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Insurance Bad Faith Under UM Policy & Punitive Damages

Posted by Ted A. Schmidt | Oct 07, 2016 | 0 Comments

Sobieski v. American Standard Ins., 748 Ariz. Adv. Rep. 9 (App. Div. I, September 26, 2016) (J. Johnsen)

EVIDENCE OF AN INCOMPLETE AND BIASED INVESTIGATION SUPPORTING AN UNREASONABLE CLAIM DENIAL WILL SUPPORT A CLAIM FOR INSURANCE BAD FAITH BUT ABSENT CLEAR AND CONVINCING EVIDENCE OF MALICE OR PLACING PROFITS AHEAD OF INSUREDS' INTERESTS PUNITIVE DAMAGES ARE NOT PERMITTED

Plaintiff Scot Sobieski was badly injured when his motorcycle slammed into the rear of a car that stopped suddenly. The car was driven by an uninsured motorist. Sobieski brought a claim against his uninsured motorist [UM] carrier American Standard. The claim was denied on the conclusion Sobieski was solely at fault in the collision. The investigation supporting this decision was limited to an interview of the driver of the car and Sobieski who had no memory of the crash.  Five other eyewitnesses and the police report, were all ignored by the adjuster.  Thereafter, Sobieski's lawyer presented the claim along with statements from three eyewitnesses putting fault on the driver of the car and calling into question his claim he was stopping for a pedestrian.  A new adjuster again denied the claim conducting no additional investigation and misstating in his findings that the police report had the insured travelling 15 miles over the speed limit when in fact the report had him going 15 miles per hour under the limit.  

The Sobieskis then sued  defendant American Standard for breach of contract. The arbitrator who heard the claim found the Sobieskis' damages totaled $950,000 and ruled that Sobieski was 60 percent at fault in the accident and the motorist, 40 percent. After American Standard paid the policy limit of $100,000, the Sobieskis sued again, alleging breach of the duty of good faith and fair dealing. A jury found in favor of the Sobieskis and awarded $500,000 in compensatory damages and $1,000,000 in punitive damages. The superior court denied American Standard's motions for judgment as a matter of law and for new trial. The Arizona Court of Appeals affirmed the compensatory award but vacated and remanded the punitive damage award due to an absence of evidence of malice.

To establish a claim for bad faith, an insured must prove the insurer acted unreasonably and either knew its conduct was unreasonable or acted with such reckless disregard that knowledge of unreasonableness may be imputed to it. Mere negligence is not enough. Here a jury could reasonably conclude that American Standard's investigation was unreasonably lacking and that a reasonable investigation would have led it to conclude that based upon Arizona's Comparative Fault scheme, enough fault could reasonably be apportioned to the uninsured motorist so as to make it clear the Sobieskis had a claim many times in excess of the $100,000 UM policy limits.

In Arizona, in order to recover punitive damages it must be proven by clear and convincing evidence that, circumstances of “aggravation or outrage, such as spite or ‘malice,' or a fraudulent or evil motive on the part of the defendant, or . . . a conscious and deliberate disregard of the interests of others . . . .” In vacating the punitive damage award here the court found:

The Sobieskis did not question American Standard's claims policies;

nor did they argue American Standard denied their claim because it

intended to harm them. Instead, citing [Nardelli v. Metropolitan

Group Prop. & Cas. Ins., 230 Ariz. 592 (App. 2012)] the Sobieskis argued

their claim was denied because of business policies and programs at

American Standard that compelled claims adjusters to promote

Company profits at the expense of its insureds. A close review of the

evidence on which the Sobieskis rely, however, reveals nothing

resembling the Nardelli-like profit-driven atmosphere the Sobieskis

argue existed at American Standard. In the absence of corporate

programs or compensation or evaluation policies that favored company

profits over the interests of insureds, the Sobieskis cite isolated phrases

in business plans and other records, but those isolated phrases are wholly

insufficient to constitute the clear and convincing evidence required to

support their claim for punitive damages.

About the Author

Ted A. Schmidt

Ted's early career as a trial attorney began on the other side of the fence, in the offices of a major insurance defense firm. It was there that Ted acquired the experience, the skills and the special insight into defense strategy that have served him so well in the field of personal injury law. Notable among his successful verdicts was the landmark Sparks vs. Republic National Life Insurance Company case, a $4.5 million award to Ted's client. To this day, it is the defining case for insurance bad faith, and yet it is only one of several other multi-million dollar jury judgments won by Ted during his career. He is certified by the State Bar of Arizona as a specialist in "wrongful death and bodily injury litigation".

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