Safeco Insurance v. Ellinghouse

                                  No. 85-257
                  IN THE SUPREME COURT OF THE STATE OF MONTANA
                                       1986




SAFECO INSURANCE COMPANY,
                   Plaintiff and Appellant,
         -vs-
GEORGE ELLINGHOUSE,
                   Defendant and Respondent.




APPEAL FROM:       District Court of the Thirteenth Judicial District,
                   In and for the County of Yellowstone,
                   The Honorable William Speare, Judge presiding.

COUNSEL OF RECORD:

         For Appellant:
                   Williams Law Firm; Richard Ranney argued, Missoula,
              .    Montana
                   Landoe, Brown, Planalp & Kommers; Gene I. Brown argued,
                   Bozeman, Montana

         For Respondent:
                   Anderson, Edwards   &   Molloy; Richard W. Anderson argued,
                   Billings, Montana




                                       Submitted:     May 13, 1986
                                           Decided:       September 17, 1986


Filed:
         SEP I !1986



                                    *,uClerk
                                                      @
Mr. Justice John Conway Harrison delivered the Opinion of the
Court.

       This cause of action arose in the District Court of the
Thirteenth Judicial District of the State of Montana in and
for the     County     of     Yellowstone.         The     cause began          as a
declaratory judgment action September, 20, 1982.                        Plaintiff,
Safeco    Insurance Company,             filed   suit     against     defendant,
George Ellinghouse, to determine whether Ellinghouse had
liability coverage under his Safeco policy in a suit then
pending against him and others for the June, 1977, death of
Raymond A. Taylor in Glendive, Montana.                  Ellinghouse answered
alleging       coverage     and    counterclaimed        against      Safeco     for
actual     and      punitive        damages      for     bad     faith,     fraud,
misrepresentation, and breach of the insurance contract.                          We
reverse, unless remittitur is accepted as provided.
       The covera.ge question and the counterclaim were tried
to a jury.       After hearing all the evidence the District Court
ruled there was coverage as a matter of law and so instructed
the    jury.        Thus,    only    the   bad     faith       counterclaim was
presented      to   the     jury, which       found     for Ellinghouse and
awarded     him     $25,000       plus   accrued       interest    in     economic
damages,       $200,000     for    emotional     damages,       and     $5,000,000
punitive damages.           Judgment was entered and Ellinghouse's
claim for attorney's fees was reserved for later hearing.
The District Court denied Safeco's motion for a new trial and
judgment notwithstanding the verdict.
       George Ellinghouse was self-employed under the name
Turf-Aid Distributing Company in 1973.                  The business involved
the sale of industrial equipment to golf courses, parks and
cemeteries for the maintenance of large turf areas.                       Early in
1974   Ellinghouse provided              consultation      services       for    the
installation of   a   sprinkler system at a golf course in
Glendive, Montana.      The   system was      fully    installed   and
Ellinghouse completed all his operations for the project by
mid-1974.
      In June, 1977, Raymond Taylor died while working on
this golf course, allegedly by electrocution while digging up
a   leak in the underground sprinkler system near certain
underground electrical lines.     At the time of the accident,
Ellinghouse carried a Safeco insurance policy insuring his
business premises for property damages, and affording him
$100,000 in liability coverage.    It is undisputed this policy
was in full force and effect at the time of Taylor's death.
The policy, however, contained an exclusion for "completed
operations" coverage.   In April, 1980, Taylor's widow filed
suit in Dawson County, blontana, for Raymond Taylor's death,
naming six defendants, including Ellinghouse.
      Ellinghouse's   insurance agent    in Billings, Montana,
forwarded notice of the claim and the legal papers served on
Ellinghouse to Safeco's office.     Safeco      initially accepted
coverage of the claim without question, and retained attorney
Lon Holden of Great Falls, Montana, to defend Ellinghouse.
All parties involved at that time assumed Ellinghouse had
coverage under    the Safeco policy     and    acted    accordingly.
Holden had   $100,000 in liability coverage with which to
negotiate.
      In August, 1981, Charles Hodge of Safeco's home office
in Seattle, reviewed the Ellinghouse file and discovered the
case involved a business operation which had been completed
three years before Taylor died.   Hodge issued a memo to other
Safeco officials noting Ellinghouse's         policy    contained a
"completed operations" exclusion and thus, in his opinion,
there was no coverage under the policy.                         Ellinghouse was not
informed of that discovery until he received a coverage
denial letter in November.
        In        October,     1981,       a    Safeco      adjuster    presented         a
"non-waiver"         agreement        to       Ellinghouse      which       he     signed,
despite the fact Lon Holden, the attorney retained by Safeco
to    defend       him, was       not      consulted        about     the    non-waiver
document.         The    adjuster       testified        that    he     explained        to
Ellinghouse at this time there were coverage problems and
that        the     non-waiver         agreement         would        preserve       both
Ellinghouse's            and   Safeco's           rights      under     the       policy.
Ellinghouse denied the adjuster had explained anything about
coverage problems at this meeting.
        In November, 1981, eighteen months after Safeco had
accepted the Taylor claim without reservation, and two months
before the original trial date of January, 1982, Safeco
formally denied coverage by                     letter to Ellinghouse.                  This
letter quoted in full two exclusions in the policy upon which
Safeco relied for denial of coverage.                          The first exclusion
was     the        "completed         operations"           exclusion        originally
discovered by Hodge at Safeco's home office.                                The second
exclusion         was    the    "away          from   the     designated         premises"
exclusion and, unlike the "completed operations" exclusion,
was not part of the original policy.                        Safeco later admitted
at trial it was wrong in relying on the "away from the
designated premises" exclusion, because this exclusion did
not    have        the   proper     endorsement          of    Ellinghouse         to    be
effective.           The     denial     letter        stated that Safeco would
continue to provide legal defense for Ellinghouse, but would
not    be    responsible        for     any       subsequent      judgment entered
against him, or any settled negotiations.                        None of the other
defendants' counsel were notified of this denial of coverage
until February, 1982.
       At this point Ellinghouse retained personal counsel.
The trial date originally set for January, 1982, was vacated,
and the trial re-set for May, 1982.              It was vacated again and
never re-set.      In April, Taylor's attorney offered to settle
the entire lawsuit for $165,000, including $50,000 for the
claim against Ellinghouse.          Ellinghouse forwarded the $50,000
offer to Safeco and demanded that it reinstate his policy and
pay   the offer.         Safeco refused.         When Safeco filed its
declaratory judgment action in September, all the defendants
in    the    Taylor   case      except     Ellinghouse    had       reached     a
settlement.
       In March, 1983, Ellinghouse asked Safeco's attorney,
Holden, to withdraw from the case and requested his file.
Shortly thereafter, Ellinghouse and Taylor reached a $25,000
cash settlement and agreed Taylor was to receive the first
$45,000 of any net proceeds recovered by Ellinghouse from
Safeco.       Ellinghouse       borrowed    $25,000     from    a    bank     and
executed a trust indenture on his home.                 A few days later,
Safeco      re-entered    the     picture    and      offered   $50,000       to
Ellinghouse to fund settlement of the Taylor claim, believing
the   original    settlement offer          to   be   open.         Safeco was
informed Ellinghouse had settled the claim himself.
       In making      its $50,000 offer to Ellinghouse, Safeco
suggested that if Safeco lost the declaratory action, it
would pay all of Ellinghouse's defense costs, but if Safeco
won, Ellinghouse would owe it $50,000.                 This offer was not
contingent on a dismissal or compromise of Ellinghouse's
counterclaim.      Safeco was informed the offer was too late,
due to the settlement made by Ellinghouse.
         The three major issues presented to this Court are
whether the District Court erred in directing a verdict on
the    issue      of      coverage;    whether     certain     prejudicial
instructional and evidentiary errors prevented Safeco from
receiving a fair trial; and whether the punitive award was
excessive or unconstitutional, and the emotional distress
award improper or excessive.
         Safeco's position is there was no coverage under the
terms of the policy itself.           The only two grounds on which it
could be held to have any duty to extend liability coverage
to Ellinghouse are the ambiguity of the policy terms or
estoppel to deny coverage.             Waiver and estoppel were the
bases for the District Court's ruling there was coverage as a
matter of law.
         Safeco argues the District Court erred in its ruling
that Safeco was estopped to deny coverage to Ellinghouse as a
matter    of    law.      We affirm the District Court's action.
Safeco's       position    is   Ellinghouse      failed   to   prove    each
essential element of the affirmative defense of estoppel,
especially the last element: "the party must in fact have
acted upon it [conduct of the other party] to his detriment."
Matter of Shaw         (Mont. 1980), 615 P.2d        910, 914.         Safeco
argues Ellinghouse did not prove by clear and convincing
evidence he was worse off because Safeco denied him coverage
in November, 1981, than he would have been had it denied
coverage immediately.           Alternatively,      if there were some
evidence by which a jury might have concluded Ellinghouse was
prejudiced, that evidence should have been presented to a
jury   for its determination.            We   find no merit       in this
argument.
        We adopt the general rule in an insurance estoppel case
as set forth in 14 Couch, Insurance 2d,                             $   51.85    (2d ed.
1982), as follows:
                 Where an insurer, without reservation and
                 with   actual or presumed      knowledge,
                 assumes the exclusive control of the
                 defense of claims against the insured, it
                 cannot thereafter withdraw and deny
                 liability under the policy on the ground
                 of noncoverage, prejudice to the insured
                 by virtue of the insurer's assumption of
                 the defense being, in this situation,
                 conclusively presumed                ...
                                              the loss of
                 the right of the insured to control and
                 manage the case is itself prejudicial.
This rule was deliberately ignored by Safeco's home office.
        Further,        the       Montana     Unfair        Trade       Practices    Act
requires     that           the     insurer       "   . . . promptly       provide     a
reasonable explanation of the basis in the insurance policy
in relation to the facts or applicable law for denial of a
claim   ...       "     Section 33-18-201(14), MCA.                      See also, 38


        Finally, the Washington case of Transamerica Ins. Group
v.   Chubb and Son, Inc.                  (Wash. 1976), 554 P.2d                1080, is
particularly important to the question of estoppel.                             In Chubb
the insureds were defended without reservation of rights for
ten months before the insurance company backed out of the
case.    It was estopped to deny coverage for three reasons:
(1) Before backing out of the case the company had undertaken
and conducted the defense for ten months, thereby depriving
the insureds "of their valuable right to retain private
counsel;"        (2) if the insureds were not protected by the
policy, they then had the "right to arrange for the initial
investigation, settlement negotiations and conduct of the
lawsuit [ ;] "        and     (3) there was a potential conflict of
interest on           the    part    of     the       retained   defense        attorney
vis-a-vis      the     insured.        The   Washington   court     found   a

presumption of prejudice and granted summary judgment.
        The court said:
               The course cannot be rerun, no amount of
               evidence will prove what might have
               occurred if a different route had been
               taken.    By its own actions, Federal
               irrevocably fixed the course of events
               concerning the law suit for the first 10
               months.   Of necessity, this establishes
               prejudice.
Chubb, 554 P.2d at 1083.
        The record here speaks for itself concerning Safeco's
activities during the eighteen months before it withdrew from
the case.       Safeco's activities were neither legitimate, nor
did     they    result     from    mistake.        Testimony       indicates
considerable investigation had been carried on by August,
1981, and       that    high    level officials were        aware of the
circumstances of this case.             A note in the file from Robert
J. McCorkle, a claims adjuster in Billings, dated August 12,
1981,    says     "Frank       Smith    says   hold   off    any    further
discovery--home office sees a coverage problem re: completed
coverage! Now? You're kidding! "               This was fifteen months
after Safeco began handling the case and had appointed Lon
Holden as counsel.             As a result of this note and other
conversations, McCorkle wrote to Safeco division headquarters
in April, 1982:
               ..  . a s we discussed, I am quite
               concerned about the eventual outcome of
               this matter      ...
                                  considering Montana's
               reputation in recent years, I wouldn't be
               surprised to see the Montana courts
               disregard fact all together.
        McCorkle was cross-examined at trial about the memo,
specifically on "Montana's reputation.":
               Q. Well,    I think you      say,.
               wouldn't be surprised to see Montana
                                                     "I     ..
               Courts disregard fact all together." Are
               you saying that the courts in this state
            disregard the facts of a case?    That's
            what your telling Mr. Smith, aren't you?
            A. Well, in reference to the Supreme
            Court, yeah, it's my opinion that they
            have been known to disregard that
            sometimes.
      Later McCorkel again warned Smith of Safeco's dangerous
course where he noted:
            As indicated in their correspondence,
            several of them [lawyers involved in the
            Taylor case] are also convinced that
            Safeco    will   immediately   pay   Mr.
            Ellinghouse's share of the settlement
            amount--and possibly a whole - -
                                           lot more.
            (Emphasis in origina1.r
     A memo written by Smith two days later said, "I feel we
really need to look at our position on indemnity given the
law that has been presented."
     A   telephone conversation with Lon Holden April       1-9,
1982, indicates that Holden told       Smith, "Insured getting
restless--I feel it appropriate that the Company have an
attorney look at your decision   ...   "
     Even before Safeco announced its repudiation, Frank
Smith was forecasting the consequences for the guidance of
the home office:
            If we were to totally deny the claim and
            withdraw defense at this point we would
            seriously   jeopardize    our    insured's
            position, etc. and I feel incur a
            lawsuit, which in Montana would be
            decided in favor of the insured.
      Smith did not give up.     Six months before Safeco filed
its "good faith'' declaratory judgment action, he advised a
superior:
            After going through the various briefs,
            etc. it does appear to me that we do have
            a serious problem as to whether we
            prejudiced the insured's rights to retain
            personal counsel and whether, in fact, we
            did create estoppel when we did not
            advise the insured of the coverage
            problem   when we    initially   accepted
            defense of the matter.
        Safeco cites several cases in defense of its argument
there was     no   estoppel   here.     OINeill Investigations v.
Illinois Emp. Ins. of Wausau (Alaska 1981), 636 P.2d 1170; R.
A. Hanson Co., Inc. v. Aetna Casualty         &   Surety Co.   (wash.
1976), 550 P.2d 701.     We are not persuaded.       While it is true
none of these cases found no estoppel, the time element was
considerably shorter in all of them, and in OINeill the
insurer had not actually commenced control of the action.
        In making its argument against estoppel, Safeco failed
to mention a controlling statute, S 26-1-601, MCA, which
provides :
             The     following        presumptions       are
             conclusive:
             (1) the truth of a declaration, act, or
             omission of a party, as against that
             party in any litigation arising out of
             such declaration, act, or omission,
             whenever he has, by such declaration,
             act, or omission, intentionally led
             another to believe a particular thing
             true and to act upon such belief;         ...
Here, Safecols acts went beyond confirmation letters to the
insured.     They included an answer to an interrogatory that
coverage was in effect.       The answer was filed with the court
and remained unchanged for eighteen months.            Safeco allowed
Ellinghouse to rely upon statements and matters of court
record, and is now estopped to deny the existence of the
same.    "The rule is that parties are bound by and estopped to
controvert admissions in their pleadings."           Fey v. A. A. Oil
Corp. (1955), 129 Mont. 300, 323, 285 P.2d 578, 590.
        The purpose of estoppel is      ". . . to    promote justice,
honesty, fair dealing and to prevent injustice."           Morris v.
Langhausen    (1970), 155 Mont. 362, 368, 472 P.2d         860, 863.
Clearly that purpose was accomplished when the court properly
applied the doctrine of estoppel.
      It should be noted while Ellinghouse's original answer
to Safeco's complaint alleged waiver, and the trial court
found waiver, Safeco makes no issue of the problem of waiver
on appeal.     It is a well established principal of appellate
review that:
             The judgment of the District Court is
             presumed to be correct and it will be
             upheld unless clearly shown erroneous;
             the burden of such showing is upon the
             appellant.
Schuman v. Study Commission of Yellowstone County (1978), 176
Mont. 313, 315, 578 P.2d 291, 292.
      Safeco     argues   that    even    if   it    is held      there was
coverage as a matter of law, the coverage question was in
fact a legitimate issue for argument, and Safeco therefore
was not in bad      faith or liable for punitive damages for
denying coverage or seeking to litigate this question.
      It is generally held that an insurer is entitled to
challenge a claim on the basis of debatable law or facts and
will not be liable for the bad faith or punitive damages for
denying coverage if its position is not wholly unreasonable.
St. Paul Fire and Marine Ins. Co. v. Cumiskey (Mont. 1983),
665 P.2d 223, 40 St.Rep. 891;            Nationwide Mut. Ins. Co. v.
Neville   (Ind. 1982) , 434 N.E.2d          585; American         Interstate
Insurance Co. of Georgia v. Revis (Ga. 1980), 274 S.E.2d 586.
      Safeco has the misconception that the mere filing of a
declaratory    judgment    action       somehow erases      any    possible
wrongs which preceeded or followed it.              The filing of such an
action    does    not     erect     a     judicial       shield     against
accountability.     Safeco fails to consider the facts giving
rise to the punitive damage issues in this case --facts not
found in any other case that has been reviewed by this Court,
and which will be discussed infra.
       Safeco next contends it did not get a fair trial for a
variety of reasons.        It argues the court should have told the
jury why       there was    "coverage," and   that   Safeco's legal
position was not frivolous. Nor should the court have allowed
attorney witnesses to instruct the jury on the law.
      Waiver and estoppel were the bases for the District
Court's    ruling   there was     coverage as   a matter   of    law.
Instruction 43 instructed the jury that:
               [Tlhe court has, as a matter of law,
               determined that George Ellinghouse's
               Safeco insurance policy provided him with
               full coverage, to his limits of $100,000
               for the death of Raymond Taylor, and that
               the exclusions alleged by Safeco do not,
               in any sense, defeat that coverage.
Safeco argues that in submitting such an instruction to the
jury the trial court must have found no coverage under the
policy itself, although this was never explicitly stated by
the   court.      In   addition   to   instruction   43, the    court
instructed the jury in instruction 24 that:
               You are instructed as a matter of law
               that in this case, George Ellinghouse's
               insurance policy was in full force and
               effect and that his premiums were paid.
      The court did not instruct the jury that Safeco had
raised reasonable legal arguments in its declaratory judgment
action or that the basis of the ruling was estoppel.            It is
Safeco's position the court's instructions, in fact, clearly
implied there was not the slightest merit in its argument the
exclusions denied coverage and their position was frivolous
as a matter of law.
       Safeco next argues that assuming there was no merit in
the exclusions it alleged and that its position was frivolous
as a matter of law, Ellinghouse was not prejudiced.            Such a
statement flies in the face of the evidence.            Examples of
Safeco's egregious conduct clearly shows prejudice in fact:
         (1) The non-waiver agreement extracted by deceit was
used against the insured in the declaratory judgment action.
         (2) Ellinghouse was denied the opportunity to conduct
his own early and independent investigation of the facts
against him.
         (3)   Ellinghouse, unaware of the coverage question gave
a deposition in the death case November 4, 1980, which
McCorkle later used against him to support the coverage
denial.
         (4) For the    first eighteen months   after the   suit,
Safeco claimed the right to exclusive control of settlement
under the policy, and then declined settlement offers made
within the policy limits without informing Ellinghouse of his
resultant and personal risk or immediate need for private
counsel.
         (5)   Discovery in the Ellinghouse defense was cut back
by Safeco's direction to Holden not to incur any additional
fees.    There is no indication in the record what preparations
were sacrificed because of this direction.
         (6) In a pleading directed to the District Court, June
18, 1981, Holden stated he would file an Ellinghouse motion
for partial summary judgment "certainly no later than a date
shortly after November 12, 1981."        Coverage was denied on
November 9, 1981.       No motion for summary judgment was ever
filed.
         (7)   By never sending a reservation of rights notice,
Safeco was permitted to arrange and announce its surprise
denial of coverage to an unsuspecting insured whose advance
opportunity to demand and protect his rights was forever
lost.
         (8)   Had Safeco respected its legal duty, Ellinghouse
would never have had to borrow $25,000 or mortgage his house.
         (9) Safeco's     claims     division        supervisor     early
recognized the prejudice to Ellinghouse.
      There is no need to comment on these examples.                 They
speak for themselves.      It is difficult to imagine situations
more illustrative to support the court's determination there
was prejudice in fact.
      Safeco next argues that the court's instructions, which
implied that Safeco's position was frivolous as a matter of
law, were reinforced by attorney testimony, which in effect,
similarly instructed the jury.            Despite vigorous objections
to admission of this testimony, the court admitted a letter
to   Safeco    from   attorney    Randy    Bishop,    stating    that   in
Bishop's opinion the law was clear that "in more than thirty
jurisdictions" the principles of waiver and estoppel would
apply to the facts of this case, and this was a rule of
"general acceptance. "      Mr.    Bishop was allowed to present
detailed opinion testimony on the coverage question, stating
it was a general principle of law that prejudice was always
presumed to exist whenever a representation of coverage had
been made and a defense provided, that the "courts are quite
unanimous in saying that insurance companies must either deny
coverage immediately or thereafter be estopped from doing
so," and that the "completed operations" exclusion had "no
application" to this case.
      Safeco further contends Mr.           Bishop's opinion on the
applicable law was enhanced by the testimony of Ellinghouse's
expert    witness,    attorney     James     Robischon.         Robischon
concurred with Bishop, and testified that Mr.                Bishop is
reputable, competent, highly skilled and experienced and that
Safeco was wrong in not following in his "advice."                      Safeco
argues he gave legal opinion that Safeco was completely wrong
in denying coverage, especially when they did so; testified
in detail as to what the legal effect of the non-waiver was;
and what legal duties were imposed upon Safeco in this case.
Safeco did not call other attorney experts to give their
opposite opinions of the law.            Safeco's position concerning
expert attorney witnesses is that it is the duty of the court
to instruct the jury on the law, and is the duty of the jury
to decide the facts of the case.
         Safeco relies on S 25-7-102, MCA:             "all questions of
law, including      . . . the    construction of statutes and other
writings,   . . . are    to be decided by the court           . . . and    all
discussions of law are to be addressed to the court."                   Safeco
also notes that Rule 704, M.R.Evid.,               provides that opinion
evidence "otherwise admissible is not objectionable because
it embraces an ultimate issue to be decided by the trier of
fact."      The Commission Comment to that rule states "the
Commission intends this rule to follow the existing Montana
practice    of     not   allowing    a   witness      to    give    a    legal
conclusion, or to apply the law to the facts in his answer."
Admission of opinion testimony as to the legal effect of a
contract is erroneous.           Energy Oils, Inc. v. Montana Power
Co.    (9th Cir.    1980), 626 F.2d         731.      This is a correct
statement of the rule and we apply it in this case.
       Ellinghouse       cites    several   Montana        cases   which   it
contends open the door for this type of testimony.                  None of
the cases cited, however, allows attorney testimony as to the
law, nor will we allow it here.                To do so would be to
dispense with Rule 704, Mont.R.Evid.,              and statutory and case
law.      No cases from other jurisdictions were cited and we
find none.       We   find no abuse of discretion in allowing
attorneys to appear as expert witnesses for the purpose of
stating their opinion on an insurer's duty to evaluate the
facts, on what constitutes a reasonable evaluation of the
facts, or on and how an insurer should have approached the
negotiations with the plaintiff.
          In view of the holding by the trial court that there
was coverage as a matter of law, we conclude that counsel's
testimony regarding the law of the case does not constitute
reversible error under the unique facts of this case.        In so
holding, we do not endorse in any way the use of attorneys'
testimony for this purpose.      As a general rule, an attorney
cannot advise the jury as to the law of the case.
          Safeco next contends the jury should not have been
permitted to hear evidence of its post-settlement activity
because much of the evidence was      not relevant to any issue
in the case and was highly prejudicial.         In view of the
record, however, we find no merit in this contention, as the
evidence is relevant to show malice.
              The essence of the cause before the Court
              is failure to deal fairly and in good
              faith with an insured and as such, the
              jury may be shown the entire course of
              conduct between the parties to arrive at
              a determination of whether that standard
              had been breached or not.
Timmons v. Royal Globe Ins. Co. (Okla. 1982), 653 ~ . 2 d907,


          Safecols trial counsel, however, did not object when
certain of this evidence was admitted. Safecols offer letter,
Ellinghouse's rejection letter, Lon Holden's billing slips
and   a    letter pleading   for Holden's   files were    received
without objection.       Holden was examined without objection
about the suit to obtain those files.         Safeco's pre-trial
memorandum contended that its      ". . . offer of   $25,000 made on
March 12, 1984, was a discharge of its duties of indemnity."
Both sides knew that recent events are relevant in bad faith
litigation.       Smith v. American Family Mut. Ins. Co.        (N.D.
1980), 294 N.W.2d    751; Farmers Ins. Exchange v. Schropp       an.
1977), 567 P.2d 1359.       Again, the facts speak for themselves.
Safeco cannot expect to try to exonerate itself at trial with
evidence of a change of heart and then take exception when
the attempt backfires.
      Safeco      also   objects   to   the   numerous   instructions
refused by the court.          We have carefully considered the
instructions offered and find them to be both cumulative and
repetitive of other        instructions given.       In the law of
insurance   bad    faith    litigation,   "Instructions should    be
weighed as a whole, and no District Court may be reversed
where the instructions, read one with another, and in the
context with each other, fully define the issues involved,
including damages."        Gibson v. Western Fire Ins. Co. (~ont.


      Safeco contends it should not be punished              for Lon
Holden1s alleged improprieties or breach of duties.          In this
regard, the jury was instructed on this issue as follows:
            An agent is one who represents another,
            called the principal, in dealings with
            third persons.   Such representation is
            called "agency."
            You may find from the evidence that
            attorney Holden was Safeco's agent even
            though he was hired by Safeco to conduct
            the defense of George Ellinghouse.     If
            you find attorney Holden was the agent of
            Safeco, then you must find that Safeco is
            responsible for all of the acts done by
            attorney Holden within the scope of his
            employment and it is responsible for
            them.   The mere fact that Holden is an
            attorney at law does not excuse Safeco
            from responsibility.
         Safeco's argument it should not be charged with its
attorney's actions, but rather that Ellinghouse has a remedy
in a separate action against attorney Lon Holden, comes close
to being part of the twilight zone.          Safeco sold the policy,
accepted     coverage    for    months,    hired       Holden     and    then
repudiated coverage.
         Safeco    attempts     to   characterize        Holden     as    an
independent       contractor,    thereby    absolving       itself       from
liability for any mistakes he may have made.                    The attempt
fails.     Safeco cannot insulate itself from its own bad faith
simply by renouncing an agency relationship.
         This issue was well reasoned by Federal Judge William
Jameson in a case on point from Montana.                   Judge Jameson
concluded the attorney is an agent of the insurance company.
The   provisions of     an     insurance contract which           give the
insurance company the right and impose a correlative duty to
defend suits against the insured have the effect of placing
absolute and exclusive control over the litigation in the
insurance carrier.        The authorities agree the               insurance
carrier has       "the correlative duty to exercise diligence,
intelligence, good faith, honest and conscientious fidelity
to the common interests of the parties.''                [Citing cases.]
Jessen v. O'Daniel      (1.962), 210 F.Supp 317, 331.              Judgment
affirmed, Nat.      Farmers Union Property         &    Casualty Co.      v.
O'Daniel (1964), 329 F.2d 60, 65.
         Safeco raises the issue of the testimony of Melvin 0.

Senst, one of its former claims adjusters.                Safeco alleges
that Senst was not revealed as a witness until ten days after
discovery had been closed, eleven days before trial, and
three days before the pre-trial order was submitted, all of
which was in violation of the court's orders.
      The testimony was offered to show Safeco's general
business practice as required to prove violation of the
Unfair Claims Settlement Act, S     33-18-201, MCA.    Safeco
alleges it did not conduct any discovery on the issue of its
general business practice and was not prepared to meet it.
Although Senst had not worked for Safeco for fifteen years,
he was allowed to testify that on five to eight occasions
during this period he was dispatched by Safecols home office
to obtain a "non-waiver" from Safeco insureds who had been
sued and for whom Safeco had provided coverage and defense
for a period of time.   He testified he was not instructed to
tell the insured there were coverage problems and that in no
case was an attorney present even though Safeco had provided
an attorney for the insureds. Signing the "non-waiver" was
the "kiss of death" as far as coverage was concerned.      He
could not recall any of the names of the insureds, parties or
attorneys involved.
     The district court judge recognized that this "testimo-
ny is explosive before a jury," and after hearing it in
chambers sustained the objections to it and then reversed
himself and allowed it.    Whether this evidence was properly
admitted is one of the closest calls this Court has made in
some period of time.    The rule has been properly set forth:
          In determining whether evidence is too
          remote to be relevant, the trial court is
          not guided by any fixed rules. Rather,
          the nature of the evidence and the
          circumstances of the particular case must
          control.   [Citations omitted.] For this
          reason, the determination of remoteness
          is left in great part to the trial
          court's discretion. [Citations omitted.]
          The   trial court ' s determination of
          relevancy is subject to review only in
          case of manifest abuse.        [Citations
          omitted. ]
Preston v. McDonnell             (Mont. 1983), 659 P.2d          276, 277, 40
St.Rep. 297, 299.
        Remoteness goes to the weight and not the evidentiary
value of the evidence.              There is no showing Safeco was un-
fairly prejudiced by admission of testimony.                      We find no
manifest abuse in its admission.
        Finally, we consider the $5,000,000 punitive damages
award and $200,000 emotional damages award.                      The punitive
damages award is 20,000% above the award of $25,000 for
economic damages caused Ellinghouse.                 It is 5,000% more than
the $100,000 maximum             of the insurance policy, for which
Safeco should have settled this case.
        The     trial      court     awarded   damages    of     $200,000   to
Ellinghouse for emotional distress, in opposition to which
Safeco advanced the argument of an absence of malice on its
part.        Although      an    award   of mental     anguish damages      is
justified by the evidence presented by Ellinghouse on the
issue of       malice, the         amount of       the award     substantially
exceeds that which the evidence could sustain and therefore
must be reduced.
        Punitive damages are an extraordinary remedy, outside
of the field of usual redressful remedies, and should be
applied with caution, lest gendered by passion and prejudice
because of the defendant's wrongdoing, the award becomes
unrealistic or unreasonable.                 Such damages may be awarded
where the nature of the wrong complained of and the injury
inflicted goes beyond merely violating the rights of another
and     is    found   to    be     willful   and    malicious.    This   Court
consistently has emphasized the primary purpose for assessing
punitive damages is to punish the wrongdoer and through that
punishment     to     deter    further   unlawful           conduct     of    the
tortfeasor and others.
             To perform its office as a deterrent,
             punitive damages when awarded should be
             of such significant amount as to serve
             the office of deterrence by punishing the
             defendant and as well warn others.
Gibson, supra, 682 P.2d at 740, 41 St.Rep. at 1063.
       Appellate courts in most jurisdictions, including ours,
will ordinarily defer to the discretion of the fact finder
when reviewing the amount of punitive damage award.                     However,
where it appears that such an award has resulted from passion
or prejudice, rather than from the reason and justice, the
Court must not permit such an award to stand.                         Passion or
prejudice may be shown by the excessive amount of punitive
damages itself.
       Punitive damages cannot be         l1   'in excess of the amount
necessary adequately to punish the defendant and serve as an
example to it and others. "          Wayte v. Rollins International,
Inc.   (Cal. 1985), 215 Cal.Rep. 59, 71.                    A duty to act is
imposed on the reviewing court to act            l1   '[w]hen the award, as
a matter of law, appears excessive, or where the recovery is
so grossly disproportionate as to raise a presumption that it
is the result of passion or prejudice                 ...      1 11
                                                                      Little v.
Stuyvesant Life Ins. Co. (Cal. 1977), 136 Cal.Rep. 653, 663.
       In    determining      the   amount      of     such     damages,      the
fact-finder should consider the following factors: the nature
of the alleged misconduct of the defendant, the extent and
the effect of the misconduct on the lives of the plaintiff
and others, the probability of future reoccurrence of such
misconduct,     the    relationship      between        the     parties,      the
relative     wealth    of     the   defendant,        and     the     facts   and
circumstances surrounding the misconduct and the amount of
the actual damages awarded.       These factors are comparable to
those set out in an early Montana case, Ramsbacher v. Hohman
(1927), 80 Mont. 480, 489, 261 P. 273, 277.        However, they
are more carefully and more appropriately stated for the
kinds of lawsuits being brought in the present day.
         The 1985 Legislature enacted a package of amendments to
our punitive damages law.       The new Montana provisions found
at   $   27-1-221 (2) through   (7), MCA, provide the claim for
punitive damages must be proved by         clear and convincing
evidence.     The plaintiff must prove a prima facie case for
punitive damages to the judge before any evidence regarding
defendant ' s financial affairs may be presented to the jury.
In all cases but those where actual fraud or actual malice is
shown, the punitive damages are limited to $25,000 or 1% of
the defendant's net worth, whichever is greater.          In the
future these elements must be taken into consideration in
awarding punitive damages.
         We find the damages awarded so grossly excessive and
disproportionate to the injury as to shock one's conscience.
As a matter of law, they must have been determined by passion
or prejudice.     A means of controlling excess punitive damages
verdicts is to order a new trial on the issue of damages or,
in the alternative, remittitur, with reduction of the amount
of a portion of punitive damages awarded to the plaintiff.
The evidence in this case is sufficient to sustain a verdict
against Safeco, but does not show a vindictiveness or ill
will on its part so extreme as to warrant the exorbitant sum
awarded here.      Nonethess, it violates the standards quoted
above, which we believe should guide the trial court in
making punitive awards.
      Judgment is reversed without costs and a new trial
ordered    unless   the   respondent   Ellinghouse   shall   within
fifteen days agree in writing to a reduction of the total
verdict to the sum of $1,000,000, in which event the judgment
is modified accordingly, and as modified, affirmed.          In the
event the respondent determines not to take the modified
judgment, the retrial of the case will be limited to the
issue of damages.




We concur:




Justices


Honorable Thomas A. Olson,
Judge of the District Court,
sitting for Mr. Justice L. C.
Gulbrandson.
Mr. Justice Frank B. Morrison, Jr., dissenting:
     I dissent to the remittitur.
     Most of the majority opinion is excellent.               However, I
am befuddled by the treatment of the damage issue.
     The    majority     opinion     carefully   notes    there    is    no
reversible    error     on     any   of   the    liability    questions.
Therefore, I assume that a new trial is being ordered on
damages only unless respondents accept a reduction in the
total verdict to the sum of $1,000,000.             This point is not
made clear.
     Neither is it clear how the majority arrived at the
figure of     $1,000,000.        The opinion carefully        notes the
egregious conduct of Safeco which is the one thing in this
case that in fact shocks one's conscience.                   We recently
affirmed a verdict, in a far less egregious case. Flanigan v.
Prudential Federal Savings and Loan (Mont. 1986), 720 P.2d
257, 43 St.Rep.      942.      Flanigan was a wrongful termination
case where the jury returned a verdict in favor of plaintiff.
She was awarded $94,170 in economic damages, $100,000 for
emotional distress, and punitive damages in the amount of
$1,300,000.      In other words, the Flanigan case involved
$194,170 in compensatory damage whereas this case involves an
award of $225,000 in compensatory damages.               In Flanigan we
upheld punitive damages in the amount of $1,300,000.              In this
case we    are reducing punitive damages to              $775,000, some
$525,000 less than we allowed in Flanigan.
    Without any question the conduct of Safeco in this case
is more outrageous than the conduct of Prudential Federal
Savings and Loan in the Flaniqan case.               Furthermore, the
undisputed evidence is that, in 1983, the Safeco group had
amassed     assets      of     $3,414,715,000.         Revenues     were
$1,702,159,000    for    one    year.     Shareholders equity           (net
assets)    was   over       $1,000,000,000.        The   jury       verdict   of
$5,000,000 in punitive damages in this case is 4 of 1% of the
defendant's net worth.
     The net worth of Prudential Federal Savings and Loan in
the Flanigan case was $44,000,000.                The 1.3 million dollar
verdict is nearly 3 % of Prudential's net worth.
     Since    the purpose         of   punitive      damages    is to deter
wrongful    conduct and punish           the   tortfeasor the punitive
damage award should bear some relationship to the net worth
of the defendant.            How the majority upholds 1.3              million
dollars    against      a    relatively    small      company,      Prudential
Savings and Loan, and reduces to $775,000 a punitive damage
award against one of America's large corporations, I do no
understand.
    When appellate judges attempt to circumvent the jury
process and substitute their judgment for those who hear the
evidence, they inevitably err.               Up to this time there is
little, if any, precedent              supporting the Montana Supreme
Court    substituting       its   judgment     for    that     of   the   jury.
Unfortunately that strong support for the jury system has now
been dynamited.      The majority announces loud and clear that
from this day      forward, four justices, robed in judicial
onmiscience, will replace our jury.             It is a sad day indeed.




Mr. Justice William E. Hunt, Sr.:                               /

        I concur with the dissent of Mr. Justice Frank B. Morrison,
Mr. Justice John C. Sheehy, dissenting:


        I concur with the dissent of Mr. Justice Morrison and
add these comments.
        This is the worst case of judicial interference by this
Court with a jury verdict since the notorious O'Brien cases
(O'Brien v. Great Northern Railway Company (1953), 145 Mont.
13, 400 P.2d 634; O'Brien v. Great Northern Railway Company
(1966), 148 Mont. 429, 421 P.2d        710, cert. den. 387 U.S.
920).     It is the worst case of judicial aberration since the
infamous Ashcraft case       (Ashcraft v. Montana Power Company
(1971), 156 Mont.     368, 480 P.2d    812).      The O'Brien cases
convinced the plaintiffs' bar in Montana that there was no
judicial restraint in the make-up of this Court in the 1960s.
The   Ashcraft   ruling was    corrected    and   overruled by   the
members of the Constitutional Convention of 1972 through the
adoption of Art. 11,    §   16 of the Montana Constitution.      The
deleterious effect     of   the   opinion   in    this case   is its
announcement that the right of a jury to set damages is
hereafter subject to the consent of the majority of this
Court.
      The right to jury trial and the right of parties to have
a jury determine the cause is limited to one jury of no less
than six persons and no more than twelve.         There is no lawful
provision for a second super jury, composed of four majority
members of this Court.      The first jury at least was sworn in.
The second and unsworn jury, in conference and by memoranda,
debated on what they might agree, ranging from reversal to
$200,000 to $2,500,000.       Their conclusion was reached in a
conference telephone conversation by the majority without the
minority members of the Court, who were not invited and did
not participate.       Of course, the minority members would not
have participated in any event, since they did not agree with
the decision.       But this was the first occasion in my eight
years on the court that the decision of a divided court was
reached ex-conference.       The resultant figure in the majority
opinion has no relation to the evidence, and no explanation
is offered nor can be offered by the majority for the figure
adopted.
      Worse, the majority do not point to a single error made
by the District Court in the conduct of the trial.           Only the
jury is blamed, accused of passion and prejudice.           Ignored is
the qualitative element of outrage of the jurors that must
inhere     in   punitive   damages   awards:   the   jury    must   be
convinced that the defendant was so motivated by malice,
fraud and oppression in its treatment of the plaintiff that,
in addition to punishment, to deter others an award must be
made in an amount sufficient to set an example.             It is not
idly that punitive damages are referred to in the codes as
exemplary damages.
      Would that the majority, whose consciences are shocked
by the jury, were more shocked by the flagrant abuse heaped
upon the plaintiff and        other insureds by      this   insurance
company.        For 25 years under the evidence here, the last
instance a week before the trial of this case, this insurance
company persisted as a business practice in misleading its
insureds into signing agreements which waived their legal
rights and claims against the company, through deception and
fraud.     Then the company denied the claims.        This insured,
after signing such an agreement, and getting such a denial,
was   forced to mortgage his home to settle a claim which
rightfully should have been settled by the insurance company
as the evidence shows.      That plaintiff suffered emotional
distress is beyond cavil.       Yet the majority here have wiped
out, without comment, his       jury-given award for emotional
distress.
     When the courts cannot be relied on to enforce jury
awards against outrageous conduct, and awards are reversed on
the grounds of passion and prejudice, the jury members are
demeaned by an implication, nay, accusation of unfairness.
In   my   view,   this   jury    acted   responsibly   toward   an
irresponsible defendant.    It did not act unfairly.    It should
be supported, not demeaned.