Woodworker's Supply, Inc. v. Principal Mutual Life Insurance

F I L E D
United States Court of Appeals
Tenth Circuit

MAR 10 1999
PUBLISH
PATRICK FISHER
Clerk
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT

WOODWORKER’S SUPPLY, INC.,

Plaintiff-Appellee/
Cross-Appellant,

v. Nos. 97-2226
97-2232
PRINCIPAL MUTUAL LIFE
INSURANCE COMPANY,

Defendant-Appellant/
Cross-Appellee,

Appeal from the United States District Court
for the District of New Mexico
(D.C. No. CIV 95-1583 BB/DJS)

Doug K. Butler (Bill E. Davidoff with him on the briefs) of Figari & Davenport,
L.L.P., Dallas, Texas, for Defendant-Appellant/Cross-Appellee.

William C. Madison and Gregory D. Steinman of Madison, Harbour, Mroz &
Brennan, P.A., Albuquerque, New Mexico, for Plaintiff-Appellee/Cross-
Appellant.

Before SEYMOUR, Chief Judge, BALDOCK and BRORBY, Circuit Judges.

SEYMOUR, Chief Judge.
 In this diversity action, Woodworker’s Supply, Inc. (Woodworker) sued

its former insurer, Principal Mutual Life Insurance Company, for unfair trade

practices and fraud. The district court held that the Employee Retirement Income

Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 et. seq., bars claims arising

after March 1, 1994, the effective date of the parties’ agreement, but sent to the

jury the claims arising prior to that date. The jury awarded Woodworker

$221,000 based on Principal Mutual’s violations of the New Mexico Unfair

Insurance Practices Act, N.M. S TAT . A NN . §§ 59A-16-1 et. seq., the New Mexico

Unfair Practices Act, N.M. S TAT . A NN . §§57-12-1 et. seq., and fraud in the

inducement. Principal Mutual appeals, arguing that 1) ERISA preempts all of

Woodworker’s claims; 2) Woodworker improperly failed to disclose its damage

theory prior to trial; 3) the evidence was insufficient to support the jury’s findings

of fraud, violations of the New Mexico statutes, and damages; and 4) Principal

Mutual is entitled to contract damages resulting from Woodworker’s failure to

pay certain premiums. Woodworker cross-appeals, claiming that 1) the district

court erred by not sending the issue of punitive damages to the jury; and 2) in

refusing to award treble damages under the state statutes; 3) we should award

Woodworker attorney’s fees and costs on appeal; 4) and if we order a new trial,

the jury should be permitted to consider conduct occurring after March 1, 1994.

We affirm in part and reverse in part.

-2-
 I.

We review the evidence in the light most favorable to Woodworker

because the jury found in its favor. See Webb v. ABF Freight Sys. Inc., 155 F.3d

1230, 1234 n.1 (10th Cir. 1998). “[W]e accept the jury’s factual determinations

as long as they are reasonably based on some evidence or the inferences that may

reasonably be drawn from such evidence.” Id. Under this standard of review, the

record establishes the following facts.

At the end of 1993, Woodworker, a manufacturer and supplier of

woodworking tools and equipment, was shopping for insurance coverage for its

employees. It was dissatisfied with its previous insurer, Washington National, for

processing claims inefficiently and inaccurately. Woodworker received bids from

several insurance companies, including Principal Mutual, through its insurance

broker, Nadyne Shimada.

Woodworker had previous experience with different types of insurance

contracts. Washington National had provided Woodworker with a contingent

premium contract, also known as a retrospective premium agreement. Under such

an agreement, the insurer sets two rates, the preliminary premium and the contract

premium. During the course of the year, the insured pays the preliminary

premium which is the lower of the two rates. At the end of the year, the insurer

-3-
calculates the claims paid as well as certain other charges. If this calculation is

lower than the preliminary premium, the insured pays nothing further. If it is

higher, the insured pays the difference but never more than the contract rate. In

exchange for this flexibility, the maximum liability is somewhat higher than it

would be were only one rate set. Woodworker’s experience with this arrangement

had been positive. Its claims had been 60-70% of the preliminary premium, and it

never had to make an additional payment at the end of the year.

When Ms. Shimada solicited bids for a new insurer on behalf of

Woodworker, she looked for a plan structured similarly to Washington National’s.

Principal Mutual submitted a low bid, so low in fact that Ms. Shimada sent it back

for the company to revise its rates upwards. Rates that are too low may harm the

insured in several ways. They may indicate insufficient coverage. Or, in a

contingent funding agreement, inadequate preliminary premiums may subject the

insured to unexpected collections at the end of the year or significant rate

increases for the next year.

Principal Mutual resubmitted an increased bid and set the preliminary

rates 25% below the contract rate. According to Ms. Shimada’s analysis, the rates

seemed reasonable and she recommended Principal Mutual’s plan to Woodworker.

Principal Mutual began insuring Woodworker on March 1, 1994, although the

parties did not sign the retrospective premium agreement until late July 1994.

-4-
 Unbeknownst to Woodworker, the underwriter of the plan, Melissa Lorek,

had serious doubts about the adequacy of the rates. On February 28, 1994, she

e-mailed Laura Bullock, the Principal Mutual sales representative on the

Woodworker contract:

We don’t feel comfortable with increasing the retro differential past
the 20%. We did, originally, look at this as an option. We decided
against this because, upon closer examination, the contract rates are
already inadequate. . . . We feel we have already been very
aggressive with this case and I don’t feel comfortable with getting
any more aggressive.

Supp. App. at 64. Ms. Bullock responded the following day, “This is completely

unacceptable. . . . This is a done deal.” Id. at 66. Principal Mutual made no

further changes to the rates. In a letter discussing contract renewal and rate

increases for the following year, Ms. Lorek told Ms. Shimada, “When [Principal

Mutual] sold this case last March, [it] knew the rates were inadequate.” Id. at 68;

see also Aplt. App. at 766. Prior to that, no one from Principal Mutual had told

Ms. Shimada that the rates charged to Woodworker were inadequate.

Principal Mutual also failed to fully disclose certain aspects of the method

it used to calculate rates, increasing the likelihood that Woodworker would

experience large rate increases and charges in excess of the preliminary

premiums. For example, Principal Mutual’s method for determining reserves to

cover “incurred but not reported” expenses deviated from the industry norm and

significantly impacted Woodworker’s renewal program. Principal Mutual did not

-5-
disclose this to Woodworker until February 1995. In addition, while the contract

mentioned pooling charges, it did not indicate that such charges could equal up to

15% of the contract premium. Even though Woodworker paid $178,000 in

premiums in 1994, its claims would have to have been less than $50,000 to avoid

an end of the year surcharge. Had Woodworker known this prior to March 1,

1994, it would not have contracted with Principal Mutual.

As would be expected, Principal Mutual’s omissions resulted in a

significant charge at the end of 1994 as well as a large rate increase for the

following year. Severe disagreements ensued between Principal Mutual and

Woodworker. Woodworker refused to pay the increase in the rates, as well as the

1994 surcharge. Principal Mutual demanded payments and unilaterally increased

the 1995 rates. Finally, Principal Mutual terminated Woodworker’s coverage

effective midnight, August 31, 1995.

II.

A. ERISA Preemption

The primary legal question in this case is whether, and to what extent,

ERISA preempts Woodworker’s claims against Principal Mutual. 1 The trial court

1
Woodworker does not contend that Principal Mutual’s counter-claim
(continued...)

-6-
originally dismissed as preempted only those claims arising “out of Principal’s

alleged failure to provide coverage in September 1995,” Aplt. App. at 153, but

modified its ruling at trial by holding preempted all claims arising after March 1,

1994, the date the insurance plan commenced. We review the trial court’s ruling

on ERISA preemption de novo as it involves a question of law. See Airparts Co.

v. Custom Benefits Serv. of Austin, 28 F.3d 1062, 1064 (10th Cir. 1994).

The plain language of ERISA provides that it shall preempt state laws that

“relate to any employment benefit plan,” subject to enumerated exceptions. See

29 U.S.C. § 1144(a). The Supreme Court has frequently acknowledged the

expansive scope of ERISA preemption, see, e.g., Ingersoll-Rand Co. v.

McClendon, 498 U.S. 133, 138-39 (1990); Pilot Life Ins. Co. v. Dedeaux, 481

U.S. 41, 47 (1987); Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 98-99 (1983), yet

the Court has also noted that this observation provides little aid in actually

determining whether ERISA supersedes state law, see, e.g., New York State

Conference of Blue Cross & Blue Shield v. Travelers Ins. Co., 514 U.S. 645, 655

(1995); California Div. of Labor Stand. v. Dillingham, 519 U.S. 316, 335-36

(1997) (Scalia, J., concurring). As the Court noted in Travelers:

[O]ne might be excused for wondering, at first blush, whether the
words of limitation . . . do much limiting. If “relate to” were taken

1
(...continued)
against it is preempted, and we do not consider that issue.

-7-
 to extend to the furthest stretch of its indeterminacy, then for all
practical purposes pre-emption would never run its course, for
“[r]eally, universally, relations stop nowhere,” H. James Roderick
Hudson xli (New York ed., World Classic’s 1980). . . . That said, we
have to recognize that our prior attempt to construe “relate to” does
not give us much help in drawing the line here.

Travelers Ins. Co., 514 U.S. at 655. The Court then offered another way of

analyzing ERISA pre-emption: “We simply must go beyond the unhelpful text

and the frustrating difficulty of defining its key term, and look instead to the

objectives of ERISA as a guide to the scope of state law that Congress understood

would survive.” Id. at 656.

In enacting ERISA, Congress intended to “protect . . . the interests of

participants in employee benefits plans and their beneficiaries . . . by establishing

standards of conduct, responsibility, and obligation for fiduciaries of employee

benefit plans, and by providing for appropriate remedies.” 29 U.S.C. § 1001(b).

Preemption of state law works toward that end by subjecting plans and plan

sponsors to a uniform body of law and minimizing the administrative and

financial burdens of complying with conflicting directives among states or

between states and the federal government. See Travelers Ins. Co., 514 U.S. at

656-57 (quoting Ingersoll-Rand Co., 498 U.S. at 142). Congress defined a plan

fiduciary as a person

(i) [who] exercises any discretionary authority or discretionary
control respecting management of such plan or exercises any
authority or control respecting management or disposition of its

-8-
 assets, (ii) [who] renders investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or other
property of such plan, or has any authority or responsibility to do so,
or (iii) [who] has any discretionary authority or discretionary
responsibility in the administration of such plan.

29 U.S.C. § 1002 (21)(A).

This court has identified four causes of action that “relate to” a benefit

plan for purposes of ERISA preemption. They involve 1) laws regulating the type

of benefits or terms of ERISA plans; 2) laws creating reporting, disclosure,

funding or vesting requirements for such plans; 3) laws providing rules for

calculating the amount of benefits to be paid under such plans; and 4) laws and

common-law rules providing remedies for misconduct growing out of the

administration of such plans. Airparts Co., 28 F.3d at 1064-65 (quoting National

Elevator Indus. v. Calhoon, 957 F.2d 1555, 1558-59 (10th Cir. 1992)).

At the same time, this circuit recognizes that ERISA does not preempt all

state law claims. It has no bearing on those “which do[] not affect the ‘relations

among the principal ERISA entities, the employer, the plan, the plan fiduciaries

and the beneficiaries’ as such.” Hospice of Metro Denver, Inc. v. Group Health

Ins. of Okla. Inc., 944 F.2d 752, 756 (10th Cir. 1991) (quoting Memorial Hosp.

Sys. v. Northbrook Life Ins. Co., 904 F.2d 236, 249 (5th Cir. 1990)). “As a

corollary, actions that affect the relations between one or more of these plan

entities and an outside party similarly escape preemption.” Airparts Co., 28 F.3d

-9-
at 1065. While the scope of ERISA preemption may be broad, it is certainly not

boundless. See Monarch Cement Co. v. Lone Star Indus. Inc., 982 F.2d 1448,

1452 (10th Cir. 1992).

With these principles in mind we turn to the parties’ claims. Essentially

Principal Mutual argues that many courts, including this one, have held ERISA

preempts fraudulent inducement claims and we should follow that precedent here.

Principal Mutual concedes that courts have allowed employers’ fraudulent

inducement claims against insurance professionals, but contends those cases are

inapposite because Principal Mutual is an insurance company, not an insurance

professional. We disagree on both counts.

In the cases upon which Principal Mutual relies, the fraudulent

inducement claims arise in a context factually distinguishable from the instant

case. For example, several of the cases involve fraudulent inducement claims

affecting relations between primary ERISA entities. See, e.g., Dedeaux, 481 U.S.

41, 43-44 (1987) (employee sued plan fiduciary for failing to pay benefits);

DeBruyne v. Equitable Life Assurance Soc. of the United States, 920 F.2d 457,

460-62 (7th Cir. 1990) (beneficiaries sued plan fiduciary). Principal Mutual’s

heavy reliance on Maez v. Mountain States Tel. & Tel., 54 F.3d 1488 (10th Cir.

1995), is also misplaced. In Maez, plan beneficiaries sued the employer to

recover benefits under the plan. Id. at 1492. As noted above, the allocation of

-10-
benefits under an employee benefits plan goes to the core of ERISA, and so such

claims are usually preempted. See Airparts Co., 28 F.3d at 1064-65.

We find instructive those cases in which an employer sued an insurance

professional for misrepresentations that induced plan participation. At least four

circuits have held that ERISA does not preempt such claims. See Wilson v.

Zoellner, 114 F.3d 713, 721 (8th Cir. 1997) (“[W]e hold that ERISA does not

preempt [plaintiff’s] suit against [an insurance agent] for the Missouri state

common-law tort of negligent misrepresentation.”); Coyne & Delaney Co. v.

Selman, 98 F.3d 1457, 1467 (4th Cir. 1996) (“We hold that [plaintiff’s]

malpractice claim [against the insurance professionals] is not preempted because

it does not ‘relate to’ an employee benefit plan within the meaning of ERISA’s

preemption provision”); Morstein v. National Ins. Serv., Inc., 93 F.3d 715, 723

(11th Cir. 1996) (en banc) (“When a state law claim involves the reliance on an

insurer’s promise that a particular treatment is fully covered under a policy, . . . a

claim of promissory estoppel is not ‘related to’ the benefits plan.”); Perkins v.

Time Ins. Co., 898 F.2d 470, 473 (5th Cir. 1990) (“[W]e conclude that a claim

that an insurance agent fraudulently induced an insured to surrender coverage

under an existing policy, to participate in an ERISA plan which did not provide

-11-
the promised coverage, ‘relates to’ that plan only indirectly.”). 2 The reasoning is

two-fold: first, by definition, the insurance professional cannot act as a plan

fiduciary before the plan exists; and second, allowing preemption would not

further Congress’ purpose in passing ERISA. See Coyne & Delaney Co., 98 F.3d

at 1466-71.

Coyne & Delaney Co. is particularly apposite to the instant case. There,

an employer sued insurance professionals under Virginia’s malpractice law. See

id. at 1464. The insurance professionals had misadvised the employer about

employee benefit plans and had designed an inadequate plan for it. See id. at

1461. Once the plan went into effect, the insurance professionals served as the

Plan Administrator and Plan Supervisor. See id. The Fourth Circuit rejected the

defendants’ claims that ERISA preempted the employer’s claims, noting:

Quite simply, Delany’s claim is not aimed at a plan administrator at
all since the defendants are sued in their capacities as insurance
professionals for actions taken in that capacity. Indeed, defendants’
malpractice, if any, took place before they began to act in their
capacities as Plan Administrator and Plan Supervisor.

Id. at 1471.

2
Two cases to the contrary relied on by Principal Mutual have
subsequently been disavowed in their respective circuits. Thus, in Wilson v.
Zoellner, 114 F.3d 713, 721 n.4 (8th Cir. 1997), the Eighth Circuit declined to
follow the dicta in Consolidated Beef Indus., Inc. v. New York Life Ins. Co., 949
F.2d 960, 964 (8th Cir. 1991). And in Morstein v. National Ins. Servs., Inc., 93
F.3d 715, 717-18, 722 (11th Cir. 1996), the Eleventh Circuit en banc court
overruled Farlow v. Union Cent. Life Ins. Co., 874 F.2d 791 (11th Cir. 1989).

-12-
 Similarly, Woodworker is suing Principal Mutual with respect to its pre-

plan activity in its role as a seller of insurance, not as an administrator of an

employee benefits plan. Principal Mutual does not, and cannot, claim that it was

a principal ERISA entity before March 1, 1994. Of the four principal ERISA

entities, the employer, the plan, the beneficiaries, and the plan fiduciaries,

Principal Mutual could only claim to be the last. However, Congress quite

logically defined a plan fiduciary in relation to a plan. If no plan exists, by

definition plan fiduciaries cannot exist. Consequently, Woodworker’s pre-March

1, 1994 claim is best characterized as a claim between an employer and an outside

party not affecting relations between ERISA entities, as such. See Airparts Co.,

28 F.3d at 1065. That Principal Mutual may have later acted as a plan fiduciary

does not alter its pre-plan status. Cf. Coyne & Delaney, 98 F.3d at 1471.

Allowing Woodworker’s claims to proceed is consistent with Congress’

purpose in enacting ERISA, that is, to protect the interests of employees and other

beneficiaries of benefit plans and establish uniform standards regulating such

plans. Holding insurers accountable for pre-plan fraud does not affect the

administration or calculation of benefits, nor does it alter the required duties of

plan fiduciaries. See Wilson, 114 F.3d at 719; Coyne & Delaney Co., 98 F.3d at

1471. Conversely, were ERISA to preempt such claims, “employees, whom

Congress sought to protect, [would] find themselves unable to make informed

-13-
choices regarding available benefit plans.” Morstein, 93 F.3d at 723-24. We

agree with the Eighth Circuit’s assertion that a state’s “efforts to prevent sellers

of goods and services, including benefit plans, from misrepresenting . . . the

scope of their services is ‘quite remote from the area with which ERISA is

expressly concerned–reporting, disclosure, fiduciary responsibility and the like.’”

Wilson, 114 F.3d at 720 (quoting Dillingham, 117 S. Ct. at 840).

Finally, we are not persuaded that Principal Mutual’s status as an

insurance company mandates preemption. 3 We acknowledge that in the above-

cited cases plaintiffs were suing insurance professionals, as opposed to insurance

companies, but we fail to see how this makes a material difference. See Camp v.

Pacific Fin. Group, 956 F. Supp. 1541, 1546-47 n.4 (C.D. Cal. 1997). In enacting

ERISA, Congress intended to protect the integrity of employment benefit plans,

not insurance companies. It explicitly defined a plan fiduciary in terms of the

function it performed for the plan, not whether it was an insurance company.

Courts have repeatedly held that insurers are not necessarily ERISA entities. See

Harris Trust & Sav. Bank v. Provident Life & Accident Ins. Co., 57 F.3d 608,

613-14 (7th Cir. 1995) (holding that insurance company was not a fiduciary as

3
Principal Mutual argues that because claims against insurance
professionals are permitted, Woodworker could sue Ms. Shimada for fraud. That
suggestion ignores Woodworker’s theory of the case: that Principal Mutual, not
Ms. Shimada, concealed material facts.

-14-
defined by ERISA and citing cases). Moreover, one circuit has indicated that an

insurance company may suffer liability in a misrepresentation suit. See Wilson,

114 F.3d at 718 (“If Prudential incurs any liability as a result of this suit, it will

do so only as the employer of a tortfeasor, and not as a plan fiduciary.”). Quite

simply, we see no principled basis for distinguishing insurance companies from

insurance professionals in this type of action. We hold that ERISA does not

preempt Woodworker’s pre-plan fraud claims against its insurer, and affirm the

district court on this point.

B. Admission of Woodworker’s Damage Theory

Principal Mutual contends that Woodworker failed to properly disclose its

damage theory prior to trial and that the district court should have excluded its

evidence of damages. Principal Mutual raises this claim under two theories:

arguing first, that Fed.R.Civ.P. 37(c) mandated exclusion, and second, the court

should have granted a new trial under Fed.R.Civ.P. 60(b)(3). We review

evidentiary rulings and the disposition of Rule 60(b) motions for an abuse of

discretion. See Howard v. Mail-Well Envelope Co., 150 F.3d 1227, 1231 (10th

Cir. 1998 ) (60(b) motions); Orjias v. Stevenson, 31 F.3d 995, 1005 (10th Cir.

1994) (evidentiary rulings under 37(c)). Under this standard, we will not reverse

unless the trial court has made “an arbitrary, capricious, whimsical, or manifestly

-15-
unreasonable judgment.” FDIC v. Oldenburg, 34 F.3d 1529, 1555 (10th Cir.

1994) (further quotations omitted).

In its complaint, Woodworker asked for “compensatory damages” for

various offenses “in an amount to be proven at trial.” Aplt. App. at 30-31. At

trial, it asked for contract damages based on recission, the difference between the

value it had received for the insurance and the purchase price. During its opening

statement, Woodworker explained, “[w]e want that . . . difference between the

amount we paid in premiums and the amount they paid in claims refunded to us.”

Id. at 442. Woodworker’s pre-trial disclosures had been somewhat vague,

however, and during a deposition Mr. John Wirth, president of Woodworker, did

not fully explain that he would request such damages.

At trial, Principal Mutual objected when the attorney for Woodworker

asked Mr. Wirth on direct examination about the amount his company had paid in

premiums, but Principal Mutual did not request a continuance. The trial court

overruled the objection without explanation, but offered Principal Mutual the

right to question Mr. Wirth outside the presence of the jury prior to his cross-

examination. Id. at 887-88. Principal Mutual apparently failed to take advantage

of this opportunity. See id. at 891. Nevertheless, during cross-examination,

Principal Mutual elicited from Mr. Wirth that his calculation of damages did not

account for the administrative and other costs incurred by the insurance company.

-16-
 Rule 37(c)(1) provides:

[a] party that without substantial justification fails to disclose
information required by Rule 26(a) or 26(e)(1) [which govern initial
disclosures and required supplements thereof] shall not, unless such
failure is harmless, be permitted to use as evidence at a trial, at a
hearing, or on a motion any witness or information not so disclosed.

“The determination of whether a Rule 26(a) violation is justified or harmless is

entrusted to the broad discretion of the district court.” Mid-America Tablewares,

Inc. v. Mogi Trading Co., 100 F.3d 1353, 1363 (7th Cir. 1996). A district court

need not make explicit findings concerning the existence of a substantial

justification or the harmlessness of a failure to disclose. United States v.

$9,041,598.68, 163 F.3d 238, 252 (5th Cir. 1998). Nevertheless, the following

factors should guide its discretion: 1) the prejudice or surprise to the party against

whom the testimony is offered; 2) the ability of the party to cure the prejudice; 3)

the extent to which introducing such testimony would disrupt the trial; and 4) the

moving party’s bad faith or willfulness. See Newman v. GHS Osteopathic Inc., 60

F.3d 153 (3d Cir. 1995) (quoting Bronk v. Ineichen, 54 F.3d 425, 418 (7th

Cir.1995)); Cf. $9,041,598.68, 163 F.3d at 252 (enumerating a similar list of

factors to determine whether inclusion of last-minute evidence is harmless); Smith

v. Ford Motor Co., 626 F.2d 784, 797 (10th Cir. 1980) (applying these four

factors to determine whether the district court abused its discretion in allowing

testimony not specified in the pretrial order).

-17-
 We assume arguendo that Woodworker improperly failed to disclose its

damage theory. Even so, we are persuaded the admission of Woodworker’s

damage theory was harmless under the factors we must consider. First, Principal

Mutual knew the numbers on which Mr. Wirth based his calculation; indeed, it

provided the calculation for the amount it paid in premiums. Moreover, the

district court gave Principal Mutual a significant opportunity to cure any resulting

prejudice by cross-examining Mr. Wirth outside the presence of the jury.

Principal Mutual failed to do so. After Mr. Wirth testified, Principal Mutual also

called as a witness Ms. Lorek, an underwriter who was familiar with the

administrative costs Principal Mutual incurred processing claims. Yet, it elicited

no testimony on this subject matter. Nor did it argue to the district court that it

needed more time to make this calculation. Finally, Woodworker’s initial

disclosures and Mr. Wirth’s deposition occurred before the district court ruled

that ERISA preempted a number of its claims. Those rulings no doubt prompted

Woodworker to modify its damage theory. While this certainly does not excuse

Woodworker from supplementing its disclosures, it reduces the likelihood that

Woodworker acted in “bad faith” in varying its trial testimony from its deposition

testimony. Under these circumstances, we hold the district court did not abuse its

discretion under Rule 37 in permitting evidence of Woodworker’s damage theory.

We now turn to Principal Mutual’s Fed.R.Civ.P. 60(b)(3) claim based on

-18-
the same facts, and again assume arguendo that Woodworker’s failure to disclose

was improper. “[B]efore retrial is mandated under Rule 60(b)(3) in consequence

of discovery misconduct, the challenged behavior must substantially have

interfered with the aggrieved party’s ability fully and fairly to prepare for and

proceed at trial.” Anderson v. Cryovac, Inc., 862 F.2d 910, 924 (1st Cir. 1988)

(emphasis in original). Given Principal Mutual’s opportunities to cure any

prejudice flowing from Mr. Wirth’s testimony, we cannot say with any certainty

that Woodworker’s failure to disclose substantially interfered with Principal

Mutual’s ability to proceed at trial. Accordingly, we hold that the district court

was within its discretion in denying Principal Mutual’s Rule 60(b)(3) motion, and

we decline to grant a new trial on this basis.

C. Sufficiency of the evidence

Principal Mutual contends that Woodworker presented insufficient

evidence to support the jury’s finding on the claims for violations of the New

Mexico Unfair Practices Act, the Unfair Insurance Practices Act, fraudulent

inducement, and damages. We view the evidence in the light most favorable to

Woodworker, upholding the verdict if the record reveals sufficient evidence to

support it. See Acrey v. American Sheep Indus. Ass’n, 981 F.2d 1569, 1572 (10th

Cir. 1992). We discuss each claim in turn.

-19-
1. New Mexico Trade Practices Statutes

Both the New Mexico Unfair Practices Act (UPA), N.M. S TAT . A NN . §§

57-12-1 et. seq., and the New Mexico Unfair Insurance Practices Act (UIPA),

N.M. S TAT . A NN . §§ 59A-16-1 et. seq., prohibit misleading or deceptive

communications to consumers. “[U]sing exaggeration, innuendo or ambiguity as

to a material fact or failing to state a material fact if doing so deceives or tends to

deceive” is unlawful under the UPA. N.M. S TAT . A NN .§ 57-12-2 (D) (14). The

UPA “applies to all misleading or deceptive statements, whether intentionally or

unintentionally made.” Ashlock v. Sunwest Bank of Roswell, 753 P.2d 346, 348

(N.M. 1988), overruled on other grounds by Gonzales v. Surgidev Corp., 899

P.2d 576, 583 (N.M. 1995).

The UIPA places similar restrictions on trade practices within the

insurance business. No person may “misrepresent[] the benefits, advantages,

conditions or term of any policy,” N.M. S TAT . A NN .§ 59A-16-4 (A) or “fail[] to

disclose material facts reasonably necessary to prevent other statements made

from being misleading.” N.M. S TAT . A NN .§ 59A-16-4 (G).

Woodworker presented evidence that Principal Mutual knew that the rates

were inadequate prior to the time the agreement went into effect, and that

Principal Mutual did not disclose its method for deciding whether to add a

-20-
surcharge to the preliminary premium or increase annual rates. Evidence in the

record shows that had Woodworker had access to that information, it would not

have contracted with Principal Mutual. We therefore hold sufficient evidence

supports the UPA and UIPA claims.

2. Fraudulent Inducement

Under New Mexico law, the elements for fraudulent inducement are 1) a

misrepresentation of fact or failure to disclose a material fact; where 2) the falsity

was known to the maker or where the representation or concealment was reckless;

3) the maker acted with the intent to deceive and to induce the other party to act

in reliance; and 4) the other party actually relied on the representation or

concealment. See Lotspeich v. Golden Oil Co., 961 P.2d 790, 792 (N.M. Ct. App.

1998); see also Krupiak v. Payton, 561 P.2d 1345, 1346 (N.M. 1977). A party

has the duty to disclose if he knows that the other party to a contemplated

transaction is acting under a mistaken belief, or if he has superior knowledge not

within the reach of the other party. Krupiak, 561 P.2d at 1346.

Woodworker presented evidence that supported its fraudulent inducement

claim. First, as discussed above, Principal Mutual had superior knowledge about

its calculation methods for the underrated premiums it had offered Woodworker.

Principal Mutual contends it failed to disclose opinions, not facts. However, its

-21-
unusual calculation methods and the resultant hidden charges presumably led Ms.

Lorek to conclude the rates were inadequate. These underlying facts serve as the

basis for a fraud claim. In addition, a reasonable juror could infer that Principal

Mutual intentionally chose not to disclose the inadequacy of the proposed rates in

order to ensure it received Woodworker’s business. Finally, Woodworker

presented evidence that it relied on Principal Mutual’s concealment. We

therefore affirm the jury’s finding of fraud. 4

3. Damages

Principal Mutual contends that Woodworker did not suffer any damages

because, at worst, Woodworker paid less in premiums than it should have. We

disagree. Woodworker presented considerable evidence that underrating

premiums and failing to disclose calculation methods can, and did, result in

unexpected retrospective collections and rate increases. Woodworker then

presented evidence of recission damages, an appropriate remedy for fraud. See

Snell v. Cornehl, 466 P.2d 94, 95-96 (N.M. 1970); Montoya v. Moore, 422 P.2d

4
Because we uphold the jury’s finding that the contract at issue was
procured by fraud, Principal Mutual has no right to collect under it. See
Rodriguez v. Horton, 622 P.2d 261, 265 (N.M. Ct. App. 1980). Consequently, we
deny Principal Mutual’s counterclaim for $56,320, the surcharge on the 1994
preliminary premium.

-22-
363, 365 (N.M. 1967); F OWLER V. H ARPER ET AL ., 2 T HE L AW OF T ORTS § 7.15

(2d ed. 1986); see also 37 A M . J UR . 2 D . Fraud and Deceit § 338 (1968). Because

sufficient evidence existed to support the damage award, we uphold it.

III.

Woodworker raises several issues in its cross-appeal which we address in

turn.

A. Punitive damages

Woodworker contends the district court erred in refusing to submit the

issue of punitive damages to the jury. After both parties rested, Woodworker

requested that evidence pertaining to punitive damages be admitted. The district

court denied the request, finding insufficient evidence to submit punitive damages

to the jury. Aplt. App. at 1144-1145. 5 We review this question of law de novo,

viewing the evidence in the light most favorable to Woodworker. See Oja v.

Howmedica, Inc., 111 F.3d 782, 792 (10th Cir. 1997).

Under New Mexico law, punitive damages may be awarded for conduct

5
Later, the district court noted the compensatory damage award alone was
sufficient to achieve the underlying policy rationale of awarding punitive
damages, that is, to encourage private citizens to undertake this type of litigation.
Aplt. App. at 201.

-23-
that is malicious, willful, reckless, wanton, fraudulent, or in bad faith. See

Gonzales v. Surgidev Corp., 899 P.2d 594, 597 (N.M. 1995); Golden Cone

Concepts v. Villa Linda Mall, 820 P.2d 1323, 1328-29 (N.M. 1991); Sanchez v.

Wiley, 946 P.2d 650, 655 (N.M. Ct. App. 1997). If sufficient evidence exists to

prove any one of the enumerated mental states, the trial court is required to

instruct the jury on punitive damages. See Gilmore v. Duderstadt, 961 P.2d 175,

184 (N.M. Ct. App. 1998). In Flores v. Baca, 871 P.2d 962, 964 (N.M. 1994), for

example, the trial court refused to instruct the jury on punitive damages. On

appeal, the New Mexico Supreme Court ordered a new trial on that issue because

the jury could have inferred from the evidence that the defendant acted

fraudulently. Id. at 968. Once a plaintiff presents sufficient evidence of a

requisite mental state, the question of punitive damages belongs to the jury.

Punitive damages are an appropriate sanction for common-law fraud. Naranjo v.

Paull, 803 P.2d 254, 261-62 (N.M. 1991).

Here, the jury specifically found Principal acted willfully and committed

fraud and therefore possessed the mental state required for a punitive damage

award. We are sympathetic to the policy justifications the district court gave in

explaining why it did not award punitive damages and would not award treble

damages. However, the district court did instruct the jury on fraudulent

inducement, and we have held that Woodworker presented sufficient evidence to

-24-
support such a finding. Under these circumstances, New Mexico law requires an

instruction on punitive damages, if requested. See, e.g., Gilmore, 961 P.2d at

184. Because substantial evidence supports the jury’s finding of fraudulent

inducement, we have no choice but to order a new trial on punitive damages.

B. Treble damages

Woodworker argues that the district court also erred in refusing to treble

its damage award. The New Mexico Unfair Trade Practices Act provides that

“[w]here the trier of fact finds that the party charged with an unfair or deceptive

trade practice . . . has willfully engaged in the trade practice, the court may award

up to three times actual damages.” N.M. S TAT . A NN . § 57-12-10 (B) (emphasis

added). The statute specifically makes the awarding of treble damages a

discretionary act. We therefore review the court’s decision not to award treble

damages under an abuse of discretion standard. Cf. Lam, Inc. v. Johns-Manville

Corp., 668 F.2d 462, 476 (10th Cir. 1982) (reviewing for abuse of discretion an

award of treble damages and attorney’s fees granted under statute providing the

court “may” award successful party such fees).

Here, the jury expressly found that Principal Mutual’s conduct was

willful, so the district court had the option to grant treble damages. However,

“[g]iven the record in the case and other remedies awarded,” it declined to do so.

-25-
Aplt. App. at 202. We are not persuaded the district court abused its discretion in

denying Woodworker treble damages.

C. Liability for post-March 1, 1994 Conduct

Woodworker contends the district court erred in instructing the jury that it

could only find liability for Principal Mutual’s conduct occurring before the

commencement of the insurance plan on March 1, 1994, with respect to the

fraudulent inducement, the UPA, and the UIPA claims. On cross-appeal,

Woodworker asks us to reverse this decision in the event we order a new trial on

liability or damages. Woodworker provides no separate argument on this issue,

however, and we are at a loss to determine either from its briefs on appeal or from

the record below what alleged post-plan conduct of Principal Mutual’s relates to

these three claims. Woodworker specifically disclaims any intent to appeal the

district court’s dismissal of its claims for breach of contract, defamation, bad

faith, and prima facie tort, which claims primarily were based on conduct

occurring after March 1, 1994. See Br. of Aplee./Cross-Aplt. at 2. Under these

circumstances, we decline to address this argument.

-26-
D. Attorney’s Fees and Costs on Appeal.

Woodworker also argues that it is entitled to attorney’s fees and costs on

appeal. The New Mexico Unfair Trade Practices Act mandates an award of costs

and attorney’s fees to prevailing plaintiffs. N.M. S TAT . A NN . § 57-12-10 (C).

The New Mexico Supreme Court has ruled that this provision applies to costs and

fees incurred on appeal as well as at trial. See Hale v. Basin Motor Co., 795 P.2d

1006, 1013-1014 (N.M. 1990). Woodworker is therefore entitled to such fees.

On remand, the district court should award Woodworker attorney’s fees for

litigating this appeal.

IV.

We REVERSE the district court’s denial of punitive damages and

REMAND this case for a new trial on that issue. We AFFIRM on all other

issues.

-27-