Hawkins v. Allstate Ins. Co., CV-86-0010-PR

• Decision Date: 26 February 1987
• Docket Number: No. CV-86-0010-PR,CV-86-0010-PR
• Citation: 152 Ariz. 490,733 P.2d 1073
• Parties: Jack Randy HAWKINS and Cynthia Hawkins, husband and wife, Plaintiffs- Appellants, v. ALLSTATE INSURANCE COMPANY, a foreign corporation, and Does I through V, Defendant-Appellee.
• Court: Arizona Supreme Court

Page 1073

733 P.2d 1073

152 Ariz. 490

Jack Randy HAWKINS and Cynthia Hawkins, husband and wife, Plaintiffs- Appellants, v. ALLSTATE INSURANCE COMPANY, a foreign corporation, and Does I through V, Defendant-Appellee.

No. CV-86-0010-PR.

Supreme Court of Arizona.

Feb. 26, 1987.

As Amended March 4, 1987.

Reconsideration Denied April 7, 1987.

Thur, Dawson & O'Sullivan by Calvin C. Thur, Scottsdale, for plaintiffs-appellants.

Harrison & Lerch, P.C. by Mark I. Harrison, Douglas L. Christian, Phoenix, for defendant-appellee Allstate Insurance Company.

GORDON, Chief Justice.

Jack and Cynthia Hawkins (Hawkins) petitioned this court to review a decision of the court of appeals reversing the trial court's grant of a motion for judgment notwithstanding the verdict in favor of Allstate Insurance Company (Allstate) and affirming the trial court's grant of Allstate's motion for a new trial. Hawkins v. Allstate Insurance Company, No. 1 CA-CIV 6881 (Ariz.Ct.App. filed Aug. 13, 1985). We granted review to determine the admissibility of an insurer's past claims practices and policies and to examine the quantum of proof necessary to sustain an award of punitive damages. Rule 23, Ariz.R.Civ.App.P., 17A A.R.S. In its supplemental brief, Allstate questioned the constitutionality of the manner by which punitive damages are imposed. We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

I. FACTS

In July 1979, the Hawkins purchased a new Chevrolet Monte Carlo, loaded with options, for approximately $8,000. Five months after purchasing the Monte Carlo, Cynthia Hawkins was involved in an automobile accident that virtually demolished the car.

The Hawkins were insured by Allstate under a standard automobile liability policy. That policy included a collision provision limiting Allstate's liability to either paying the actual cash value of the car at the time of the loss or to replacing the car with one of like kind and quality.

The Hawkins reported the accident to Allstate the day it happened, December 6, 1979. Within a few days, Allstate classified the car as a "total loss" after determining that the actual cash value of the car was less than the estimated repair cost. The Hawkins' claim was transferred to a total loss adjuster, Paul Schwenk.

According to Allstate's witnesses, the actual cash value of a car is its market value. To determine actual cash value, Allstate's total loss adjusters first establish a guide book value by calculating the high retail Blue Book value of the car and its optional equipment minus deductions for the car's condition immediately prior to the loss. Such deductions represent amounts needed to bring the car to average retail condition and include deductions for the condition of the exterior of the car, paint, bumpers, upholstery, glass, tires, and clean up. The adjusters then perform a "market verification" by asking three or four local dealerships to estimate the insured car's worth and sometimes by checking the selling price of similar cars advertised in local car magazines. From the range of values resulting from this procedure, Allstate's adjusters determine a specific dollar amount as the actual cash value, apparently relying most heavily on the low estimates received from local dealerships.

In the Hawkins' case, Schwenk determined that the Blue Book value of the Hawkins' car was $6,545. Schwenk did not examine the car and failed to consider many of the accessories on the insured car. From this figure, Schwenk deducted a $35 clean-up fee, which resulted in a guide book value of $6,510. Four dealer estimates of the value of a similar car ranged from $6,150 to $6,300. These estimates were based on Schwenk's description of the car and did not reflect all the options on the insured car. The actual cash value recorded in the Hawkins' claim file was $6,165 and was accompanied by the following explanation:

Dealers have replacements, similar equipment but more miles; say one like this worth $6,200. Deduction for reconditioning. ACV $6,165.

Schwenk first contacted the Hawkins on December 13, 1979, one week after the accident. At that time, the Hawkins requested that Allstate provide them with a replacement car, rather than a sum of money equal to the actual cash value of their "totalled" car. Schwenk sent them to look at four similar Monte Carlos at a local dealership. Schwenk would not let the Hawkins have the car they selected because it was $300 more than Allstate was willing to pay. ¹ Instead, Schwenk selected one of the other cars and insisted that the Hawkins take it. The Hawkins refused because the car Schwenk selected had few of the options their insured car had and was not comparable in either quality or gas mileage.

Four days after Schwenk rejected the car the Hawkins selected as a replacement, Schwenk told the Hawkins he would pay them $4,500 in cash unless they took the car he had selected. The Hawkins refused, explaining that they had paid over $8,000 for their car five months earlier and could not purchase a comparable car for $4,500. Later, during the same conversation, Schwenk threatened to deliver a check for $5,000.

By December 20, the Hawkins, desperate for a car, accepted a check for $6,471, payable to Hawkins and a local dealership, to purchase the car Schwenk had selected. It had been approximately a week since the Hawkins viewed the car, and when Jack Hawkins went to pick up the car, he again realized the cars were not comparable and called Schwenk from the dealership to tell him he did not want the car. After a lengthy, heated discussion and assurances from Schwenk that the replacement car would be brought up to the insured car's standards after the holidays, Jack Hawkins reluctantly gave the check to the dealer.

The replacement car lacked power windows, had a larger engine and got worse gas mileage, had dealer-installed (not factory-installed) cruise control, and lacked several styling features of the original car. After the holidays, Allstate sent an additional $125 to the Hawkins to install power windows, but the Hawkins were unable to get the work done for less than $600. Allstate refused to make any other adjustments and closed the file. Although no evidence of the replacement vehicle's actual cash value was presented, Allstate conceded on appeal that the list price of the replacement vehicle was at least $161.45 less than that of the insured car.

The Hawkins sued Allstate for fraud and bad faith. At trial, three former Allstate employees testified about Allstate's claims procedures and practices. None had any direct experience with the Hawkins' claim. In addition, Schwenk and his supervisor testified.

The trial judge directed a verdict in favor of Allstate on the fraud count but submitted the bad faith claim to the jury to consider liability for both compensatory and punitive damages. The jury awarded the Hawkins $15,000 compensatory damages and $3.5 million punitive damages. The trial court subsequently granted Allstate's motion for judgment notwithstanding the verdict on the ground that the evidence presented at trial was insufficient to sustain the verdict. In the alternative, the trial court granted Allstate's motion for a new trial on five grounds. The court of appeals held that the trial court erred in entering a judgment notwithstanding the verdict, but affirmed the grant of a new trial for two reasons: 1) the testimony of a former Allstate claims adjuster was improperly admitted, and 2) the amount of the punitive damages award was not justified by the evidence. ² Hawkins, slip op. at 11, 16.

II. ADMISSIBILITY OF INSURER'S PAST CLAIMS PRACTICES

During trial, Hawkins called three former Allstate employees to testify about Allstate's procedures for handling total loss claims. Over Allstate's objection on the grounds of relevancy, each testified concerning Allstate's method of determining the amount of an insured's loss (the actual cash value of the property) and general company policies regarding claims handling.

One former claims representative, Pat Paterno, testified about Allstate's claims practices in the Phoenix office at the time the Hawkins claim was processed. Although she did not work on the Hawkins claim, Paterno testified that as a claims representative Allstate instructed her to automatically make certain deductions in determining a car's actual cash value. Specifically, she testified that adjusters were instructed to deduct an extra $5 for tire wear and always to deduct a $35 cleaning fee, regardless of the car's cleanliness. She testified that her supervisors explained that a $5 deduction "wouldn't mean much to an insured or claimant, but $5 on every claim would mean a lot to the company."

Another former claims representative, Jan Mauritz, was employed by Allstate in Tacoma, Washington from 1978 to 1981. Like Paterno, Mauritz testified that he was instructed automatically to make certain deductions, including a cleaning fee, in valuing a "total loss." He testified that he was instructed to offer an insured the lowest value of a claim because the insured probably would take it in order to get his car fixed quickly. He also testified that Allstate used the adjusters' "severity rating," a ratio of total dollars paid out in claims over the number of claims, to evaluate adjusters' performance and promotion potential. Mauritz opined that the claims-handling practices and policies to which he testified were followed throughout the company and not merely in the Tacoma office because they were promulgated through corporate literature and policy statements. In his opinion, these practices "may lead to what one may call chiseling, to calculated offers substantially below fair value...."

The third former Allstate employee that testified, William Boettcher, was employed by Allstate as a claims examiner in Phoenix from 1962 to 1964, 15 years before the Hawkins' claim. He testified that he was instructed automatically to...