Summary: The Nardellis bought a Ford Explorer for over $35,000 and had it insured with Met Life. Ten months later, it was stolen and then found abandoned in Mexico with multiple interior, exterior, and engine damages. The Nardellis wanted the Explorer declared a total loss, but Met Life refused. An Arizona jury returned a “compensatory damages” verdict of $155,000 and a punitive damages award of $55 million. The trial court reduced the punitive award to $620,000. On appeal, the bad faith award was affirmed unanimously and, on a split vote, the punitive damages award was affirmed, but reduced to $155,000.
The Nardellis purchased a brand new Ford Explorer for $35,750 in December 2001. Early in September 2002, the Met Life insured Explorer was stolen. When it was recovered in Mexico a few weeks later, it had “slit seats, cut wires, a torn interior, and what turned out to be a ruined engine.” Met Life had it towed to a yard back in Arizona. The original estimate was that it would cost $815 to repair. After a tow yard employee told Mr. Nardelli that the “appraiser had not even lifted the hood,” and described some of the damages, the Nardellis had the Explorer taken to the dealership for an inspection. Each time the vehicle was inspected, additional damages were discovered. The Met Life damage estimates kept increasing until late in October the repair estimate exceeded $11,000. Met Life eventually decided that the Explorer could be “repaired to pre-loss condition,” so it issued a joint check to the Nardellis and their lender for $10,759.13 (which took into account the $250 deductible).
The Nardellis sued and obtained the verdicts described above. After the post trial motions were filed, the punitive damages award was reduced. The Nardellis appealed arguing there should not have been any reduction of the punitive damages. In its cross-appeal, Met Life argued the evidence did not support either bad faith liability or punitive damages. In the alternative, it argued that the punitive damage award should be reduced even further. The Court of Appeals unanimously affirmed the jury’s verdict on bad faith liability, but was split on the entitlement to punitive damages with a majority finding punitive damages were appropriate, but the punitive award should be reduced to a one to one ratio, $155,000. The dissenting justice did not think any punitive damages were proper.
In Arizona an insurance company “acts in bad faith when it unreasonably investigates, evaluates, or processes a claim (an “objective” test), and either knows it is acting unreasonably or acts with such reckless disregard that such knowledge may be imputed to it (a “subjective” test). Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 238, ¶22, 995 P.2d 276, 280 (2000).” (Other citations omitted) (¶19)
The majority ruled a bad faith award was justified in the Nardelli case because there was “substantial evidence from which a reasonable jury could find Met Life acted in bad faith in making at least three decisions: deciding to repair rather than total the Explorer, sending the Nardellis a check for an amount that did not cover the repair costs, and failing to advise them of policy provisions relevant to their claim.” (¶20)
The repair versus total issue was hotly contested with evidence going both ways. The court looked at the testimony of witnesses for both sides, including a body shop employee at the Ford dealership. The plaintiff and the body shop man testified consistently that the dealership said they would do the best they could to repair while cautioning Nardelli it was unlikely, despite their best efforts, to get it to its pre-loss condition. (¶23) The Nardellis also presented evidence that, contrary to Met Life’s duty to “immediately conduct an adequate investigation [and] act reasonably in evaluating the claim,” Met Life ignored other information that the Explorer was most likely a total loss. (Zilisch at ¶21, 95 P.2d at 920) (¶26) According to the majority opinion, the Nardellis provided substantial evidence which could have caused a jury to conclude that, contrary to the policy requirement, the Explorer could not be repaired to its pre-loss condition, Met Life ignored other information that it was close to a total loss, and Met Life did not obtain a salvage bid which would have helped it determine how close to a total loss was “close.” (¶31) After further reviewing the evidence, the court ruled that Met Life had failed to abide by the Zilisch ruling that an insurer has a “duty of ‘[e]qual consideration of the insured [which] requires more’ than this type of investigation and evaluation.” (¶35)
The Appellate Court also noted the evidence that Met Life had issued and mailed a $10,759 check, which was less than what it would cost to fully repair the Explorer to its pre-loss condition. At trial Met Life employees admitted they knew the Nardellis would have to pay labor costs about $30 per hour more than what Met Life paid them. Furthermore, Met Life employees knew if the Nardellis accepted the check without doing any repairs, they would never receive the full repair costs. There was also evidence Met Life added the name of the lender both because it was required to do so and because Met Life expected the lender would put pressure on the Nardellis to have the Explorer repaired contrary to their wishes. Based upon that evidence, the Appellate Court found a reasonable jury “could have found it was objectively unreasonable to send the Nardellis a check that did not cover all repair costs and Met Life subjectively knew it was unreasonable yet did so to force the Nardellis to authorize repairs and abandon their claim the Explorer should be declared a total loss.” (¶41)
There was also evidence that Met Life failed to advise the Nardellis of two policy provisions that could have provided them with additional benefits. The first provision was one which “generally provided additional benefits to the Nardellis if they had experienced a total loss.” (¶43) There was evidence from Met Life that the Nardellis had been told about the provision, but the claim file did not document that and there were no letters from Met Life advising them of that provision. Furthermore, Met Life failed to advise the Nardellis of the appraisal provision. Met Life relied upon Arizona case law in support of its argument that it had no duty to point out those two policy provisions in the first place. The court acknowledged that there was no requirement to “explain every fact and provision without limitation.” (¶54) However, there was an Arizona regulation which, like many other states, requires insurers to disclose to first party claimants “all pertinent benefits, coverages, or other provisions of an insurance policy or insurance contract under which a claim is presented” and are required not to conceal such provisions. (¶55) Additionally, Met Life’s training manuals called for such disclosures. Based upon the substantial evidence before the court, it held that the jury was permitted to “find Met Life breached the implied covenant of good faith and fair dealing.” (¶58)
The majority then turned to the consideration of punitive damages issue. Met Life argued first there was no clear and convincing evidence to support the finding that the Nardellis were entitled to punitive damages and then argued, more successfully, that the evidence did not support the amount of the award. The court ruled that under Arizona law, a plaintiff had to “show ‘something more’ than the conduct necessary to establish the tort” of bad faith. That “something more” had been determined by the Arizona Supreme Court to require plaintiffs to “prove that defendant’s evil hand was guided by an evil mind. The requisite ‘evil mind’ may be manifested in either of two ways. It may be found where defendant intended to injure the plaintiff. It may also be found where, although not intending to cause injury, defendant consciously pursued a course of conduct knowing that it created a substantial risk of significant harm to others. As [the Arizona] Supreme Court has instructed, punitive damages are recoverable in a bad faith tort action when, and only when, the facts establish that defendant’s conduct was aggravated, outrageous, malicious or fraudulent. Indifference to facts or failure to investigate are sufficient to establish the tort of bad faith but may not rise to the level required by the punitive damages rule… .” Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 578-79 (1986). (Multiple internal citations omitted) In another Arizona Supreme Court case, it was determined that the plaintiff must “prove the defendant’s evil mind by clear and convincing evidence.” Linthicum v. Nationwide Life Ins. Co., 150 Ariz. 326, 332, 723 P.2d 675, 681 (1986). (¶60)
At this point the majority and the dissent parted company. The majority looked to evidence of institutional bad faith on the part of Met Life. They concluded that five elements of that evidence established that “Met Life acted outrageously and with the requisite evil mind.” The items cited by the majority were that Met Life had first initiated an aggressive company-wide profit goal for 2002; second, assigned to the claims department a significant role in achieving that goal; third, aggressively communicated that goal to the claims department; fourth, had tied the benefits of the claims offices and claims employees to the average amount paid on claims; and fifth, had implemented these actions “without taking steps to ensure its efforts to drive up its corporate profits would not affect whether it treated its insureds fairly.” (¶62)
The dissenting justice concluded that while the evidence rose to the level of a finding of bad faith, it did not by clear and convincing evidence establish that Met Life acted with an evil mind. Specifically, the dissenting justice stated that the Arizona Supreme Court had created the tort of bad faith and had at the same time “made clear that an insurer may not elevate its economic interests above the interests of its insured. But by holding that only the rare and extreme bad faith case qualifies for punitive damages, the court had made clear that a profit motive alone cannot suffice.” (¶111) The dissenting justice further noted the lack of any evidence that “Met Life deprived its insureds of care necessary for life… . There is no evidence that Met Life set up its system to deny valid claims. And, of course, there is no evidence that Met Life affirmatively intended to injure the Nardellis.” (¶112) In contrast, the majority quoted from the trial judge’s opinion in support of its finding that punitive damages were appropriate. The trial court judge acknowledged that it was permissible to implement an aggressive plan to increase profits, but if it did so, “it is also responsible for the foreseeable risks in carrying out such a plan.” That trial court judge found that Met Life “produced little evidence that it made reasonable mitigation efforts to prevent the type of conduct that occurred in this case.” (¶81)
After finding that punitive damages were supported by the evidence, the court then turned to the due process analysis required by the United States Supreme Court in State Farm Mut. Auto. Ins. Co. v. Campbell, and the Arizona Court of Appeals in Sec. Title Agency, Inc. v. Pope, 219 Ariz. 480, 200 P.3d 977 (Ariz.App.Ct. 2008). (¶¶83, 84) The court examined the reprehensibility of the insurer’s misconduct, the ratio between the compensatory damages and the punitive damages, and a review of comparative penalties.
The court noted that the reprehensibility analysis called for a determination of whether the harm was physical, as opposed to economic. Although there was some evidence of alleged aggravation of Mr. Nardelli’s pre-existing mental health conditions, it was obvious that the Met Life decision to repair was largely an economic issue. Furthermore, although the Pope court refused to impose a bright line test, it found that an award of more than four times the amount of compensatory damages “might be close to the line of constitutional impropriety” and further noted that whenever the compensatory damages were substantial, “a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” Pope at para. 103, 200 P.3d at 1000. (¶95) The court found that neither the jury’s ratio of roughly of 355 to 1 nor the trial court imposition of a 4 to 1 ratio were appropriate, especially given the reprehensibility review and the substantial compensatory damages awarded. (¶96) Finally, the court looked to an Arizona statutory provision which caps civil penalties for unfair claims settlement practices at $50,000 per six month period. Referring to that provision and distinguishing the case upon which the Nardellis relied, the court held that the 4 to 1 ratio imposed by the trial court was improper. Accordingly, the Appellate Court found that “the reprehensibility of Met Life’s misconduct was low to, at most, moderate. The ratio of punitive damages to the substantial compensatory damages was large, and the most applicable civil penalties are far less than the punitive damages awarded.” Using the Campbell guideposts, the majority concluded that the $55 million punitive damage award was excessive and that the record “does not justify awarding punitive damages at a ratio above 1 to 1 ($155,000). Thus, we vacate the judgment of punitive damages entered by the Superior Court and on remand direct it to enter judgment awarding the Nardellis $155,000 in punitive damages.” (¶100)
The Nardelli case is instructive on many fronts for claimants and insurers alike. For one thing, it demonstrates the importance of understanding institutional bad faith claims. In addition, it demonstrates how well meaning plans can go awry when they are implemented by others. It also provides guidance regarding the applicability of punitive damages tests in insurance litigation, especially in the bad faith context.