Zoppo v. Homestead Ins. Co.

Decision Date30 December 1994
Docket NumberNo. 93-1616,93-1616
PartiesZOPPO et al., Appellants, v. HOMESTEAD INSURANCE COMPANY, Appellee.
CourtOhio Supreme Court

SYLLABUS BY THE COURT

1. An insurer fails to exercise good faith in the processing of a claim of its insured where its refusal

to pay the claim is not predicated upon circumstances that furnish reasonable justification therefor. (Hart v. Republic Mut. Ins. Co. [1949], 152 Ohio St. 185, 39 O.O. 465, 87 N.E.2d 347, and Staff Builders, Inc. v. Armstrong [1988], 37 Ohio St.3d 298, 525 N.E.2d 783, approved and followed; Slater v. Motorists Mut. Ins. Co. [1962], 174 Ohio St. 148, 21 O.O.2d 420, 187 N.E.2d 45, paragraph two of the syllabus, overruled; Motorists Mut. Ins. Co. v. Said [1992], 63 Ohio St.3d 690, 590 N.E.2d 1228, overruled to the extent inconsistent herewith.)

2. R.C. 2315.21(C)(2) violates the right to trial by jury under Section 5, Article I of the Ohio Constitution.

In the early morning hours of October 13, 1988, Windy's Bar Restaurant, an establishment owned and insured by Donald Zoppo, was destroyed by fire. The fire was incendiary in nature and was started with kerosene, a liquid accelerant. At the time of the fire, Zoppo had an insurance contract in effect issued by Homestead Insurance Company. The coverage on the Homestead policy was $50,000 for the building and $65,000 for its contents.

Following its investigation, Homestead denied coverage to Zoppo. Homestead concluded that there was sufficient evidence that Zoppo had participated in setting the fire. Further, Homestead found that Zoppo had made material misrepresentations regarding his whereabouts on the night of the fire and regarding whether he had additional insurance.

Zoppo then brought suit against Homestead for breach of the insurance contract and for the tort of bad faith refusal to settle. Zoppo sought punitive damages in connection with the bad faith claim. The case went to trial before a jury.

After Zoppo's case in chief, Homestead moved for a directed verdict on the bad faith and punitive damages claims. The court denied these motions. The court instructed the jury on the relevant law. The court's instruction on bad faith was based upon the reasonable justification standard as enunciated in case law prior to Motorists Mut. Ins. Co. v. Said (1992), 63 Ohio St.3d 690, 590 N.E.2d 1228.

The jury returned verdicts for Zoppo in the sum of $80,000 in compensatory damages on the breach of contract claim and $187,800 on the bad faith claim ($122,800 in compensatory damages plus $65,000 in attorney fees). The jury also found that Zoppo was entitled to punitive damages. Pursuant to R.C. 2315.21(C)(2), the trial court set the amount of punitive damages at $50,000.

Homestead appealed and Zoppo cross-appealed. During the pendency of these appeals, this court decided Said, supra, which did away with the reasonable justification standard and made intent an element of bad faith.

The court of appeals affirmed the breach of contract claim but reversed the trial court's judgment on the issue of bad faith. The court of appeals held that there was no evidence of wrongful intent on the part of Homestead in denying Zoppo's claim. Hence, it found that the trial court erred in denying Homestead's motion for a directed verdict on the bad faith claim. The court of appeals also vacated the award of punitive damages and attorney fees.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Robert P. Rutter, for appellants.

Gallagher, Sharp, Fulton & Norman, Alan M. Petrov, D. Cheryl Atwell and Timothy J. Fitzgerald, for appellee.

Clark, Perdue, Roberts & Scott Co., L.P.A., Edward L. Clark and Dale K. Perdue; Nurenberg, Plevin, Heller & McCarthy and Andrew P. Krembs, urging reversal for amicus curiae, Ohio Academy of Trial Lawyers.

Murray & Murray Co., L.P.A., Dennis E. Murray, Sr., and Kirk J. Delli Bovi, urging reversal for amicus curiae, Erie County Board of Com'rs.

Vorys, Sater, Seymour & Pease, William D. Kloss, Robert N. Webner and Julie A. Schafer, urging affirmance for amicus curiae, Ohio Ins. Institute.

Young & Alexander Co., L.P.A., Mark R. Chilson and Paul G. Hallinan; Meyers, Hentemann, Schneider & Rea Co., L.P.A., and Henry A. Hentemann, urging affirmance for amicus curiae, State Farm Ins. Companies.

Weston, Hurd, Fallon, Paisley & Howley, Timothy D. Johnson, William H. Baughman, Jr., Robert D. Rosewater and Gregory E. O'Brien, urging affirmance for amicus curiae, Ohio Ass'n of Civil Trial Attys.

FRANCIS E. SWEENEY, Sr., Justice.

The issues before this court are: (1) whether actual intent by the insurer to refuse to fulfill its contract with the insured is a requisite element of the tort of bad faith as held in Said; and (2) whether R.C. 2315.21(C)(2), requiring the court to set the amount of punitive damages even in jury trials, is violative of the right to trial by jury. For the reasons that follow, we overrule Said: and hold that actual intent is not an element of the tort of bad faith. We further hold that R.C. 2315.21(C)(2) violates the right to trial by jury. Accordingly, we reverse the judgment of the court of appeals.

I Bad Faith

This court must initially determine the proper standard used to decide whether an insurer has breached its duty to its insured to act in good faith. In deciding this issue, it is necessary to revisit our decision in Motorists Mut. Ins. Co. v. Said, supra, 63 Ohio St.3d 690, 590 N.E.2d 1228.

In Said, we held that:

"A cause of action arises for the tort of bad faith when an insurer breaches its duty of good faith by intentionally refusing to satisfy an insured's claim where there is either (1) no lawful basis for the refusal coupled with actual knowledge of that fact or (2) an intentional failure to determine whether there was any lawful basis for such refusal. Intent that caused the failure may be inferred and imputed to the insurer when there is a reckless indifference to facts or proof reasonably available to it in considering the claim." (Emphasis added.) Id. at paragraph three of the syllabus.

Rather than clarify the standard of proof required in the area of bad faith litigation as the Said decision set out to do, this court has caused greater confusion by erroneously making intent an element of the tort of bad faith.

Until Said, the element of intent had been notably absent from this court's definition of when an insurer acts in bad faith. In fact, with the exception of Said and the four-to-three decision of Slater v. Motorists Mut. Ins. Co. (1962), 174 Ohio St. 148, 21 O.O.2d 420, 187 N.E.2d 45, over the past forty-five years this court has consistently applied the "reasonable justification" standard to bad faith cases. According to this standard, first announced in 1949 in the case of Hart v. Republic Mut. Ins. Co. (1949), 152 Ohio St. 185, 39 O.O. 465, 87 N.E.2d 347, and reaffirmed in Hoskins v. Aetna Life Ins. Co. (1983), 6 Ohio St.3d 272, 6 OBR 337, 452 N.E.2d 1315, and Staff Builders, Inc. v. Armstrong (1988), 37 Ohio St.3d 298, 525 N.E.2d 783, "an insurer fails to exercise good faith in the processing of a claim of its insured where its refusal to pay the claim is not predicated upon circumstances that furnish reasonable justification therefor." Id. at 303, 525 N.E.2d at 788. Intent is not and has never been an element of the reasonable justification standard. Hence, in deciding Said, supra, and in relying upon the erroneous Slater decision, this court departed from forty-five years of precedent. By expressly overruling Said and Slater, we will be following the logical progression of case law that has developed over the years.

We reject appellee's contention that under the doctrine of stare decisis, we must adhere to our decision in Said. The Said decision was an aberration that failed to follow clearly established precedent. As stated in Helvering v. Hallock (1940), 309 U.S. 106, 119, 60 S.Ct. 444, 451, 84 L.Ed. 604, 612: "[S]tare decisis is a principle of policy and not a mechanical formula of adherence to the latest decision, however recent and questionable, when such adherence involves collision with a prior doctrine more embracing in its scope, intrinsically sounder, and verified by experience." In this case, stare decisis dictates that we correct our previous mistakes and reinstate the reasonable justification standard.

Our review of the record indicates the trial court correctly instructed the jury on the law of bad faith using the reasonable justification standard. There was ample evidence to support the jury's finding that Homestead failed to conduct an adequate investigation and was not reasonably justified in denying Zoppo's claim.

From the outset, Homestead's inquiry focused primarily on Zoppo, who claimed that he was in Pennsylvania hunting at the time of the fire. Homestead's investigators did not seriously explore evidence that other individuals, who were previously ousted from the bar by Zoppo, had threatened to burn the bar down. In fact, there was a previous attempt made to set the bar on fire. Two of the ousted men bragged in public that they were responsible for the attempted fire and one said he would be back "to finish the job." Following the actual fire, which occurred only three weeks after the attempted arson, one of the ousted men told a group of bar patrons that he had set the fire.

Despite these leads, and despite the fact that there appeared to have been a robbery and break-in (machines were broken into and one of the windows was broken), there was evidence at trial that the Homestead investigators failed to locate certain key suspects, verify alibis, follow up with witnesses or go to Pennsylvania to determine Zoppo's whereabouts on the morning of the fire. In fact, evidence was presented that when interviewing some of the alleged perpetrators, the investigators did little more than ask cursory questions such...

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