Court Opinion

ID: 9846147
Source: CourtListenerOpinion
Date Created: 2023-09-24 03:35:43.207327+00
Date Added: 2024-06-11T09:16:34.226293
License: Public Domain

ORDER ON MOTION FOR REHEARING BUSTAMANTE, Judge.  {76} All parties have requested rehearing on various aspects of our opinion filed March 8,1999. After due consideration, we have determined to deny the requests. However, one aspect of the motions — addressing the proper standard for granting punitive damages in insurance-bad-faith cases — requires extended discussion. Rather than revise the opinion, we have opted to respond in this separate published Order. {77} Teague-Strebeek and Mills-Strebeck (Plaintiffs) assert that the opinion misapprehends New Mexico law regarding punitive damages in the context of insurance bad faith. Plaintiffs remind us that our Supreme Court has just recently stated that “bad faith ... is a culpable mental state.” Allsup’s Convenience Stores, Inc. v. North River Ins. Co., 1999-NMSC-006, ¶ 53, 127 N.M. 1, 976 P.2d 1. Based on that statement — and earlier cases including language to the same effect— Plaintiffs argue that “New Mexico law clearly provides for punitive damages in insurance cases based solely on bad faith,” and that it is improper to require anything in addition as a prerequisite to awarding punitive damages. See Jessen v. National Excess Ins. Co., 108 N.M. 625, 627, 776 P.2d 1244, 1246 (1989) (“Bad faith supports punitive damages upon a finding of entitlement to compensatory damages.”); United Nuclear Corp. v. Allendale Mut. Ins. Co., 103 N.M. 480, 485, 709 P.2d 649, 654 (1985) (“To assess punitive damages for breach of an insurance policy there must be evidence of bad faith or malice in the insurer’s refusal to pay the claim.”). {78} In essence, Plaintiffs position is that conduct sufficient to support bad faith compensatory damages against one’s insurer is necessarily synonymous with conduct sufficient to support an award of punitive damages. With this we disagree. Rather, New Mexico and other jurisdictions require the presence of aggravated conduct beyond that necessary to establish the basic cause of action in order to impose punitive damages. We rely on Paiz v. State Farm, Fire & Casualty Co., 118 N.M. 203, 210, 880 P.2d 300, 307 (1994), and Allsup’s, 1999-NMSC-006, ¶ 46, 127 N.M. 1, 976 P.2d 1, for our conclusion. See generally Stephen S. Ashley, Bad Faith Actions § 8.06 (2d ed. 1997); John C. McCarthy, Recovery of Damages for Bad Faith §§ 1.60 (5th ed. 1990). {79} Paiz was a first party insurance-bad-faith case. Plaintiffs in Paiz sued then-insurer and insurance agent because the insurer denied a fire-loss claim. See 118 N.M. at 205, 880 P.2d at 302. The trial court directed a verdict against Plaintiffs on then-bad faith tort-based claim. See id. at 206, 880 P.2d at 303. However, the case was submitted to the jury on several theories including breach of contract, negligent misrepresentation, negligent investigation and negligent delay in making payment. See id. at 205, 880 P.2d at 302. The trial court also submitted a punitive damages instruction against the insurer alone based on a theory of gross negligence. See id. The jury returned a verdict of $380,000 in compensatory damages and $485,000 in punitive damages. See id. at 206, 880 P.2d at 303. On appeal our Supreme Court re-examined the basis for punitive damages in breach-of-contract cases. The Supreme Court first acknowledged that it had previously applied a more relaxed standard for punitive damages in insurance-contract cases. See id. at 210-11, 880 P.2d at 307-08; see also Romero v. Mervyn’s, 109 N.M. 249, 255 n.3, 784 P.2d 992, 998 n.3 (1989) (“We have allowed the award of punitive damages in insurance cases under a more relaxed standard in part because of the fiduciary obligations inhering in insurance relationships and because of concerns arising from the bargaining position typically occupied by the insured and insurer.”). The court then held: However, to reaffirm that this Court has not lost sight of the limited purpose of punitive damages — to punish and deter persons from conduct manifesting a “culpable mental state” — we now disavow the proposition that in a contract case, including one involving an insurance contract, punitive damages may be predicated solely on gross negligence. In addition to, or in lieu of, such negligence there must be evidence of an “evil motive” or a “culpable mental state.” A mental state sufficient to support an award of punitive damages will exist when the defendant acts with “reckless disregard” for the rights of the plaintiff — i.e., when the defendant knows of potential harm to the interests of the plaintiff but nonetheless “utterly fail[s] to exercise care” to avoid the harm. 118 N.M. at 211, 880 P.2d at 308 (citation absent from original) (alteration in original). Paiz thus brought the standard for awarding punitive damages in contract-based insurance-bad-faith cases into line with other contract cases. Cf. Eckhardt v. Charter Hospital, 1998-NMCA-017, ¶ 57, 124 N.M. 549, 953 P.2d 722 (applying the same standard and rationale to punitive damages in tort cases). {80} We note that in Paiz the Supreme Court cited with approval Linthicum v. Nationwide Life Insurance Co., 150 Ariz. 326, 723 P.2d 675 (1986) (in banc). See 118 N.M. at 211, 880 P.2d at 308. Linthicum was an insurance-bad-faith and breach-of-eontract case in which compensatory and punitive damages had been awarded against the insurer. The Arizona Court of Appeals affirmed the compensatory award but reversed the punitive damages award. See 723 P.2d at 676. The Arizona Supreme Court granted review as to the issue of punitive damages only. See id. Prior to oral argument, the Supreme Court asked counsel to address the following question: 1. Assuming that indifference to or failure to consider the interests of the insured is sufficient grounds for award of tort damages in a bad faith case, what additional requirement or standard is appropriate to justify an award of punitive damages? Id. {81} After generally clarifying Arizona’s punitive damages law, the Supreme Court held: “In a bad faith tort case, as with all other torts, punitive damages are not award-able unless there is something more than the conduct required to establish the tort.” Id. at 681. See also Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 577 (1986) (en banc) (rejecting argument that “since bad faith is a species of intentional tort, punitive damages are automatically recoverable in every case in which the plaintiff proves that the tort was committed”). {82} Paiz left unanswered several questions. Among them are (1) whether evidence of bad faith requires giving a jury instruction on punitive damages, (2) whether a finding of bad faith requires an award of punitive damages, and (3) whether a finding of bad faith would by itself be sufficient to support an award of punitive damages. We need not concern ourselves here with the first question because this matter was tried to the court alone.1 As to the second, Plaintiffs concede that an award of punitive damages is not mandatory even when bad faith is found. See UJI 13-1718 NMRA 1999 (“If you find that plaintiff should recover compensatory damages for the bad faith actions of the insurance company, then you may award punitive damages.” (Emphasis added)). The third question is answered by Allsup’s. {83} We have already noted the passage from Allsup’s upon which Plaintiffs rely. That passage provides some support for Plaintiffs position. However, another discussion earlier in Allsup’s is much more pertinent to our inquiry. Defendant North River’s first challenge to the punitive damages award against it was that “insurance companies ... were singled out by the jury instructions as having to act only unreasonably, as opposed to acting in bad faith, in order to be held liable for punitive damages, and that its due process right was thereby violated.” 1999-NMSC-006, ¶44, 127 N.M. 1, 976 P.2d 1. North' River pointed to a jury instruction essentially identical to UJI 13-1705 NMRA 1999 as symptomatic of the problem it faced. See id. {84} In response, the Supreme Court quoted with approval another instruction given to the jury as clarifying any ambiguity in the instruction North River challenged. To establish the claim of breach of the implied covenant of good faith and fair dealing by defendants ..., Allsup’s has the burden of proving that one or more of the defendants acted in bad faith by not giving equal consideration to the interest of Allsup’s as to its own interest in at least one of the following ways ... Related to its claims for punitive damages, 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. Id. ¶ 46 (second alteration in original) (emphasis omitted). Asserting that this instruction comported with its holding in Paiz, the Supreme Court wrote: Reading both instructions together clearly advised the jury that if it found that North River acted in bad faith, it also had to determine whether this constituted malicious, reckless, or wanton conduct before it could award punitive damages. The jury was adequately instructed on the issue of punitive damages. Id. (emphasis added). {85} This discussion clearly indicates there is a real distinction between “bad faith” sufficient to support an award of compensatory damages and “bad faith” meriting exemplary damages. In appropriate circumstances “bad faith” may include a culpable mental state, but it is not necessarily so.  {86} We recognize the potential for confusion arising from nomenclature. The causes of action we are discussing are commonly called “insurance bad faith cases.” In ordinary parlance and meaning bad faith connotes highly improper, probably evil, intent and purpose. Given that meaning, a person acting in bad faith would be deserving of some sort of punishment. However, the New Mexico cause of action for insurance bad faith does not require proof of aggravated misconduct or a culpable mental element to stand.  {87} As noted in the Committee Comment to UJI 13-1701 NMRA 1999, in New Mexico “[t]he cause of action for bad faith arises from a breach of the obligation of good faith.” The covenant of good faith and fair dealing is imposed by law in every contractual insurance relationship requiring the parties to deal fairly and honestly with each other. See id; see also UJI 13-1710 NMRA 1999. The covenant of good faith and fair dealing in a first-party claim situation can be breached in a number of ways, though the most common are failures to act reasonably in timely and fairly investigating and evaluating claims and unreasonable delays in responding to claims. See UJI 13-1702 NMRA 1999; see also UJI 13-1705. Thus, an insurer can breach the covenant of good faith and be liable under our uniform jury instructions by actions that do not evince evil motive or other culpable mental state. {88} The culpability of the insurer is measured on a continuum of reasonableness imposed in light of the insurer’s fiduciary obligation to its insured. At one end, the insurer acts reasonably in all respects and is not liable except under its contract. Further along, the insurer’s acts are unreasonable enough to allow damages against it in tort. At some point, the insurer’s acts and motives become qualitatively different and are repre- ■ hensible enough to merit punishment. This is the message of the following language in Allsup’s: We think the jury was more likely to comprehend the instruction as meaning that the good faith of the insurance company is determined by how reasonable the conduct of the insurance company is. In turn, the bad faith of the insurance company may be measured by how unreasonable its conduct is. While 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, 127 N.M. 1, 976 P.2d 1. {89} Given the Supreme Court’s efforts to re-focus the role and purpose of punitive damages in Paiz and other cases, acceptance of Plaintiffs’ position carries another consequence, probably undesired by most plaintiffs. If punitive damages could be awarded for every breach of the covenant of good faith and fair dealing, the standard for all bad-faith cases would have to be raised accordingly. That is, a possible effect would be to make it more difficult to obtain compensatory damages in the less aggravated, more “run-of-the-mill” cases.  {90} Turning our attention to this case, the district court entered lengthy findings of fact detailing the events, acts, and failures to act supporting a determination of bad faith. Despite these findings, the district court concluded: “The evidence does not support a conclusion that in adjusting this claim that [Chrysler] acted with an evil nature or other culpable mental state; punitive damages are therefore not appropriate.” Plaintiffs argue that this conclusion of law incorrectly applied a heightened standard- for punitive damages, and that punitive damages should have been considered solely on the basis of the district court’s discrete bad-faith determinations. As we have already demonstrated, New Mexico now requires a showing of a culpable mental element to allow imposition of punitive damages. The district court was correct in measuring Chrysler’s conduct against the standard of evil motive or culpable mental state despite the statement in Jessen, 108 N.M. at 627, 776 P.2d at 1246, that “[b]ad faith supports punitive damages upon a finding of entitlement to compensatory damages.” That formulation must be viewed as having been superseded by Paiz and Allsup’s. .{91} We deny the remaining points in Plaintiffs’ Motion for Rehearing, except to acknowledge that our use of the figure “$300,000” for the damages figure was only illustrative and used for drafting convenience. The precise damage figure is, of course, subject to calculation on remand. {92} With respect to Chrysler’s motion for rehearing, the district court may adjust the award of attorney fees and costs if the court determines that Plaintiffs did not have an insurable interest. {93} Because of the tragic death of former Chief Justice Frost, further evidentiary proceedings may be necessary on remand. {94} IT IS SO ORDERED. HARTZ and ARMIJO, JJ., concur.  . We note, however, that Paiz was decided in 1994, three years after our bad faith jury instructions were adopted by the Supreme Court. UJI 13-1718 NMRA 1999 clearly contemplates the giving of a punitive damages instruction in every bad faith case submitted to a jury. See id. (Directions for Use). Given the holding in Paiz, and the language in Allsup’s, upon which we rely, it would seem appropriate to reconsider this approach.