Sloan v. State Farm Mut. Auto. Ins. Co., No. 02-2050.

• Decision Date: 04 March 2004
• Docket Number: No. 02-2059.,No. 02-2050.
• Citation: 360 F.3d 1220
• Parties: Joseph Edward SLOAN; Byron Z. Moldo, Chapter 7 Trustee—In re Joseph Edward Sloan, Debtor, Plaintiffs-Appellants/Cross-Appellees, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

360 F.3d 1220

Joseph Edward SLOAN; Byron Z. Moldo, Chapter 7 Trustee—In re Joseph Edward Sloan, Debtor, Plaintiffs-Appellants/Cross-Appellees, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellee/Cross-Appellant.

No. 02-2050.

No. 02-2059.

United States Court of Appeals, Tenth Circuit.

March 4, 2004.

Stephen L. Tucker, Tucker Law Firm, Santa Fe, NM (Lisa K. Vigil, Vigil and

Vigil, and Steven Vogel, Albuquerque, NM, with him on the briefs), for Plaintiffs-Appellants/Cross-Appellees.

Terry R. Guebert (Ramona G. Bootes, with him on the brief), Guebert, Bruckner & Bootes, P.C., Albuquerque, NM, for Defendant-Appellee/Cross-Appellant.

Before KELLY, PORFILIO, and BRISCOE, Circuit Judges.

PAUL KELLY, JR., Circuit Judge.

Plaintiffs-Appellants/Cross-Appellees Sloan (Debtor and Insured) and Moldo (Bankruptcy Trustee) appeal from the district court's judgment awarding $560,000 in compensatory damages based upon breach of contract, bad faith failure to settle, and a violation of the New Mexico Insurance Practices Act. Defendant-Appellee/Cross-Appellant State Farm (Insurer) also appeals contending that several trial errors occurred. We affirm the judgment on liability, reverse the judgment insofar as damages and remand for a new trial on compensatory and punitive damages.

Background

The insured and his family were traveling eastbound on I-40 near Grants, New Mexico, during snowy weather when his vehicle crossed into the westbound lane, causing a head-on collision with the Shelton family. Mrs. Shelton was seriously injured. The Sheltons' lawyer offered to settle the claims of the family members for $300,000. Ultimately, the family members sued the insured. Prior to trial, the claims of the insured's two children were settled (for $35,001, and $20,001, respectively). The claims of Mr. and Mrs. Shelton were tried to a jury, resulting in judgments against the insured for $49,500 and $495,000, respectively. State Farm paid the $49,500 judgment, but only paid $100,000 of the other judgment, resulting in an excess judgment of $395,000.

A key dispute in this case pertains to the insured's policy limits. The insurer maintains that the policy issued, designated policy form # 9805.5, limited coverage for bodily injury to $100,000 per person, and $300,000 per accident involving two or more persons, with the per accident limits subject to the per person limits. Thus, according to the insurer, only $100,000 of coverage was available to compensate Mrs. Shelton, the most seriously injured victim.

Early in the underlying litigation, the Sheltons' attorney obtained a certified copy of the policy from the insurer. That policy form is shown as # 9805.3 and is different from what the insurer now relies upon. The certified policy contains $100,000/$300,000 limits, however, the provision containing those limits had been held patently ambiguous by a Washington state court. Haney v. State Farm Ins. Co. 52 Wash.App. 395, 760 P.2d 950, 952-53 (1988). Construing the contract in favor of the insured, the Haney court concluded that the per accident limits were not subject to the per person limits, resulting in an interpretation that renders the $100,000 per-person limit unenforceable in favor of the $300,000 limit. Id.; see also Andrews v. Nationwide Mut. Ins. Co., 124 N.H. 148, 467 A.2d 254, 258 (1983).

The Sheltons' attorney notified the insurer of the ambiguous policy language in the context of a $300,000 demand. The insurer replied that it had certified the wrong policy (Form #9805.3) and that a later policy (Form #9805.5), one that remedied the ambiguous language, was actually issued. Whether the change was the correction of an inadvertent error or an attempt to prevent the insured from exercising his contractual rights was the subject of the federal court trial. It is clear, however, that the insurer was well aware of the potential for an excess judgment against its insured.

On appeal, Plaintiffs contend that the district court erred in not submitting (1) punitive damages on the bad faith claim to the jury, because (2) the evidence supported compensatory damages and (3) there was sufficient evidence for punitive damages. Plaintiffs also object to the district court's (4) ordering remittitur without giving the Plaintiffs the option to consent or to have a new trial on damages. Defendant contends that (1) Plaintiffs were not entitled to have punitive damages submitted to the jury because they failed to object to the jury instructions which omitted this issue, (2) the compensatory award will not support the necessary finding for punitive damages, and (3) the evidence does not support punitive damages. Defendant agrees that (4) remittitur requires that the plaintiff be given an option to accept the remittitur or a new trial on damages. In its cross-appeal, Defendant argues that (5) the jury instructions and verdict form were faulty because they failed to prohibit double recovery, (6) the remittitur was inadequate to cure this problem, (7) the visiting district judge who presided at the trial improperly rushed it, failed to timely advise Defendants of the need to summarize depositions (the court would not allow depositions to be read) while so advising the Plaintiffs, and made derogatory and negative comments about defense counsel and his evidence throughout the trial. Defendant seeks a new trial on compensatory damages only, or in the alternative, a new trial on liability and damages should we accept its contention that it was prejudiced by the district judge's conduct towards it. See Aplee. Br. at 58-59. Defendant urges this court to uphold the district court's grant of judgment as a matter of law (JMOL) on the punitive damages claim.

Discussion

We stayed these appeals pending resolution of a certified question of law on the punitive damages issue addressed to the New Mexico Supreme Court. Sloan v. State Farm Mut. Auto. Ins. Co. (In re: Sloan), 320 F.3d 1073 (2003). We now vacate that stay and proceed to the merits. Obviously, we were not persuaded by Defendant's contention that Plaintiffs forfeited the punitive damages issue by failing to object to the jury instructions and the verdict form that omitted the issue. See Fed.R.Civ.P. 51.¹ The district court granted JMOL on the punitive damages claim at the close of the Plaintiffs' case, reconsidered the issue after the Defendant's case upon Plaintiff's motion and adhered to its original ruling. Aplt.App. 653-654, 721. Thus, the district court made a legal determination, albeit on a factual issue and without the guidance we now have from the New Mexico Supreme Court, that punitive damages for bad faith required a culpable mental state and that was lacking here. The issue having been raised and definitively ruled upon, it was not forfeited. See City of St. Louis v. Praprotnik, 485 U.S. 112, 119-20, 108 S.Ct. 915, 99 L.Ed.2d 107 (1988); E.R. Squibb & Sons, Inc. v. Lloyd's & Cos., 241 F.3d 154, 167 (2d Cir.2001). In granting the motion for JMOL, the district court explained that the case was "nothing more than a breach of a contract by an insurance company." Aplt.App. 654. At the close of the evidence, however, the case was submitted to the jury on three theories of liability including bad faith. The special verdict returned by the jury was predicated in part on bad faith. Aplt.App. 203-04,² 252. The evidentiary basis for the liability portion of that special verdict has not been challenged in this appeal.

A. Punitive Damages.

In light of the contentions of the parties, we posed the following question for the New Mexico Supreme Court:

Is an instruction for punitive damages required in every insurance bad faith case in which the plaintiff has produced evidence supporting compensatory damages as suggested by Uniform Jury Instruction 13-1718, N.M.R. Ann., UJI-Civ. (2002) (Directions for Use), or is the New Mexico Court of Appeals correct that subsequent New Mexico Supreme Court authority requires a culpable mental state beyond bad faith for imposition of punitive damages in insurance bad faith cases? Teague-Strebeck Motors, Inc. v. Chrysler Ins. Co., 127 N.M. 603, 985 P.2d 1183, 1202-05 (1999).

In re: Sloan, 320 F.3d at 1073.

The New Mexico Supreme Court accepted certification and overruled that part of Teague-Strebeck that would require a culpable mental state for punitive damages beyond that required for compensatory damages in bad faith cases. See Sloan v. State Farm Mut. Auto. Ins. Co. (In re: Sloan), 135 N.M. 106, 85 P.3d 230, 236 (2004) (copy attached). In most cases, evidence of bad faith sufficient to present the case to the jury will warrant an instruction on punitive damages because it could support a culpable mental state. Id. at 236, 238. In the first-party context, an unreasonable denial or delay of a claim suffices for compensatory damages; if the denial or delay is also frivolous or unfounded, that demonstrates a culpable mental state sufficient to submit the issue of punitive damages to the jury. Id. at 237.

This case includes a bad-faith failure to settle claim. In such cases, an insurer's failure to investigate or competently defend may be evidence of bad faith. Id. at 237. But if there is evidence that the insurer exercised "dishonest judgment" and did not given equal consideration to its interests and that of its insured, a punitive damages instruction is warranted. Id. at 238. To these ends, the New Mexico Supreme Court has revised the instruction on punitive damages in bad faith cases to require a finding not only that compensatory damages are warranted, but also that "the conduct of the insurance company was in reckless disregard for the interests of the plaintiff, or was based on a dishonest judgment, or was otherwise malicious, willful, or wanton." Id. at 238 (revising N.M. UJI 13-1718).

Based upon what we now know about punitive damages and bad faith in New Mexico, we hold that the grant of JMOL on the punitive damages claim was error. The...