Jessen v. National Excess Ins. Co.

• Decision Date: 22 June 1989
• Docket Number: No. 17197,17197
• Citation: 108 N.M. 625,776 P.2d 1244,1989 NMSC 40
• Parties: Larry JESSEN and Michael McCoun, Plaintiffs-Appellees, v. NATIONAL EXCESS INSURANCE COMPANY, a California corporation, and Ruth K. Corbett, Individually, Defendants-Appellants.
• Court: New Mexico Supreme Court

Page 1244

776 P.2d 1244

108 N.M. 625

Larry JESSEN and Michael McCoun, Plaintiffs-Appellees, v. NATIONAL EXCESS INSURANCE COMPANY, a California corporation, and Ruth K. Corbett, Individually,

Defendants-Appellants.

No. 17197.

Supreme Court of New Mexico.

June 22, 1989.

Rehearing Denied Aug. 8, 1989.

[108 NM 626] Civerolo, Hansen & Wolf, W.R. Logan, Albuquerque, for defendants-appellants.

Roy A. Anuskewicz, Jr., Turner W. Branch, Albuquerque, for plaintiffs-appellees.

OPINION

RANSOM, Justice.

Seeking compensatory and punitive damages, Larry Jessen and Michael McCoun sued National Excess Insurance Company (National) for breach of contract and bad faith failure to pay a first-party claim. The jury returned a verdict in favor of Jessen and McCoun, awarding $25,000 compensatory and $75,000 punitive damages against National. The trial court awarded attorney fees and costs to Jessen and McCoun. National appeals. We affirm.

Jessen and McCoun first were covered as insureds by National when they rented a Cessna 310 airplane in February 1985. To be covered under the lessor's policy with National, Jessen was required to provide information about his experience as a pilot. By telephone, Jessen told Ruth Corbett, an agent for National, that he had a current medical certificate and approximately 1200 hours total flying time. After Jessen took a successful check ride in the Cessna 310, he and McCoun were added to the lessor's owner policy.

In March 1985, Jessen and McCoun decided to buy the Cessna 310. Jessen telephoned Corbett and told her that he and McCoun wanted to continue the same coverage the previous owners had under their National policy. The policy provided $25,000 coverage for physical damage to the airplane. On April 1, Jessen went to Corbett's office, signed an application, and paid one-third of the first year's premium. Two days later, with McCoun as his passenger, Jessen crashed the airplane on take-off from a dirt airstrip at Ghost Ranch, New Mexico. Although Jessen and McCoun received only minor injuries, the airplane was destroyed. Jessen and McCoun took nothing with them from the airplane after it crashed; but within ninety minutes two Forest Service employees searched the airplane and retrieved a blue bag, which they left at the Ghost Ranch museum for safekeeping.

National hired an independent insurance adjuster, Bill McManaman, to investigate the accident. McManaman searched for but was unable to locate the pilot logbook, which Jessen claimed was in the blue bag at the time of the crash. The logbook contained the only single source verifying that Jessen had logged 1200 flight hours. It was never recovered.

Both Jessen and McCoun gave sworn statements about the circumstances of the crash. Jessen signed an Airman's Records Release authorizing McManaman to obtain copies of his records from the FAA. Jessen, through his attorney, also offered to give National an affidavit that the 1200 flight hours he stated in his application for insurance from National was an accurate representation of the hours recorded in the missing pilot's logbook.

On October 1, 1985, National offered to settle the claim for $11,000. Jessen and McCoun refused the settlement offer and, on December 27, 1985, filed this lawsuit against National.¹ When the case came to trial two years after the crash of the airplane National still had neither denied nor paid Jessen and McCoun's claim.

The jury was instructed, to establish the claim of breach of contract, Jessen and McCoun had the burden of proving National failed to pay the claim as required by the terms of the policy and in deviation from acceptable standards of the insurance industry. The jury also was instructed, to establish the claim of bad faith,² Jessen and McCoun had the burden of proving National's failure to pay the claim within a reasonable period of time. Bad faith was defined as a refusal to pay or delay in paying the claim for frivolous or unfounded reasons. National does not contest the compensatory award in the amount of physical damage covered by the policy, to which plaintiffs limited their claim under both contract and tort. It argues, however, that the evidence did not warrant an instruction on punitive damages.

Instruction on punitive damages not error. Bad faith supports punitive damages upon a finding of entitlement to compensatory damages. See United Nuclear Corp. v. Allendale Mut. Ins. Co., 103 N.M. 480, 485, 709 P.2d 649, 654 (1985). Arguably, if it is conceded that substantial evidence supported instructions on compensatory damages for bad faith, then it supported instructions on punitive damages for bad faith. Yet, here, punitive damages were sought exclusively for reckless or grossly negligent conduct, and we limit our considerations to evidence of such conduct. As we discuss below, if supported by substantial evidence, such conduct would justify an award of punitive damages under either the contract or tort claim. Further, under either contract or tort, as the court instructed the jury in this case, an insurer has a right to refuse a claim without exposure to punitive damages if it has a reasonable ground to believe a meritorious defense exists to the claim. Id.; State Farm Gen. Ins. Co. v. Clifton, 86 N.M. 757, 527 P.2d 798 (1974).

National argues it acted reasonably in delaying payment or denying the claim until it could verify Jessen had the 1200 hours of flight time as represented. We believe insofar as National argues it acted reasonably, it attempts to have this Court reweigh matters decided by the jury, and this we decline to do. See Hort v. General Elec. Co., 92 N.M. 359, 588 P.2d 560 (Ct.App.1978), cert. denied, 92 N.M. 353, 588 P.2d 554 (1979); Curtiss v. Aetna Life Ins. Co., 90 N.M. 105, 107, 560 P.2d 169, 171 (Ct.App.), cert. denied, 90 N.M. 7, 558 P.2d 619 (1976).

McManaman testified that, in the two years between the crash and trial, he spent only seventy hours investigating Jessen and McCoun's claim. Moreover, despite the fact McManaman knew of Jessen's previous flying experience and knew of potential sources of information that might have allowed him to verify the number of flight hours claimed, his check of such sources was incomplete. Additionally, while some of the sources he did check appeared to have been biased against Jessen, McManaman did not attempt to corroborate the information provided by these sources.

The jury also heard testimony from Mr. Wallace, vice president of the company that did the underwriting for National. Wallace testified that if Jessen had been able to produce the logbook of his flight time National probably would have paid the claim without question. Acknowledging that a pilot's logbook may often be lost or destroyed in a crash, Wallace testified National nonetheless believed it should not pay the claim until Jessen's flight experience was verified positively by McManaman. The plaintiffs' expert, Mr. Allen, countered that the conduct of National in delaying payment of the claim for two years pending the outcome of McManaman's investigation was not in keeping with accepted industry standards because it had "put an inappropriate and unduly harsh burden on the insured." Allen testified that McManaman's investigation methods had not produced results of sufficient reliability or conclusiveness to justify a denial of the claim. No misrepresentation by Jessen was established by the investigation, which amounted to no more than a failure to verify Jessen's claimed flying experience, to which Jessen testified in detail.

Given the evidence adduced at trial, we conclude the trial court correctly instructed the jury on the issue of punitive damages. Cf. Curtiss, 90 N.M. at 109, 560 P.2d at 173 (punitive damages properly awarded when insurer insisted plaintiff take physical examination before paying claim for medical expenses, knowing that plaintiff was unable to take examination due to heart attack out of which expenses arose); Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 620 P.2d 141, 169 Cal.Rptr. 691 (1979) (inadequate investigation supported award of punitive damages).

In New Mexico, punitive damages have been awarded for breach of contract when the defendant's conduct was malicious, fraudulent, oppressive, or committed recklessly with a wanton disregard for the plaintiff's rights. Green Tree Acceptance, Inc. v. Layton, 108 N.M. 171, 173, 769 P.2d 84, 86 (1989) (quoting Hood v. Fulkerson, 102 N.M. 677, 680, 699 P.2d 608, 611 (1985)); see also Clifton; Curtiss. In an appropriate case, punitive damages may also be awarded when the defendant's conduct was grossly negligent. Valdez v. Cillessen & Son, Inc., 105 N.M. 575, 734 P.2d 1258 (1987) (personal injury); Valdez v. Warner, 106 N.M. 305, 742 P.2d 517 (Ct.App.), cert. quashed, 106 N.M. 353, 742 P.2d 1058 (1987) (negligent employment); see generally, J. McCarthy, Punitive Damages in Bad Faith Cases Sec. 1.51 (4th ed. 1987) (award of punitive damages in bad faith cases depends on jurisdiction's general standard for such award). The words describing culpable conduct are to be taken in the disjunctive; if, for example, a defendant acts recklessly, it is unnecessary to show intentional misconduct. Green Tree Acceptance. The Uniform Jury Instructions provide that the appropriate language should be selected as supported by the evidence. SCRA 1986, 13-1827.

Whether under a theory of contract or tort, we believe submission of the issue of punitive damages on language of either gross negligence or reckless disregard for the interests of the insured is especially appropriate when, as here, the evidence shows the insurer utterly failed to exercise care for the interests of the insured in denying or delaying payment on an insurance policy. Here, pursuant to the Uniform Jury Instructions, the jury also was instructed that the limited purpose of punitive damages is to punish wrongdoers and dissuade similar conduct in the future, that it must take into account...