Torts -- Insurance Bad Faith & Punitive Damages Found in SUV Theft Case

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Nardelli v. Metropolitan Group Prop. & Cas. Ins. Co., 634 Ariz. Adv. Rep. 11 (App. Div. I, May 1, 2012) (J. Norris)

INSURANCE BAD FAITH AND A RIGHT TO PUNITIVE DAMAGES ESTABLISHED WHERE DEFENDANT FAILS TO REASONABLY INVESTIGATE AND FAILS TO PAY AT LEAST AMOUNT SUFFICIENT TO REPAIR SUV AND FAILS TO ALERT INSURED AS TO FAVORABLE LANGUAGE IN POLICY/PUNITIVE DAMAGES HOWEVER SHOULD MATCH COMPENSATORY AWARD

http://azcourts.gov/Portals/89/opinionfiles/CV/CV100350OP.pdf

Plaintiff sued defendant for insurance bad faith and was awarded $155,000 in compensatory damages and $55 million in punitive damages. The trial court reduced the punitive damage award to $620,000 and sustained the compensatory award. On appeal the Arizona Court of Appeals affirmed the jury verdict on compensatory damages but reduced the punitive to $155,000.

Less than a year after purchasing a new Ford Explorer the Explorer was stolen. Plaintiff made a theft claim on their auto policy with defendant. The SUV was later recovered in Mexico severely damaged and inoperable. Despite the extensive damage to the Explorer the defendant repeatedly refused to treat it as a total loss and instead tendered a check for repairs to the vehicle, less than the amount Earnhardt Ford had stated it would cost to repair the vehicle. Plaintiff's allowed the SUV to be repossessed by the lender and gave the repair check to Earnhardt Ford. The court found “substantial” evidence of bad faith as a result of defendant's decision to repair rather than replace the vehicle, sending a check for an amount that did not cover repair costs and failing to advise the plaintiffs of policy provisions important to their claim.

Evidence supporting the punitive damage award included the fact the defendant had instituted an aggressive company-wide profit goal the year this loss was addressed, assigned a significant role in obtaining this goal to the claims department and tied compensation and benefits paid claims personnel to the average amount they paid on claims. The court found it particularly important that at the same time the defendant made no effort to assure that in seeking to achieve this goal insureds would be protected against unfair treatment. This evidence fairly supported a conclusion that the claims personnel on plaintiffs' claim were primarily motivated by financial self interest and placed this interest ahead of the interests of its insured.

Finally, the court noted that federal due process imposes a substantive limit on the amount of punitive damages awarded. The United States Supreme Court has indicated that in assessing this limit the court should consider 1) the degree of reprehensibility of the misconduct, 2)the disparity between the actual or potential harm suffered by the plaintiff and the amount of the award, and 3)the difference between the award and any relevant civil penalties that might be applied to comparable cases. See State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 418 (2003). Here the harm to plaintiffs was largely economic. Plaintiffs were not particularly financially vulnerable and though allowing the SUV to be repossessed damaged their credit, it did not damage it sufficiently to impair family needs or the ability to buy a new car. There was no evidence that defendant's bad conduct was of longstanding duration or part of a scheme or plan to cheat policyholders. With respect to civil penalties, Arizona's Unfair Claims Practices Act caps civil penalties at $50,000 per six month period. Such a penalty could not put the defendant on notice that it might be required to pay a $55 million punitive damage award in this case.

Considering the three factors, and acknowledging there is no “bright line” test as to what the ratio between compensatory and punitive damages ought to be the court found the degree of defendant's reprehensibility to be low to at most moderate, the ratio of punitive to a substantial compensatory award large while applicable civil penalties are comparatively low. Under these circumstances the court found a 1 to 1 ratio constitutionally required and reduced the punitive damage award to $155,000.

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