Richards v. Allstate Ins. Co.

• Citation: 693 F.2d 502
• Decision Date: 13 December 1982
• Docket Number: No. 82-4006,82-4006
• Parties: Larry D. RICHARDS, Plaintiff-Appellee, Cross-Appellant, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellant Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 502

693 F.2d 502

Larry D. RICHARDS, Plaintiff-Appellee, Cross-Appellant, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellant Cross-Appellee.

No. 82-4006.

United States Court of Appeals, Fifth Circuit.

Dec. 13, 1982.

Floyd G. Hewitt, Jr., Biloxi, Miss., Harry R. Allen, Gulfport, Miss., for defendant-appellant.

William L. Denton, Donald C. Dornan, Jr., Biloxi, Miss., William C. Walker, Jr., University, Miss., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Mississippi.

Before CLARK, Chief Judge, RUBIN and WILLIAMS, Circuit Judges.

PER CURIAM:

Larry Richards filed this diversity suit against Allstate Insurance Company, seeking actual damages for injuries he sustained in a motorcycle accident and punitive damages for Allstate's bad-faith refusal to honor his claim for those injuries. The jury returned a verdict of $2,500 in compensatory damages and $750,000 in punitive damages. The district judge subsequently ordered a remittitur of $375,000, which Richards accepted, albeit reluctantly. Allstate contends here that the award of punitive damages was without basis in Mississippi law. Richards cross-appeals, challenging the propriety of the remittitur. We affirm.

Mississippi law requires all automobile insurance policies to provide at least $10,000 coverage for personal injuries sustained in accidents caused by motorists who have no insurance. See Miss.Code Ann. Sec. 83-11-101. The focal point of this litigation is Exclusion 2 of the policy issued by Allstate to Richards, which attempted to limit such coverage. This provision, which was for many years part of Allstate's standard Mississippi automobile policy, totally excluded from uninsured motorist coverage injuries suffered by an insured while occupying a vehicle owned by him but not specified as insured under his policy.

Allstate retained Exclusion 2 in its standard policy until 1981 despite the fact that in 1973 the Mississippi Supreme Court struck down a similar exclusion in another company's policy in Lowery v. State Farm Mutual Automobile Insurance Co., 285 So.2d 767 (Miss.1973). Allstate officials admittedly were aware of the Lowery decision and its fatal effect on Exclusion 2. They did not, however, delete the exclusion from their standard policy. Nor did they make any effort to inform their insureds or their sales agents of the effect of Lowery. Instead, mid-level claims personnel were instructed to honor claims that otherwise would have been denied in reliance on Exclusion 2. Unfortunately, as the result of a series of mistakes, this procedure failed in Mr. Richards' case and his claim was denied.

The incident that gave rise to Richards' claim occurred in August of 1977. Early in that month he was injured in a motorcycle accident caused by the negligence of an uninsured motorist. After Richards contacted an Allstate sales agent in an unsuccessful attempt to recover for the damages to his motorcycle, he brought his accident to the attention of Pete Quave, who worked for Richards' retained counsel. Quave was an ex-employee of Allstate and had handled a similar claim while working there. He contacted Allstate on Richards' behalf and spoke with Marinella Davis, one of Allstate's telephone claims handlers, describing the accident and the terms of Richards' policy, including the fact that the motorcycle was not an insured vehicle. After discussing the case with her supervisor, Margaret Kessler, Davis informed Quave that Allstate planned to deny coverage in reliance on Exclusion 2. At this point Quave brought the Lowery decision to Davis' attention and urged her to reconsider. He then talked to Kessler, again emphasizing the effect of Lowery on Richards' claim. Quave also asked to speak to Cecil Snodgrass, who he knew was aware of Lowery. Because Snodgrass was unavailable, Quave asked Kessler to discuss the case with him. The message somehow got garbled in transmission, and Snodgrass concurred in the denial. After receipt of Allstate's letter of denial, Richards filed suit.

Allstate contends first that this is not a proper case for an award of punitive damages. The leading Mississippi case on punitive damages in an insurance claim setting is Standard Life Ins. Co. of Indiana v. Veal, 354 So.2d 239 (Miss.1978). There the court recognized that punitive damages are not to be awarded unless the breach of the insurance contract is attended by an intentional wrong or such gross negligence as to amount to an independent tort. But the court allowed punitive damages, finding that the company had denied a legitimate claim for a reason clearly contrary to the express provisions of the policy. The court equated gross negligence with a refusal to pay not based on a legitimate or arguable reason.

This circuit has recognized Veal 's two-part "legitimate or arguable reason" rule to mean that the absence of (1) a justifiable reason, or (2) an arguable basis under Mississippi law, for refusal to pay a valid claim creates a jury issue on punitive damages. Black v. Fidelity & Guaranty Insurance Underwriters, 582 F.2d 984, 990-91 (5th Cir.1978). In this case we conclude that under Veal submission of the punitive damages issue to the jury was compelled by the proof.

At trial Richards alleged that three separate but related actions of Allstate justified a punitive award: (1) retention of the invalid Exclusion 2 in the standard Allstate policy; (2) failure to provide an adequate procedure to prevent erroneous denials; and (3) denial of Richards' claim itself. The...