Gurule v. Illinois Mut. Life and Cas. Co.

• Decision Date: 02 March 1987
• Docket Number: No. CV-86-0488-PR,CV-86-0488-PR
• Citation: 734 P.2d 85,152 Ariz. 600
• Parties: Ramon GURULE and Maria Gurule, husband and wife, Plaintiffs/Appellees, v. ILLINOIS MUTUAL LIFE AND CASUALTY COMPANY, an Illinois corporation, Defendant/Appellant.
• Court: Arizona Supreme Court

Page 85

734 P.2d 85

152 Ariz. 600

Ramon GURULE and Maria Gurule, husband and wife, Plaintiffs/Appellees, v. ILLINOIS MUTUAL LIFE AND CASUALTY COMPANY, an Illinois corporation, Defendant/Appellant.

No. CV-86-0488-PR.

Supreme Court of Arizona, In Banc.

March 2, 1987.

Reconsideration Denied April 15, 1987.

Langerman, Begam, Lewis and Marks, Phoenix, by Amy G. Langerman for plaintiffs/appellees.

Gust, Rosenfeld, Divelbess & Henderson, Phoenix, by Richard A. Segal, Brian Holohan, for defendant/appellant.

FELDMAN, Vice Chief Justice.

Plaintiff Ramon Gurule (Gurule) sued defendant Illinois Mutual Life and Casualty Company (Illinois Mutual) for breach of We accepted review to clarify the kind and amount of evidence necessary to support punitive damages under Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986) and Linthicum v. Nationwide Life Insurance Co., 150 Ariz. 326, 723 P.2d 675 (1986). ¹ Rule 23(c)(4), Ariz.R.Civ.App.P., 17A A.R.S. (Supp.1986). We have jurisdiction under Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

                [152 Ariz. 601] contract and the tort of "bad faith."   A jury awarded Gurule $25,506.54 in contract damages, $90,000 in compensatory tort damages, and $384,493.46 in punitive damages.  Illinois Mutual appealed the bad faith claim, arguing that the evidence was insufficient to support the verdict.  The court of appeals affirmed the jury's award of compensatory damages but vacated the punitive damages award.  The court reasoned "that before punitive damages may be awarded in a bad faith case, the evidence must reflect something more than the reckless disregard necessary to support the [bad faith] claim."  Gurule v. Illinois Mutual Life and Casualty Co., No. 2 CA-CIV 5700, memo. op. at 3 (Ariz.Ct.App. May 9, 1986) (emphasis added)
                

DISCUSSION

A. General Principles

Punitive damages primarily further the same objectives underlying criminal law: punishing the defendant and deterring the defendant and others from future misconduct. See Linthicum, 150 Ariz. at 330, 723 P.2d at 679; W. PROSSER & W. KEETON, THE LAW OF TORTS § 2, at 9 (5th ed. 1984). Our decision in Rawlings--that punitive damages are appropriate only if defendant acted with an "evil mind"--was intended to limit punitive damage awards to situations in which they will further these objectives.

Punishment is an appropriate objective in a civil case only if the defendant's conduct or motive involves " 'some element of outrage similar to that usually found in crime.' " Rawlings, 151 Ariz. at 162, 726 P.2d at 578 (quoting Restatement (Second) of Torts § 908 comment b (1979)). Punitive damages are therefore "undeserved as punishment" unless defendant acted with a knowing, culpable state of mind, or defendant's conduct was so egregious that the requisite mental state can be inferred. Cooter, Economic Analysis of Punitive Damages, 56 S.CAL.L.REV. 79, 79 (1982); see also Rawlings, 151 Ariz. at 162, 726 P.2d at 578 (citing A.R.S. § 13-105(5)(C)'s definition of "criminal recklessness" as appropriate measuring stick for punitive damages).

The same "evil mind" that justifies punitive damages as punishment also furthers the objective of deterring similar misconduct in the future. If defendant did not act with an "evil mind," however, compensatory damages usually provide the optimum level of deterrence. See generally Ellis, Fairness and Efficiency in the Law of Punitive Damages, 56 S.CAL.L.REV. 1, 23, 33 (1982). As Professor Cooter has explained, "for most potential injurers, it is far cheaper to comply with the law than risk liability, so noncompliance will usually be unintentional. If fault is unintentional, then imposing punitive damages in addition to compensatory damages is ... unnecessary for deterrence...." 56 S.CAL.L.REV. at 79. It is only when fault is intentional ² that the enhanced deterrence of punitive damages becomes necessary. Id. at 79-80. Thus, in bad faith cases, unless the evidence establishes that, in addition to bad faith, defendant acted with an evil mind, punitive damages are unnecessary because compensatory damages adequately deter. See Rawlings, 151 Ariz. at 159-163, 726 P.2d at 575-79; Note, Damage Measurements for Bad Faith Breach of Contract: An Economic Analysis, 39 STAN.L.REV. 161, 175-80 (1986).

If juries could award punitive damages without proof of anything more than bad faith, insurance companies may be overdeterred The requisite "something more," or "evil mind," is established by evidence that defendant either (1) "intended to injure the plaintiff ... [or (2) ] consciously pursued a course of conduct knowing that it created a substantial risk of significant harm to others." Rawlings, 151 Ariz. at 162, 726 P.2d at 578. This standard is satisfied by evidence that defendant's wrongful conduct was motivated by spite, actual malice, or intent to defraud. Id., 151 Ariz. at 162-63, 726 P.2d at 578-79; W. PROSSER & W. KEETON, supra § 2, at 9-10 and nn. 23-32. Defendant's conscious and deliberate disregard of the interests and rights of others also will suffice. Rawlings, supra; W. PROSSER & W. KEETON, supra § 2, at 10.

                and may pay legitimately questionable claims to avoid the risk of a punitive damages award.  See Note, supra, 39 STAN.L.REV. at 179.   Such a result would be bad policy as well as bad law.  Insurance companies are not liable for punitive damages every time they commit a tort;  something more is required.   Rawlings, supra
                

Of course, the required evil mind may be established by defendant's express statements or inferred from defendant's expressions, conduct, or objectives. Rawlings, 151 Ariz at. 162-63, 726 P.2d at 578-79; Linthicum, 150 Ariz. at 331, 723 P.2d at 680. For example, defendant may have conducted himself in an outrageous or egregiously improper manner, thus permitting the inference that he intended to injure, or consciously disregarded the substantial risk that his conduct would cause significant harm.

Even if the defendant's conduct was not outrageous, a jury may infer evil mind if defendant deliberately continued his actions despite the inevitable or highly probable harm that would follow. See, e.g., Delgado v. Heritage Life Insurance Co., 157 Cal.App.3d 262, 278, 203 Cal.Rptr. 672, 681-82 (Cal.Ct.App.1984) (restrictive policy interpretation coupled with repeated failure to investigate sufficient to infer conscious disregard); Little v. Stuyvesant Life Insurance Co., 67 Cal.App.3d 451, 462, 136 Cal.Rptr. 653, 659 (Cal.Ct.App.1977) (termination of disability benefits despite overwhelming medical evidence of disability); Grimshaw v. Ford Motor Co., 119 Cal.App.3d 757, 813, 174 Cal.Rptr. 348, 384 (Cal.Ct.App.1981) (punitive damages appropriate when Ford "knew that the Pinto's fuel tank and rear structure would expose consumers to serious injury or death"). A jury certainly may infer evil mind when a defendant continues a course of conduct with knowledge of the past harm caused by that conduct. Grimshaw, supra. No doubt other circumstances, alone or in combination, may justify the inference of an evil mind. See, e.g., Hawkins v. Allstate Insurance Co., 152 Ariz. 490, 733 P.2d 1073 (1987) (pattern of dishonest or fraudulent conduct); Restatement (Second) of Torts § 908 comment c (1979) (punitive damages appropriate "when a tort ... is committed for an outrageous purpose" even though no significant harm results).

In summary, the propriety of awarding punitive damages turns upon the defendant's state of mind. Intent to injure or defraud, or pursuit of wrongful conduct with conscious disregard of the probability of some injury or damage to the rights and interests of others all qualify as forms of "evil mind," justifying imposition of punitive damages. We abandon such terms as "gross," "reckless," and "wanton" conduct. They convey little, and fail to focus the jury's attention on the important question--the defendant's motives. The quality of defendant's conduct is relevant and important only because it provides one form of evidence from which defendant's motives may be inferred. The more outrageous or egregious the conduct, the more compelling will be the inference of "evil mind." Of course, defendant's state of mind may be evidenced by other factors and may be established or inferred even if defendant's conduct was outwardly unexceptional. The inquiry in every punitive damage case focuses on the defendant's state of mind, which may be established by either direct or circumstantial evidence.

B. Issues and Facts

In the present case, the legal standard articulated in Rawlings and Linthicum Although the trial court's punitive damages instruction was incorrect, Illinois Mutual did not appeal the instruction; it appealed only the sufficiency of the evidence. Therefore, we must review the facts in the light most favorable to Gurule and affirm the jury's verdict if a reasonable juror could conclude that Illinois Mutual either intended to violate Gurule's rights under the policy or consciously pursued a course of conduct knowing that it created a substantial risk of doing so. With these principles in mind, we turn to the facts.

                [152 Ariz. 603] was not conveyed to the jury.  The trial judge instructed the jury that it could award punitive damages if it found, by a preponderance of the evidence, that defendant "engaged in wilful or wanton conduct ... which shows reckless indifference to the results of an act or reckless indifference to the rights and welfare of others."   The standard articulated in Rawlings requires more than "reckless indifference."   Filasky v. Preferred Risk Mutual Insurance Co., 152 Ariz. 591, 599 n. 3, 734 P.2d 76, 84 n. 3 (1987);  Linthicum, 150 Ariz. at 331, 723 P.2d at 680. 3
                

Gurule purchased "paycheck replacement" individual disability insurance from Illinois Mutual in 1974. The policy provided disability benefits for a maximum of five years. During the first two years following injury, one is "totally disabled" if "completely unable to perform each and...