Insurance Bad Faith, Negligence in the Procurement of Insurance, Admissibility of Application for Insurance, Forgery and Punitive Damages

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Arellano v. Primerica Life ins. Co., 693 Ariz. Adv. Rep. 13 (App. Div. I, August 12, 2014) (J. Orozco)

APPLICATION FOR INSURANCE NOT ADMISSIBLE EVIDENCE WHERE NOT ATTACHED TO POLICY OR DELIVERED TO CUSTOMER AT TIME OF FORMATION OF ORAL CONTRACT FOR COVERAGE/ARIZONA DOES NOT RECOGNIZE A TORT FOR FORGERY THOUGH SUCH CONDUCT MAY SUPPORT A CLAIM FOR BAD FAITH/WHERE REPREHENSIBILITY OF DEFENDANT CONDUCT WAS IN MID TO HIGH RANGE A RATIO OF 13:1 OF PUNITIVE DAMAGES TO COMPENSATORY DAMAGES REDUCED TO A RATIO OF 4:1

Miriam Arellano [wife] met with agents of defendant Huels Cox dba Cox & Associates [Huel] to purchase life insurance on her husband Martin Arellano [Mr.Arellano]. Initially an application for $100,000 in life insurance with Primerica Life Insurance [Primerica] was completed with agent Tammy where wife assisted Mr. Arellano in completing the medical questionnaire because he had difficulty with English. Later wife called Huel and told them to cancel the insurance because it was too expensive. As a result a second agent  for Huel, Donald, went to the Arellano home and met with wife.  Mr. Arellano was unaware of this meeting. At this meeting wife agreed to life insurance coverage of $150,000 with a slightly higher premium. She denied completing a second application. She alleged agent Donald told her at this second meeting that the premium check she gave him was proof of coverage.  Thereafter the Donald submitted two applications for the coverage to Primerica. Primerica found the age for Mr. Arellano to be incorrect on the second application and due to his disclosed hypertension required an underwriting medical interview and medical exam. When contacted for the medical interview by an outside vendor called Examinations Management Services [EMSI], Mr. Arellano told the interviewer that “Uh .  .  .  oh, they already got one for me.  .  . my wife already bought some for me at a different company.”  Based upon this EMSI left a message for Donald at Huel to the effect that Mr. Arellano had cancelled the Primerica coverage. Donald, however, no longer worked for Huel at the time the message was left and there was no follow up by Huel. Mr. Arellano died on March 14, 2007. Wife made a death benefits claim with Primerica. Primerica denied the claim stating no coverage was secured and sent wife a copy of the second application. Wife later claimed the signatures and initials on the second application were forgeries and an attempt by forgery to reduce the coverage to $100,000.   Wife sued Huel, Tammy and Donald for negligence (producer malpractice), breach of contract,  fraud and consumer fraud and brought claims of negligence, insurance bad faith, breach of contract and promissory estoppel against Primerica. Wife also served an offer of judgment for $150,000 plus costs and fees of $15,000.   Wife successfully argued to the trial court that ARS sec. 20-1108 precluded the admissibility of the insurance applications: “[n]o application for the issuance of any life or disability insurance policy or contract shall be admissible in evidence in any action relative to such policy or contract, unless a true copy of the application was attached to or otherwise made part of the policy when issued and delivered.” Nonetheless wife's handwriting expert was permitted to testify the signature and initials on the second application were forgeries.  The jury awarded wife $164,586 for the breach of contract claim, $32,000 for the forgery claim, $82,000 in bad faith damages, $57,400 for negligence and $1,117,572 in punitive damages against Primerica. Wife was found to be 30% at fault reducing her negligence award to $40,180. She was awarded $100,000 (reduced 10% for comparative fault=$66,420) against Huel for procurer malpractice. Finally wife was awarded $49,000 (reduced 40% for comparative fault=$29,400) against Donald. The Arizona Court of Appeals affirmed in part and reversed and remanded in part.   The court of appeals found the exclusion of the applications from evidence to be proper rejecting Primerica's argument that it would be impossible to “attach” or make an application a part of a claimed oral contract. The court found that delivery of the application to the wife at the time she was told the check bound coverage would have complied with the statute. The point of the statute is that the consumer must be given the application so as to have the opportunity to read and correct it when appropriate.   On the other hand the court vacated the jury verdict based upon the tort of forgery finding no statutory or case law support for such a tort in Arizona and acknowledging that Arizona follows the Restatement in such circumstances which does not recognize such a tort.   As to punitive damages the court exercised its three prong gatekeeping function under the Due Process Clause of the Fourteenth Amendment. 1.  Reprehensibility of Primerica's Conduct—here the court found Primerica's forgery, acceptance of premium payment without obtaining true signatures on the second application , failure to provide wife and Mr. Arellano copies of the documents, and failure to follow up after being told the coverage was cancelled by Mr. Arellano all  supported the award. 2. Disparity Between Actual or Potential Harm and Amount of Award—noting there is no “bright line test” and the inquiry is “fact sensitive” the court then quoted Hudgins v. S.W. Airlines. Co., 221 Ariz. 472, 489, 212 P.3d 810, 827 (App. 2009), “single-digit multipliers are more likely to comport with due process, [and]a factor more than four comes close to the line of constitutional impropriety.”  Here the ratio is 13:1 weighing against sustaining the award.  3) Comparable Civil Sanctions—ARS sec. 20-456 (B) provides a civil penalty of $50,000 for prohibited insurance practices.  Based upon these factors the court of appeals found Primerica's conduct to fall on the “middle to high range of reprehensibility” and the ratio of 13:1 to high. The court reduced the ratio to 4:1 or $328,000.   Next the court of appeals reversed the trial court's denial of prejudgment interest on wife's offer of judgment noting that while under ARS sec. 44-1201 prohibits awarding prejudgment interest on unliquidated damages, Rule 68(g) allows for it. As such, the unliquidated claim becomes liquidated upon entry of judgment and relates back to the filing of the offer of judgment.   [Editor's Note:  It is interesting that the court allowed the claim of negligence by the insurance carrier to stand here along with a claim for bad faith without addressing Miel v. State Farm Mut. Auto. Ins., Ariz. 104, 912 P.2d 1333 ( App. 1995) which held that an insurer cannot be held liable for negligence but only bad faith the latter of which is a quasi-intentional tort.]

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