Opinion ID: 1244024
Heading Depth: 1
Heading Rank: 2

Heading: admissibility of insurer's past claims practices

Text: During trial, Hawkins called three former Allstate employees to testify about Allstate's procedures for handling total loss claims. Over Allstate's objection on the grounds of relevancy, each testified concerning Allstate's method of determining the amount of an insured's loss (the actual cash value of the property) and general company policies regarding claims handling. One former claims representative, Pat Paterno, testified about Allstate's claims practices in the Phoenix office at the time the Hawkins claim was processed. Although she did not work on the Hawkins claim, Paterno testified that as a claims representative Allstate instructed her to automatically make certain deductions in determining a car's actual cash value. Specifically, she testified that adjusters were instructed to deduct an extra $5 for tire wear and always to deduct a $35 cleaning fee, regardless of the car's cleanliness. She testified that her supervisors explained that a $5 deduction wouldn't mean much to an insured or claimant, but $5 on every claim would mean a lot to the company. Another former claims representative, Jan Mauritz, was employed by Allstate in Tacoma, Washington from 1978 to 1981. Like Paterno, Mauritz testified that he was instructed automatically to make certain deductions, including a cleaning fee, in valuing a total loss. He testified that he was instructed to offer an insured the lowest value of a claim because the insured probably would take it in order to get his car fixed quickly. He also testified that Allstate used the adjusters' severity rating, a ratio of total dollars paid out in claims over the number of claims, to evaluate adjusters' performance and promotion potential. Mauritz opined that the claims-handling practices and policies to which he testified were followed throughout the company and not merely in the Tacoma office because they were promulgated through corporate literature and policy statements. In his opinion, these practices may lead to what one may call chiseling, to calculated offers substantially below fair value.... The third former Allstate employee that testified, William Boettcher, was employed by Allstate as a claims examiner in Phoenix from 1962 to 1964, 15 years before the Hawkins' claim. He testified that he was instructed automatically to take certain deductions on property damage claims, including amounts for tire wear. He also testified as to Allstate's explanation for making the deductions: Q Was an explanation given as [to] why you should make various deductions? A Yes, it was. Q What explanation was given? A Basically, that particularly in terms of property damage or collision claim, that the owner of the vehicle was concerned whether or not he was going to get his vehicle back, how soon he could get it repaired and so forth. Therefore, he would not perhaps object to some of these small deductions. And you'd be able to settle the claim at a cheaper rate. The statement was frequently made that if you could save one dollar on a million claims, you would save the company as much as a million dollars. Boettcher testified that he heard this explanation from instructors at an Allstate regional claims school, which he attended for approximately 2 weeks in 1962, from regional claims supervisors, and from his local assistant manager in the Phoenix office. Boettcher testified that both the local and regional claims supervisors' general policy was to settle claims for as low an amount as possible. He also testified about the function of the claims department during his employment: In general terms, I'd say it was perhaps not to settle claims as much as it was to save the company money, because this would increase their profits. Among other reasons, the trial court granted Allstate's motion for a new trial after deciding it had erred in admitting the testimony of the former Allstate employees. The trial court did not explain the perceived error, but only summarily concluded that the testimony of the three witnesses should not have been admitted. [3] The court of appeals affirmed the grant of a new trial, but held that the testimony of only one of the former employees, William Boettcher, was erroneously admitted. The appellate court reasoned that Boettcher's testimony was inadmissible under Rule 404(b), Ariz. Rules of Evid., 17A A.R.S. [4] because Allstate did not deny its acts nor claim they were unintentional and because the evidence was irrelevant as the practices Boettcher described were not sufficiently similar to the Hawkins' experience to be admissible to establish a pattern of bad faith to support a punitive damages award. In light of this procedural history, the issue we address is whether the trial court's admission of Boettcher's testimony was an error that justified granting Allstate's motion for new trial. The power to grant a new trial is largely within the trial court's discretion, but this power is not unlimited. King v. Superior Court, 138 Ariz. 147, 151, 673 P.2d 787, 791 (1983). [I]f it appears clearly from the record that there was no error in the matters presented in the motion for new trial, it is an abuse of discretion for the court to grant a new trial. Helena Chem. Co. v. Coury Bros. Ranches, 126 Ariz. 448, 450, 616 P.2d 908, 910 (App. 1980). A party cannot urge in a motion for new trial that evidence was erroneously admitted unless a proper objection, stating the specific ground of the objection, was made at the time the evidence was offered, unless the error is fundamental. M. Udall & J. Livermore, Arizona Law of Evidence, § 12, at 14 (2d ed. 1982); see Helena Chem. Co., 126 Ariz. at 453, 616 P.2d at 913; Rule 103. At trial, Allstate objected to Boettcher's testimony only on grounds of relevancy. [5] We disagree with the court of appeals that Boettcher's testimony was erroneously admitted because it was irrelevant. [6]

Relevant evidence is defined as evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence. Rule 401. Relevancy is not an inherent characteristic of proffered evidence; instead, it is the relationship between the proffered evidence and the fact sought to be proved. See M. Udall & J. Livermore, supra, at 163; 1 Weinstein's Evidence ¶ 401[03], at 401-17 (1986). Essentially, relevancy is a two-part test. First, evidence is relevant only if it relates to a consequential fact; evidence directed to an undisputed issue is irrelevant. What is at issue in a particular case is determined from the pleadings and the substantive law. M. Udall & J. Livermore, supra, at 161; Weinstein's Evidence, supra, at 401-17 to -19. Second, to be relevant, evidence need only alter the probability, not prove or disprove the existence, of a consequential fact. M. Udall & J. Livermore, supra, at 162; Weinstein's Evidence, supra ¶ 401[06], at 401-33 to -36. Allstate's liability for both the tort of bad faith and punitive damages was at issue during the trial. Therefore, evidence that tends to establish a prima facie case of bad faith or entitlement to punitive damages is relevant.
We recently clarified that tort recovery for bad faith is allowed if an insurer intentionally breaches the implied covenant of good faith and fair dealing in the insurance contract by denying the insured the security and protection from calamity that is the object of the insurance relationship. Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986). To establish a prima facie case of bad faith, Hawkins had to prove that Allstate acted intentionally, not inadvertently or mistakenly, and that Allstate dealt unfairly or dishonestly with the Hawkins' claim or failed to give fair and equal consideration to the Hawkins' interests. Id. at 160, 726 P.2d at 576.
Punitive damages are recoverable in insurance bad faith tort actions only if the insured acted with an evil mind in breaching the implied covenant of good faith and fair dealing. Rawlings, 151 Ariz. at 162-63, 726 P.2d at 578-79. The requisite evil mind is found if the insurer intended to injure the insured or consciously pursued a course of conduct knowing that it created a substantial risk of significant harm to the insured. Id. at 162, 726 P.2d at 578. In addition, the requisite evil mind may be inferred if the insured's conduct is sufficiently oppressive, outrageous or intolerable. Id. at 162-63, 726 P.2d at 578-79. To recover punitive damages, the plaintiff must also introduce sufficient evidence to allow the trier-of-fact to calculate a punitive damage award that is reasonable under the circumstances. E.g., Nielson v. Flashberg, 101 Ariz. 335, 341, 419 P.2d 514, 520 (1966). Although a precise laundry list of relevant evidence is impossible, evidence is properly considered by the trier-of-fact in assessing punitive damages if it bears upon the purpose and function of punitive damages. The purpose of punitive damages is not to compensate the plaintiff, but to express society's disapproval of outrageous conduct and to deter such conduct by the defendant and others in the future. See, e.g., Nielson v. Flashberg, 101 Ariz. at 341, 419 P.2d at 520; Acheson v. Shafter, 107 Ariz. 576, 578, 490 P.2d 832, 834 (1971). One category of relevant evidence is the defendant's financial position. See, e.g., Acheson v. Shafter, 107 Ariz. at 578, 490 P.2d at 834 (wealth or financial status of defendant relevant to allow jury to impose an appropriate punishment); Nielson v. Flashberg, 101 Ariz. at 341, 419 P.2d at 520. Obviously, the goals of punishment and deterrence would be circumvented if the financial position of the defendant allowed it to comfortably absorb the award. Another category of relevant evidence is the nature of the defendant's conduct, including the reprehensibility of the conduct and the severity of the harm likely to result, as well as the harm that has occurred, from the defendant's conduct. See Mallor & Roberts, Punitive Damages: Toward a Principled Approach, 31 Hastings L.J. 639, 667 (1980); [7] Owen, Punitive Damages in Products Liability Litigation, 74 Mich.L.Rev. 1257 (1976). The more reprehensible the act and the more severe the resulting harm, the greater the award of punitive damages that is reasonable under the circumstances. The duration of the misconduct, the degree of defendant's awareness of the harm or risk of harm, and any concealment of it are elements to consider in judging the reprehensibility of the defendant's conduct. See Neal v. Farmers Ins. Exchange, 21 Cal.3d 910, 927, 582 P.2d 980, 990, 148 Cal. Rptr. 389, 399 (1978); Chodos v. Ins. Co. of North America, 126 Cal. App.3d 86, 104, 178 Cal. Rptr. 831, 841 (1981); State ex rel. Young v. Crookham, 290 Or. 61, 71, 618 P.2d 1268, 1274 (1980). A third relevant consideration is the profitability of the defendant's conduct. See Cox v. Stolworthy, 94 Idaho 683, 691, 496 P.2d 682, 690 (1972); Wangen v. Ford Motor Co., 97 Wis.2d 260, 304, 294 N.W.2d 437, 460 (1980); Mallor & Roberts, supra, at 667-68. A punitive damage award that disgorges ill-gotten profits serves to deter future similar conduct by eliminating any profit incentive. These factors are presented only as guidelines to the character of evidence that is relevant to assessing punitive damages and should be viewed as neither exhaustive nor exclusive. [8] Furthermore, it is well settled that not all relevant evidence is admissible and whether such evidence is admissible in a particular case depends upon the circumstances of that case. See Rules 402-411. Thus, to establish a prima facie case for the recovery of punitive damages, Hawkins had to prove that an evil mind  either a desire to harm or conscious disregard of the Hawkins' right to a fair valuation of their property loss  motivated Allstate's bad faith conduct. To recover punitive damages Hawkins also had to establish a factual basis from which the jury could assess a sum of punitive damages that would accomplish the goals of punishment and deterrence.
Boettcher's testimony is relevant both to Allstate's liability for the tort of bad faith and punitive damages. See Dunlap v. Jimmy GMC of Tucson, Inc., 136 Ariz. 338, 343, 666 P.2d 83, 88 (App. 1983) (evidence of past deceptive sales practices relevant to whether those practices are currently used and to issue of punitive damages). Regarding Allstate's liability for bad faith, Boettcher's testimony is relevant to whether Allstate acted intentionally. Evidence of previous, similar acts alters the probability that the conduct in question was unintentional; the more frequently an act occurs, the more probable it is intentional. Thus, Boettcher's testimony made it more probable that the invalid $35 cleaning fee deduction used in estimating the actual cash value of Hawkins' loss was not mistakenly nor inadvertently made. More importantly, Boettcher's testimony is relevant both to establish a prima facie case for recovery of punitive damages and to assess a sum of punitive damages. We note that unless the defendant is willing to take the stand and admit its evil mind, the plaintiff must prove entitlement to punitive damages with circumstantial evidence. Thus, whether the defendant intended to injure the plaintiff or consciously disregarded the plaintiff's rights may be suggested by a pattern of similar unfair practices. Colonial Life & Acc. Ins. Co. v. Superior Court, 31 Cal.3d 785, 792, 647 P.2d 86, 90, 183 Cal. Rptr. 810, 814 (1982); Moore v. American United Life Ins. Co., 150 Cal. App.3d 610, 624-25, 197 Cal. Rptr. 878, 886-87 (1984); see Rawlings v. Apodaca, 151 Ariz. at 162-63, 726 P.2d at 578-79 (improper motives may be inferred from sufficiently oppressive, outrageous or intolerable conduct). We disagree with the court of appeals that the practices about which Boettcher testified lacked sufficient similarity to the Hawkins' experience and the other adjusters' testimony to constitute such a pattern. All three former employees described a policy of routine, automatic deductions, regardless of their validity, in valuing an insured's loss. Boettcher's testimony is different because he did not describe the specific cleaning fee deduction testified to by Mauritz and Paterno and included in the actual cash value calculations of the Hawkins' car. This difference is immaterial to the purpose for which the evidence was offered. Boettcher's testimony was offered to show that Allstate engaged in a conscious course of conduct, firmly grounded in corporate policy, which denied Hawkins and countless other insureds the actual cash value of their property. The evidence was not offered to establish any particular conduct regarding the Hawkins' claim. This testimony was offered to explain Allstate's motive or its state of mind when dealing with the Hawkins and other insureds. Boettcher's testimony also is different because he described Allstate's claims procedures and policies 15 years before the Hawkins claim. Allstate argues this time span robs the evidence of its relevance. We disagree. Remoteness in time goes to the weight of the evidence, not its admissibility. State v. Jeffers, 135 Ariz. 404, 418, 661 P.2d 1105, 1119, cert. denied, 464 U.S. 865, 104 S.Ct. 199, 78 L.Ed.2d 174 (1983). As noted above, relevance requires only a modicum of rationally probative force. While a significant time span may reduce the probative force of evidence, it does not eliminate it. Clearly, Boettcher's testimony concerning Allstate's past claims practices also was relevant to assessing an appropriate sum of punitive damages. Boettcher's testimony presents direct evidence of the duration of Allstate's misconduct and establishes evidentiary facts from which the jury could determine the reprehensibility of Allstate's conduct. See ante 152 Ariz. at 497-498, 733 P.2d at 1080-1081. Because we find Boettcher's testimony relevant to both the issue of bad faith and punitive damages, we hold that the trial court abused its discretion if it granted a new trial because Boettcher's testimony was not relevant.
We also disagree with the court of appeals that a new trial was justified because Boettcher's testimony was erroneously admitted in violation of Rule 404. Because Allstate did not object to Boettcher's testimony as impermissible character evidence, this error was not preserved as an issue for Allstate's motion for a new trial. M. Udall & J. Livermore, supra § 12, at 18; Grant v. Arizona Public Service Co., 133 Ariz. 434, 450, 652 P.2d 507, 523 (1982) (objection that evidence is irrelevant, without specifying how or why, does not raise any issue on appeal where the evidence would have been relevant under any possible circumstance); 1 Weinstein's Evidence ¶ 103[02], at 103-23 to -24 (if a general objection is overruled, party objecting is precluded from asserting a proper objection on appeal). Therefore, we hold that the trial court abused its discretion if it granted a new trial because Boettcher's testimony was inadmissible character evidence. However, even if the issue was properly preserved, the evidence was not inadmissible pursuant to Rule 404. Subsection (b) permits evidence of other crimes, wrongs or acts if the purpose is to show a party's motive, intent or absence of mistake or accident. These are precisely the purposes for which Boettcher's testimony was admitted. See ante at 498-499, 733 P.2d at 1081-1082. We disagree with the court of appeals that Rule 404(b) is inapplicable. See Rawlings, 151 Ariz. at 153, 726 P.2d at 569. We interpret the court's statement to mean that because Allstate did not deny its acts nor allege that they were unintentional, the deliberateness of Allstate's conduct was not at issue and Boettcher's testimony was irrelevant because it was not directed to a fact of consequence to the determination of the case. This reasoning ignores that Boettcher's testimony is relevant and admissible to prove Allstate's improper motives for purposes of punitive damages. Furthermore, proof of intentional conduct is necessary to establish a prima facie case of the tort of bad faith. Absent a stipulation by Allstate to this element of the claim, Hawkins was required to put on such proof to survive a directed verdict. Also, when Allstate did present its defense, it took the position that its claims practices were innocent, cost-saving measures taken to prevent overpayment of claims. Certainly, Boettcher's testimony was admissible to rebut this contention.
Allstate also argues that in granting a new trial based on erroneously admitted evidence, the trial court properly exercised its discretion to exclude Boettcher's testimony because the probative force of the evidence was substantially outweighed by the danger of unfair prejudice. See Rule 403. Allstate urges that its objection to the evidence as irrelevant necessarily embodied an objection on grounds of unfair prejudice. This argument finds support in our case law. See Jones v. Pak-Mor Mfg. Co., 145 Ariz. 121, 125, 700 P.2d 819, 823 (question of relevancy looks at whether evidence lacks probative value and whether probativeness is outweighed by danger of prejudice), cert. denied, ___ U.S. ___, 106 S.Ct. 314, 88 L.Ed.2d 295 (1985). But see 1 Weinstein's Evidence ¶ 103[02], at 103-23 (objections pertaining to undue prejudice or impermissible character evidence must be stated specifically and are not raised by incompetent, irrelevant and immaterial objection); Jay Edwards, Inc. v. New England Toyota Distributor, Inc., 708 F.2d 814, 823 (1st Cir.1983) (only stated objection was relevancy and court refused to consider prejudicial effect), cert. denied, 464 U.S. 894, 104 S.Ct. 241, 78 L.Ed.2d 231. However, Allstate misperceives the posture of this case on review. The issue is not whether the trial court could have exercised its discretion to exclude Boettcher's testimony as unfairly prejudicial, but whether admitting the testimony was an error that justified a new trial. Because we discern no legal error in the admission of Boettcher's testimony, we hold that the trial court abused its discretion by ordering a new trial on this basis.