Aetna Cas. and Sur. Co. v. Broadway Arms Corp.

Decision Date19 December 1983
Docket NumberNo. 83-134,83-134
Citation281 Ark. 128,664 S.W.2d 463
PartiesAETNA CASUALTY AND SURETY COMPANY, Appellant, v. BROADWAY ARMS CORPORATION, Appellee. . Dissenting Opinion
CourtArkansas Supreme Court

Friday, Eldredge & Clark by William H. Sutton and Anderson & Kilpatrick by Overton S. Anderson and Michael E. Aud, Little Rock, for appellant.

Gary Eubanks & Associates by Gary L. Eubanks and Hugh F. Spinks, Little Rock, for appellee.

SUBSTITUTED OPINION ON REHEARING

PURTLE, Justice.

Appellee filed suit against its insurance carrier based upon the tort of bad faith arising out of conduct involving the handling of a claim for damages resulting from a fire. The jury's verdict (by interrogatories) included a finding that the carrier had acted in bad faith resulting in damages to the appellee (insured) in the sum of $175,000 compensatory loss and $5,000,000 punitive damages. On appeal it is urged that: 1) the trial court erred in failing to direct a verdict on the issue of bad faith; 2) the court erred in instructing the jury; 3) the court erred in allowing an attorney for the appellee to testify; 4) damages awarded were excessive and not supported by substantial evidence; and 5) the court erred in failing to grant a new trial. For reasons stated below we reverse and remand.

Aetna Casualty and Surety Company (appellant) issued a fire insurance policy on property owned by Broadway Arms Corporation (appellee.) The policy contained a rider providing for a 25% increase in coverage for loss during peak season. The coverage also included provisions for loss of business and up to $1,000 to be used to clean up the premises in case of loss. On August 22, 1981, a fire occurred on the insured's premises and all inventory was destroyed or damaged, resulting in the insured's business being shut down. Aetna advanced appellee the sum of $30,000, as partial payment on the loss, a few days after the fire. A dispute over the ownership of the salvage arose and matters deteriorated between the insurer and insured. The appellee obtained the services of attorney Roger Glasgow to handle the claim.

On November 10, 1981, appellant offered appellee the sum of $63,225 for settlement of all claims under the policy. This offer included $45,000 for direct fire loss ($30,000 had been previously advanced), $1,000 cleanup and $17,225 for loss of business. The offer was rejected and appellee filed suit on December 4, 1981. Glasgow had originally agreed to represent appellee on an hourly basis; however the fee was not paid as billed and a contingent fee schedule was agreed upon on March 24, 1982. Subsequently, Glasgow associated Gary Eubanks to handle the case. The contract between appellee and Glasgow remains in effect. The two attorneys agreed to split the fee under the terms set out in the agreement of March 24, 1982. Although Glasgow withdrew as attorney of record he will get half of any fee collected in this case. He continued to represent Broadway Arms in other suits brought against them and was designated corporate representative for them during the trial of this cause and as such was allowed to sit at counsel table.

The matter was submitted to the jury on interrogatories. The interrogatories included answers to the effect that: 1) the coverage had not been increased to $100,000; 2) the coverage should increase by 25% for seasonal variation; 3) the loss of earnings was $40,191 in excess of $17,225; 4) the insurer acted in bad faith; and 5) appellee's damages were assessed at $175,000 compensatory and $5,000,000 punitive.

The first argument for reversal is that the court erred in refusing to direct a verdict on the pleadings which charged appellant with bad faith in handling the first party loss under the insurance policy issued to the insured by the insurer. Appellant argues that the Trade Practices Act (Act 148 of 1959), Ark.Stat.Ann. §§ 66-3001, et seq. (Repl.1980), and the penalty and fees statute of Ark.Stat.Ann. § 66-3238 pre-empt the area upon which the tort of bad faith is founded. We do not agree with this argument. Such interpretation would rule out third party claims of bad faith because the Trade Practices Act is only an effort to clean up undesirable conduct of insurers and the penalty and fees statute applies only to first party claims. The penalty and fees statute is the primary remedy an insured has against an insurer who fails or refuses to pay a claim when there is no bad faith. The Trade Practices Act provides for procedures and penalties to be utilized by the provisions of the act. Neither of these remedies deals with the area of bad faith much less pre-empts it.

We have previously recognized that bad faith is an actionable tort in Arkansas. In discussing the tort of bad faith in Findley v. Time Ins. Co., 264 Ark. 647, 573 S.W.2d 908 (1978), we cited the earlier case of Members Mutual Ins. Co. v. Blissett, 254 Ark. 211, 492 S.W.2d 429 (1973), as authority for the premise that the tort of bad faith is an extension of the well established rule through which a liability insurance company can be held accountable in tort for failure to settle a claim within the policy limits. Although Blissett was decided on the question of negligence on the part of an insurer for failure to settle a third party claim within the policy limits of its insured, it did state that the action was a separate tort action. M.B.M. Co., Inc., v. Counce, 268 Ark. 269, 596 S.W.2d 681 (1980); Findley v. Time Ins. Co., supra; Tri-State Ins. Co. v. Busby, 251 Ark. 568, 473 S.W.2d 893 (1971). In Blissett we settled the issue when we concluded that in order to be successful a claim based on the tort of bad faith must include affirmative misconduct by the insurance company, without a good faith defense, and that the misconduct must be dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy. Such a claim cannot be based upon good faith denial, offers to compromise a claim or for other honest errors of judgment by the insurer. Neither can this type claim be based upon negligence or bad judgment so long as the insurer is acting in good faith. We agree with the Ohio Supreme Court in Columbus Finance v. Howard, 42 Ohio St.2d 178, 327 N.E.2d 654 (1975), holding that in an action of this type for tort, actual malice is that state of mind under which a person's conduct is characterized by hatred, ill will or a spirit of revenge. Actual malice may be inferred from conduct and surrounding circumstances. Bad faith may give rise to either first or third party claims.

Three accusations of bad faith against Aetna were made in the present action. Appellee alleged: 1) refusal to pay policy limits under the fire coverage; 2) failure to release the salvage to the insured; and 3) a threat to report the transaction to the Internal Revenue Service. Less than 90 days after the loss the insurer offered to settle the matter for the lump sum of $63,225, which was in addition to the $30,000 advanced immediately after the fire. The offer was rejected by the insured. Suit was filed on December 4, 1981. The jury found appellee was due the additional sum of $58,941 under the policy provisions, which was more than the offer by the insurer. The jury found the appellant had committed acts of bad faith and awarded damages in the sums of $175,000 compensatory and $5,000,000 punitive. So far as the salvage is concerned it remained in the possession and control of the appellee at all times. Testimony indicates salvage was discussed in September following the fire and each party apparently thought the other claimed the right to the salvage. There is nothing about the handling of the salvage claim which appears dishonest, malicious or oppressive as a matter of law. The threat about the IRS is the final act of bad faith alleged in the complaint. The testimony on this subject indicates a representative of the insurer met with the insured's first attorney, Roger Glasgow, and during the discussion indicated that the insurer might be called on by the IRS to explain why it paid $75,000 on a loss when the books of the insured revealed an inventory value of $23,000. It is probable the claim agent's statement intended to put some type of pressure upon its insured to settle the claim. This matter being a fact issue, it will not be decided at this time because we are remanding for a new trial and the matter may or may not be presented in the same manner at the next trial.

The second argument for reversal is that the court erred in instructing the jury regarding the Trade Practices Act. A portion of this act (Ark.Stat.Ann. § 66-3005(9)) includes a section headed Unfair Claim Settlement Practices which states in part:

Committing or performing with such frequency as to indicate a general business practice, any of the following:

(a) Misrepresenting pertinent facts ...

(b) Failing to acknowledge and act reasonably and promptly ...

(c) Failing to adopt and implement reasonable standards for the prompt investigation of claims ...

(d) Refusing to pay claims without conducting a reasonable investigation ...

(e) Failing to affirm or deny coverage ...

(f) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims ...

The instruction did not include a very important part of the statute stating: "Committing or performing with such frequency as to indicate a general business practice, any of the following." The evidence did not purport to describe anything other than the specific acts in this case. There was a proffer of proof by another attorney that Aetna violated the provisions of Ark.Stat.Ann. § 66-3005. He further offered to testify that these particular acts of Aetna were willful, malicious or oppressive. A violation of the Trade Practices Act is not necessarily evidence of bad faith. Only Sec. 9(f) relates by implication to bad faith even if found to exist. We do not think the trial court abused its...

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