Dunn v. State Farm Fire & Cas. Co.

• Decision Date: 03 April 1991
• Docket Number: No. 90-1312,90-1312
• Citation: 927 F.2d 869
• Parties: Mollie Ann DUNN, Plaintiff-Appellant, v. STATE FARM FIRE & CASUALTY COMPANY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 869

927 F.2d 869

19 Fed.R.Serv.3d 242

Mollie Ann DUNN, Plaintiff-Appellant, v. STATE FARM FIRE & CASUALTY COMPANY, et al., Defendants-Appellees.

No. 90-1312.

United States Court of Appeals, Fifth Circuit.

April 3, 1991.

Grady F. Tollison, Tollison & Alexander, Oxford, Miss., for plaintiff-appellant.

Guy T. Gillespie, III, Robert H. Faulks, Holcomb, Dunbar, Connell, Chaffin & Willard, Oxford, Miss., for defendant-appellees.

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

Before POLITZ, WILLIAMS and JONES, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

After her insurance claim was denied, plaintiff-appellant Mollie Ann Dunn brought suit against State Farm Fire & Casualty Company asserting refusal to pay a claim for fire loss. She alleged breach of contract, breach of fiduciary duty, breach of duty to act in good faith, and wrongful conversion of property. Jurisdiction was based upon diversity of citizenship. 28 U.S.C. Sec. 1332 (1988). During discovery, the district court granted State Farm a protective order for documents covered by the attorney-client privilege and work product doctrine. After discovery and on State Farm's motion, the court entered summary judgment on the noncontractual claims. The parties then settled the breach of contract claim. Dunn appeals the protective order and the partial summary judgment.

I. FACTS AND PRIOR PROCEEDINGS.

Mollie Dunn and her husband, Melvin Dunn, owned a house in New Albany, Mississippi as tenants by the entirety, subject to a deed of trust held by the People's Bank and Trust. They had insured the house and its contents with State Farm.

In December, 1985, the Dunns separated and Mrs. Dunn and her children moved to Houston, Mississippi. On the first weekend in February, 1986, Mrs. Dunn returned to the New Albany house and removed some of her belongings. The following Monday the house burned. From the beginning of its investigation, the fire department suspected arson. A few days after the fire, Mr. Dunn confessed to setting the fire intentionally.

Later Mrs. Dunn filed a claim with State Farm based upon her interest in the house and her share of the contents of the house. State Farm asserts that during its investigation of Mrs. Dunn's claim, she did not disclose some of her debts on items claimed, overvalued her loss of contents of the house, and made claims upon some items which were not in the house when it burned.

State Farm urges further that it had reason to believe that Mrs. Dunn possibly had agreed to the arson. It considered the Dunn's separation a pretext for pursuing separate insurance claims. State Farm relied further upon the facts that the Dunns initially pursued their insurance claim jointly and also, shortly after the fire, the Dunns began living together again and sharing expenses. State Farm also believed Mrs. Dunn knew where her husband poured flammable liquid in the house because she identified the area in the house in which arson investigators had found evidence of flammable liquids.

As required by Mississippi law, State Farm paid the amount owed on the deed of trust to People's Bank and Trust Company. State Farm then denied Mrs. Dunn's claim, because of the alleged misrepresentations, because it believed she consented to her husband's arson, and because it was possible that Mississippi law barred Mrs. Dunn from recovering under the Dunn's insurance policy even if she were innocent of the arson.

The district court granted partial summary judgment dismissing all of Mrs. Dunn's extra-contractual damage claims. The district court held that State Farm did not convert Mrs. Dunn's interest in the house because State Farm was permitted by law to take the assignment of the deed of trust on the house after paying off the mortgage. 711 F.Supp. 1362 (1988). The court ruled that State Farm's fiduciary duty was not implicated since this case did not involve a requirement that State Farm defend the insured against claims by third parties. Finally, in holding that State Farm did not act in bad faith, the court stated three alternative grounds: (1) Mr. Dunn's criminal act might properly in law be attributable to Mrs. Dunn, (2) State Farm had an arguable reason to believe that Mrs. Dunn consented to her husband's criminal act, and (3) State Farm had reason to believe that Mrs. Dunn made willful misrepresentations of material facts in her claim. In addition, the court held that Mrs. Dunn failed to create a material issue as to bad faith because she did not introduce evidence to support her burden of proof that State Farm acted with malice or gross negligence.

The parties subsequently settled the breach of contract claim by agreeing that if this Court affirms the district court, Mrs. Dunn "will forego pursuit of her contractual damage claims in exchange for State Farm's release of its assigned note and deed of trust on the insured property." If this Court reverses the district court, "State Farm's liability for contract damages, if any, may be satisfied by State Farm's release of the assigned note and deed of trust." After the parties made this settlement, the district court certified the partial summary judgment order as a final judgment. The judgment held in abeyance the contract claims under the terms of the settlement as still pending until this appeal is decided. Mrs. Dunn appeals both the protective order and the partial summary judgment. There is no appeal of the holding that State Farm did not breach its fiduciary duty, and we therefore do not address the issue.

II. STANDARD OF REVIEW.

On appeal, we evaluate a district court's decision to grant summary judgment by reviewing the record under the same standards which guided the district court. Brooks, Tarlton, Gilbert, Douglas & Kressler v. United States Fire Ins. Co., 832 F.2d 1358, 1364 (5th Cir.1987). According to Rule 56(c), we cannot affirm a summary judgment unless "we are convinced, after an independent review of the record, that 'there is no genuine issue as to any material fact' and that the movant is 'entitled to a judgment as a matter of law.' " Brooks, 832 F.2d at 1364 (quoting Fed.R.Civ.P. 56(c)). We must consider fact questions with deference to the nonmovant. We decide questions of law de novo.

The Supreme Court recently explained Rule 56(c): "the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which the party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); see also Issacharoff & Loewenstein, "Second Thoughts About Summary Judgment," 100 Yale L.J. 73, 84-91 (1990). Mrs. Dunn must present sufficient evidence to establish the existence of each element for which she bears the burden of proof in order to survive State Farm's motion for summary judgment. Celotex, 477 U.S. at 322, 106 S.Ct. at 2552.

III. PUNITIVE DAMAGE CLAIM.

With the settlement of the contract claims, the only claim remaining is the claim of punitive damages for alleged wrongful conduct by State Farm. Mrs. Dunn's suit is based on diversity jurisdiction, we undertake to apply Mississippi law to the issue of punitive damages and rule as would the Mississippi courts. Brooks, 832 F.2d at 1364, 1376.

Mrs. Dunn sued State Farm for punitive damages for its alleged bad faith refusal to pay a claim. Under Mississippi law, punitive damages may be assessed against an insurer only when the insurer denies a claim (1) without an arguable or legitimate basis, either in fact or law, and (2) with malice or gross negligence in disregard of the insured's rights. Aetna Casualty & Sur. Co. v. Day, 487 So.2d 830 832 (Miss.1986); State Farm Fire and Casualty Co. v. Simpson, 477 So.2d 242, 250, 252 (Miss.1985); see also Larr v. Minnesota Mutual Life Ins. Co., 924 F.2d 65, 67 (5th Cir.1991); Peel v. American Fidelity Assurance Co., 680 F.2d 374, 376 (5th Cir.1982) (per curiam).

Whether State Farm had an arguable reason to deny Mrs. Dunn's claim is an issue of law for the court. Banker's Life and Casualty Co. v. Crenshaw, 483 So.2d 254, 269 (Miss.1985), aff'd, 486 U.S. 71, 108 S.Ct. 1645, 100 L.Ed.2d 62 (1988). State Farm does not need to prove that it was a certainty that Mrs. Dunn was not entitled to payment. Instead it must show only that it had reasonable justifications, in either fact or law, to deny payment.

In deciding whether an insurer had an arguable basis to deny insurance liability, Mississippi courts usually apply the directed verdict test. Under this test, unless the insured would be entitled to a directed verdict on the underlying insurance claim, an arguable reason to deny an insurance claim exists in most instances. Blue Cross & Blue Shield v. Campbell, 466 So.2d 833, 843 (Miss.1984) ("[U]nless the trial judge grants a directed verdict to the insured plaintiff on the contract claim, then, as a matter of law, the insurance carrier has shown reasonably arguable basis to deny the claim ... in the vast majority of cases."); see also Reece v. State Farm Fire & Casualty Co., 684 F.Supp. 140, 146 (N.D.Miss.1987) (when plaintiff is not entitled to directed verdict on policy claim, it "necessarily follows that [there was] an arguable reason for denying the claim"); Aetna Casualty & Sur. Co. v. Day, 487 So.2d 830, 832-34 (Miss.1986) (when questions of fact existed on underlying policy claim, no reasonable juror could find fraud or malice on part of insurer; exception to general rule would exist only under "extreme factual situations"); Southern United Life Ins. Co. v. Caves, 481 So.2d 764, 769 (Miss.1985) (failure of plaintiff to obtain summary judgment or directed verdict on policy claim eliminates punitive claim in "great majority" of cases); State Farm Fire and Casualty Co. v. Simpson, 477...