## F I L E D United States Court of Appeals Tenth Circuit 

### MAR 4 2004 

## PATRICK FISHER Clerk PUBLISH
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

JOSEPH EDWARD SLOAN; BYRON Z. MOLDO, Chapter 7 Trustee – In re: JOSEPH EDWARD SLOAN, Debtor, Plaintiffs-Appellants/ Cross-Appellees,

v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellee/ Cross-Appellant. Nos. 02-2050 and 02-2059

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW MEXICO D.C. No. 00-CV-702-BB/WWD
Stephen L. Tucker, Tucker Law Firm, Santa Fe, New M exico (Lisa K. Vigil, Vigil and Vigil, and Steven Vogel, Albuquerque, New Mexic o, with him on the briefs), for Plaintiffs-Appellants/Cross-Appellees. Terry R. Guebert (RaMona G. Bootes, with him on the brief), Guebert, Bruckner & Bootes, P.C., Albuquerque, New Mexico, for Defend ant-Appellee/CrossAppellant.

Before KELLY , PORFILIO , and BRISCOE , Circuit Judges.- 2 -



### KELLY, Circuit Judge.

Plaintiffs-Appellants/Cross-Appellees Sloan (Debtorand Insured) and Moldo (Bankruptcy Trustee) appeal from the districtcourt’s judgment awarding $560,000 in compensatory damages based upon breach of contract, bad faith failure to settle, and a violation of the New Mexic o Insurance Practices Act. Defendant-Appellee/Cross-Appellant State Farm (Insu rer) also appeals contending that several trial errors occurred. We affirm the judgment on liability, reverse the judgment insofar as damages and remand for a new tr ial on compensatory and punitive damages.

Background The insured and his family were traveling eastbound on I-40 near Grants, New Mexico, during snowy weather when his vehicle c rossed into the westbound lane, causing a head-on collision with the Shelton family. Mrs. Shelton was seriously injured. The Sheltons’ lawyer offered to settle the claims of the family members for $300,000. Ultimately, the family membe rs sued the insured. Prior to trial, the claims of the insured’s two children were settled (for $35,001, and $20,001, respectively). The claims of Mr. and Mrs. Shelton were tried to a jury, resulting in judgments against the insured for $49, 500 and $495,000, respectively.- 3 -



### State Farm paid the $49,500 judgment, but only paid $100,000 of the other judgment, resulting in an excess judgment of $395,0 00. A key dispute in this case pertains to the insured’ s policy limits. The insurer maintains that the policy issued, designate d policy form # 9805.5 , limited coverage for bodily injury to $100,000 per person, and $300,000 per accident involving two or more persons, with the per acciden t limits subject to the per person limits. Thus, according to the insurer, onl y $100,000 of coverage was available to compensate Mrs. Shelton, the most seri ously injured victim. Early in the underlying litigation, the Sheltons’ attorney obtained a certified copy of the policy from the insurer. That policy f orm is shown as # 9805.3 and is different from what the insurer now relies upon. T he certified policy contains $100,000/$300,000 limits, however, the provision co ntaining those limits had been held patently ambiguous by a Washington state court. Haney v. State Farm
Ins. Co. 760 P.2d 950, 952-53 (Wash. Ct. App. 1988). Construing the contract in favor of the insured, the Haneycourt concluded that the per accident limits were not subject to the per person limits, resulting in an interpretation that renders the $100,000 per-person limit unenforceable in favor of the $300,000 limit. Id. ; see also Andrews v. Nationwide Mut. Ins. Co. , 467 A.2d 254, 258 (N.H. 1983). The Sheltons’ attorney notified the insurer of the ambiguous policy language in the context of a $300,000 demand. The insurer replied that it had- 4 -



### certified the wrong policy (Form # 9805.3) and thata later policy (Form # 9805.5), one that remedied the ambiguous language, was actually issued. Whether the change was the correction of an inadvertent error or an attempt to prevent the insured from exercising his contractual rights was the subject of the federal court trial. It is clear, however, that th e insurer was well aware of the potential for an excess judgment against its insure d. On appeal, Plaintiffs contend that the district cou rt erred in not submitting (1) punitive damages on the bad faith claim to the jury, because (2) the evidence supported compensatory damages and (3) there was su fficient evidence for punitive damages. Plaintiffs also object to the di strict court’s (4) ordering remittitur without giving the Plaintiffs the option to consent or to have a new trial on damages. Defendant contends that (1) Plaintiffs were not entitled to have punitive damages submitted to the jury because they failed to object to the jury instructions which omitted this issue, (2) the comp ensatory award will not support the necessary finding for punitive damages, and (3) the evidence does not support punitive damages. Defendant agrees that (4) remitt itur requires that the plaintiff be given an option to accept the remittitur or a ne w trial on damages. In its crossappeal, Defendant argues that (5) the jury instruct ions and verdict form were faulty because they failed to prohibit double recov ery, (6) the remittitur was inadequate to cure this problem, (7) the visiting d istrict judge who presided at the1 

### Effective December 1, 2003, Fed. R. Civ. P. 51 wa s amended. Either

version of the rule would result in the same outcom e. See Fed. R. Civ. P. 51(c)(2), (d)(1)(B). - 5 - 

### trial improperly rushed it, failed to timely advise Defendants of the need to summarize depositions (the court would not allow de positions to be read) while so advising the Plaintiffs, and made derogatory and ne gative comments about defense counsel and his evidence throughout the tri al. Defendant seeks a new trial on compensatory damages only, or in the alter native, a new trial on liability and damages should we accept its contention that itwas prejudiced by the district judge’s conduct towards it. See Aplee. Br. at 58-59. Defendant urges this court to uphold the district court’s grant of judgment as a matter of law (JMOL) on the punitive damages claim.

Discussion We stayed these appeals pending resolution of a certified question of law on the punitive damages issue addressed to the New Mexico Supreme Court. Sloan v. State Farm Mut. Auto. Ins. Co. (In re: Slo an) , 320 F.3d 1073 (2003). We now vacate that stay and proceed to the merits. Ob viously, we were not persuaded by Defendant’s contention that Plaintiffs forfeited the punitive damages issue by failing to object to the jury inst ructions and the verdict form that omitted the issue. See Fed. R. Civ. P. 51. 1 

### The district court granted JMOL2 

### The bad faith contentions were as follows:

To establish the claim of Bad Faith on the part of State Farm, Sloan has the burden of proving any of the contentions se t forth below: 1. State Farm acted in bad faith by failing to con duct a timely and fair investigation and evaluation of the claim; or 2. State Farm’s denial of a $300,000.00 payment fo r the Shelton’s claim was frivolous or unfounded; or 3. State Farm acted in bad faith with Sloan by fai ling to timely investigate, evaluate or pay Sloan’s claim which is a bad faith breach of the duty to act honestly and in good faith in its performance of th e insurance contract; or - 6 - 

### on the punitive damages claim at the close of the P laintiffs’ case, reconsidered the issue after the Defendant’s case upon Plaintiff’s m otion and adhered to its original ruling. Aplt. App. 653-654, 721. Thus, t he district court made a legal determination, albeit on a factual issue and withou t the guidance we now have from the New Mexico Supreme Court, that punitive da mages for bad faith required a culpable mental state and that was lacki ng here. The issue having been raised and definitively ruled upon, it was not forf eited. See City of St. Louis v. Praprotnik , 485 U.S. 112, 119-20 (1988); E.R. Squibb & Sons, Inc. v. Lloyd’s &
Cos. , 241 F.3d 154, 167 (2d Cir. 2001). In granting th e motion for JMOL, the district court explained that the case was “nothing more than a breach of a contract by an insurance company.” Aplt. App. 654. At the close of the evidence, however, the case was submitted to the ju ry on three theories of liability including bad faith. The special verdict returned by the jury was predicated in part on bad faith. Aplt. App. 203-04, 2 

### 252. The evidentiary basis for the liability

### 4. State Farm acted in bad faith by failing to giv e Sloan’s interests the

same or equal consideration as their own interests. Sloan also contends and has the burden of proving t hat such insurance bad faith was a proximate cause of his damages. Aplt. App. 203-204, 767-768. - 7 - 

### portion of that special verdict has not been challe nged in this appeal. A. Punitive Damages. In light of the contentions of the parties, we pose d the following question for the New Mexico Supreme Court: Is an instruction for punitive damages required in every insurance bad faith case in which the plaintiff has produced evidence supporting compensatory damages as suggested by Uni form Jury Instruction 13-1718, N.M. R. Ann., UJI-Civ. (2002) (Directions for Use), or is the New Mexico Court of Appeals correctthat subsequent New Mexico Supreme Court authority requires a culpa ble mental state beyond bad faith for imposition of punitive d amages in insurance bad faith cases? Teague-Strebeck Motors, Inc. v. Chrysler Ins. Co. , 985 P.2d 1183, 1202-05 (N.M. Ct. App. 1999). In re: Sloan , 320 F.3d at 1073. The New Mexico Supreme Court accepted certification and overruled that part of Teague-Strebeckthat would require a culpable mental state for pun itive damages beyond that required for compensatory damages in ba d faith cases. See Sloan v. State Farm Mut. Auto. Ins. Co. (In re: Sloan) , No. 27,928, slip op. at 8 (N.M. Jan. 20, 2004) (copy attached). In most cases, evidence of bad faith sufficient to present the case to the jury will warrant an instru ction on punitive damages- 8 -



### because it could support a culpable mental state. Id . at 8, 12. In the first-party context, an unreasonable denial or delay of a claim suffices for compensatory damages; if the denial or delay is also frivolous o r unfounded, that demonstrates a culpable mental state sufficient to submit the issu e of punitive damages to the jury. Id. at 10. This case includes a bad-faith failure to settle cl aim. In such cases, an insurer’s failure to investigate or competently def end may be evidence of bad faith. Id. at 11. But if there is evidence that the insurer exercised “dishonest judgment” and did not given equal consideration to its interests and that of its insured, a punitive damages instruction is warrante d. Id. at 12. To these ends, the New Mexico Supreme Court has revised the instru ction on punitive damages in bad faith cases to require a finding not only th at compensatory damages are warranted, but also that “the conduct of the insura nce company was in reckless disregard for the interests of the plaintiff, or wa s based on a dishonest judgment, or was otherwise malicious, willful, or wanton.” Id. at 13 (revising N.M. UJI 13- 1718). Based upon what we now know about punitive damages and bad faith in New Mexico, we hold that the grant of JMOL on the p unitive damages claim was error. The insurer has not cross-appealed from the judgment insofar as the sufficiency of the evidence supporting liability, i ncluding liability on the bad faith3 

### The insurer does suggest other reasons why a new trial on liability ought

to occur. - 9 - 

### claim. 3 

### Indeed, Plaintiffs tell us that the insurer did n ot move for JMOL on these grounds either; the appendix does not appear to be to the contrary. Aplt. Br. at
19-20. The general rule announced by the New Mexico Suprem e Court is that ordinarily a jury should decide the issue of puniti ve damages given a prima facie showing of bad faith sufficient to submit the case to the trier of fact. Sloan , slip op. at 8. Given the liability findings and the obv ious factual dispute about the bona fides of the policy switch, we hold that a pun itive damages instruction is now warranted. A jury could conclude that the insu rer may have exercised less than honest judgment or that it did not give equal consideration to its interests and that of the insured. Given the doubt surrounding w hich policy applied and the insured’s almost certain exposure to an excess judg ment, a jury could conclude that the insured conducted an unfair balancing of i nterests in not settling for policy limits early on. See Id . at 4 (“An insurer’s frivolous or unfounded refusa l to pay is the equivalent of a reckless disregard fo r the interests of the insured, and a dishonest or unfair balancing of interests is no less reprehensible than reckless disregard, which has historically justified an awar d of punitive damages.”).- 10 -



### B. Remittitur. The next issue we must confront is the remittitur. Ordinarily, a district court’s grant of remittitur in a diversity case is reviewed for an abuse of discretion. Gasperini v. Ctr. for Humanities, Inc. , 518 U.S. 415, 419 (1996). Plaintiffs do not argue that the district court was without power to order remittitur or a new trial. Although the insurer challenges th e remittitur as insufficient, both parties agree that the district court may not force the plaintiff to remit the excess portion of the judgment prior to allowing a plainti ff to choose between remittitur or a new trial on damages. We agree with the parties. The Seventh Amendment requires that a plaintiff be given the option of a new trial in lie u of remitting a portion of the jury’s award. Hetzel v. Prince William County , 523 U.S. 208, 211 (1998). No judgment for a remittitur may be entered without th e plaintiff’s consent because the Seventh Amendment prohibits the court from subs tituting its judgment for that of the jury’s regarding any issue of fact. Id. ; Gasperini , 518 U.S. at 433; see also Dimick v. Schiedt , 293 U.S. 474, 486-87 (1935). Regardless of wheth er remittitur is proposed by the trial or appellate court, if the plaintiff does not consent to the remittitur, the district court has no alternative b ut to order a new trial on damages. O’Gilvie v. Int’l Playtex, Inc. , 821 F.2d 1438, 1447-48 (10th Cir. 1987) (citing Kennon v. Gilmer , 131 U.S. 22, 28-30 (1889); McKinnon v. City of Be rwyn , 750- 11 -



### F.2d 1383 (7th Cir. 1984)). Even if allowed to elect, Plaintiffs tell us that t hey will not accept remittitur as ordered by the district court. Aplt. Br. at 46; Aplt. Reply/Answer Br. at 17. Thus, the case must remanded for a new trial on dam ages, a remedy also sought by the insurer. Because of that, we do not address Defendant’s arguments concerning double recovery and the adequacy of the remittitur amount. C. Conduct of the Trial. We must consider Defendant’s point concerning the c onduct of the trial to the extent Defendant seeks a new trial on liability . Essentially, Defendant contends that the judge’s conduct considered in its totality deprived it of a fair trial. Defendant relies upon Rocha v. Great Am. In s. Co. , 850 F.2d 1095 (6th Cir. 1988): When the remarks of the judge during the course of a trial, or his manner of handling the trial, clearly indicate a ho stility to one of the parties, or an unwarranted prejudgment of the merit s of the case, or an alignment on the part of the Court with one of t he parties for the purpose of furthering or supporting the contentions of such party, the judge indicates, whether consciously or not, a pers onal bias and prejudice which renders invalid any resulting judgm ent in favor of the party so favored. Id. at 1100 (quoting Knapp v. Kinsey , 232 F.2d 458, 466 (6th Cir. 1956)) (emphasis omitted). Our review of this claim of ju dicial bias is for plain error because Defendant did not object on this basis. Se e Gaydar v. Sociedad Instituto Gineco-Quirurgico y Planificacion Familiar , 345 F.3d 15, 23-24 (1st Cir. 2003);- 12 -



### United States v. MacKay , 491 F.2d 616, 621-22 (10th Cir. 1973) (criminal context). And counsel must object. We recognize c ounsel’s fear of antagonizing the trial judge (or possibly the jury) and thereby prejudicing his client’s case, but a respectful objection may bring the matter before the trial court for possible corrective action and preserve the client’s right t o meaningful appellate review. As it stands, in civil cases, the plain error doctr ine is sharply limited to errors that seriously affect the fairness, integrity or public reputation of judicial proceedings. Quigley v. Rosenthal , 327 F.3d 1044, 1063 (10th Cir. 2003). Having reviewed the transcript, we are troubled by the process used by the court to inform counsel of how deposition testimonywould be admitted. At a minimum, a variant procedure such as this one shoul d be announced to both parties well in advance (not on the eve of trial), or be included in the pretrial order. At the same time, a review of the record in dicates that deposition testimony was presented (albeit out of sequence and through excerpted portions of video or summaries presented by counsel) with couns el afforded the opportunity to object and have those objections ruled upon by t he court. Suffice it to say that while we understand defense counsel’s justifiable c oncern with the procedure, we cannot find that the fairness of the proceedings wa s substantially compromised. Although a federal court has the right to comment o n witness testimony, it must “exercise great care to maintain an impartial attitude and not become an- 13 -



### advocate for one of the parties to the litigation o r mislead the jury.” United States v. Sowards , 339 F.2d 401, 403 (10th Cir. 1964). We have revi ewed the district court’s comments on the evidence, Aplt. Ap p. 442-443, 505, and the revelation of facts to the jury that the prior dist rict judge may have ruled inadmissible, Aplt. App. 635-36, and find no plain error. A district court may attempt to clarify evidence, and it may revisit int erlocutory evidentiary rulings made by another district judge. The district judge did not comment directly on the ultimate factual issue to be decided by the jury, nor add to the evidence, both of which would be improper. See Quercia v. United States , 289 U.S. 466, 471-72 (1933); Rocha , 850 F.2d at 1100; Sowards , 339 F.2d at 402-403. Finally, we consider the district court’s commen ts directed towards counsel’s preparation, erudition, objections or lac k of objection, and settlement. We certainly expect trial courts to treat counsel w ith respect, but given our standard of review in the absence of any objection, we do not find that the district court’s comments in this case (directed towards bot h sides) rendered the trial unfair. The district court repeatedly expressed it s views that the parties should settle the case (and what the case was worth), but it did this outside the presence of the jury. While we recognize that settlement is an appropriate topic for a pretrial conference, Fed. R. Civ. P. 16(c)(9), some cases cannot be settled and the parties’ desire for a trial must be respected. As for the trial court’s other- 14 -



### comments, we do not find them to be of such a chara cter to have compromised the substantial rights of the insurer on the issue of l iability. Both sides won and lost issues on that score. On remand, however, we thinkit would be best for the case to be reassigned. AFFIRMED in part, REVERSED in part and REMANDED.IN THE SUPREME COURT OF THE STATE OF NEW MEXICO

Opinion Number: 2004-NMSC-004 Filing Date: January 20, 2004 Docket No. 27,928
IN RE: JOSEPH EDWARD SLOAN, Debtor JOSEPH EDWARD SLOAN and BYRON Z. MOLDO, Chapter 7 Trustee, Plaintiffs-Appellants and Cross-Appellees,

vs. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellee and Cross-Appellant.
CERTIFICATION FROM THE UNITED STATES COURT OF APPEA LS FOR THE TENTH CIRCUIT Tucker Law Firm, P.C. Steven L. Tucker Santa Fe, NM Eaton, Martinez, Hart & Valdez, P.C. Steven J. Vogel Albuquerque, NM Vigil & Vigil, P.A. Lisa K. Vigil Albuquerque, NM for Appellants and Cross-AppelleesGuebert, Bruckner & Bootes, P.C.

Terry R. Guebert Donald G. Bruckner Jr. Ramona G. Bootes Albuquerque, NM for Appellee and Cross-AppellantOPINION

CHÁVEZ, Justice. {1} In this insurance-bad-faith case, arising from an insurance company's failure to settle a third-party lawsuit against its insured, w e are asked to clarify whether a culpable mental state in addition to bad faith is required f or the imposition of punitive damages. The following question was certified to us by the U nited States Court of Appeals for the Tenth Circuit, in accordance with Rule 12-607 NMRA 2003:

Is an instruction for punitive damages required in every insurance bad faith case in which the plaintiff has produced evid ence supporting compensatory damages as suggested by [UJI 13-1718 N MRA 2003], or is the New Mexico Court of Appeals correct that subseq uent New Mexico Supreme Court authority requires a culpable mental state beyond bad faith for imposition of punitive damages in insurance badfaith cases? Teague-Strebeck Motors, Inc. v. Chrysler Ins. Co., [1999-NMCA-109, ¶¶ 76-90, 127 N.M. 603, 985 P.2d 1183]. Sloan v. State Farm Mut. Auto. Ins. Co. (In re Sloan), 320 F.3d 1073, 1073 (10th Cir. 2003). {2} Exercising jurisdiction under NMSA 1978, § 39-7-4 (1997), we answer that under New Mexico law, a punitive-damages instructio n should be given to the jury in every common-law insurance-bad-faith case where the evidence supports a finding either (1) in failure-to-pay cases (those arising f rom a breach of the insurer's duty to timely investigate, evaluate, or pay an insured's c laim in good faith), that the insurer failed or refused to pay a claim for reasons that w ere frivolous or unfounded, or (2) in failure-to-settle cases (those arising from a breac h of the insurer's duty to settle a third-party claim against the insured in good faith ), that the insurer's failure or refusal to settle was based on a dishonest or unfair balancing of interests. An insurer's frivolous or unfounded refusal to pay is the equivalent of a rec kless disregard for the interests of the insured, and a dishonest or unfair balancing of int erests is no less reprehensible than reckless disregard, which has historically justifie d an award of punitive damages. To ensure the jury has found a culpable mental state b efore awarding punitive damages, we modify UJI 13-1718 to reflect that punitive damages may only be awarded when the insurer's conduct was in reckless disregard for the interests of the plainti ff, or was based on a dishonest

### - 2 -

judgment, or was otherwise malicious, willful, or w anton. I. {3} This matter comes to us in the course of an appeal from a jury trial in federal district court. The trial court granted Defendant S tate Farm's motion for judgment as a matter of law on Plaintiffs' claim for punitive dam ages against Defendant for bad-faith failure to settle. Sloan, 320 F.3d at 1074. The court submitted Plaintiffs' insurance-bad-faith claims to the jury without the instruction for punitive damages, UJI 13-1718 NMRA 2003. Even though Plaintiffs' claims p rimarily involved bad-faith failure to settle, the court included in its instru ctions to the jury both the bad-faith standard in a failure-to-settle action, that is, a dishonest or unfair balancing of interests (Jury Instruction No. 6, below), and the bad-faith standard in a first-party failure-to-pay action, that is, any frivolous or unfounded refusal to pay (Jury Instruction No. 8, below). Because the trial court gave the jury both instruct ions, we shall address the standard for punitive damages under both causes of action. The j ury instructions relevant to Plaintiffs' bad-faith claim given at trial were: Jury Instruction No. 6 A liability insurance company has a duty to timely investigate and fairly evaluate the claim against its insured, and to acce pt reasonable settlement offers within policy limits. An insurance company's failure to conduct a compete nt investigation of the claim and to honestly and fairly balance its own interest s and the interests of the insured in rejecting a settlement offer within poli cy limits is bad faith. If the company gives equal consideration to its own intere sts and the interests of the insured and based on honest judgment and adequate i nformation does not settle the claim and proceeds to trial, it has acted in go od faith.

See UJI 13-1704 NMRA 2003.
Jury Instruction No. 8

An insurance company acts in bad faith when it refu ses to pay a claim of the policyholder for reasons which are frivolous orunfounded. An insurance company does not act in

### - 3 -

bad faith by denying a claim for reasons which are reasonable under the terms of the policy. In deciding whether to pay a claim, the insurance c ompany must act reasonably under the circumstances to conduct a timely and fair inve stigation and evaluation of the claim. A failure to timely investigate, evaluate or pay a claim is a bad faith breach of the duty to act honestly and in good faith in the performanc e of the insurance contract.

See UJI 13-1702 NMRA 2003.
{4} The jury found that State Farm acted in b ad faith in its dealings with Plaintiffs and that its bad faith proximately caused Plaintiff s' damages. The jury awarded Plaintiffs $600,000 in compensatory damages, later reduced to $540,000 on motion for remittitur. Plaintiffs appealed to the United State s Court of Appeals for the Tenth Circuit, arguing that under New Mexico law, where there is sufficient evidence to submit an insurance-bad-faith claim to the jury, th e jury must also receive an instruction on punitive damages. The Court of Appeals then cert ified the above question to us because it was unclear under New Mexico law whetherin an insurance-bad-faith action, a finding of bad faith, without an additional findi ng of a culpable mental state, permitted an award of punitive damages.
{5} This case presents an opportunity to asse ss the New Mexico Court of Appeals' holding in Teague-Strebeck that an award of punitiv e damages in an insurance-bad-faith case requires a culpable mental state in addition t o the bad faith required for compensatory damages. See Teague-Strebeck Motors, I nc. v. Chrysler Ins. Co., 1999-NMCA-109, ¶ 78, 127 N.M. 603, 985 P.2d 1183. A lthough we denied the petition for certiorari in that case, such denial in itself expresses no opinion on the merits of the case. See State v. Breit, 1996-NMSC-067, ¶ 13, 122 N.M. 655, 930 P.2d 792. In our denial of certiorari in Teague-Strebeck, we avoidedhaving to reconcile various statements we have made about the standard for puni tive damages in insurance-bad-faith claims. We now take the opportunity to clarify the law on this point.

### - 4 -

{6} For the reasons that follow, we conclude that under New Mexico law, bad-faith conduct by an insurer typically involves a culpable mental state, and therefore the determination whether the bad faith evinced by a particular defendant warrants punitive damages is ordinarily a question for the jury to re solve. To the extent Teague-Strebeck would, in every insurance-bad-faith case, require ashowing of an additional culpable mental state to permit an instruction on punitive d amages, Teague-Strebeck is overruled. In so holding, we reaffirm our statementin Jessen v. National Excess Insurance Co., 108 N.M. 625, 627, 776 P.2d 1244, 12 46 (1989) that "[b]ad faith supports punitive damages upon a finding of entitle ment to compensatory damages." Accordingly, an instruction on punitive damages wil l ordinarily be given whenever the plaintiff's insurance-bad-faith claim is allowed to proceed to the jury. We do, however, somewhat limit the per se Jessen rule by affording the trial court the discretion to withhold a punitive-damages instruction in those rare instances in which the plaintiff has failed to advance any evidence tending to suppo rt an award of punitive damages.

II. {7} Teague-Strebeck held that in insurance-bad- faith cases, New Mexico requires "the presence of aggravated conduct beyond that nec essary to establish the basic cause of action in order to impose punitive damages." 199 9-NMCA-109, ¶ 78. In reaching this conclusion, the Teague-Strebeck court analyzed two New Mexico Supreme Court rulings, Paiz v. State Farm Fire & Casualty Co., 11 8 N.M. 203, 880 P.2d 300 (1994) and Allsup's Convenience Stores, Inc. v. North River In surance Co., 1999-NMSC-006, 127 N.M. 1, 976 P.2d 1, and determined from the languag e of those opinions that this Court intended to raise the standard of conduct required for an award of punitive damages in insurance-bad-faith cases. The Teague-Strebeck court determined that Paiz and Allsup's "superseded" the Jessen formulation and that "New M exico now requires a showing of a culpable mental element to allow imposition of puni tive damages." Teague-Strebeck, 1999-NMCA-109, ¶ 90.

### - 5 -

{8} In its original opinion, the Teague-Streb eck court affirmed the trial court's denial of the plaintiffs' claim for punitive damage s arising from an insurance-bad-faith claim. Id. ¶¶ 70-73. The plaintiffs had argued thatthey were automatically entitled to punitive damages once compensatory damages were awarded and that the trial court therefore misapplied the legal standard for the award of punitive damages. Id. ¶¶ 71-72. Teague-Strebeck interpreted Paiz as requiring evide nce of "an evil motive or a culpable mental state," in addition to bad faith, for a plai ntiff to be entitled to punitive damages. Accordingly, it held the trial court did not abuse its discretion by refusing punitive damages. Id. ¶¶ 72-73. {9} In a separate published order on rehearin g, appended to the original published opinion, the Teague-Strebeck court reinforced its i nitial holding, and again relied on Paiz and Allsup's for the proposition that "there i s a real distinction between `bad faith' sufficient to support an award of compensatory dama ges and `bad faith' meriting exemplary damages." Id. ¶ 85. The Teague-Strebeck c ourt also noted that UJI 13-1718, as it currently stands, "clearly contemplates the g iving of a punitive damages instruction in every bad faith case submitted to a jury." Id. ¶82 n.1. The court then stated, "Given the holding in Paiz, and the language in Allsup's, upon which we rely, it would seem appropriate to reconsider this approach." Id. {10} As we reconsider UJI 13-1718 and the law o f punitive damages in insurance-bad-faith claims, we first consider the analyses of Paiz and Allsup's in Teague-Strebeck. A. {11} The Teague-Strebeck court began its analys is of Paiz by characterizing it as "a first party insurance-bad-faith case." 1999-NMCA-10 9, ¶ 79. Although Paiz began as an insurance-bad-faith case, by the time it reached th e appellate courts it was reduced to a breach-of-contract case. At the trial level the pla intiffs had filed claims sounding in negligence, insurance bad faith, and breach of cont ract. Before submitting the case to the jury, however, the trial court directed a verdict against the plaintiffs with respect to their insurance-bad-faith claim. Paiz, 118 N.M. at 210, 880 P.2d at 307. The judge t hensubmitted

### - 6 -

the case to the jury under a breach-of-contract the ory and under the plaintiffs' tort claims of "negligent misrepresentation, negligent investig ation, and negligent delay in making payment." Id. at 206, 880 P.2d at 303. The jury ret urned a verdict in favor of the plaintiffs. "[T]he trial judge viewed the damages awarded as arising from State Farm's breach of contract instead of from any of Defendant s' various negligent acts." Id. at 207, 880 P.2d at 304. We agreed, holding the jury's awar d was "grounded in breach of contract and not as damages for commission of one o r more torts." Id. {12} Importantly, the claim of insurance bad fa ith was never raised as an issue on appeal. The plaintiffs did not appeal the directed verdict against them and therefore "conceded the correctness of the trial court's ruli ng" rejecting the bad-faith claim. Id. at 210, 880 P.2d at 307. "[C]ases are not authority fo r propositions not considered." Sangre de Cristo Dev. Corp. v. City of Santa Fe, 84 N.M. 3 43, 348, 503 P.2d 323, 328 (1972). We conclude Paiz ought not be relied upon in answer ing the certified question and was not dispositive in answering the question raised inTeague-Strebeck, because in Paiz this Court as well as the trial court focused on the contractual nature of the claims, rather than the degree to which they also sounded in tort. {13} Teague-Strebeck interprets Paiz as directl y applicable to the tort of insurance bad faith. Teague-Strebeck, 1999-NMCA-109, ¶ 79. As we read Paiz, however, the holding is more narrowly drawn: "[W]e hold that suc h [a punitive-damages] award for a breach of contract may no longer be based solely onthe breaching party's `gross negligence' in failing to perform the contract." Pa iz, 118 N.M. at 204, 880 P.2d at 301. Because the tort of insurance bad faith is fundamentally distinct from a claim for breach of contract, and because insurance bad faith was no t before the Court in that case, the opinion in Paiz is properly confined to the standar d for punitive damages in a case for breach of contract.

B. {14} The Teague-Strebeck court further advancedcertain language from Allsup's as supporting its conclusion that this Court had raise d the standard for punitive damages in

### - 7 -

insurance-bad-faith cases. Allsup's involved an ins urer's appeal of a jury award of punitive damages in an insurance-bad-faith claim. 1 999-NMSC-006, ¶ 44. The insurer, North River, argued its due process rights were vio lated by a jury instruction suggesting the jury would merely have to find unreasonable con duct, as opposed to bad faith, in order to be held liable for punitive damages. Id. T he instruction at issue there, essentially identical to UJI 13-1705 NMRA 2003, read:

Under the "bad faith" claim, what is customarily do ne by those engaged in the insurance industry is evidence of whether the i nsurance company acted in good faith. However, the good faith of the insur ance company is determined by the reasonableness of its conduct, wh ether such conduct is customary in the industry or not. Industry customs or standards are evidence of good or bad faith, but they are not con clusive. Allsup's, 1999-NMSC-006, ¶ 44. North River interpre ted this instruction as permitting the slightest unreasonableness to render an insuran ce company liable for punitive damages. Id. ¶ 45. This, North River argued, confli cted with our statement in McGinnis v. Honeywell, Inc., 110 N.M. 1, 9, 791 P.2d 452, 46 0 (1990) that a culpable mental state is a prerequisite to punitive damages. {15} To resolve the alleged conflict, we examin ed another jury instruction given at trial that stated in part, "Allsup's contends and h as the burden of proving that any bad faith actions on the part of North River were malic ious, reckless or wanton, and, therefore punitive damages should be awarded." 1999 -NMSC-006, ¶ 46 (emphasis omitted). Reading the two instructions together, we concluded the jury must have found "malicious, reckless, or wanton conduct before it c ould award punitive damages." Id. Thus, Allsup's held, North River suffered no due pr ocess violation in the imposition of punitive damages. As we read Allsup's, its holding is strictly designed to resolve the question whether the jury was adequately instructedon the standard for punitive damages to survive a due process challenge. See id. ¶ 44. A ccordingly, the presence of the second instruction on punitive damages enabled this Court to avoid the precise issue before us now, which is whether

### - 8 -

a greater standard than that required for compensat ory damages in insurance-bad-faith litigation is required before instructing on puniti ve damages. As a result of these considerations, we believe the Teague-Strebeck court, understandably, may have been misled by our opinion in Allsup's in regard to whatwe now hold is the correct analysis of New Mexico law on the standard for punitive dama ges in insurance-bad-faith cases. {16} In our current analysis, we conclude that Allsup's in fact supports our view that a punitive-damages instruction will ordinarily be giv en whenever the plaintiff is entitled to have the jury instructed on his or her insurance-ba d-faith claim. In analyzing UJI 13-1705, the Allsup's court reasoned that "[w]hile bad faith and unreasonableness are not always the same thing, there is a certain point, de termined by the jury, where unreasonableness becomes bad faith and punitive dam ages may be awarded." 1999-NMSC-006, ¶ 45 (emphasis added). In other word s, there comes a point at which the insurer's conduct progresses from mere unreason ableness to a culpable mental state. Because the resolution of precisely where this point lies in each case depends on an assessment of the complex factual determinations surrounding the insurer's conduct and corresponding motives, such a question must ordinar ily be reserved for the factfinder to resolve. As a general proposition, therefore, once a plaintiff has made a prima facie showing sufficient to submit his or her bad-faith c laim to the jury, the determination whether the insurer's bad-faith conduct is deservin g of punitive damages is for the jury to decide. III. {17} Although we overrule Teague-Strebeck's hol ding that an award of punitive damages in such cases always requires evidence of c ulpable conduct beyond that necessary to establish basic liability, we agree wi th its statement that "`bad faith' may include a culpable mental state, but it is not nece ssarily so." 1999-NMCA-109, ¶ 85. We agree with this statement because of the manner in which the jury instructions for basic liability, UJI 13-1702 and 13-1704, are currently written. While these instructions properly convey the two standards we have previousl y articulated for a finding of a culpable mental state—a

### - 9 -

frivolous or unfounded refusal to pay, see UJI 13-1 702, and a failure to honestly and fairly balance the interests of the insured and its own, see UJI 13-1704—we acknowledge the instructions as written might be interpreted, i n some circumstances, as permitting merely unreasonable conduct to support a finding of bad faith sufficient for an award of punitive damages. This is because these instruction s, particularly UJI 13-1702, include concepts of reasonableness along with concepts whic h may evince a culpable mental state. Because punitive damages are imposed for the limited purposes of punishment and deterrence, a culpable mental state is a prerequisi te to punitive damages. See McGinnis, 110 N.M. at 9, 791 P.2d at 460. While the unreasonable conduct described in these instructions may support an award of compensatory d amages, such conduct does not support an award of punitive damages. Thus, there m ay be cases in which a plaintiff, despite having advanced evidence sufficient to subm it his or her bad-faith failure-to-pay claim to the jury, nevertheless fails to make a pri ma facie showing that the insurer's conduct exhibited a culpable mental state.
{18} Under New Mexico law, an insurer who fails to pay a first-party claim has acted in bad faith where its reasons for denying or delay ing payment of the claim are frivolous or unfounded. See State Farm Gen. Ins. Co. v. Clift on, 86 N.M. 757, 759, 527 P.2d 798, 800 (1974). In Clifton we concluded that in order t o recover damages in tort under this claim, there must be evidence of bad faith or a fraudulent scheme. Id. We further announced that "bad faith" means "any frivolous or unfounded refusal to pay." Id. (internal quotation marks and quoted authority omitted). We have defined "frivolous or unfounded" as meaning an arbitrary or baseless refu sal to pay, lacking any support in the wording of the insurance policy or the circumstance s surrounding the claim:

"Unfounded" in this context does not mean "erroneou s" or "incorrect"; it means essentially the same thing as "reckless disre gard," in which the insurer "utterly fail[s] to exercise care for the i nterests of the insured in denying or delaying payment on an insurance policy. " [Jessen, 108 N.M. at 628, 776 P.2d at 1247.] It means an utter or total lack of foundation for an

### - 10 - assertion of nonliability—an arbitrary or baseless refusal to pay, lacking any arguable support in the wording of the insuranc e policy or the circumstances surrounding the claim. It is synonymo us with the word with which it is coupled: "frivolous."

Jackson Nat'l Life Ins. Co. v. Receconi , 113 N.M. 403, 419, 827 P.2d 118, 134 (1992). By refusing or delaying payment on a claim for reas ons that are frivolous or unfounded, the insurer has acted with reckless disregard for the interests of the insured; such reckless disregard supports a claim for punitive damages.
{19} We acknowledge, however, that the reasonab leness of the insurer's conduct is generally an element of the jury's inquiry in determining whether compensatory damages should be awarded. For this reason, the bracketed s econd sentence of our jury instruction reads, "In deciding whether to pay a claim, the ins urance company must act reasonably under the circumstances to conduct a timely and fai r [investigation or evaluation] of the claim." UJI 13-1702 NMRA 2003. In failure-to-pay cl aims, therefore, a plaintiff under these circumstances might make a proper showing that the insurer acted unreasonably in denying or delaying a claim, entitling the plaintif f to compensatory damages, without having made a prima facie showing that the refusal to pay was frivolous or unfounded. In such circumstances, it is proper for the trial court to submit the plaintiff's bad-faith claim to the jury for consideration of an award of compen satory damages but withhold the punitive-damages instruction. {20} On the other hand, while New Mexico recogn izes a common-law cause of action for bad-faith failure to settle within policy limit s, we do not recognize a cause of action for negligent failure to settle. Ambassador Ins. Co . v. St. Paul Fire & Marine Ins. Co. , 102 N.M. 28, 690 P.2d 1022 (1984). To be entitled t o recover for bad-faith failure to settle, a plaintiff must show that the insurer's re fusal to settle was based on a dishonest judgment. By "dishonest judgment," we mean that an insurer has failed to honestly and fairly balance its own interests and the interests of the insured. An insurer cannot be partial to its own

### - 11 -

interests, but rather must give the interests of it s insured at least the same consideration or greater. See Lujan v. Gonzales , 84 N.M. 229, 236, 501 P.2d 673, 680 (Ct. App. 197 2). In caring for the insured's interests, "the insurershould place itself in the shoes of the insured and conduct itself as though it alone were liable for the entire amount of the judgment." Dairyland Ins. Co. v. Herman, 1998-NMSC- 005, ¶ 14, 124 N.M. 624, 954 P.2d 56 (internal quotation marks and quoted author ity omitted). As we stated in Ambassador, "[The insurer's] decision not to settle should be an honest decision. It should be the result of the weighing of probabiliti es in a fair and honest way." 102 N.M. at 31, 690 P.2d at 1025 (quoted authorities omitted ). This element of a dishonest or unfair balancing of interests is the key element indetermining whether, in bad-faith failure-to-settle claims, the insurer's conduct mer its punitive damages.
{21} In such failure-to-settle claims, evidence of an insurer's negligence in researching a claim does not give rise to its own c ause of action, but rather provides one possible means of demonstrating that an insurer act ed in bad faith. As we said in Ambassador:
[W]hen failure to settle the claim stems from a fai lure to properly

investigate the claim or to become familiar with th e applicable law, etc., then this is negligence in defending the suit (a duty expressly imposed upon the insurer under the insurance contract) and is strong evidence of bad faith in failing to settle. Here, basic standar ds of competency can be imposed, and the insurer is charged with knowledge of the duty owed to its insured. In this sense, such negligence becomes an element tending to prove bad faith, but not a cause of action in and o f itself. Id. at 31, 690 P.2d at 1025. Thus, if the insurer f ails to meet "basic standards of competency" in investigating a claim or researching the applicable law, such conduct is "strong evidence" of bad faith, but is not in itsel f sufficient to support the plaintiff's bad-faith failure-to-settle claim.
{22} In Ambassador, we predicated an insurer's honest judgment on its diligent, competent investigation of the claim:

### - 12 - In order that [the insurer's decision whether to se ttle] be honest and intelligent it must be based upon a knowledge of th e facts and circumstances upon which liability is predicated, and upon a knowledge of the nature and extent of the injuries so far as the y reasonably can be ascertained. This requires the insurance company to make a dilig ent effort to ascertain the facts upon which only an intelligent and good-f aith judgment may be predicated. Id. (quoted authorities omitted). Our current unifo rm jury instruction reflects this standard of conduct when it states an insurer "has a duty to timely investigate and fairly evaluate the claim against its insured." UJI 13-170 4 NMRA 2003. Nevertheless, we conclude the competence and timeliness of the insur er's investigation of the claim, while strong evidence of whether the insurer conducted it self fairly and in good faith, is not the dispositive element in a failure-to-settle claim. E ven where the insurer's investigation was both competent and timely, the insurer is nevertheless liable for bad faith when its refusal to settle within policy limits is based on a dishonest judgment. In many respects, a dishonest judgment in these circumstances may be more reprehensible than where the insurer bases its decision not to settle on a negli gent investigation. We conclude, therefore, in failure-to-settle cases, it is the in surer's failure to treat the insured honestly and in good faith, giving "equal consideration to i ts own interests and the interests of the insured," id., that renders the insurer liable for insurance bad faith and also merits an instruction on punitive damages. IV. {23} As a result of the foregoing analysis, we conclude that in most cases, the plaintiff's theory of bad faith, if proven, will lo gically also support punitive damages. To ensure, however, that a jury only awards punitive d amages for bad-faith conduct manifesting a culpable mental state, and not for co nduct that may fall short of such reprehensibility, we find it necessary to augment the punitive-damages instruction to reflect the requisite standard for a culpable menta l state. Accordingly, we modify the first sentence of UJI 13-1718 to read as follows:

### - 13 - If you find that plaintiff should recover compensat ory damages for the bad faith actions of the insurance company, and you fin d that the conduct of the insurance company was in reckless disregard for the interests of the plaintiff, or was based on a dishonest judgment, orwas otherwise malicious, willful, or wanton, then you may award p unitive damages.

The trial court should include also the definitions of "dishonest judgment"—"a failure by the insurer to honestly and fairly balance its own interests and the interests of the insured"—along with the definitions of "reckless," "malicious," "willful," and "wanton." See UJI 13-1827 NMRA 2003. We believe this revised instruction will ensure the jury will award punitive damages only in those cases whe re the insurer's conduct is shown to have manifested a culpable mental state.
{24} Finally, in answering as we do that a puni tive-damages instruction will ordinarily be given every time the jury is instruct ed on the plaintiff's insurance-bad-faith claim, we acknowledge the prospect that in certain instances a plaintiff's evidence of bad-faith conduct, though sufficient to entitle the plaintiff to compensatory damages, may be, as a matter of law, insufficient to warranta punitive-damages instruction. Where the trial court determines, based on the evidence m arshaled at trial, that no reasonable jury could find the insurer's conduct to have manif ested a culpable mental state, then the trial court may withhold the giving of a punitive-d amages instruction. Accordingly, we also modify the Use Note for UJI 13-1718 to reflectthat this instruction must ordinarily be given whenever UJI 13-1702, -1703, or -1704 is g iven; the instruction will not be given only in those circumstances in which the plai ntiff fails to make a prima facie showing that the insurer's conduct exhibited a culp able mental state.
{25} IT IS SO ORDERED.

__________________________________ EDWARD L. CHÁVEZ, Justice

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WE CONCUR:

__________________________________ PETRA JIMENEZ MAES, Chief Justice

__________________________________ PAMELA B. MINZNER, Justice

__________________________________ PATRICIO M. SERNA, Justice

__________________________________ RICHARD C. BOSSON, Justice