Sobley v. Southern Natural Gas Co.

• Decision Date: 13 August 2002
• Docket Number: No. 01-60541.,01-60541.
• Citation: 302 F.3d 325
• Parties: GEORGE SOBLEY; Linda Sobley, Plaintiffs-Appellees, v. SOUTHERN NATURAL GAS COMPANY; et al., Defendants, State Farm Lloyds, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

302 F.3d 325

GEORGE SOBLEY; Linda Sobley, Plaintiffs-Appellees, v. SOUTHERN NATURAL GAS COMPANY; et al., Defendants, State Farm Lloyds, Defendant-Appellant.

No. 01-60541.

United States Court of Appeals, Fifth Circuit.

August 13, 2002.

COPYRIGHT MATERIAL OMITTED

Michael Jay Nichols (argued), Aubrey E. Nichols, Marc D. Amos, Gholson, Hicks & Nichols, Columbus, MS, for Plaintiffs-Appellees.

Dan W. Webb, Sherrie L. Moore, Webb, Sanders & Williams, Tupelo, MS, Elizabeth Koebel Russo (argued), Russo Appellate Firm, Miami, FL, for State Farm Lloyds.

Appeal from the United States District Court for the Northern District of Mississippi.

Before HIGGINBOTHAM, WIENER, and BENAVIDES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

State Farm Lloyds appeals from a judgment of $1.25 million in punitive damages entered against it on a verdict by a Mississippi jury on the bad faith insurance claim of plaintiffs George and Linda Sobley. We conclude that the punitive damages issue should not have been submitted to the jury on remand from this court in the appeal from the first trial in this case, Sobley v. Southern Natural Gas Co. (Sobley I).¹ We therefore REVERSE and RENDER in favor of State Farm.

I.

Relying on our description of the factual background in Sobley I, we recapitulate.

The Sobleys built their house in Columbus, Mississippi in 1993 and purchased homeowner's insurance from State Farm Lloyds ("State Farm"). In the fall of 1994, George Sobley noticed that the ground around his pumphouse was saturated with water. His plumber found small holes in the pipe running in that area. It was repaired only to reoccur in pipes located several feet away. George Sobley sent a section of damaged pipe to the manufacturer for analysis, learning that the holes were caused by electrolysis, an electrical current running through the pipe. It was later determined that facilities belonging to Southern Natural Gas Company (SONAT) were responsible for the charge on the pipes and the resulting electrolysis.

When the Sobleys first discovered water leaking into their house is disputed. State Farm contends that George Sobley testified in a deposition early in this case that water entered his house in mid-1994. The Sobleys allege that they first discovered water problems in their house one morning in mid-December 1994, when they found water seeping from the walls, through the tile, and in their carpet in several locations throughout the house. The Sobleys immediately attempted to clean up the water with rags, mops, and a shop vacuum. George Sobley found that water was leaking into the house at each place where the plumbing pipes came through the slab. He then shut off the main water source and re-routed the damaged plumbing, completing the task in May 1995.

During that process, the Sobleys continued to live in the house and turned on the water for brief periods of time to shower. The Sobleys acknowledge that some water leaked into the house each time they turned the water on but contend that this water never soaked the house as badly as had the initial leakage and that they contained any damage resulting from their daily water use by immediately cleaning up any leakage.

The parties also dispute when the Sobleys first contacted State Farm, with the Sobleys insisting on January 1995 and State Farm insisting on March 31, 1995 as the date of first contact. It is undisputed that Pat Dillard, a State Farm claims adjuster, first spoke with Linda Sobley in April 1995 and arranged to visit the house on April 21, 1995.

Dillard inspected the Sobleys' house on April 21, where, according to her own notes, she witnessed damage to the Sobleys' carpet and tile which she photographed. Linda Sobley told Dillard that their pipes had been damaged by electrolysis. The parties disagree as to whether Dillard ever mentioned the policy's water exclusion to the Sobleys at any time in April 1995. It is undisputed that an April 25, 1995 letter from Dillard to the Sobleys explicitly cited the electrolysis exclusion in section 1.h of the policy as the basis for denying coverage for their claim.² That letter reads:

This letter will follow-up my inspection of your loss on April 21, 1995, and discussion regarding cause of loss being electrolysis. I have confirmed this cause of loss is excluded on page 10 of your policy, Exclusion 1.h.

Should you find anything to the contrary or should you have any further questions, or if I can be of further assistance, please do not hesitate to call me. My number is listed below. Based on the above, we are regretfully unable to provide any coverage for this loss.

Attached to the letter was a copy of page 10 of the Sobleys' homeowner's policy. It is also undisputed that the Sobleys did not contact State Farm again after receiving this letter until some time in 1997, when Linda Sobley contacted State Farm to ask for copies of the pictures which Dillard took at the house on April 21, 1995.

II.

The Sobleys filed suit against SONAT in Mississippi state court in October 1996 for negligence in causing damage through electrolysis to their house. In June 1997, after SONAT had removed the case, the Sobleys amended their complaint to add State Farm as a defendant, seeking coverage under their homeowner's policy for the water damage to their house from their leaking water pipes.³ State Farm answered in July 1997, raising numerous defenses and policy exclusions to coverage as affirmative defenses. State Farm also cross-claimed against SONAT for damages in the event that State Farm was found to have insured losses caused by SONAT's negligence. All parties consented to proceed before a magistrate judge.

In March 1998, the Sobleys amended their complaint to add a claim for punitive damages against State Farm based on bad faith denial of insurance coverage. After cross-motions for summary judgment were denied, the case proceeded to a pre-trial conference in early January 1999.

At the pre-trial conference, the Sobleys reached a settlement with SONAT. SONAT moved to dismiss the Sobleys' claim and State Farm's cross-claim against it, representing that, "[a]s a part of the Settlement Agreement, Plaintiffs will not attempt to recover property damage claims against State Farm Lloyds, but will litigate only whether Plaintiffs are entitled to extra contractual damages, attorney's fees, court costs and punitive damages" and so the settlement "will render moot the Cross-claim of State Farm Lloyds against [SONAT]." The trial court granted the motion, concluding that, pursuant to the settlement agreement, "all of Plaintiffs' claims for property damages are satisfied and extinguished" and the Sobleys' claim and State Farm's cross-claim against SONAT "are moot as a result of this settlement."

State Farm took the position, however, that it did not waive any claims, cross-claims or positions as a result of the agreement between the Sobleys and SONAT. State Farm also moved to dismiss the Sobleys' claim for extra-contractual or punitive damages against it on the ground that there was no subject matter jurisdiction over the claim where the order of dismissal provided that the settlement agreement had extinguished all of the Sobleys' claims for property damages under their homeowner's policy, but this motion was denied.⁴

The case proceeded to trial before a jury in late January 1999. At the first trial, the trial court first allowed the Sobleys to present evidence only on the issue of coverage for their claim under their policy and deferred the issues relating to punitive or extra-contractual damages to a later phase of the trial. Following the Sobleys' case-in-chief, however, the trial court "ruled from the bench that the Sobleys had created a jury issue as to coverage but that he was `jumping over to make a determination of whether or not the jury, based upon the facts that have been before the Court and the facts that the Court is aware of ... is it sufficient to put forth a bad faith claim; was there an arguable basis for denial,' and ruled that State Farm did have such an arguable basis."⁵ The trial court therefore issued a directed verdict in favor of State Farm and entered a judgment dismissing the Sobleys' case against State Farm.

On appeal, this court reversed and remanded. We held that, "[u]nder Mississippi law, a finding of coverage is a necessary predicate to bringing a punitive damages claim," and, "[o]nce coverage is established, the issue of punitive damages should be submitted to the jury if the trial court determines that there are jury issues with regard to whether: (1) the insurer lacked an arguable or legitimate basis for denying the claims, and (2) the insurer committed a wilful or malicious wrong, or acted with gross and reckless disregard for the insured's rights."⁶ We noted that, in the instant case, "the trial court determined that there was a jury issue as to coverage and this finding has not been appealed."⁷ We further held that, "once coverage is established, a court should evaluate whether there was an arguable basis for denial of coverage based solely on the reasons for denial of coverage given to the insured by the insurance company," such that, in this case, "the trial court should determine whether there is a jury question regarding arguable basis solely with respect to the reasons State Farm gave to the Sobleys for denying the claim."⁸

We reversed because, in determining that the water exclusion provided an arguable basis for denying the Sobleys' claim, "the trial judge did not make a factual finding as to whether the water exclusion was presented to the Sobleys as a reason for denying coverage," and so "this court cannot tell whether it was an error under Mississippi law to consider whether that exclusion provided State Farm with an arguable basis for denying coverage."⁹ As such, we held that, "[o]n remand, the trial court should reconsider whether there is a genuine issue of material fact regarding the...