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State Farm v. Weiford (5/8/92), 831 P 2d 1264
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Notice: This is subject to formal correction before
publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors
to the attention of the Clerk of the Appellate Courts,
303 K Street, Anchorage, Alaska 99501, in order that
corrections may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
STATE FARM MUTUAL AUTOMOBILE )
INSURANCE COMPANY, )
) Supreme Court Nos. S-4331/4332
Appellant and )
Cross-Appellee, ) Trial Court No.
) 3AN-88-4234 Civil
v. )
) O P I N I O N
LINDA WEIFORD, )
)
Appellee and ) [No. 3838 - May 8, 1992]
Cross-Appellant. )
______________________________)
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Anchorage,
J. Justin Ripley,
Judge.
Appearances: William R. Hickman,
Heather Houston, Reed McClure, Seattle; Clay
A. Young, Delaney, Wiles, Hayes, Reitman &
Brubaker, Anchorage, for Appellant and Cross-
Appellee. Richard H. Friedman, Jeffrey A.
Friedman, Law Offices of Friedman & Rubin,
Anchorage, for Appellee and Cross-Appellant.
Before: Rabinowitz, Chief Justice,
Burke, Matthews, and Compton, Justices.
[Moore, Justice, not participating.]
MATTHEWS, Justice.
BURKE, Justice, dissenting in part.
FACTS AND PROCEEDINGS
Linda Weiford was involved in an accident with an
uninsured motorist on August 28, 1984. Two days later she
contacted her insurer, State Farm Mutual Automobile Insurance
Company. State Farm had issued an automobile insurance policy to
Weiford when she lived in Oregon which contained uninsured
motorist coverage.
As a result of the accident, Weiford experienced pain
and numbness in her neck occasionally radiating down her arm. In
October 1984 her doctors diagnosed a cervical strain.
The parties began negotiating in an attempt to reach a
settlement for Weiford's personal injuries in August 1985.
Weiford requested $17,500.1 State Farm responded with an offer
of $3408, then $5000. Weiford reduced her offer to $16,000, then
to $14,000, and then to $10,000. When this last offer was not
accepted, Weiford withdrew it and requested arbitration.
However, when her symptoms reappeared she withdrew her
arbitration request until the extent of her injuries could be
ascertained.
In July 1986 Weiford's internist diagnosed "left C7
radiculopathy [nerve root injury] . . . probably related to
underlying cervical disc disease resulting from the automobile
accident." His diagnosis was based on the results of Weiford's
electromyography. At this point, the parties renewed their
negotiations. Weiford demanded her policy limits, $25,000.
State Farm agreed to settle for $7500. Weiford counter-offered
$18,500. State Farm responded with offers of $10,000, then
$12,500. The negotiations were fruitless and arbitration was
arranged.
In preparation for the arbitration, State Farm
requested an independent medical examination of Weiford. The
exam confirmed that Weiford suffered from a nerve root injury.
At this point State Farm offered $17,500. This was rejected by
Weiford who counter-offered $21,000.
Prior to the November 5, 1987 arbitration, State Farm
made its final offer of $20,000. This was rejected and the arbi
tration panel set Weiford's damages at $22,000. This amount was
paid by State Farm. Weiford indicates that she spent some $5500
in attorney's fees in order to obtain the arbitration award.
In April 1988 Weiford sued State Farm for punitive and
compensatory damages for its alleged bad faith in handling her
claim. At the conclusion of the trial, the jury found that State
Farm had breached its duty of good faith. It awarded Weiford
$18,007.50 in compensatory damages and $1,200,000 in punitive
damages. After the court denied State Farm's post-judgment
motions, State Farm appealed the verdict to this court.
DISCUSSION
The main issues in this case are whether there was
sufficient evidence to warrant submission to the jury of
Weiford's bad faith and punitive damages claims. For the reasons
that follow we conclude that there was sufficient evidence to
raise a jury question as to bad faith, but not as to punitive
damages.
Punitive damages have a two-fold purpose: "to punish
the wrongdoer and to deter the wrongdoer and others like him from
repeating the offensive act." Providence Washington Ins. Co. of
Alaska v. City of Valdez, 684 P.2d 861, 863 (Alaska 1984). Since
these objectives go beyond the primary purpose of tort law, to
provide just compensation for the wrong done, "punitive damages
are not favored in law. They are to be allowed only with caution
and within narrow limits." Alaska Placer Co. v. Lee, 553 P.2d
54, 61 (Alaska 1976). Consistent with this approach, we have
limited punitive damages to cases where the wrongdoer's conduct
could fairly be categorized as "outrageous, such as acts done
with malice or bad motives or reckless indifference to the
interests of another." State Farm Fire & Casualty Co. v.
Nicholson, 777 P.2d 1152, 1158 (Alaska 1989); Alyeska Pipeline
Serv. Co. v. Beadles, 731 P.2d 572, 574 (Alaska 1987); Ross Lab.,
Div. of Abbott Lab. v. Thies, 725 P.2d 1076, 1081 (Alaska 1986).
Malice may be inferred if the acts exhibit "a callous disregard
for the rights of others." Alyeska Pipeline Serv. Co. v.
O'Kelley, 645 P.2d 767, 774 (Alaska 1982). However, "where there
is no evidence that gives rise to an inference of actual malice
or conduct sufficiently outrageous to be deemed equivalent to
actual malice,"the trial court need not, and indeed should not,
submit the issue of punitive damages to the jury. Id.; Beadles,
731 P.2d at 574.2
Despite the narrow range in which punitive damages may
be awarded, the role of the appellate court in reviewing punitive
damages awards is limited. We will reverse a punitive damages
award "only if we have a firm conviction based on the record as a
whole that the trial court erred and we must intervene to prevent
a miscarriage of justice." Alaska Village, Inc. v. Smalley, 720
P.2d 945, 948 (Alaska 1986).
Weiford's claim of bad faith is based on the covenant
of good faith and fair dealing which is implied in all contracts.
Alaska Pacific Assur. Co. v. Collins, 794 P.2d 936, 947 (Alaska
1990). Generally, claims that the implied covenant has been
breached may be brought only in contract. ARCO Alaska v. Akers,
753 P.2d 1150, 1153-54 (Alaska 1988). However, bad faith claims
brought by insured persons against their insurance companies may
be brought in tort as well as in contract. State Farm Fire &
Casualty Co. v. Nicholson, 777 P.2d at 1157.
Not all conduct which amounts to the tort of bad faith
is sufficiently outrageous to warrant an award of punitive
damages. That was the case in Nicholson where the insured made a
claim under his homeowner's policy for damages caused when a
water main broke. Although State Farm agreed to cover a related
claim asserted by a neighbor, it denied coverage of the insured's
claim. Id. at 1153-54. Three months later State Farm agreed
that there was coverage, but waited another year and a half
before making a formal offer of settlement. The insured's expert
witness testified that State Farm's delay was both unreasonable
and outrageous. Id. at 1154. We concluded based on our review
of the entire record that "there was insufficient evidence as a
matter of law to support a finding of outrageous conduct or a
gross deviation from an acceptable standard of reasonable conduct
in order to sustain an award of punitive damages." Id. at 1158.
However, the jury's award of compensatory damages based on State
Farm's breach of the implied covenant of good faith and fair
dealing was affirmed.
Weiford's primary argument in support of her punitive
damages award is centered on the fact that in 1984 and 1985 State
Farm decided to take a "tough stance"on payments to insureds.
This policy was implemented in part by periodic evaluations of
State Farm's adjusters and supervisors in which paid claims'
averages were monitored. Weiford contends that this policy
prompted State Farm to adopt an uncompromising attitude toward
settlement of her case. She argues that this was manifested by
the early $5000 offer which her expert witness characterized as
totally inadequate. Weiford also contends that the $7500 offered
by State Farm in July 1986 was "unreasonably low." Further,
pointing to the fact that between July 1986 and November 1987
State Farm raised its settlement offers from $7500 to $10,000,
$12,500, $17,500, and finally $20,000, Weiford argues that State
Farm knew that its offers below $20,000 were not reasonable.
Weiford also contends that a punitive damages award
could be based on a State Farm's supervisor's note in the claim
file not to offer more money than $20,000 because "with policy
limits of $25 K, insured has more to lose by going to arbitration
than we do." Further, Weiford contends that State Farm was in
violation of its duty of good faith and fair dealing because it
took positions in arbitration which allegedly were knowingly
false.
In our view, while there is some evidence which would
justify a finding that State Farm was acting in bad faith, none
of the evidence shows conduct which may fairly be categorized as
outrageous.
The crux of Weiford's bad faith case was the testimony
of her expert, George Broatch. Broatch testified that no single
act of State Farm amounted to bad faith, but that cumulatively
State Farm's actions did:
It -- to me it was a matter of the
company philosophy. I don't really have any
quarrel with the day to day handling of the
file particularly. I think that perhaps they
could have done it a little differently, but
I know, for example, Polly [Marsh - the State
Farm adjuster assigned to the case] asked for
$7,500.00 authority at one time when I
thought the case should have been settled,
and so I really don't have any quarrel with
this day's handling or that day's handling or
whatever, but they -- these people were
obviously faced with some severe parameters
that they had to follow and it meant that
they had to chop claims up, tell people they
just weren't gonna get what they were
entitled to.
State Farm's offer of $5000 made in August 1985 was
made when the diagnosis of Weiford's injury was that of a
cervical strain which her physician had advised her was of a
"likely benign self-limited nature." Her physician had placed no
limitation on her activities at that point and advised her to
continue swimming, running and playing racquetball. Marsh, the
adjuster on Weiford's case, had requested authority of $7500 to
settle Weiford's case on August 26, 1985. Karl Hahn, Marsh's
supervisor, testified that he thought $7500 was too high.
Accordingly, he reduced the authority to $5000, which he felt was
adequate. Marsh had earlier evaluated the case as worth $3000 on
November 28, 1984. Broatch evaluated the reasonable range for a
settlement at between $10,000 and $15,000. However, he
incorrectly indicated that Weiford's nerve root problems had been
confirmed by studies as of August 1985.3 In fact, such studies
were not conducted until the spring of 1986.
It appears that in mid-July 1986 medical reports were
forwarded to State Farm by Weiford's attorney indicating that an
electromyography had revealed positive signs of nerve root
damage. When this report was received, Hahn authorized Marsh to
increase the offer of settlement to $7500. Hahn also directed
that the case be referred to attorney Huddleston. Huddleston
reviewed the case and opined that the minimum value was $12,500.
State Farm authorized settlement in this amount, but directed
Huddleston to first make a $10,000 offer. When this was rejected
it was followed by a $12,500 offer. State Farm then sought a
medical evaluation from Dr. Newman, a physician retained by State
Farm. This was performed in March 1987. Dr. Newman verified
that Weiford had a nerve root injury: "The patient clearly has a
C7 radiculopathy." Following receipt of Dr. Newman's report,
Marsh requested authority to settle for $17,500. This authority
was granted and an offer at that level was made. Some four
months later with arbitration pending, State Farm raised its
settlement offer to $20,000, which was its final offer. As
noted, the arbitrators awarded $22,000 in November 1987.
We find nothing in this sequence of events which can be
characterized as outrageous. Given Broatch's testimony, the
$5000 offer might support a fact finder's conclusion that State
Farm was guilty of bad faith. However, because of Weiford's high
level of physical activity, the absence of definitive medical
test results in 1985,4 and the fact that Weiford's physicians
evidently believed that her injury would be self resolving, even
this conclusion is fairly debatable. The evidence will not
reasonably support the further conclusion that this offer was so
low as to be outrageous.
The course of the offers following receipt of Weiford's
physician's report, which for the first time detected a nerve
root injury, is difficult to characterize even as being in bad
faith. When the report was received the offer was increased to
$7500 and then quickly to $10,000 and $12,500, within the range
which Broatch testified as reasonable. Following verification by
State Farm's physician of Weiford's nerve root damage, State Farm
again raised its offer, first to $17,500 and then to $20,000. As
measured by the arbitrator's award and Broatch's testimony, both
of the latter offers were clearly within a reasonable range.
The supervisor's note to the effect that the insured
had more to lose than State Farm by going to arbitration was
written in the context of evaluating whether to offer more than
$20,000. As noted, the $20,000 offer clearly was reasonable.
While the file note might be reflective of a bad motive, since
the offer in question was reasonable, the note cannot
independently form the basis for a punitive damages award.
State Farm attorney Huddleston's advocacy during the
arbitration of the claim was vigorous, but there was evidentiary
support for each of the positions which he took.5 Thus,
Huddleston's advocacy was not outrageous or malicious.
For the above reasons we conclude that the evidence
does not reasonably support a conclusion that State Farm was
guilty of a gross breach of accepted standards of conduct which
might be characterized as outrageous or malicious. We are firmly
convinced "based on the record as a whole that the trial court
erred and we must intervene to prevent a miscarriage of justice."
Alaska Village, Inc. v. Smalley, 720 P.2d at 948. Thus, the
award of punitive damages must be vacated. We conclude however
that there was sufficient evidence to support a jury finding that
State Farm acted in bad faith.
State Farm also contends that the court erred in giving
an instruction on the Unfair Claim Settlement Practices Act, AS
21.36.125. The instruction the court gave stated that if State
Farm failed to attempt in good faith to make prompt and equitable
settlement of claims, or compelled insureds to litigate by
offering substantially less than the amounts ultimately recovered
"with such frequency as to indicate a practice,"such acts might
be considered in deciding whether or not State Farm breached its
duty of good faith and fair dealing in this case.6
We held in O.K. Lumber Co. v. Providence Washington
Ins. Co., 759 P.2d 523, 527 (Alaska 1988), that the Unfair Claim
Settlement Practices Act does not create a private right of
action for damages. That question was of importance in O.K.
Lumber because that case was brought by a third-party claimant
having no contractual relationship with the insurance company.
Without such a relationship, the claimant was not able to sue for
breach of the covenant of good faith and fair dealing. Id. at
526. Thus the claimant was forced to rely on the Act if he was
to have a cause of action for bad faith against the insurance
company.
That is not the situation in the present case.
Weiford's claim against State Farm is a first-party claim, since
she is an insured of State Farm. The covenant of good faith and
fair dealing thus runs to her from State Farm and is enforceable
both in contract and in tort. Nicholson, 777 P.2d at 1156-57.
The instruction given by the court merely informed the jury as to
two types of conduct which could be considered evidence of bad
faith: frequently failing to make prompt and equitable
settlements in cases where liability is reasonably clear and
frequently compelling insureds to litigate by offering
substantially less than the amounts ultimately recovered. State
Farm does not dispute that it is required to make prompt and
equitable offers of settlement to its policyholders and to
otherwise treat them fairly. The testimony of Karl Hahn acknow
ledges these duties. The fact that the instruction is based on a
statute added nothing to the case, and the instruction was
therefore not prejudicial to State Farm.7
State Farm also argues that Weiford's closing argument
was improper in certain respects. However, counsel did not
object to the argument. In the absence of such an objection,
State Farm waived its right to appeal this point unless there is
a demonstration that plain error was committed. Teamsters Local
959 v. Wells, 749 P.2d 349, 362 n.27 (Alaska 1988); In re L.A.M.,
727 P.2d 1057, 1059 (Alaska 1986) ("plain error exists where an
obvious mistake has been made which creates a high likelihood
that injustice has resulted"). We have reviewed the various
alleged improprieties in Weiford's counsel's argument and find
that none of them rise to the level of plain error.
For the above reasons, the award of punitive damages is
REVERSED. The award of compensatory damages is AFFIRMED. The
case is REMANDED for recalculation of attorney's fees under Civil
Rule 82.
BURKE, Justice, dissenting in part.
I would affirm the jury's award of punitive damages.
Viewed in the light most favorable to Weiford, I think the
evidence supports the award, and the record certainly does not
persuade me that "we must intervene to prevent a miscarriage of
justice." Alaska Village, Inc. v. Smalley, 720 P.2d 945, 948
(Alaska 1986).
Otherwise, I concur in the opinion of the court.
_______________________________
1 According to State Farm, the uninsured motorist coverage
in Weiford's Oregon policy was $15,000. However, State Farm
treated her as an Alaskan policy holder with $25,000 worth of
coverage.
2 The legislature has also recognized the narrow limits in
which punitive damages should be allowed. AS 09.17.020 provides
that punitive damages may not be awarded "unless supported by
clear and convincing evidence." This act applies to all causes
of action accruing after July 11, 1986. This effective date
might have potentially caused a problem in this case, as some of
State Farm's conduct which Weiford alleged to be outrageous took
place before and some took place after this effective date. This
potential difficulty was, however, resolved when Weiford
submitted an instruction which was given by the court which
required Weiford "to prove the outrageousness of defendant's
conduct by clear and convincing evidence."
3 On direct examination, Broatch testified as follows:
Q: [W]hat was your understanding of what the
medical reports were saying at this point in time
[August 1985 when State Farm offered $5,000]?
A: Well, it was a typical neck sprain case and a
bothersome one because the doctors all indicated
that they -- the studies they'd done indicated
that she did have what's called nerve root
problems and that they didn't see that the -- that
there was any end to it. Although it had -- as I
say, it had stabilized somewhat.
4 As discussed earlier, Broatch appears to have
misunderstood when the nerve root injury was detected.
5 Huddleston's alleged bad faith acts included: 1) arguing
that Weiford's medical problems were caused by "work stress"when
Weiford's and State Farm's doctors believed that her medical
problems were related to the accident; 2) arguing that Weiford
had purposely escalated her medical expenses when State Farm
employees agreed that Weiford was not faking or exaggerating her
symptoms and that her medical expenses were proper; 3) arguing
that Weiford refused to see an orthopedic physician and refused
to return to see the physician retained by State Farm, Dr.
Newman, in the face of testimony by State Farm employees that
Weiford was always cooperative and in the absence of evidence
that she ever refused to see Dr. Newman; and 4) arguing in
arbitration that the medical witnesses had said that there were
minimal or nonexistent findings when State Farm knew that
Weiford's doctors and its own doctor had concluded that there was
objective evidence of nerve root damage.
6 Instruction No. 18 stated:
AS 21.36.125 provides that an
insurance company may not commit or engage in
with such frequency as to indicate a practice
any of the following acts or practices:
(1) Fail to attempt in good faith
to make prompt and equitable settlement of
claims in which liability is reasonably
clear; or
(2) Compel insureds to litigate
for recovery of amounts due under insurance
policies by offering substantially less than
the amounts ultimately recovered in actions
brought by those insureds.
If you find that State Farm
violated this law, you may consider this in
deciding whether or not State Farm breached
its duty of good faith and fair dealing in
this case.
7 See Alaska Evidence Rule 406: "Evidence of . . . routine
practice of an organization . . . is relevant to prove that the
conduct of . . . the organization on a particular occasion was in
conformity with . . . the routine practice."
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