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 Mexico (Lisa K. Vigil, Vigil

and Vigil, and Steven Vogel, Albuquerque, New Mexico, 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 Defendant-Appellee/CrossAppellant. 

Before KELLY, PORFILIO, and BRISCOE, Circuit Judges.
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KELLY, Circuit Judge.

Plaintiffs-Appellants/Cross-Appellees Sloan (Debtor and Insured) and

Moldo (Bankruptcy Trustee) appeal from the district court’s judgment awarding

$560,000 in compensatory damages based upon breach of contract, bad faith

failure to settle, and a violation of the New Mexico Insurance Practices Act. 

Defendant-Appellee/Cross-Appellant State Farm (Insurer) 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 trial 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 crossed 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 members 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 $395,000.

A key dispute in this case pertains to the insured’s policy limits. The

insurer maintains that the policy issued, designated 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 accident limits subject to the per

person limits. Thus, according to the insurer, only $100,000 of coverage was

available to compensate Mrs. Shelton, the most seriously injured victim.

Early in the underlying litigation, the Sheltons’ attorney obtained a certified

copy of the policy from the insurer. That policy form is shown as # 9805.3 and is

different from what the insurer now relies upon. The certified policy contains

$100,000/$300,000 limits, however, the provision containing 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 Haney court 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
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certified the wrong policy (Form # 9805.3) and that a 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 the insurer was well aware of the

potential for an excess judgment against its insured. 

On appeal, Plaintiffs contend that the district court 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 sufficient evidence for

punitive damages. Plaintiffs also object to the district 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 compensatory award will not support

the necessary finding for punitive damages, and (3) the evidence does not support

punitive damages. Defendant agrees that (4) remittitur requires that the plaintiff

be given an option to accept the remittitur or a new trial on damages. In its crossappeal, Defendant argues that (5) the jury instructions and verdict form were

faulty because they failed to prohibit double recovery, (6) the remittitur was

inadequate to cure this problem, (7) the visiting district judge who presided at the
1

 Effective December 1, 2003, Fed. R. Civ. P. 51 was amended. Either

version of the rule would result in the same outcome. 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 depositions to be read) while so

advising the Plaintiffs, and made derogatory and negative comments about

defense counsel and his evidence throughout the trial. Defendant seeks a new

trial on compensatory damages only, or in the alternative, a new trial on liability

and damages should we accept its contention that it was 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: Sloan), 320 F.3d 1073 (2003). We

now vacate that stay and proceed to the merits. Obviously, we were not

persuaded by Defendant’s contention that Plaintiffs forfeited the punitive

damages issue by failing to object to the jury instructions and the verdict form

that omitted the issue. See Fed. R. Civ. P. 51.1

 The district court granted JMOL
2

 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 set forth below:

1. State Farm acted in bad faith by failing to conduct a timely and

fair investigation and evaluation of the claim; or

2. State Farm’s denial of a $300,000.00 payment for the Shelton’s claim

was frivolous or unfounded; or

3. State Farm acted in bad faith with Sloan by failing 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 the insurance contract; or

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on the punitive damages claim at the close of the Plaintiffs’ case, reconsidered the

issue after the Defendant’s case upon Plaintiff’s motion and adhered to its

original ruling. Aplt. App. 653-654, 721. Thus, the district court made a legal

determination, albeit on a factual issue and without the guidance we now have

from the New Mexico Supreme Court, that punitive damages for bad faith

required a culpable mental state and that was lacking here. The issue having been

raised and definitively ruled upon, it was not forfeited. 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 the 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 jury 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 give Sloan’s interests the

same or equal consideration as their own interests.

Sloan also contends and has the burden of proving that such insurance bad

faith was a proximate cause of his damages.

Aplt. App. 203-204, 767-768.

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portion of that special verdict has not been challenged in this appeal. 

A. Punitive Damages.

In light of the contentions of the parties, we posed 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 Uniform Jury

Instruction 13-1718, N.M. R. Ann., UJI-Civ. (2002) (Directions for

Use), or is the New Mexico Court of Appeals correct that subsequent

New Mexico Supreme Court authority requires a culpable mental

state beyond bad faith for imposition of punitive damages 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-Strebeck that would require a culpable mental state for punitive damages

beyond that required for compensatory damages in bad 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 instruction on punitive damages
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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 or unfounded, that demonstrates a

culpable mental state sufficient to submit the issue of punitive damages to the

jury. Id. at 10.

This case includes a bad-faith failure to settle claim. In such cases, an

insurer’s failure to investigate or competently defend 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 warranted. Id. at 12. To these ends,

the New Mexico Supreme Court has revised the instruction on punitive damages

in bad faith cases to require a finding not only that compensatory damages are

warranted, but also that “the conduct of the insurance company was in reckless

disregard for the interests of the plaintiff, or was 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 punitive damages claim was

error. The insurer has not cross-appealed from the judgment insofar as the

sufficiency of the evidence supporting liability, including liability on the bad faith
3

 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 not 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 Supreme Court is that

ordinarily a jury should decide the issue of punitive 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 obvious factual dispute about the

bona fides of the policy switch, we hold that a punitive damages instruction is

now warranted. A jury could conclude that the insurer 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 which policy applied and the

insured’s almost certain exposure to an excess judgment, a jury could conclude

that the insured conducted an unfair balancing of interests in not settling for

policy limits early on. See Id. at 4 (“An insurer’s frivolous or unfounded refusal

to pay is the equivalent of a reckless disregard for 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 award 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 the 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 plaintiff 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 lieu 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 the plaintiff’s consent because

the Seventh Amendment prohibits the court from substituting 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 whether remittitur

is proposed by the trial or appellate court, if the plaintiff does not consent to the

remittitur, the district court has no alternative but 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 Berwyn, 750
- 11 -

F.2d 1383 (7th Cir. 1984)).

Even if allowed to elect, Plaintiffs tell us that they 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 damages, 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 conduct 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. Ins. 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 hostility to one of the

parties, or an unwarranted prejudgment of the merits of the case, or

an alignment on the part of the Court with one of the parties for the

purpose of furthering or supporting the contentions of such party, the

judge indicates, whether consciously or not, a personal bias and

prejudice which renders invalid any resulting judgment 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 judicial bias is for plain error

because Defendant did not object on this basis. See 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 counsel’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 to meaningful appellate review. 

As it stands, in civil cases, the plain error doctrine 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 testimony would be admitted. At a

minimum, a variant procedure such as this one should 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 indicates that deposition

testimony was presented (albeit out of sequence and through excerpted portions of

video or summaries presented by counsel) with counsel afforded the opportunity

to object and have those objections ruled upon by the court. Suffice it to say that

while we understand defense counsel’s justifiable concern with the procedure, we

cannot find that the fairness of the proceedings was substantially compromised. 

Although a federal court has the right to comment on witness testimony, it

must “exercise great care to maintain an impartial attitude and not become an
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advocate for one of the parties to the litigation or mislead the jury.” United

States v. Sowards, 339 F.2d 401, 403 (10th Cir. 1964). We have reviewed the

district court’s comments on the evidence, Aplt. App. 442-443, 505, and the

revelation of facts to the jury that the prior district 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 interlocutory 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 comments directed towards 

counsel’s preparation, erudition, objections or lack of objection, and settlement.

We certainly expect trial courts to treat counsel with 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 both sides) rendered the trial

unfair. The district court repeatedly expressed its 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
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comments, we do not find them to be of such a character to have compromised the

substantial rights of the insurer on the issue of liability. Both sides won and lost

issues on that score. On remand, however, we think it 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 APPEALS

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-Appellees
Guebert, Bruckner & Bootes, P.C.

Terry R. Guebert

Donald G. Bruckner Jr.

Ramona G. Bootes

Albuquerque, NM

 for Appellee

 and Cross-Appellant
OPINION

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, we are asked to clarify whether a culpable

mental state in addition to bad faith is required for the imposition of punitive damages.

The following question was certified to us by the United 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 evidence supporting

compensatory damages as suggested by [UJI 13-1718 NMRA 2003], or is

the New Mexico Court of Appeals correct that subsequent New Mexico

Supreme Court authority requires a culpable mental state beyond bad faith

for imposition of punitive damages in insurance bad faith 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 instruction 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 from a breach of the insurer's duty to

timely investigate, evaluate, or pay an insured's claim in good faith), that the insurer

failed or refused to pay a claim for reasons that were frivolous or unfounded, or (2) in

failure-to-settle cases (those arising from a breach 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 reckless disregard for 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 award of punitive damages. To

ensure the jury has found a culpable mental state before 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 plaintiff, or was based on a dishonest
- 2 -

judgment, or was otherwise malicious, willful, or wanton.

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 State Farm's motion for judgment as a

matter of law on Plaintiffs' claim for punitive damages 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 primarily involved bad-faith

failure to settle, the court included in its instructions 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 instructions, we shall address the standard for

punitive damages under both causes of action. The jury 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 accept reasonable settlement offers

within policy limits.

An insurance company's failure to conduct a competent investigation of the claim

and to honestly and fairly balance its own interests and the interests of the

insured in rejecting a settlement offer within policy limits is bad faith. If the

company gives equal consideration to its own interests and the interests of the

insured and based on honest judgment and adequate information does not settle

the claim and proceeds to trial, it has acted in good faith.

See UJI 13-1704 NMRA 2003.

Jury Instruction No. 8

An insurance company acts in bad faith when it refuses to pay a claim of

the policyholder for reasons which are frivolous or unfounded. 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 company must act reasonably under

the circumstances to conduct a timely and fair investigation 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 performance of the insurance contract.

See UJI 13-1702 NMRA 2003.

{4} The jury found that State Farm acted in bad faith in its dealings with Plaintiffs

and that its bad faith proximately caused Plaintiffs' damages. The jury awarded

Plaintiffs $600,000 in compensatory damages, later reduced to $540,000 on motion for

remittitur. Plaintiffs appealed to the United States 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, the jury must also receive an instruction

on punitive damages. The Court of Appeals then certified the above question to us

because it was unclear under New Mexico law whether in an insurance-bad-faith action,

a finding of bad faith, without an additional finding of a culpable mental state,

permitted an award of punitive damages.

{5} This case presents an opportunity to assess the New Mexico Court of Appeals'

holding in Teague-Strebeck that an award of punitive damages in an insurance-bad-faith

case requires a culpable mental state in addition to the bad faith required for

compensatory damages. See Teague-Strebeck Motors, Inc. v. Chrysler Ins. Co.,

1999-NMCA-109, ¶ 78, 127 N.M. 603, 985 P.2d 1183. Although 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 avoided having to reconcile various

statements we have made about the standard for punitive 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 resolve. To the extent Teague-Strebeck

would, in every insurance-bad-faith case, require a showing of an additional culpable

mental state to permit an instruction on punitive damages, Teague-Strebeck is

overruled. In so holding, we reaffirm our statement in Jessen v. National Excess

Insurance Co., 108 N.M. 625, 627, 776 P.2d 1244, 1246 (1989) that "[b]ad faith

supports punitive damages upon a finding of entitlement to compensatory damages."

Accordingly, an instruction on punitive damages will 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 support 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 necessary to establish the basic cause

of action in order to impose punitive damages." 1999-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., 118 N.M. 203, 880 P.2d 300 (1994) and

Allsup's Convenience Stores, Inc. v. North River Insurance Co., 1999-NMSC-006, 127

N.M. 1, 976 P.2d 1, and determined from the language 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 Mexico now requires a showing of a

culpable mental element to allow imposition of punitive damages." Teague-Strebeck,

1999-NMCA-109, ¶ 90.
- 5 -

{8} In its original opinion, the Teague-Strebeck court affirmed the trial court's

denial of the plaintiffs' claim for punitive damages arising from an insurance-bad-faith

claim. Id. ¶¶ 70-73. The plaintiffs had argued that they 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 evidence of "an evil motive or a culpable

mental state," in addition to bad faith, for a plaintiff 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 rehearing, appended to the original published

opinion, the Teague-Strebeck court reinforced its initial holding, and again relied on

Paiz and Allsup's for the proposition that "there is a real distinction between `bad faith'

sufficient to support an award of compensatory damages and `bad faith' meriting

exemplary damages." Id. ¶ 85. The Teague-Strebeck court also noted that UJI 13-1718,

as it currently stands, "clearly contemplates the giving 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 of 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 analysis of Paiz by characterizing it as "a

first party insurance-bad-faith case." 1999-NMCA-109, ¶ 79. Although Paiz began as an

insurance-bad-faith case, by the time it reached the appellate courts it was reduced to a

breach-of-contract case. At the trial level the plaintiffs had filed claims sounding in

negligence, insurance bad faith, and breach of contract. 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 then submitted 
- 6 -

the case to the jury under a breach-of-contract theory and under the plaintiffs' tort claims

of "negligent misrepresentation, negligent investigation, and negligent delay in making

payment." Id. at 206, 880 P.2d at 303. The jury returned 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 Defendants' various negligent acts." Id. at 207,

880 P.2d at 304. We agreed, holding the jury's award was "grounded in breach of

contract and not as damages for commission of one or more torts." Id.

{12} Importantly, the claim of insurance bad faith 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 ruling" rejecting the bad-faith claim. Id. at

210, 880 P.2d at 307. "[C]ases are not authority for propositions not considered." Sangre

de Cristo Dev. Corp. v. City of Santa Fe, 84 N.M. 343, 348, 503 P.2d 323, 328 (1972).

We conclude Paiz ought not be relied upon in answering the certified question and was

not dispositive in answering the question raised in Teague-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 directly 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 such [a punitive-damages] award for a

breach of contract may no longer be based solely on the breaching party's `gross

negligence' in failing to perform the contract." Paiz, 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 not before the Court in that case, the

opinion in Paiz is properly confined to the standard for punitive damages in a case for

breach of contract.

B.

{14} The Teague-Strebeck court further advanced certain language from Allsup's as

supporting its conclusion that this Court had raised the standard for punitive damages in
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insurance-bad-faith cases. Allsup's involved an insurer's appeal of a jury award of

punitive damages in an insurance-bad-faith claim. 1999-NMSC-006, ¶ 44. The insurer,

North River, argued its due process rights were violated by a jury instruction suggesting

the jury would merely have to find unreasonable conduct, as opposed to bad faith, in

order to be held liable for punitive damages. Id. The instruction at issue there, essentially

identical to UJI 13-1705 NMRA 2003, read:

Under the "bad faith" claim, what is customarily done by those engaged in

the insurance industry is evidence of whether the insurance company acted

in good faith. However, the good faith of the insurance company is

determined by the reasonableness of its conduct, whether such conduct is

customary in the industry or not. Industry customs or standards are

evidence of good or bad faith, but they are not conclusive.

Allsup's, 1999-NMSC-006, ¶ 44. North River interpreted this instruction as permitting

the slightest unreasonableness to render an insurance company liable for punitive

damages. Id. ¶ 45. This, North River argued, conflicted with our statement in McGinnis

v. Honeywell, Inc., 110 N.M. 1, 9, 791 P.2d 452, 460 (1990) that a culpable mental state

is a prerequisite to punitive damages.

{15} To resolve the alleged conflict, we examined another jury instruction given at

trial that stated in part, "Allsup's contends and has the burden of proving that any bad

faith actions on the part of North River were malicious, 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 could award punitive damages." Id.

Thus, Allsup's held, North River suffered no due process 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 instructed on the standard for punitive damages

to survive a due process challenge. See id. ¶ 44. Accordingly, the presence of the second

instruction on punitive damages enabled this Court to avoid the precise issue before us

now, which is whether
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a greater standard than that required for compensatory damages in insurance-bad-faith

litigation is required before instructing on punitive 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 what we now hold is the correct analysis

of New Mexico law on the standard for punitive damages 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 given whenever the plaintiff is entitled to

have the jury instructed on his or her insurance-bad-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, determined by the jury, where

unreasonableness becomes bad faith and punitive damages may be awarded."

1999-NMSC-006, ¶ 45 (emphasis added). In other words, there comes a point at which

the insurer's conduct progresses from mere unreasonableness 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 ordinarily 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 claim to the jury, the determination

whether the insurer's bad-faith conduct is deserving of punitive damages is for the jury to

decide.

III.

{17} Although we overrule Teague-Strebeck's holding that an award of punitive

damages in such cases always requires evidence of culpable conduct beyond that

necessary to establish basic liability, we agree with its statement that "`bad faith' may

include a culpable mental state, but it is not necessarily 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 previously articulated for a finding of a

culpable mental state—a 
- 9 -

frivolous or unfounded refusal to pay, see UJI 13-1702, 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, in 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 instructions, particularly UJI 13-1702, include

concepts of reasonableness along with concepts which 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 prerequisite 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 damages, such conduct does not

support an award of punitive damages. Thus, there may be cases in which a plaintiff,

despite having advanced evidence sufficient to submit his or her bad-faith failure-to-pay

claim to the jury, nevertheless fails to make a prima 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 delaying payment of the claim are frivolous

or unfounded. See State Farm Gen. Ins. Co. v. Clifton, 86 N.M. 757, 759, 527 P.2d 798,

800 (1974). In Clifton we concluded that in order to 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 refusal to pay, lacking any support in the

wording of the insurance policy or the circumstances surrounding the claim:

"Unfounded" in this context does not mean "erroneous" or "incorrect"; it

means essentially the same thing as "reckless disregard," in which the

insurer "utterly fail[s] to exercise care for the interests 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 insurance policy or the

circumstances surrounding the claim. It is synonymous 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 reasons 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 reasonableness 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 second sentence of our jury instruction

reads, "In deciding whether to pay a claim, the insurance company must act reasonably

under the circumstances to conduct a timely and fair [investigation or evaluation] of the

claim." UJI 13-1702 NMRA 2003. In failure-to-pay claims, therefore, a plaintiff under

these circumstances might make a proper showing that the insurer acted unreasonably in

denying or delaying a claim, entitling the plaintiff 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 compensatory damages but withhold the

punitive-damages instruction.

{20} On the other hand, while New Mexico recognizes a common-law cause of action

for bad-faith failure to settle within policy limits, 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 to recover for bad-faith failure to

settle, a plaintiff must show that the insurer's refusal 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 its insured at least the same consideration

or greater. See Lujan v. Gonzales, 84 N.M. 229, 236, 501 P.2d 673, 680 (Ct. App. 1972).

In caring for the insured's interests, "the insurer should 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 authority 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 probabilities 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 in determining whether, in bad-faith

failure-to-settle claims, the insurer's conduct merits 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 cause of action, but rather provides one

possible means of demonstrating that an insurer acted in bad faith. As we said in

Ambassador:

[W]hen failure to settle the claim stems from a failure to properly

investigate the claim or to become familiar with the 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 standards 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 of itself.

Id. at 31, 690 P.2d at 1025. Thus, if the insurer fails 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 itself 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 settle] be honest and

intelligent it must be based upon a knowledge of the facts and

circumstances upon which liability is predicated, and upon a knowledge of

the nature and extent of the injuries so far as they reasonably can be

ascertained.

This requires the insurance company to make a diligent effort to ascertain

the facts upon which only an intelligent and good-faith judgment may be

predicated.

Id. (quoted authorities omitted). Our current uniform 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 13-1704 NMRA 2003. Nevertheless, we

conclude the competence and timeliness of the insurer's investigation of the claim, while

strong evidence of whether the insurer conducted itself fairly and in good faith, is not the

dispositive element in a failure-to-settle claim. Even 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 negligent investigation. We conclude,

therefore, in failure-to-settle cases, it is the insurer's failure to treat the insured honestly

and in good faith, giving "equal consideration to its 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 logically also support punitive damages. To

ensure, however, that a jury only awards punitive damages for bad-faith conduct

manifesting a culpable mental state, and not for conduct 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 mental state. Accordingly, we modify the

first sentence of UJI 13-1718 to read as follows:
- 13 -

If you find that plaintiff should recover compensatory damages for the bad

faith actions of the insurance company, and you find that the conduct of the

insurance company was in reckless disregard for the interests of the

plaintiff, or was based on a dishonest judgment, or was otherwise

malicious, willful, or wanton, then you may award punitive 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 where the insurer's conduct is shown to

have manifested a culpable mental state.

{24} Finally, in answering as we do that a punitive-damages instruction will

ordinarily be given every time the jury is instructed 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 warrant a punitive-damages instruction. Where

the trial court determines, based on the evidence marshaled at trial, that no reasonable

jury could find the insurer's conduct to have manifested a culpable mental state, then the

trial court may withhold the giving of a punitive-damages instruction. Accordingly, we

also modify the Use Note for UJI 13-1718 to reflect that this instruction must ordinarily

be given whenever UJI 13-1702, -1703, or -1704 is given; the instruction will not be

given only in those circumstances in which the plaintiff fails to make a prima facie

showing that the insurer's conduct exhibited a culpable mental state.

{25} IT IS SO ORDERED.

__________________________________

EDWARD L. CHÁVEZ, Justice
- 14 -

WE CONCUR:

__________________________________

PETRA JIMENEZ MAES, Chief Justice

__________________________________

PAMELA B. MINZNER, Justice

__________________________________

PATRICIO M. SERNA, Justice

__________________________________

RICHARD C. BOSSON, Justice