                                                                         



                21             Id. at 1220-22 (Alaska 2000) ("[W]e recognize[] that an insurance adjuster  

                                                                                                                                                                                          

owes a duty of care to the insured which is independent of any contractual obligation  

                                                                                                                                                                                    

arising out of the insurance policy, and that a breach of this duty is actionable." (quoting  

                                                                                                                                                                                        

Sauer v. Home Indemn. Co., 841 P.2d 176, 184 (Alaska 1992))); Cont'l Ins. Co., 608  

                                                                                                                                                                                                   

P.2d at 287-88, 288 n.10 (stating adjuster "could not be held liable for a breach of the  

                                                                                                                                                                                                     

fiduciary duty of good faith arising out of the insurance contract, but he could be held  

                                                                                                                                      

                                                                                                                                                                            (continued...)  



                                                                                                 -15-                                                                                           7331
  


----------------------- Page 16-----------------------

adjuster's duties to the insured do not arise from an insurance contract because an                                                                                 



adjuster is not a party to the contract.  But for the adjuster to owe the insured a duty to                                                                           

                                                                                                                           22   Absent a contractual  

act with reasonable care, a contractual relationship must exist.                                                                                   



relationship between an insurance company and an insured, an adjuster would owe no  

                                           



duty.  Kenick and Trailov focus on the fact that Berry was not a party to the federal  

                                                                                                                                                            



action, but they ignore that Allstate ratified Berry's conduct and that Berry's actions as  

                                                                                                                                                                      



Allstate's in-house adjuster were at issue in the federal action.  It was her conduct on  

                                                                                                                                                                     



Allstate's behalf that the federal jury found to be reasonable.  

                                                                                                                          



                          The evidence and argument to be advanced in the state proceeding overlap  

                                                                                                                                                           

significantly with that which was advanced in the federal declaratory action.23  The focus  

                                                                                                                                                                



of the litigation in both proceedings, as shown by the available record of the federal  

                                                                                                                                                            



proceeding and as outlined in the underlying complaint, is Berry's actions or omissions  

                                                                                                                                                      



in evaluating Trailov's bodily injury claim and Kenick's NIED claim, with particular  

                                                                                                                                                       



focus on what Berry did after receiving Power's February demand letter and the letter  

                                                                                                                                                                



                                                   24  

with the May 16 deadline.                                

                                  



                          Weighing  all  of  these  considerations,  we  hold  that  the  federal  jury's  

                                                                                                                                                             



determination  that  Allstate  acted  reasonably  in  offering  policy  limits  on  May  30  

                                                                                                                                                                    



encompasses the issue of fact that Berry, as Allstate's employee, acted reasonably in  

                                                                                                                                                                      



offering policy limits on May 30.  

                                                            



             21           (...continued)  



                                                                                                                                                                           

liable for negligence arising out of a breach of the general tort duty of ordinary care").  



             22           Cf. C.P. ex rel. M.L.                   , 996 P.2d at 1220-21.         



             23           See Powercorp Alaska, LLC v. Alaska Energy Auth., 290 P.3d 1173, 1182  

                                                                                                                                                                

(Alaska 2012), as amended on reh'g (Jan. 7, 2013).  

                                                                                                       



             24           Cf. id. at 1182-83.  

                                             



                                                                                 -16-                                                                           7331
  


----------------------- Page 17-----------------------

                C.	             The   Issue   Of   Allstate's   Reasonableness   Was   Resolved   In   A   Final  

                                Judgment On The Merits.                         



                                Kenick and Trailov argue that "no tort issues were decided in the federal                                                                            



case, [only] a series of contract issues were decided."                                                                                But this argument seemingly                   



conflates the identity of issues factor with the final judgment factor for determining                                                                                           



                                                                               25  

whether issue preclusion applies.                                                                                                                                                                     

                                                                                      The relevant inquiry here is whether the issue had  



                                                               26  

                                                                                                                                                                                                  

"actually be[en] litigated."                                          We have identified the issue of fact - that Allstate acted  



                                                                                                                                                                                           

reasonably. Because this issue was determined by a federal jury, "the issue was resolved  



                                                                                                                              27  

                                                                                                                                    

in the first action by a final judgment on the merits." 



                                                                                                                                                                                                      

                D.	             TheDeterminationOfAllstate'sReasonableness Was Essential To The  

                                               

                                Final Judgment.  



                                                                                                                                                                                              

                                The fourth and final factor in determining whether issue preclusion applies  



                                                                                                                                                                                       

is whether the issue was essential to the final judgment in the federal case.  Allstate's  



                                                                                                                                                                                                      

reasonableness was the only issue of fact resolved by the federal jury.  It therefore was  



                                     

essential to the federal court's declaration that Allstate had not breached the insurance  



                                                                                                                          28  

                                                                                                                                                                                                            

contract and that Herron's breach was not excused.                                                                               If the federal jury had returned a  



                                                                                                                                                                  

verdict that Allstate had not acted reasonably, Allstate would have been in breach and  



                                                                                                          

Herron's breach would have been excused.  



                25              As we noted, the second factor of the four-factor issue preclusion test is                                                                                                 



whether the precluded issue is "identical to the issue decided in the first action"; the third                                                                                                      

factor is whether that issue "was resolved in the first action by a final judgment on the                                                                                                              

merits."    See supra                            12 (quoting                   Latham v. Palin                          , 251 P.3d 341, 344 (Alaska 2011)                                       

(quoting  Midgett v. Cook Inlet Pre-Trial Facility                                                                  , 53 P.3d 1105, 1110 (Alaska 2002))).                                  



                26              In re Adoption of A.F.M. , 15 P.3d 258, 268 n.46 (Alaska 2001).  

                                                                                                                                                                         



                27              Id.  



                28              Cf. Powercorp Alaska, LLC., 290 P.3d at 1183.  

                                                                                                                                                   



                                                                                                   -17-	                                                                                           7331
  


----------------------- Page 18-----------------------

                             Because all four factors of issue preclusion are met, Kenick and Trailov are                                                                           



precluded from relitigating the issue of reasonableness.                                                               An essential element of the tort                            



of negligent adjustment is the lack of reasonable care; the federal jury found that there                                                     

                                      29   The superior court erred in denying Allstate and Berry's motion to  

was no such lack.                                                                                                                                                                     



dismiss.  

                   



V.            CONCLUSION  



                             We VACATE the jury's verdict and resulting judgment.  We REVERSE  



the superior court's order denying the motion to dismiss and REMAND for dismissal of  

                                                                                                                                                                                      



the complaint consistent with this opinion.  

                                                                          



              29             See C.P. ex rel. M.L. v. Allstate Ins. Co., 996 P.2d 1216, 1220-21 (Alaska  

                                                                                                                                                                         

2000); Cont'l Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 287 (Alaska 1980).  

                                                                                                                                                                      



                                                                                        -18-                                                                                          7331  

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