Lasma Corp. v. Monarch Ins. Co. of Ohio

• Decision Date: 12 May 1987
• Docket Number: Nos. CV-87-0315-P,2,CA-CV,s. CV-87-0315-P
• Citation: 159 Ariz. 55,764 P.2d 1114
• Parties: LASMA CORP., an Arizona corporation; Lasma Arabians, Ltd., a limited partnership; William C. Zekan and Betty Zekan, husband and wife, Plaintiffs/Appellees/Cross-Appellants, v. The MONARCH INSURANCE COMPANY OF OHIO, an Ohio corporation; and Frelinghuysen Livestock Managers, Inc., Defendants/Appellants/Cross-Appellees. 87-0093.
• Court: Arizona Court of Appeals

Page 1114

764 P.2d 1114

159 Ariz. 55

LASMA CORP., an Arizona corporation; Lasma Arabians, Ltd., a limited partnership; William C. Zekan and Betty Zekan, husband and wife, Plaintiffs/Appellees/Cross-Appellants, v. The MONARCH INSURANCE COMPANY OF OHIO, an Ohio corporation; and Frelinghuysen Livestock Managers, Inc., Defendants/Appellants/Cross-Appellees.

Nos. CV-87-0315-PR, 2 CA-CV 87-0093.

Court of Appeals of Arizona,

Division 2, Department B.

May 12, 1987.

[159 Ariz. 56] Lewis and Roca by Foster Robberson, Susan M. Freeman, Phoenix, for plaintiffs/appellees/cross-appellants Lasma.

Rawlins, Burrus, Lewkowitz & Feinstein, P.C. by R. Stewart Halstead, and Jeffrey S. Leonard, Phoenix, for plaintiffs/appellees/cross-appellants Zekan.

Fisher & Smith by H. Richmond Fisher, Phoenix, and Raggio, Jaffe & Kayser by H. Miles Jaffe, New York City, for defendants/appellants/cross-appellees.

OPINION

LACAGNINA, Judge.

Monarch Insurance Company and its managing agent, Frelinghuysen Livestock Managers, Inc. (FLM), appeal from a jury verdict and judgment awarding William and Betty Zekan and Lasma Corporation compensatory and punitive damages, and from orders of the trial court denying motions for judgment n.o.v. and new trial.

The case arises from a claim made on an insurance policy insuring the life of a horse euthanized after the issuance of the policy. Monarch and FLM argue that the trial court improperly instructed the jury on the law in Arizona governing the meaning of a policy condition requiring "sound health" of the insured animal at the commencement of the policy. They also contend that the trial court should have granted their motions for directed verdict on the issue of bad faith and punitive damages and to set aside the award of punitive damages as excessive in relation to the net worth of Monarch and FLM.

Lasma and Zekans argue in their respective cross-appeals that the trial court wrongfully granted a directed verdict on their damage claims for economic interference and emotional distress as a consequence of the insurer's bad faith.

We reverse the judgments for compensatory and punitive damages and remand for new trial.

FACTS

The relevant facts supporting our opinion are as follows. Zekans were the high bidders at a horse auction conducted by Lasma for the purchase of an Arabian mare, *Eroica, for $580,000, $116,000 payable at time of sale and the balance by execution of a five-year note to Lasma. At the drop of the gavel, Zekans purchased a binder on the life of the horse issued by an agent of FLM as agent for Monarch. Specific condition 1 of the policy provided:

At the commencement of this insurance each animal hereby insured must be in sound health and free from any illness, disease, lameness, injury or physical disability whatsoever.

Evidence of *Eroica's health prior to and after the sale caused conflicting expert opinions regarding the existence, severity and relationship of any health problems as they existed 1) prior to and on the date of sale, February 6, 1983; 2) when application for insurance was made on February 17, 1983; 3) when surgery was performed on March 18, 1983, and March 20, 1983; and 4) on the day she was euthanized, April 12, 1983.

The trial court instructed the jury over objections by FLM and Monarch as follows:

The defendants claim that under Specific Condition 1 of the insurance policy they do not owe the insurance proceeds to the plaintiffs because *EROICA was not "in sound health and free from any illness, disease, lameness, injury, or physical disability, whatsoever" on February 6th, 1983.

Under Arizona law this policy condition was satisfied if, as of February 6th, 1983, the Zekans reasonably believed that *EROICA was in sound health. "Sound health," means having no grave, important or serious disease and being free from any ailment that seriously affects the general soundness and healthfulness of the system.

FLM and Monarch offered the following instruction, which was refused:

If you find that the Zekans did not withhold any material information in applying for insurance for *EROICA, you may then consider the Zekans' and Lasma's breach of contract claims.

The Zekans and Lasma have alleged that Monarch breached its contract of insurance with the Zekans when it refused to pay their claim for *EROICA. However, the contract required that *EROICA "must be in sound health and free from any illness, disease, lameness, injury or physical disability whatsoever" on February 6, 1983. "Sound health" means having no grave, important or serious disease and being free from any ailment that seriously affects the general soundness and healthfulness of the system. A horse is unsound from the moment symptoms of disease appear although it may be some time before the disease becomes fully developed.

If Monarch and Frelinghuysen prove by a preponderance of the evidence that * EROICA was not in sound health and free from any illness, disease, lameness, injury or physical disability whatsoever on February 6, 1983, then you must find in favor of Monarch and Frelinghuysen on all of plaintiffs' claims.

This case presents us with a novel problem created by an absence of sufficient precedent interpreting livestock life insurance. There is ample authority to assist an appellate court in deciding human life insurance disputes. Whether this body of law is authority supporting a decision involving animal life insurance is the problem confronting the court in this case. There are differences and similarities between human life insurance and animal life insurance. In Samsill v. American Home Assurance Company, 119 Ariz. 84, 579 P.2d 588 (App.1978), Division One of this court characterized a horse as personal property, and upheld an insurance policy provision limiting the time to sue on the policy because the destruction of the horse was loss of personal property, not governed by the void policy restrictions of A.R.S. § 20-1115. This is an example of one difference recognized by statute and the court's interpretation of the statute.

Zekans cite Illinois Bankers' Life Assurance v. Theodore, 44 Ariz. 160, 34 P.2d 423 (1934), in support of the court's instruction on their reasonable belief concerning *Eroica's sound health. This case and all others cited in the briefs in support of this proposition deal only with statements of opinion by applicants for human life insurance. These cases correctly state the law, which prohibits an insurance company from voiding coverage after the insured event occurs when the opinion of the applicant's health is erroneous because, at the time given, the applicant was suffering from some disease unknown or undetectable. Even though the cases all deal with human life, they are instructive as to the law governing statements of fact or opinion in all applications for insurance. They support the court's instructions to the jury on the statements made in the application for insurance prepared by Zekans after the sale on the issues raised by FLM and Monarch's counterclaim.

However, the cases cited are not authority when applied to a condition precedent in a policy which has been described as "fall of the gavel insurance." On February 6, 1983, Zekans were not owners of the horse until they became high bidders. They made no statements regarding the health of *Eroica before obtaining the binder. They gave no opinion concerning the health of the horse upon which the binder was issued. Therefore, if the Zekans have no claim under the policy, it is...