Paiz v. State Farm Fire and Cas. Co.

• Decision Date: 29 July 1994
• Docket Number: No. 20446,20446
• Parties: Ronald PAIZ and Bernadine Paiz, Plaintiffs-Appellees, and Cross-Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY, a foreign corporation, and Robert Ellsworth, Defendants-Appellants, and Cross-Appellees.
• Court: New Mexico Supreme Court

Page 300

880 P.2d 300

118 N.M. 203

Ronald PAIZ and Bernadine Paiz, Plaintiffs-Appellees, and Cross-Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY, a foreign corporation and Robert Ellsworth, Defendants-Appellants, and Cross-Appellees.

No. 20446.

Supreme Court of New Mexico.

July 29, 1994.

Rehearing Denied Aug. 17, 1994.

[118 N.M. 204] Miller, Stratvert, Torgerson & Schlenker, P.A., Alice Tomlinson Lorenz, Nancy Augustus, Albuquerque, for appellants and cross-appellees.

The Branch Law Firm, Turner W. Branch, Brian K. Branch, Arthur Solon, Albuquerque, for appellees and cross-appellants.

Sager, Curran, Sturges & Tepper, P.C., C. Kristine Osnes, Albuquerque, for amicus curiae, Defense Lawyers Ass'n.

OPINION

MONTGOMERY, Chief Justice.

Ronald and Bernadine Paiz ("the Paizes" or "Plaintiffs") sued State Farm Fire and Casualty Company and Robert Ellsworth, the agent through whom they purchased a policy of hazard insurance from State Farm ("Defendants"), on several claims arising from State Farm's denial of payment for damage to a building destroyed by fire. The Paizes won a jury verdict of $380,000 in compensatory damages against both Defendants and $485,000 in punitive damages against State Farm. The trial court entered judgment on the verdict, awarding Plaintiffs the damages assessed by the jury, along with prejudgment interest. Defendants appeal from the judgment in its entirety, and Plaintiffs cross-appeal from part of it.

Defendants' appeal is based principally on the grounds that the jury's verdict is internally inconsistent and that the award of punitive damages rests on a legally insufficient basis. (Other grounds are also asserted; these will be discussed in the course of this opinion.) We basically agree with Defendants' position, but do not agree that it requires reversal of the entire judgment. We affirm the compensatory-damage award against State Farm, reverse the punitive-damage award, and reverse the judgment against Ellsworth. In our discussion of the punitive-damages issue, we hold that such an award for a breach of contract may no longer be based solely on the breaching party's "gross negligence" in failing to perform the contract.

I.

In 1984, the Paizes purchased a parcel of land in Albuquerque and subsequently divided it into two tracts: Tract A, on which seven apartment buildings were located, and Tract B, where the structure that is the subject of this dispute--a defunct nightclub that the Paizes were renovating into an office building--was situated. Mr. Paiz contacted Ellsworth, through whom he had obtained insurance on virtually all his properties, seeking to obtain coverage for the tracts, and Ellsworth visited the property. According to Paiz's testimony, Ellsworth knew of Paiz's plans to remodel the office building; Paiz told Ellsworth that he wanted insurance for the entire property, including the office building; and Ellsworth indicated that he would provide coverage for the entire project. Paiz provided Ellsworth with a plot plan which showed the seven apartment buildings on Tract A and the office building on Tract B. The seven apartment buildings were numbered consecutively in thick, conspicuous ink; the office building was not highlighted. Ellsworth testified he had thought that Paiz was going to tear down the building on Tract B and only wanted coverage for the apartment buildings on Tract A.

When Paiz received the policy and declarations page, there apparently was no attached schedule of the buildings that were covered. The declarations page described the insured premises with reference to the street address of the parcel (which Paiz took as encompassing both tracts) and stated that it provided "blanket coverage." From this declarations page and his communications with Ellsworth, Paiz assumed the office building was covered. This assumption was reinforced when the building was burglarized in March 1986 and, after Paiz submitted a claim to Ellsworth, State Farm paid for the losses to the building. Also, when a car hit a gas meter connected to the office building in August 1988, State Farm paid the damages; and when the office building was vandalized in April 1989, Paiz reported the broken storefront windows to Ellsworth and Ellsworth instructed him to acquire an estimate and submit it to State Farm. Ellsworth testified that Paiz had led him to believe that all of these claims pertained to the apartment buildings on Tract A and that he never intended that State Farm would pay any claim pertaining to Tract B. For example, the loss report on the burglary that Ellsworth prepared and Paiz signed stated that the burglar had "broken into [an] apartment."

On June 21, 1989, a fire destroyed the office building on Tract B. Paiz reported the fire to Ellsworth the next day; and Ellsworth, after speaking with Paiz and reviewing the documents he had pertaining to Paiz's policy, submitted a claim to State Farm's claims department. The claims department investigated the claim by visiting and photographing the site, acquiring drawings and blueprints, speaking with Ellsworth a number of times, taking a recorded statement from Paiz, and gathering underwriting records. For some reason, the claims department failed to obtain the claim reports for the three previous claims Paiz had made for damage to the office building. Noting that the building was not listed on the schedule of covered buildings and ascertaining from Ellsworth that he had never intended to include the building under the policy, the claims department concluded that the building was not covered and denied the claim. The claims department was also concerned because an Albuquerque Fire Department investigator had concluded that the fire had been intentionally set and because the building had been vacant and on the market for five or six months--facts that suggested to the claims department that Paiz might have been linked with the fire.

On October 2, 1989, the Paizes sued State Farm and Ellsworth on a number of different theories revolving around State Farm's denial of the claim. The case was tried to a jury in November 1991. The judge submitted the case to the jury based on the following claims: (1) As against State Farm, a claim for breach of contract on the theory that Plaintiffs' insurance policy covered the office building or that State Farm was estopped from denying coverage, along with a claim for negligence on the theory that State Farm failed to pay Plaintiffs' loss within a reasonable time or that it failed to exercise ordinary care in investigating whether the building was covered; and (2) as against Ellsworth, claims that he had negligently failed to obtain adequate insurance coverage for Plaintiffs' property, that he had negligently misrepresented the extent of Plaintiffs' coverage, and that he had violated the Unfair Practices Act (NMSA 1978, Sections 57-12-1 to -21 (Orig.Pamp.)), by making false or misleading representations in connection with his sale of insurance to Plaintiffs. The court also submitted, as against State Farm only, Plaintiffs' claim for punitive damages--which could be awarded if, and only if, the jury should find that State Farm's conduct was grossly negligent.¹ The court refused to submit a claim for punitive damages against Ellsworth. Additionally, in its instruction informing the jury of the parties' claims and defenses, the court described Defendants' various defenses, including, with respect to Plaintiffs' claims of negligence, the defense that Plaintiffs themselves had been negligent (i.e., comparatively negligent) in various respects.

Before instructing the jury, the trial court ruled that Plaintiffs had presented no evidence that State Farm had acted with bad faith and directed a verdict against them on that claim. Along with its instructions, the court submitted a special verdict form to the jury, asking whether State Farm had breached its contract with Plaintiffs, whether Ellsworth had violated the Unfair Practices Act, whether either State Farm or Ellsworth had been negligent, whether either Defendant had made a negligent misrepresentation, and whether each Defendant's conduct had proximately caused damage to Plaintiffs. The jury answered "yes" to all these questions. In response to a question requesting the jury to compare the negligence of the various parties, the jury attributed negligence as follows: State Farm, 50%; Robert Ellsworth, 35%; and Ronald Paiz, 15%. In the special verdict form the court informed the jury that the court would multiply the percentage of each Defendant's fault by the Plaintiffs' total damages and then enter judgment for the Plaintiffs against each Defendant in the proportion of damages found as to that Defendant.

Pursuant to the court's damage instruction, the jury found the total amount of Plaintiffs' compensatory damages to be $380,000. The jury also found that the acts and omissions of State Farm, its agents, employees, or representatives, were grossly negligent and that Plaintiffs were entitled to an award of punitive damages against State Farm in the sum of $485,000. The court subsequently entered judgment against the Defendants for $380,000 in compensatory damages without any reduction for comparative negligence, plus prejudgment interest of approximately $86,700 (along with costs of $7,320), and against State Farm for $485,000 in punitive damages.

Defendants appeal from the judgment on various grounds, and Plaintiffs cross-appeal on the ground that the judgment fails to include an award of attorney's fees against Ellsworth under the Unfair Practices Act. We affirm the judgment with respect to the award of compensatory damages (plus prejudgment interest² and costs) against State Farm and with respect to the trial court's refusal to award attorney's fees against Ellsworth. We reverse the judgment with respect to the damages (plus costs and interest) assessed against Ellsworth and with respect to the award of punitive damages against...