Sloan v. State Farm Mutual Automobile Insurance

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
MAR 4 2004
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT

JOSEPH EDWARD SLOAN; BYRON
Z. MOLDO, Chapter 7 Trustee – In re:
JOSEPH EDWARD SLOAN, Debtor,

Plaintiffs-Appellants/
Cross-Appellees,
Nos. 02-2050 and 02-2059
v.

STATE FARM MUTUAL
AUTOMOBILE INSURANCE
COMPANY,

Defendant-Appellee/
Cross-Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
D.C. No. 00-CV-702-BB/WWD

Stephen L. Tucker, Tucker Law Firm, Santa Fe, New Mexico (Lisa K. Vigil, Vigil
and Vigil, and Steven Vogel, Albuquerque, New Mexico, 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, New Mexico, for Defendant-Appellee/Cross-
Appellant.

Before KELLY, PORFILIO, and BRISCOE, Circuit Judges.
KELLY, 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.

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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. 760 P.2d 950, 952-53 (Wash. Ct. App. 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., 467 A.2d 254, 258 (N.H. 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

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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

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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

1
Effective December 1, 2003, Fed. R. Civ. P. 51 was amended. Either
version of the rule would result in the same outcome. See Fed. R. Civ. P.
51(c)(2), (d)(1)(B).

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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 (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

2
The bad faith contentions were as follows:

To establish the claim of Bad Faith on the part of State Farm, Sloan
has the burden of proving any of the contentions set forth below:
1. State Farm acted in bad faith by failing to conduct a timely and
fair investigation and evaluation of the claim; or
2. State Farm’s denial of a $300,000.00 payment for the Shelton’s claim
was frivolous or unfounded; or
3. State Farm acted in bad faith with Sloan by failing to timely investigate,
evaluate or pay Sloan’s claim which is a bad faith breach of the duty to act
honestly and in good faith in its performance of the insurance contract; or

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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., 985 P.2d 1183, 1202-05 (N.M. Ct. App. 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), No. 27,928, slip op. at 8 (N.M. Jan.

20, 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

4. State Farm acted in bad faith by failing to give Sloan’s interests the
same or equal consideration as their own interests.

Sloan also contends and has the burden of proving that such insurance bad
faith was a proximate cause of his damages.

Aplt. App. 203-204, 767-768.

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because it could support a culpable mental state. Id. at 8, 12. 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 10.

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 11. 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 12. 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 13 (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 insurer has not cross-appealed from the judgment insofar as the

sufficiency of the evidence supporting liability, including liability on the bad faith

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claim. 3 Indeed, Plaintiffs tell us that the insurer did not move for JMOL on these

grounds either; the appendix does not appear to be to the contrary. Aplt. Br. at

19-20.

The general rule announced by the New Mexico Supreme Court is that

ordinarily a jury should decide the issue of punitive damages given a prima facie

showing of bad faith sufficient to submit the case to the trier of fact. Sloan, slip

op. at 8. Given the liability findings and the obvious factual dispute about the

bona fides of the policy switch, we hold that a punitive damages instruction is

now warranted. A jury could conclude that the insurer may have exercised less

than honest judgment or that it did not give equal consideration to its interests and

that of the insured. Given the doubt surrounding which policy applied and the

insured’s almost certain exposure to an excess judgment, a jury could conclude

that the insured conducted an unfair balancing of interests in not settling for

policy limits early on. See Id. at 4 (“An insurer’s frivolous or unfounded refusal

to pay is the equivalent of a reckless disregard for the interests of the insured, and

a dishonest or unfair balancing of interests is no less reprehensible than reckless

disregard, which has historically justified an award of punitive damages.”).

The insurer does suggest other reasons why a new trial on liability ought
3

to occur.

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B. Remittitur.

The next issue we must confront is the remittitur. Ordinarily, a district

court’s grant of remittitur in a diversity case is reviewed for an abuse of

discretion. Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 419 (1996).

Plaintiffs do not argue that the district court was without power to order remittitur

or a new trial. Although the insurer challenges the remittitur as insufficient, both

parties agree that the district court may not force the plaintiff to remit the excess

portion of the judgment prior to allowing a plaintiff to choose between remittitur

or a new trial on damages.

We agree with the parties. The Seventh Amendment requires that a

plaintiff be given the option of a new trial in lieu of remitting a portion of the

jury’s award. Hetzel v. Prince William County, 523 U.S. 208, 211 (1998). No

judgment for a remittitur may be entered without the plaintiff’s consent because

the Seventh Amendment prohibits the court from substituting its judgment for that

of the jury’s regarding any issue of fact. Id.; Gasperini, 518 U.S. at 433; see also

Dimick v. Schiedt, 293 U.S. 474, 486-87 (1935). Regardless of whether remittitur

is proposed by the trial or appellate court, if the plaintiff does not consent to the

remittitur, the district court has no alternative but to order a new trial on damages.

O’Gilvie v. Int’l Playtex, Inc., 821 F.2d 1438, 1447-48 (10th Cir. 1987) (citing

Kennon v. Gilmer, 131 U.S. 22, 28-30 (1889); McKinnon v. City of Berwyn, 750

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F.2d 1383 (7th Cir. 1984)).

Even if allowed to elect, Plaintiffs tell us that they will not accept remittitur

as ordered by the district court. Aplt. Br. at 46; Aplt. Reply/Answer Br. at 17.

Thus, the case must remanded for a new trial on damages, a remedy also sought

by the insurer. Because of that, we do not address Defendant’s arguments

concerning double recovery and the adequacy of the remittitur amount.

C. Conduct of the Trial.

We must consider Defendant’s point concerning the conduct of the trial to

the extent Defendant seeks a new trial on liability. Essentially, Defendant

contends that the judge’s conduct considered in its totality deprived it of a fair

trial. Defendant relies upon Rocha v. Great Am. Ins. Co., 850 F.2d 1095 (6th Cir.

1988):

When the remarks of the judge during the course of a trial, or his
manner of handling the trial, clearly indicate a hostility to one of the
parties, or an unwarranted prejudgment of the merits of the case, or
an alignment on the part of the Court with one of the parties for the
purpose of furthering or supporting the contentions of such party, the
judge indicates, whether consciously or not, a personal bias and
prejudice which renders invalid any resulting judgment in favor of
the party so favored.

Id. at 1100 (quoting Knapp v. Kinsey, 232 F.2d 458, 466 (6th Cir. 1956))

(emphasis omitted). Our review of this claim of judicial bias is for plain error

because Defendant did not object on this basis. See Gaydar v. Sociedad Instituto

Gineco-Quirurgico y Planificacion Familiar, 345 F.3d 15, 23-24 (1st Cir. 2003);

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United States v. MacKay, 491 F.2d 616, 621-22 (10th Cir. 1973) (criminal

context). And counsel must object. We recognize counsel’s fear of antagonizing

the trial judge (or possibly the jury) and thereby prejudicing his client’s case, but

a respectful objection may bring the matter before the trial court for possible

corrective action and preserve the client’s right to meaningful appellate review.

As it stands, in civil cases, the plain error doctrine is sharply limited to errors that

seriously affect the fairness, integrity or public reputation of judicial proceedings.

Quigley v. Rosenthal, 327 F.3d 1044, 1063 (10th Cir. 2003).

Having reviewed the transcript, we are troubled by the process used by the

court to inform counsel of how deposition testimony would be admitted. At a

minimum, a variant procedure such as this one should be announced to both

parties well in advance (not on the eve of trial), or be included in the pretrial

order. At the same time, a review of the record indicates that deposition

testimony was presented (albeit out of sequence and through excerpted portions of

video or summaries presented by counsel) with counsel afforded the opportunity

to object and have those objections ruled upon by the court. Suffice it to say that

while we understand defense counsel’s justifiable concern with the procedure, we

cannot find that the fairness of the proceedings was substantially compromised.

Although a federal court has the right to comment on witness testimony, it

must “exercise great care to maintain an impartial attitude and not become an

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advocate for one of the parties to the litigation or mislead the jury.” United

States v. Sowards, 339 F.2d 401, 403 (10th Cir. 1964). We have reviewed the

district court’s comments on the evidence, Aplt. App. 442-443, 505, and the

revelation of facts to the jury that the prior district judge may have ruled

inadmissible, Aplt. App. 635-36, and find no plain error. A district court may

attempt to clarify evidence, and it may revisit interlocutory evidentiary rulings

made by another district judge. The district judge did not comment directly on

the ultimate factual issue to be decided by the jury, nor add to the evidence, both

of which would be improper. See Quercia v. United States, 289 U.S. 466, 471-72

(1933); Rocha, 850 F.2d at 1100; Sowards, 339 F.2d at 402-403.

Finally, we consider the district court’s comments directed towards

counsel’s preparation, erudition, objections or lack of objection, and settlement.

We certainly expect trial courts to treat counsel with respect, but given our

standard of review in the absence of any objection, we do not find that the district

court’s comments in this case (directed towards both sides) rendered the trial

unfair. The district court repeatedly expressed its views that the parties should

settle the case (and what the case was worth), but it did this outside the presence

of the jury. While we recognize that settlement is an appropriate topic for a

pretrial conference, Fed. R. Civ. P. 16(c)(9), some cases cannot be settled and the

parties’ desire for a trial must be respected. As for the trial court’s other

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comments, we do not find them to be of such a character to have compromised the

substantial rights of the insurer on the issue of liability. Both sides won and lost

issues on that score. On remand, however, we think it would be best for the case

to be reassigned.

AFFIRMED in part, REVERSED in part and REMANDED.

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IN THE SUPREME COURT OF THE STATE OF NEW MEXICO
Opinion Number: 2004-NMSC-004
Filing Date: January 20, 2004

Docket No. 27,928

IN RE: JOSEPH
EDWARD SLOAN, Debtor

JOSEPH EDWARD SLOAN and
BYRON Z. MOLDO, Chapter 7

Trustee,

Plaintiffs-Appellants
and Cross-Appellees,

vs.

STATE FARM MUTUAL
AUTOMOBILE INSURANCE
COMPANY,
Defendant-Appellee
and Cross-Appellant.

CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT

Tucker Law Firm, P.C.
Steven L. Tucker
Santa Fe, NM

Eaton, Martinez, Hart & Valdez, P.C.
Steven J. Vogel
Albuquerque, NM

Vigil & Vigil, P.A.
Lisa K. Vigil
Albuquerque, NM

for Appellants
and Cross-Appellees
Guebert, Bruckner & Bootes, P.C.
Terry R. Guebert
Donald G. Bruckner Jr.
Ramona G. Bootes
Albuquerque, NM

for Appellee
and Cross-Appellant
 OPINION
CHÁVEZ, Justice.
{1} In this insurance-bad-faith case, arising from an insurance company's failure to
settle a third-party lawsuit against its insured, we are asked to clarify whether a culpable
mental state in addition to bad faith is required for the imposition of punitive damages.
The following question was certified to us by the United States Court of Appeals for the
Tenth Circuit, in accordance with Rule 12-607 NMRA 2003:
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 [UJI 13-1718 NMRA 2003], 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., [1999-NMCA-109, ¶¶
76-90, 127 N.M. 603, 985 P.2d 1183].
Sloan v. State Farm Mut. Auto. Ins. Co. (In re Sloan), 320 F.3d 1073, 1073 (10th Cir.
2003).
{2} Exercising jurisdiction under NMSA 1978, § 39-7-4 (1997), we answer that
under New Mexico law, a punitive-damages instruction should be given to the jury in
every common-law insurance-bad-faith case where the evidence supports a finding
either (1) in failure-to-pay cases (those arising from a breach of the insurer's duty to
timely investigate, evaluate, or pay an insured's claim in good faith), that the insurer
failed or refused to pay a claim for reasons that were frivolous or unfounded, or (2) in
failure-to-settle cases (those arising from a breach of the insurer's duty to settle a
third-party claim against the insured in good faith), that the insurer's failure or refusal to
settle was based on a dishonest or unfair balancing of interests. An insurer's frivolous or
unfounded refusal to pay is the equivalent of a reckless disregard for the interests of the
insured, and a dishonest or unfair balancing of interests is no less reprehensible than
reckless disregard, which has historically justified an award of punitive damages. To
ensure the jury has found a culpable mental state before awarding punitive damages, we
modify UJI 13-1718 to reflect that punitive damages may only be awarded when the
insurer's conduct was in
reckless disregard for the interests of the plaintiff, or was based on a dishonest
judgment, or was otherwise malicious, willful, or wanton.
I.
{3} This matter comes to us in the course of an appeal from a jury trial in federal
district court. The trial court granted Defendant State Farm's motion for judgment as a
matter of law on Plaintiffs' claim for punitive damages against Defendant for bad-faith
failure to settle. Sloan, 320 F.3d at 1074. The court submitted Plaintiffs'
insurance-bad-faith claims to the jury without the instruction for punitive damages, UJI
13-1718 NMRA 2003. Even though Plaintiffs' claims primarily involved bad-faith
failure to settle, the court included in its instructions to the jury both the bad-faith
standard in a failure-to-settle action, that is, a dishonest or unfair balancing of interests
(Jury Instruction No. 6, below), and the bad-faith standard in a first-party failure-to-pay
action, that is, any frivolous or unfounded refusal to pay (Jury Instruction No. 8, below).
Because the trial court gave the jury both instructions, we shall address the standard for
punitive damages under both causes of action. The jury instructions relevant to
Plaintiffs' bad-faith claim given at trial were:
Jury Instruction No. 6
A liability insurance company has a duty to timely investigate and fairly
evaluate the claim against its insured, and to accept reasonable settlement offers
within policy limits.
An insurance company's failure to conduct a competent investigation of the claim
and to honestly and fairly balance its own interests and the interests of the
insured in rejecting a settlement offer within policy limits is bad faith. If the
company gives equal consideration to its own interests and the interests of the
insured and based on honest judgment and adequate information does not settle
the claim and proceeds to trial, it has acted in good faith.

See UJI 13-1704 NMRA 2003.

Jury Instruction No. 8
An insurance company acts in bad faith when it refuses to pay a claim of
the policyholder for reasons which are frivolous or unfounded. An insurance
company does not act in

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bad faith by denying a claim for reasons which are reasonable under the terms of the
policy.

In deciding whether to pay a claim, the insurance company must act reasonably under
the circumstances to conduct a timely and fair investigation and evaluation of the claim.

A failure to timely investigate, evaluate or pay a claim is a bad faith breach of the duty
to act honestly and in good faith in the performance of the insurance contract.

See UJI 13-1702 NMRA 2003.

{4} The jury found that State Farm acted in bad faith in its dealings with Plaintiffs
and that its bad faith proximately caused Plaintiffs' damages. The jury awarded
Plaintiffs $600,000 in compensatory damages, later reduced to $540,000 on motion for
remittitur. Plaintiffs appealed to the United States Court of Appeals for the Tenth
Circuit, arguing that under New Mexico law, where there is sufficient evidence to
submit an insurance-bad-faith claim to the jury, the jury must also receive an instruction
on punitive damages. The Court of Appeals then certified the above question to us
because it was unclear under New Mexico law whether in an insurance-bad-faith action,
a finding of bad faith, without an additional finding of a culpable mental state,
permitted an award of punitive damages.

{5} This case presents an opportunity to assess the New Mexico Court of Appeals'
holding in Teague-Strebeck that an award of punitive damages in an insurance-bad-faith
case requires a culpable mental state in addition to the bad faith required for
compensatory damages. See Teague-Strebeck Motors, Inc. v. Chrysler Ins. Co.,
1999-NMCA-109, ¶ 78, 127 N.M. 603, 985 P.2d 1183. Although we denied the petition
for certiorari in that case, such denial in itself expresses no opinion on the merits of the
case. See State v. Breit, 1996-NMSC-067, ¶ 13, 122 N.M. 655, 930 P.2d 792. In our
denial of certiorari in Teague-Strebeck, we avoided having to reconcile various
statements we have made about the standard for punitive damages in insurance-bad-faith
claims. We now take the opportunity to clarify the law on this point.

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{6} For the reasons that follow, we conclude that under New Mexico law, bad-faith
conduct by an insurer typically involves a culpable mental state, and therefore the
determination whether the bad faith evinced by a particular defendant warrants punitive
damages is ordinarily a question for the jury to resolve. To the extent Teague-Strebeck
would, in every insurance-bad-faith case, require a showing of an additional culpable
mental state to permit an instruction on punitive damages, Teague-Strebeck is
overruled. In so holding, we reaffirm our statement in Jessen v. National Excess
Insurance Co., 108 N.M. 625, 627, 776 P.2d 1244, 1246 (1989) that "[b]ad faith
supports punitive damages upon a finding of entitlement to compensatory damages."
Accordingly, an instruction on punitive damages will ordinarily be given whenever the
plaintiff's insurance-bad-faith claim is allowed to proceed to the jury. We do, however,
somewhat limit the per se Jessen rule by affording the trial court the discretion to
withhold a punitive-damages instruction in those rare instances in which the plaintiff
has failed to advance any evidence tending to support an award of punitive damages.

II.
{7} Teague-Strebeck held that in insurance-bad-faith cases, New Mexico requires
"the presence of aggravated conduct beyond that necessary to establish the basic cause
of action in order to impose punitive damages." 1999-NMCA-109, ¶ 78. In reaching this
conclusion, the Teague-Strebeck court analyzed two New Mexico Supreme Court
rulings, Paiz v. State Farm Fire & Casualty Co., 118 N.M. 203, 880 P.2d 300 (1994) and
Allsup's Convenience Stores, Inc. v. North River Insurance Co., 1999-NMSC-006, 127
N.M. 1, 976 P.2d 1, and determined from the language of those opinions that this Court
intended to raise the standard of conduct required for an award of punitive damages in
insurance-bad-faith cases. The Teague-Strebeck court determined that Paiz and Allsup's
"superseded" the Jessen formulation and that "New Mexico now requires a showing of a
culpable mental element to allow imposition of punitive damages." Teague-Strebeck,
1999-NMCA-109, ¶ 90.

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{8} In its original opinion, the Teague-Strebeck court affirmed the trial court's
denial of the plaintiffs' claim for punitive damages arising from an insurance-bad-faith
claim. Id. ¶¶ 70-73. The plaintiffs had argued that they were automatically entitled to
punitive damages once compensatory damages were awarded and that the trial court
therefore misapplied the legal standard for the award of punitive damages. Id. ¶¶ 71-72.
Teague-Strebeck interpreted Paiz as requiring evidence of "an evil motive or a culpable
mental state," in addition to bad faith, for a plaintiff to be entitled to punitive damages.
Accordingly, it held the trial court did not abuse its discretion by refusing punitive
damages. Id. ¶¶ 72-73.
{9} In a separate published order on rehearing, appended to the original published
opinion, the Teague-Strebeck court reinforced its initial holding, and again relied on
Paiz and Allsup's for the proposition that "there is a real distinction between `bad faith'
sufficient to support an award of compensatory damages and `bad faith' meriting
exemplary damages." Id. ¶ 85. The Teague-Strebeck court also noted that UJI 13-1718,
as it currently stands, "clearly contemplates the giving of a punitive damages instruction
in every bad faith case submitted to a jury." Id. ¶ 82 n.1. The court then stated, "Given
the holding in Paiz, and the language in Allsup's, upon which we rely, it would seem
appropriate to reconsider this approach." Id.
{10} As we reconsider UJI 13-1718 and the law of punitive damages in
insurance-bad-faith claims, we first consider the analyses of Paiz and Allsup's in
Teague-Strebeck.
A.
{11} The Teague-Strebeck court began its analysis of Paiz by characterizing it as "a
first party insurance-bad-faith case." 1999-NMCA-109, ¶ 79. Although Paiz began as an
insurance-bad-faith case, by the time it reached the appellate courts it was reduced to a
breach-of-contract case. At the trial level the plaintiffs had filed claims sounding in
negligence, insurance bad faith, and breach of contract. Before submitting the case to the jury,
however, the trial court directed a verdict against the plaintiffs with respect to their
insurance-bad-faith claim. Paiz, 118 N.M. at 210, 880 P.2d at 307. The judge then submitted

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the case to the jury under a breach-of-contract theory and under the plaintiffs' tort claims
of "negligent misrepresentation, negligent investigation, and negligent delay in making
payment." Id. at 206, 880 P.2d at 303. The jury returned a verdict in favor of the
plaintiffs. "[T]he trial judge viewed the damages awarded as arising from State Farm's
breach of contract instead of from any of Defendants' various negligent acts." Id. at 207,
880 P.2d at 304. We agreed, holding the jury's award was "grounded in breach of
contract and not as damages for commission of one or more torts." Id.
{12} Importantly, the claim of insurance bad faith was never raised as an issue on
appeal. The plaintiffs did not appeal the directed verdict against them and therefore
"conceded the correctness of the trial court's ruling" rejecting the bad-faith claim. Id. at
210, 880 P.2d at 307. "[C]ases are not authority for propositions not considered." Sangre
de Cristo Dev. Corp. v. City of Santa Fe, 84 N.M. 343, 348, 503 P.2d 323, 328 (1972).
We conclude Paiz ought not be relied upon in answering the certified question and was
not dispositive in answering the question raised in Teague-Strebeck, because in Paiz this
Court as well as the trial court focused on the contractual nature of the claims, rather
than the degree to which they also sounded in tort.
{13} Teague-Strebeck interprets Paiz as directly applicable to the tort of insurance
bad faith. Teague-Strebeck, 1999-NMCA-109, ¶ 79. As we read Paiz, however, the
holding is more narrowly drawn: "[W]e hold that such [a punitive-damages] award for a
breach of contract may no longer be based solely on the breaching party's `gross
negligence' in failing to perform the contract." Paiz, 118 N.M. at 204, 880 P.2d at 301.
Because the tort of insurance bad faith is fundamentally distinct from a claim for breach
of contract, and because insurance bad faith was not before the Court in that case, the
opinion in Paiz is properly confined to the standard for punitive damages in a case for
breach of contract.

B.
{14} The Teague-Strebeck court further advanced certain language from Allsup's as
supporting its conclusion that this Court had raised the standard for punitive damages in

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insurance-bad-faith cases. Allsup's involved an insurer's appeal of a jury award of
punitive damages in an insurance-bad-faith claim. 1999-NMSC-006, ¶ 44. The insurer,
North River, argued its due process rights were violated by a jury instruction suggesting
the jury would merely have to find unreasonable conduct, as opposed to bad faith, in
order to be held liable for punitive damages. Id. The instruction at issue there, essentially
identical to UJI 13-1705 NMRA 2003, read:

Under the "bad faith" claim, what is customarily done by those engaged in
the insurance industry is evidence of whether the insurance company acted
in good faith. However, the good faith of the insurance company is
determined by the reasonableness of its conduct, whether such conduct is
customary in the industry or not. Industry customs or standards are
evidence of good or bad faith, but they are not conclusive.

Allsup's, 1999-NMSC-006, ¶ 44. North River interpreted this instruction as permitting
the slightest unreasonableness to render an insurance company liable for punitive
damages. Id. ¶ 45. This, North River argued, conflicted with our statement in McGinnis
v. Honeywell, Inc., 110 N.M. 1, 9, 791 P.2d 452, 460 (1990) that a culpable mental state
is a prerequisite to punitive damages.
{15} To resolve the alleged conflict, we examined another jury instruction given at
trial that stated in part, "Allsup's contends and has the burden of proving that any bad
faith actions on the part of North River were malicious, reckless or wanton, and,
therefore punitive damages should be awarded." 1999-NMSC-006, ¶ 46 (emphasis
omitted). Reading the two instructions together, we concluded the jury must have found
"malicious, reckless, or wanton conduct before it could award punitive damages." Id.
Thus, Allsup's held, North River suffered no due process violation in the imposition of
punitive damages. As we read Allsup's, its holding is strictly designed to resolve the
question whether the jury was adequately instructed on the standard for punitive damages
to survive a due process challenge. See id. ¶ 44. Accordingly, the presence of the second
instruction on punitive damages enabled this Court to avoid the precise issue before us
now, which is whether

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a greater standard than that required for compensatory damages in insurance-bad-faith
litigation is required before instructing on punitive damages. As a result of these
considerations, we believe the Teague-Strebeck court, understandably, may have been
misled by our opinion in Allsup's in regard to what we now hold is the correct analysis
of New Mexico law on the standard for punitive damages in insurance-bad-faith cases.
{16} In our current analysis, we conclude that Allsup's in fact supports our view that a
punitive-damages instruction will ordinarily be given whenever the plaintiff is entitled to
have the jury instructed on his or her insurance-bad-faith claim. In analyzing UJI
13-1705, the Allsup's court reasoned that "[w]hile bad faith and unreasonableness are not
always the same thing, there is a certain point, determined by the jury, where
unreasonableness becomes bad faith and punitive damages may be awarded."
1999-NMSC-006, ¶ 45 (emphasis added). In other words, there comes a point at which
the insurer's conduct progresses from mere unreasonableness to a culpable mental state.
Because the resolution of precisely where this point lies in each case depends on an
assessment of the complex factual determinations surrounding the insurer's conduct and
corresponding motives, such a question must ordinarily be reserved for the factfinder to
resolve. As a general proposition, therefore, once a plaintiff has made a prima facie
showing sufficient to submit his or her bad-faith claim to the jury, the determination
whether the insurer's bad-faith conduct is deserving of punitive damages is for the jury to
decide.
III.
{17} Although we overrule Teague-Strebeck's holding that an award of punitive
damages in such cases always requires evidence of culpable conduct beyond that
necessary to establish basic liability, we agree with its statement that "`bad faith' may
include a culpable mental state, but it is not necessarily so." 1999-NMCA-109, ¶ 85. We
agree with this statement because of the manner in which the jury instructions for basic
liability, UJI 13-1702 and 13-1704, are currently written. While these instructions
properly convey the two standards we have previously articulated for a finding of a
culpable mental state—a

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frivolous or unfounded refusal to pay, see UJI 13-1702, and a failure to honestly and
fairly balance the interests of the insured and its own, see UJI 13-1704—we acknowledge
the instructions as written might be interpreted, in some circumstances, as permitting
merely unreasonable conduct to support a finding of bad faith sufficient for an award of
punitive damages. This is because these instructions, particularly UJI 13-1702, include
concepts of reasonableness along with concepts which may evince a culpable mental
state. Because punitive damages are imposed for the limited purposes of punishment and
deterrence, a culpable mental state is a prerequisite to punitive damages. See McGinnis,
110 N.M. at 9, 791 P.2d at 460. While the unreasonable conduct described in these
instructions may support an award of compensatory damages, such conduct does not
support an award of punitive damages. Thus, there may be cases in which a plaintiff,
despite having advanced evidence sufficient to submit his or her bad-faith failure-to-pay
claim to the jury, nevertheless fails to make a prima facie showing that the insurer's
conduct exhibited a culpable mental state.

{18} Under New Mexico law, an insurer who fails to pay a first-party claim has acted
in bad faith where its reasons for denying or delaying payment of the claim are frivolous
or unfounded. See State Farm Gen. Ins. Co. v. Clifton, 86 N.M. 757, 759, 527 P.2d 798,
800 (1974). In Clifton we concluded that in order to recover damages in tort under this
claim, there must be evidence of bad faith or a fraudulent scheme. Id. We further
announced that "bad faith" means "any frivolous or unfounded refusal to pay." Id.
(internal quotation marks and quoted authority omitted). We have defined "frivolous or
unfounded" as meaning an arbitrary or baseless refusal to pay, lacking any support in the
wording of the insurance policy or the circumstances surrounding the claim:

"Unfounded" in this context does not mean "erroneous" or "incorrect"; it
means essentially the same thing as "reckless disregard," in which the
insurer "utterly fail[s] to exercise care for the interests of the insured in
denying or delaying payment on an insurance policy." [Jessen, 108 N.M. at
628, 776 P.2d at 1247.] It means an utter or total lack of foundation for an

-9-
 assertion of nonliability—an arbitrary or baseless refusal to pay, lacking
any arguable support in the wording of the insurance policy or the
circumstances surrounding the claim. It is synonymous with the word with
which it is coupled: "frivolous."

Jackson Nat'l Life Ins. Co. v. Receconi, 113 N.M. 403, 419, 827 P.2d 118, 134 (1992).
By refusing or delaying payment on a claim for reasons that are frivolous or unfounded,
the insurer has acted with reckless disregard for the interests of the insured; such
reckless disregard supports a claim for punitive damages.

{19} We acknowledge, however, that the reasonableness of the insurer's conduct is
generally an element of the jury's inquiry in determining whether compensatory damages
should be awarded. For this reason, the bracketed second sentence of our jury instruction
reads, "In deciding whether to pay a claim, the insurance company must act reasonably
under the circumstances to conduct a timely and fair [investigation or evaluation] of the
claim." UJI 13-1702 NMRA 2003. In failure-to-pay claims, therefore, a plaintiff under
these circumstances might make a proper showing that the insurer acted unreasonably in
denying or delaying a claim, entitling the plaintiff to compensatory damages, without
having made a prima facie showing that the refusal to pay was frivolous or unfounded. In
such circumstances, it is proper for the trial court to submit the plaintiff's bad-faith claim
to the jury for consideration of an award of compensatory damages but withhold the
punitive-damages instruction.
{20} On the other hand, while New Mexico recognizes a common-law cause of action
for bad-faith failure to settle within policy limits, we do not recognize a cause of action
for negligent failure to settle. Ambassador Ins. Co. v. St. Paul Fire & Marine Ins. Co.,
102 N.M. 28, 690 P.2d 1022 (1984). To be entitled to recover for bad-faith failure to
settle, a plaintiff must show that the insurer's refusal to settle was based on a dishonest
judgment. By "dishonest judgment," we mean that an insurer has failed to honestly and
fairly balance its own interests and the interests of the insured. An insurer cannot be
partial to its own

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interests, but rather must give the interests of its insured at least the same consideration
or greater. See Lujan v. Gonzales, 84 N.M. 229, 236, 501 P.2d 673, 680 (Ct. App. 1972).
In caring for the insured's interests, "the insurer should place itself in the shoes of the
insured and conduct itself as though it alone were liable for the entire amount of the
judgment." Dairyland Ins. Co. v. Herman, 1998-NMSC-005, ¶ 14, 124 N.M. 624, 954
P.2d 56 (internal quotation marks and quoted authority omitted). As we stated in
Ambassador, "[The insurer's] decision not to settle should be an honest decision. It
should be the result of the weighing of probabilities in a fair and honest way." 102 N.M.
at 31, 690 P.2d at 1025 (quoted authorities omitted). This element of a dishonest or
unfair balancing of interests is the key element in determining whether, in bad-faith
failure-to-settle claims, the insurer's conduct merits punitive damages.

{21} In such failure-to-settle claims, evidence of an insurer's negligence in
researching a claim does not give rise to its own cause of action, but rather provides one
possible means of demonstrating that an insurer acted in bad faith. As we said in
Ambassador:

[W]hen failure to settle the claim stems from a failure to properly
investigate the claim or to become familiar with the applicable law, etc.,
then this is negligence in defending the suit (a duty expressly imposed
upon the insurer under the insurance contract) and is strong evidence of
bad faith in failing to settle. Here, basic standards of competency can be
imposed, and the insurer is charged with knowledge of the duty owed to its
insured. In this sense, such negligence becomes an element tending to
prove bad faith, but not a cause of action in and of itself.
Id. at 31, 690 P.2d at 1025. Thus, if the insurer fails to meet "basic standards of
competency" in investigating a claim or researching the applicable law, such conduct is
"strong evidence" of bad faith, but is not in itself sufficient to support the plaintiff's
bad-faith failure-to-settle claim.

{22} In Ambassador, we predicated an insurer's honest judgment on its diligent,
competent investigation of the claim:

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 In order that [the insurer's decision whether to settle] be honest and
intelligent it must be based upon a knowledge of the facts and
circumstances upon which liability is predicated, and upon a knowledge of
the nature and extent of the injuries so far as they reasonably can be
ascertained.

This requires the insurance company to make a diligent effort to ascertain
the facts upon which only an intelligent and good-faith judgment may be
predicated.

Id. (quoted authorities omitted). Our current uniform jury instruction reflects this
standard of conduct when it states an insurer "has a duty to timely investigate and fairly
evaluate the claim against its insured." UJI 13-1704 NMRA 2003. Nevertheless, we
conclude the competence and timeliness of the insurer's investigation of the claim, while
strong evidence of whether the insurer conducted itself fairly and in good faith, is not the
dispositive element in a failure-to-settle claim. Even where the insurer's investigation
was both competent and timely, the insurer is nevertheless liable for bad faith when its
refusal to settle within policy limits is based on a dishonest judgment. In many respects,
a dishonest judgment in these circumstances may be more reprehensible than where the
insurer bases its decision not to settle on a negligent investigation. We conclude,
therefore, in failure-to-settle cases, it is the insurer's failure to treat the insured honestly
and in good faith, giving "equal consideration to its own interests and the interests of the
insured," id., that renders the insurer liable for insurance bad faith and also merits an
instruction on punitive damages.
IV.
{23} As a result of the foregoing analysis, we conclude that in most cases, the
plaintiff's theory of bad faith, if proven, will logically also support punitive damages. To
ensure, however, that a jury only awards punitive damages for bad-faith conduct
manifesting a culpable mental state, and not for conduct that may fall short of such
reprehensibility, we find it necessary to augment the punitive-damages instruction to
reflect the requisite standard for a culpable mental state. Accordingly, we modify the
first sentence of UJI 13-1718 to read as follows:

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 If you find that plaintiff should recover compensatory damages for the bad
faith actions of the insurance company, and you find 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, then you may award punitive damages.

The trial court should include also the definitions of "dishonest judgment"—"a failure by
the insurer to honestly and fairly balance its own interests and the interests of the
insured"—along with the definitions of "reckless," "malicious," "willful," and "wanton."
See UJI 13-1827 NMRA 2003. We believe this revised instruction will ensure the jury
will award punitive damages only in those cases where the insurer's conduct is shown to
have manifested a culpable mental state.

{24} Finally, in answering as we do that a punitive-damages instruction will
ordinarily be given every time the jury is instructed on the plaintiff's insurance-bad-faith
claim, we acknowledge the prospect that in certain instances a plaintiff's evidence of
bad-faith conduct, though sufficient to entitle the plaintiff to compensatory damages,
may be, as a matter of law, insufficient to warrant a punitive-damages instruction. Where
the trial court determines, based on the evidence marshaled at trial, that no reasonable
jury could find the insurer's conduct to have manifested a culpable mental state, then the
trial court may withhold the giving of a punitive-damages instruction. Accordingly, we
also modify the Use Note for UJI 13-1718 to reflect that this instruction must ordinarily
be given whenever UJI 13-1702, -1703, or -1704 is given; the instruction will not be
given only in those circumstances in which the plaintiff fails to make a prima facie
showing that the insurer's conduct exhibited a culpable mental state.

{25} IT IS SO ORDERED.

__________________________________
EDWARD L. CHÁVEZ, Justice

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WE CONCUR:

__________________________________
PETRA JIMENEZ MAES, Chief Justice

__________________________________
PAMELA B. MINZNER, Justice

__________________________________
PATRICIO M. SERNA, Justice

__________________________________
RICHARD C. BOSSON, Justice

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