Sobieski v. American Standard Insurance Co.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

SCOT and JOANNA SOBIESKI,
husband and wife, Plaintiffs/Appellees,

v.

AMERICAN STANDARD INSURANCE
COMPANY OF WISCONSIN, a
Wisconsin corporation; AMERICAN FAMILY
MUTUAL INSURANCE COMPANY, a
Wisconsin company authorized to do business in Arizona,
Defendants/Appellants.

No. 1 CA-CV 14-0416
FILED 9-29-2016

Appeal from the Superior Court in Maricopa County
No. CV2010-092624
The Honorable David King Udall, Judge

AFFIRMED IN PART; REVERSED IN PART;
VACATED AND REMANDED IN PART

COUNSEL

Law Office of Richard A. Dillenburg, PC, Tempe
By Richard A. Dillenburg
Co-Counsel for Plaintiffs/Appellees

Knapp & Roberts, PC, Scottsdale
By David L. Abney
Co-Counsel for Plaintiffs/Appellees
Tyson & Mendes, LLP, Phoenix
By Lynn M. Allen
Co-Counsel for Defendants/Appellants

Lewis Roca Rothgerber Christie, LLP, Phoenix
By Steven J. Hulsman, Jon D. Weiss, Jared L. Sutton
Co-Counsel for Defendants/Appellants

OPINION

Presiding Judge Diane M. Johnsen delivered the opinion of the Court, in
which Judge Patricia A. Orozco and Judge Kenton D. Jones joined.

J O H N S E N, Judge:

¶1 A motorcyclist was badly injured when he slammed into a car
that had stopped abruptly in front of him. Although the driver of the car
was uninsured, the motorcyclist had uninsured motorist coverage. The
motorcyclist's insurer denied the claim, however, because it concluded the
motorcyclist was solely at fault in the accident. We affirm a judgment
against the insurer for breach of the duty of good faith and fair dealing, but,
in the absence of evidence linking its denial of coverage to an improper
motive, we vacate the award of punitive damages.

FACTS AND PROCEDURAL BACKGROUND

¶2 Scot Sobieski and three others on motorcycles were riding
along a North Phoenix thoroughfare one afternoon. The driver of a car they
were following slowed to make a right turn, then abruptly stopped.
Sobieski tried to swerve around the car, but he hit its left rear, severely
injuring his leg. The following day, February 19, 2007, Sobieski's wife,
Joanna, reported the accident to their insurer, American Standard Insurance
Company of Wisconsin. Although the driver of the car was uninsured, the
Sobieskis had purchased $100,000 of uninsured motorist coverage, which
would be implicated if and to the extent the driver was at fault in the
collision.

¶3 At American Standard, adjuster Caroline Biddlecome was
assigned to the claim. Biddlecome reviewed the notice of loss, which
documented Joanna Sobieski's initial call to the insurer and stated police
had cited her husband for failure to control his speed and following too

2
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

closely. Biddlecome then telephoned the motorist, who told Biddlecome
that she had stopped before turning right even though the traffic light was
green because a pedestrian had walked out in front of her. The motorist
said she felt a bump and saw Sobieski "fly by" her on the driver's side. She
told Biddlecome her boyfriend was in the car with her at the time of the
collision. Biddlecome did not record the motorist's statement, nor did she
ask for any details about the pedestrian, or whether the motorist was using
her turn signal or her rearview mirrors. Nor did Biddlecome try to
interview the boyfriend.

¶4 The police report of the accident did not arrive at American
Standard for several days. In the meantime, Biddlecome completed a
liability analysis worksheet attributing 100 percent fault for the accident to
Sobieski. Biddlecome then spoke again with Joanna Sobieski, who told her
one of the other three motorcyclists said the car had stopped suddenly and
that Sobieski had tried going around it on the right side (not the left), but
lost control, hitting the rear of the vehicle. According to Biddlecome's notes
of their phone conversation, nothing Joanna Sobieski said changed her
preliminary evaluation that Scot Sobieski was 100 percent at fault.
Biddlecome told Joanna Sobieski there was no coverage for the claim
because "anyone can stop in front of you for any reason. You have to
maintain safe distance to react to them. [Sobieski] did not do that and is
considered the cause of the accident." The police report that eventually
arrived at American Standard identified the other three motorcyclists and
named the passenger in the car, but Biddlecome did not speak with any of
them. A month later, Biddlecome telephoned Scot Sobieski, who told her
he was unable to recall anything about the accident. Biddlecome reiterated
that the policy would not cover his medical expenses because he was at
fault in the accident. Biddlecome closed the file on the claim shortly
thereafter.

¶5 More than a year later, a lawyer for the Sobieskis submitted a
policy-limit demand to American Standard. The lawyer recounted
Sobieski's several injuries, including "open right tibia and fibula fractures
with severe comminution, tibial topical avulsion," along with a right rotator
cuff tear and fractured clavicle. He said Sobieski still was not released to
return to work and was unable to walk without crutches. The lawyer
enclosed medical bills totaling $115,667 and argued that written statements
from the three other motorcyclists suggested the driver of the car should
share some fault in the accident. The motorcyclists' statements were
enclosed; two of them cast doubt on the motorist's assertion that there was
a pedestrian in the intersection and asserted she had not used her turn

3
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

signal. One of the motorcyclists also opined that the collision was caused
by the motorist's "erratic driving" and failure to signal.

¶6 Upon receipt of the letter, American Standard re-opened the
claim and assigned it to adjuster Verna Holmes. Holmes, however, did not
contact the driver of the car and did not interview any of the witnesses the
Sobieskis had identified. In her file notes, Holmes mistakenly reported that
Sobieski had been traveling 15 miles over the speed limit, when the police
report had stated he had been traveling 15 miles under the speed limit.
Based on Biddlecome's original investigation, and with the approval of her
supervisor, Philip Nick, Holmes again denied the Sobieskis' claim. As Nick
explained in file notes, "the fault for this accident is unfortunately with our
insured. We can not [sic] pay for the injuries he caused himself."

¶7 The Sobieskis then sued American Standard for breach of
contract. The arbitrator who heard the claim found the Sobieskis' damages
totaled $950,000 and ruled that Sobieski was 60 percent at fault in the
accident and the motorist, 40 percent. After American Standard paid the
policy limit of $100,000, the Sobieskis sued again, alleging breach of the
duty of good faith and fair dealing. A jury found in favor of the Sobieskis
and awarded $500,000 in compensatory damages and $1,000,000 in punitive
damages. The superior court denied American Standard's motions for
judgment as a matter of law and for new trial. We have jurisdiction of
American Standard's timely appeal pursuant to Arizona Revised Statutes
("A.R.S.") sections 12-2101(A)(1), (A)(5)(a) (2016) and 12-120.21(A)(1)
(2016).1

DISCUSSION

A. Standard of Review.

¶8 The superior court may grant a motion for judgment as a
matter of law "if there is no legally sufficient evidentiary basis for a
reasonable jury to find for" the non-moving party. Ariz. R. Civ. P. 50(a); see
Shoen v. Shoen, 191 Ariz. 64, 65 (App. 1997) ("if the facts presented in support
of a claim have so little probative value that reasonable people could not
find for the claimant"). We review the superior court's ruling on a motion
for judgment as a matter of law de novo, viewing the evidence and all
reasonable inferences from it in the light most favorable to the nonmoving

1 Absent material revision after the relevant date, we cite a statute's
current version.

4
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

party. See County of La Paz v. Yakima Compost Co., 224 Ariz. 590, 596, ¶ 5
(App. 2010).

¶9 The superior court may grant a motion for new trial if the
jury's verdict is against the weight of the evidence. Goodman v. Physical Res.
Eng'g, Inc., 229 Ariz. 25, 28, ¶ 6 (App. 2011). We review the superior court's
denial of a motion for a new trial for an abuse of discretion. Id.

B. Breach of the Duty of Good Faith and Fair Dealing.

¶10 In every insurance contract, there is an implied legal duty
obligating the insurer to act in good faith; breach of that duty may give rise
to a claim for the tort of bad faith. Noble v. Nat'l Am. Life Ins., 128 Ariz. 188,
190 (1981). The implied covenant of good faith and fair dealing forbids an
insurer from taking any action that would undermine its insured's
realization of the expected contractual benefits, which, in this context, are
"protection and security from economic catastrophe." Rawlings v. Apodaca,
151 Ariz. 149, 154 (1986). "Conduct by the insurer which does destroy the
security or impair the protection purchased breaches the implied covenant
of good faith and fair dealing implied in the contract." Id. at 155.

¶11 To establish a claim for bad faith, an insured must prove the
insurer acted unreasonably and either knew its conduct was unreasonable
or acted with such reckless disregard that knowledge of unreasonableness
may be imputed to it. See Deese v. State Farm Mut. Auto. Ins., 172 Ariz. 504,
507 (1992). Mere negligence is not enough. Id. Here, the Sobieskis alleged
American Standard breached its duty of good faith by unreasonably
investigating and denying their claim for coverage.

¶12 The Sobieskis presented sufficient evidence from which the
jury could conclude that American Standard's investigation of the claim
was not reasonable. Biddlecome knew that, in addition to Scot Sobieski,
there were five witnesses to the accident - the driver of the car, the driver's
passenger, and the three other motorcyclists who trailed Sobieski to the
intersection. Biddlecome, however, spoke only to the motorist and Sobieski
and never tried to contact any of the four others. She reached a conclusion
about liability without having reviewed the police report. And after
reopening the claim at the request of the Sobieskis' lawyer, the second
adjuster, Holmes, did nothing more to investigate the accident.

¶13 Arizona's comparative negligence regime figured
prominently in the Sobieskis' coverage claim. Under Arizona law, a party
who is only partially at fault in an accident may be liable for a proportionate
share of the claimant's damages. See A.R.S. § 12-2506 (2016). When

5
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

damages are great, even a small share of the liability can have significant
financial consequences. As the Sobieskis argue, American Standard knew
early in the claims process that damages for Sobieski's injuries likely would
well exceed the $100,000 limits of his uninsured motorist coverage. That
being the case, if the motorist was at fault even to a small degree, the
Sobieskis' uninsured motorist coverage would be implicated, and the
insurer would have to cover some portion of their damages.

¶14 Biddlecome knew that comparative fault and proportionate
liability are the law in Arizona, yet failed to reasonably investigate whether
the motorist might be at fault to any degree. After hearing second-hand
accounts of the accident from Joanna Sobieski, Biddlecome had reason to
question the motorist's story of a pedestrian suddenly entering the
intersection, and knew that the motorist might not have used her turn
signal. At trial, Biddlecome explained she decided not to interview the
other three motorcyclists because she assumed they would be biased in the
Sobieskis' favor. Yet, in deciding Sobieski was wholly at fault, she relied
entirely on the account of the motorist, who herself would be at financial
risk if Sobieski were to sue her for his injuries. Even after the Sobieskis'
attorney brought the witness statements to American Standard's attention,
Holmes undertook no further investigation, and American Standard stood
by its initial determination that Sobieski was entirely at fault.

¶15 These facts together were sufficient evidence from which the
jury could find that American Standard acted unreasonably in investigating
the Sobieskis' claim and that it knew its conduct was unreasonable or acted
with reckless disregard of the reasonableness of its investigation. The
insurer knew that when an uninsured motorist claim is made in a
comparative-negligence state such as Arizona, even the slightest degree of
fault on the part of the uninsured motorist can implicate the policy. It also
knew that Sobieski's injuries were so severe that his damages exceeded his
policy limits, likely by one or more multiples. Nevertheless, American
Standard failed to pursue apparent inconsistencies in the witness accounts
that might have revealed that the motorist shared some fault in the accident.

¶16 Accordingly, the superior court did not err in denying
American Standard's motions for judgment as a matter of law and for new
trial on the Sobieskis' claim for breach of the duty of good faith and fair
dealing.2

2 On appeal, American Standard does not take issue with the amount
of compensatory damages the jury awarded to the Sobieskis.

6
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

C. Punitive Damages.

1. Legal principles.

¶17 A breach of the duty of good faith and fair dealing is not
sufficient, by itself, to support a claim for punitive damages. Our supreme
court has explained the difference between the evidence required to prove
an insurer's breach of the duty of good faith and that required to support
an award of punitive damages:

Something more than the mere commission of a tort is always
required for punitive damages. There must be circumstances
of aggravation or outrage, such as spite or "malice," or a
fraudulent or evil motive on the part of the defendant, or . . .
a conscious and deliberate disregard of the interests of others
. . . . We restrict [punitive damages] to those cases in which
the defendant's wrongful conduct was guided by evil
motives. Thus, to obtain punitive damages, plaintiff must
prove that defendant's evil hand was guided by an evil mind.
The evil mind which will justify the imposition of punitive
damages may be manifested in either of two ways. It may be
found where defendant intended to injure the plaintiff. It
may also be found where, although not intending to cause
injury, defendant consciously pursued a course of conduct
knowing that it created a substantial risk of significant harm
to others. . . . Such damages are recoverable in bad faith tort
actions when, and only when, the facts establish that
defendant's conduct was aggravated, outrageous, malicious
or fraudulent. . . . When defendant's motives are shown to be
so improper, or its conduct so oppressive, outrageous or
intolerable that such an "evil mind" may be inferred, punitive
damages may be awarded.

Rawlings, 151 Ariz. at 162-63 (citations omitted). Further, a plaintiff suing
for punitive damages must prove the defendant's "evil mind" by clear and
convincing evidence. Linthicum v. Nationwide Life Ins., 150 Ariz. 326, 332
(1986). "[A] damage award, punitive or otherwise, must be based on more
than mere speculation or conjecture." Hawkins v. Allstate Ins., 152 Ariz. 490,
501 (1987).

¶18 "Punitive damages are appropriate 'only in the most
egregious of cases,'" upon proof of both "the defendant's 'reprehensible
conduct' and 'evil mind.'" SWC Baseline & Crismon Inv'rs, L.L.C. v. Augusta

7
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

Ranch Ltd. P'ship, 228 Ariz. 271, 289, ¶ 74 (App. 2011) (quoting Sec. Title
Agency, Inc. v. Pope, 219 Ariz. 480, 498, ¶ 81 (App. 2008)). Accordingly, our
supreme court has made clear that an insurer does not open itself to
punitive damages simply by considering its own interests in denying a
claim. Gurule v. Ill. Mut. Life & Cas. Co., 152 Ariz. 600, 607 (1987) ("Self
interest is not, however, evidence of an 'evil mind.'"). Because punitive
damages may be awarded only when they will serve to punish a "defendant
[that] acted with an 'evil mind,'" id. at 601, "the defendant's motives are
determinative," Bradshaw v. State Farm Mutual Automobile Insurance, 157
Ariz. 411, 422 (1988).

2. Alleged undue profit pressures affecting handling of the
claim.

¶19 At trial, the Sobieskis did not contend American Standard
intended to injure them by denying their claim without a reasonable
investigation. Neither did the Sobieskis question American Standard's
claims-handling policies; their expert admitted those policies were
reasonable. Nor did the Sobieskis offer evidence that American Standard
deliberately engaged in routine claims practices designed to benefit itself at
the expense of its insureds. Cf. Hawkins, 152 Ariz. at 498 (insurer routinely
shorted insureds by small amounts and imposed small charges on them,
effectively betting that few insureds would object). The Sobieskis instead
argued American Standard was liable for punitive damages because its
breach of the duty of good faith was driven by business policies that
compelled the company's claims handlers to favor corporate profits at the
expense of its insureds. Citing Bradshaw, the Sobieskis contend on appeal
they offered sufficient evidence that American Standard acted to serve its
own interests, with "reason to know and consciously disregarding a
substantial risk that [its] conduct might significantly injure" them.
Bradshaw, 157 Ariz. at 422; see also Gurule, 152 Ariz. at 602.

¶20 The Sobieskis liken American Standard's conduct to that of
the insurer in Nardelli v. Metropolitan Group Property & Casualty Insurance,
230 Ariz. 592 (App. 2012). In concluding punitive damages were warranted
in that case, we cited evidence that the insurer "instituted an aggressive
company-wide profit goal"; "assigned to the claims department a significant
role in achieving that goal"; "aggressively communicated this goal to the
claims department" and to the employees handling the plaintiffs' claim; and
"tied the benefits of claims offices and individuals to, among other things,
the average amount paid on claims"; all "without taking steps to ensure its
efforts to drive up its corporate profits would not affect whether it treated
its insureds fairly." Id. at 605, ¶ 62. This evidence, we said, enabled the jury

8
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

to find that decisions the insurer made in handling the plaintiffs' claim
"were driven by financial self interest and not by the merits" of the claim.
Id. The Sobieskis argue they presented evidence that American Standard's
handling of their claim was influenced, as in Nardelli, by a mandate from
management to the claims department to reduce the amount paid on
personal injury claims. In considering that contention, we first review the
evidence in Nardelli, then look closely at the evidence in the record here.

¶21 In Nardelli, after the insurer publicly announced a profit goal
of $155 million, the president of the company told claims employees he
expected their department "to absorb all of the normal inflation" so that the
company could recognize profits from savings in other departments. Id. at
¶ 64. Claims workers were warned that if the company did not meet its
overall profit goal, their division would be sold. As a result, the president
wrote to managers, "reaching our [earnings] goal . . . is not optional - it is a
business promise . . . and it must be met with resolve . . . . Everything counts
and everyone counts." Id. The record in Nardelli demonstrated that claims
employees understood their jobs were in jeopardy if the company-wide
profit goal – the one to which their department was expected to
significantly contribute – was not met. Id. at ¶ 65. During detailed
"Roadshow presentations," senior claims officers informed every claims
employee that the company "had adopted a policy to 'be tougher on claims'
in which 'every dollar counts, and we'll do it one claim at a time.'" Id. at
606, ¶ 67. The company "communicated a corporate policy to 'every
associate' that emphasized they should keep the $155 million target in mind
when evaluating every aspect of every claim." Id. at ¶ 68.

¶22 Significantly, the insurer in Nardelli "tied each claims office's
compensation" to average claim payouts (also called "severities"), "with
resulting effect on individual compensation." Id. at ¶ 67, n.21, ¶ 69. The
company "imposed severity goals on the [local] office and managers" that
had handled the plaintiffs' claim. Id. at ¶ 69. To assess whether individual
claims offices were contributing sufficiently to company profit goals, the
insurer used "claims balance scorecard[s]" that gave average claim payouts
greater weight than any other factor. Id. at 607, ¶ 70. A third of the incentive
pay awarded each claims office was driven by that specific office's
performance on the "scorecard." Id. at ¶ 71. As management explained to
employees, "additional incentive money [would be] available to those
employees and offices that . . . made the greatest contribution to the 2001
results of both the Claim Department and the Company." Id. at ¶ 71, n.25.
Consistent with the notion that claims employees were paid based on
whether they limited payouts, their performance reviews noted when they
"fell short of expectations" in maintaining payout averages. Id. at ¶¶ 72-73.

9
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

¶23 On that record, we held the jury reasonably could have
concluded that claims employees "were to decide every aspect of every
claim based on making $155 million in profits." Id. at 609, ¶ 79. Given the
evidence that the company "was in a make or break situation," with
"palpable" pressure on claims employees who knew they would be laid off
if the profit goal was not met, the jury reasonably could have found that
those concerns drove the manner in which adjusters handled the plaintiffs'
claim. Id. at ¶ 80.

¶24 Here, the Sobieskis argue that claims workers denied their
claim because of similar undue pressure from American Standard to
promote company profits at the expense of insureds. The Sobieskis cite five
broad categories of evidence: Claims department business plans, company-
wide incentive-pay programs, employee performance reviews and
personnel files, claims-manager training materials, and a mandate to claims
employees to focus on comparative negligence in adjusting claims.

¶25 Addressing the business plans first, the Sobieskis contend
they offered evidence that beginning in about 2002, American Standard
"imposed a plan to turn its claims department into a profit center by setting
arbitrary goals to pay less than its competitors" on bodily injury claims. But
the business plans in evidence do not support that contention. The plans
set no "arbitrary goals" for claims payouts and, by contrast to the insurer's
exhortations in Nardelli, they did not direct adjusters to keep company
profits in mind when settling claims. "[A] company keeping statistics on
resolution of claims and looking to their 'bottom line' are reasonable
internal procedures; particularly when Plaintiff has offered no evidence
that this behavior ever resulted in the denial of a legitimate (or illegitimate)
claim." Knoell v. Metro. Life Ins., 163 F. Supp. 2d 1072, 1078 (D. Ariz. 2001).

¶26 To be sure, in some years before Sobieski's accident, business
plans for American Standard's claims department in Arizona highlighted
that, on average, the company was paying out less than its competitors on
comparable personal injury claims. Business plans adopted before 2006
called on department leaders to "manage the gap," an apparent reference to
those payout margins. But an insurer does not open itself to punitive
damages simply by taking steps to monitor profitability. An insured
seeking punitive damages must show clear and convincing evidence that
the insurer's concern for profits drove the company to breach its duty of
good faith and fair dealing to the insured.

¶27 Entirely lacking in this record is any evidence that, as in
Nardelli, company officers directed adjusters to reduce claims payouts to

10
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

enhance the company's bottom line. In that case, in recorded presentations
to the various claims offices, management "communicated a corporate
policy to 'every associate' that emphasized they should keep the $155
million target in mind when evaluating every aspect of every claim." 230
Ariz. at 606, ¶ 68. By contrast, the American Standard business plans the
Sobieskis offered in evidence did not impose on claims workers any
overriding mandate to boost company profits by reducing claims payouts;
to the extent the plans mentioned claims payouts at all, the strategies they
identified were hardly inappropriate.

¶28 The plans, which were circulated to managers such as Nick
but not to adjusters such as Biddlecome or Holmes, set out goals and
corresponding strategies for the company's Arizona claims operations.
Typically ten pages long, the plans were issued at the beginning of the
calendar year and quarterly throughout the year. At the outset, each plan
stated, "The American Family Claim Division state business plans align
initiatives and activities with customer service and other divisional and
corporate goals."

¶29 The 2006 plan identified as "Key State Issues: Customer
Satisfaction; Collision, Comprehensive and Property Severity." The first
four pages of the 2006 plan recited various specific actions aimed at
improving "customer satisfaction." For example, the first such "initiative"
was, "Adjusters will explain each loss in person or on the telephone . . . .
Each loss is explained with the written Claim Settlement Report given to
the insured." Another initiative was that "[a]djusters will be trained to
consistently explain the claim handling process and keep the customer
informed throughout the claims process." Page eight of the 2006 plan was
titled, "Bodily Injury Severity." At the top of that page was the following:

Our overriding philosophy is to pay what we owe. In this
plan, we have established specific initiatives and activities
that will ensure we adhere to our philosophy of paying what
we owe. Listed below is Fast Track data for comparison. The
expectation is that where the measurement is over 100.0%,
claim personnel will work toward trending downward and
where the measurement is under 100.0%, claim personnel
should try to manage the gap.

The identified "Initiative" for "manag[ing] the gap" was to "[m]aintain focus
through quality file handling techniques." Under the "Activities" to be
performed toward the goal to "manage the gap," the plan stated, "Thorough

11
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

Investigations, proper application of comparative negligence and fair
settlements."

¶30 References to "manage the gap" were removed from claims
department business plans before Sobieski's accident. The only reference
to bodily injury claims-handling in the seven-page 2007 Arizona plan was
an "Initiative" labeled "Control Severity," which was to be achieved by
"[h]av[ing] more manager involvement reviewing files for timely and
thorough investigation and suspense activity to update the file."3 The 2008
business plan contained no reference to severity rates or average industry
claim payouts. Instead, that plan called for "Exceptional Claims
Experiences." It emphasized communicating with the insured and
"[m]aking claim payments that are accurate and fair," and "Pay What We
Owe."

¶31 In sum, contrary to the Sobieskis' contention, the business
plans American Standard adopted for the claims department immediately
before, during and after the period in which the insurer denied the
Sobieskis' claim contain no support for the assertion that the company
sought to turn its claims department into a "profit center" at the expense of
its insureds.

¶32 Second, again citing Nardelli, the Sobieskis argue the jury
could have found that American Standard's compensation policies caused
claims employees to deny their request for coverage. But in Nardelli, the
insurer calculated average claim payments for each claims office and tied a
worker's compensation to his or her office's average. 230 Ariz. at 606, ¶ 69.
By contrast, the record here contains no evidence that any specific severity
goal was imposed on the claims office that handled the Sobieskis' claim or
that compensation paid to claims employees was linked to their success in
limiting claims payouts.4

3 The 2007 plan contained headings labeled "Customer Satisfaction,"
"Agency Partnership," "Employee Engagement" and "Loss Costs" for
various categories of damage. Among the bullet points under the
"customer satisfaction" heading were "Explanation of the claim payment"
and "Fairness of the claim settlement amount."

4 The Sobieskis' expert witness agreed that American Standard's
compensation policies did not tie a claims employee's compensation to that
employee's personal severity performance.

12
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

¶33 The Sobieskis argue, however, that American Standard
employees stood to receive annual bonuses through a "Corporate Incentive
Plan" that was based in part on claims payouts. By contrast to the bonus
plan in Nardelli, however, the American Standard incentive plan was a
company-wide profit-sharing program in which all employees could be
rewarded in accordance with the company's overall performance on
specified measures. At the relevant time, incentive payments under the
American Standard profit-sharing program were based on four factors,
each of which was given equal weight: (1) Return on equity (meaning the
degree to which the company successfully managed its investment assets),
(2) growth in the number of policies in force, (3) policy retention rate and
(4) the amount that the company contributed to the plan (a sum that,
according to the record, was "based on annual operating results"). No
component of the American Standard incentive plan was comparable to the
severity-based bonuses paid to claims employees in Nardelli. The Sobieskis
cite a sentence in the compensation plan that stated, "The Program is
designed to encourage each employee to focus on how he/she, in his/her
day-to-day work, can help the Company meet its strategic goals." Nothing
in that general statement can be taken as a directive to claims employees to
short-change insureds on valid claims or, more specifically, as evidence that
claims employees denied the Sobieskis' claim in order to boost the
company's contribution to the profit-sharing plan.5

5 The Sobieskis point to American Standard's adoption in early 2009
of a revamped Corporate Employee Incentive Plan based on the company's
overall performance in five areas, each weighted equally: "Customer
Satisfaction," customer retention, net premium growth, return on equity,
and "combined ratio." The company's "Customer Satisfaction" was
measured by a survey of customers by a third-party research firm;
"Customer Retention" was the percentage of policies retained on a rolling
12-month basis, including new policies written during that period; and
"New Premium Written Growth" was a calculation reflecting the sale of
new policies, customer retention and rates. It is true that the "combined
ratio" measure related amounts paid on claims to income from premiums.
But use of the company-wide ratio as one of five elements of a profit-
sharing plan is a far cry from the insurer's directive to claims employees in
Nardelli that they were expected to manage claims in a way to cover
inflationary pressures for the entire company. Moreover, by the time the
2009 plan was adopted, the insurer already had denied the Sobieskis' claim
and rejected their lawyer's demand letter. (The Sobieskis argue that Nick
testified that his bonus in 2008 was based in part on company-wide loss

13
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

¶34 Third, the Sobieskis argue that claims employees' personnel
files reflect management pressure to reduce amounts paid on claims. The
Sobieskis point to a single line in a log in which Nick, the claims department
supervisor, documented his interactions with adjusters who worked for
him: "[M]et with staff to discuss their contribution to the profit & hand out
bonus checks." This note is contained in an eight-page, single-spaced
document that recorded Nick's communications with the claims workers he
managed beginning on January 20, 2005 and continuing through December
4, 2007. The log was filled with references to customer service; nothing in
it was akin to the documented demands managers placed on claims
workers in Nardelli to handle claims with a "laser-like focus on meeting"
company profit goals. 230 Ariz. at 608, ¶ 74.6

¶35 The Sobieskis argue Nick testified that he was evaluated in
part on how his claims adjusters controlled severity (meaning, amounts
paid out on claims). But, as the Sobieskis' expert witness acknowledged,
there is no requirement that an insurer pay more than what it owes on
claims. A close review of the record reveals no evidence or inference that
Nick encouraged his employees to deliberately short-change insureds to
improve company profits or his standing within the company. This was
not a Nardelli situation in which claims handlers were pressured to enhance
company profits by cutting payments to insureds, or that management
"impressed upon its claims employees . . . that they were to decide every

ratios, but the company compensation documents in evidence do not
support that recollection.)

6 The communications recorded in Nick's log concern the quality of
claims workers' investigations and include praise for their "very good
customer focus." He urged one employee to "work [files] aggressively then
deny/pay as appropriate" and others to work harder to stay in touch with
customers: "When you can't reach an insured, you need to call the agent
and request spouse #, cel# [sic], work# etc. to aggressively pursue insured
report/contact"; "Discussed with John to keep current on returning phone
calls"; "Discussed call issues with Lucia, [explained] make more than one
attempt to contact insd. Call agent for alternate phone numbers." He also
urged thoroughness in file management: "Make sure to make immediate
contact with all people in your files. Get statements from all people who
are hurt. Claimant statements, witness statements are needed in all comp
neg files. We owe our insured an aggressive investigation."

14
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

aspect of every claim based on making" a profit goal. See Nardelli, 230 Ariz.
at 609, ¶ 79.7

¶36 The Sobieskis also point to a reference in Holmes' personnel
file to "control collision severity." But that phrase appears in a self-
evaluation in which Holmes, the second adjuster assigned to the Sobieskis'
claim, pledged to address severity by "identify[ing], thoroughly
investigat[ing], document[ing], and properly pursu[ing] collision files with
subrogation potential." Subrogation, of course, is a lawful and not
inappropriate means by which an insurer can pursue recovery from
another party's insurer for the fault of the other party. The Sobieskis have
no explanation for how an insurer's general focus on subrogation might
expose it to liability for a punitive-damage claim by the insured.8

7 Nor do the employees' personnel files provide any support for the
Sobieskis' contention that American Standard "submerged its claims
adjusters in profit concerns" or sought in annual performance reviews to
promote the company's "profit-centered practices and goals" at the expense
of appropriate claims investigations and payouts. Nick's file reflects that in
2005 he pledged to support "Claim Division Goals: Control Severity,
Improve Employee Satisfaction" by granting to his employees "claim
authority" consistent with those employees' "responsibilities, training,
experience and ability." In a self-evaluation, he wrote, "I have worked hard
to get our people to listen to the customer, respond quickly to what they
need and to recognize and resolve situations that could escalate and become
a larger problem showing them that it saves time to take care of a problem
early on." His reviewer responded, "Philip is very committed to quality
customer satisfaction and conveys this on a regular basis to his unit," and
"Philip is very positive about customer service." Other performance
measures reflected in the evaluation forms lend no support to the Sobieskis'
contention that employees were encouraged to pay insureds less than what
the company owed: "Anticipates and adjusts to customer needs,"
"Collaborates effectively for the benefit of customers," "Provides
exceptional customer service," "Measures customer value and experience,"
"Models uncompromising ethics and integrity," "Champions corporate
values (caring, helpfulness, ease & convenience, fairness)."

8 Contrary to the Sobieskis' argument that Holmes must have been
driven by concern for American Standard's bottom line when she denied
their claim, her personnel file contains plenty of praise from her reviewers
for her good customer service during the time in question: "Handles claim

15
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

¶37 Biddlecome's file contains praise and guidance for improving
customer service, and similarly is devoid of any mandate to keep company
profits in mind when adjusting claims.9 When Biddlecome's evaluations
reference "controlling severity," it is only in the context of entirely
appropriate acts that an insurer might take to ensure that it pays no more
than what it owes on a claim.10

¶38 In sum, notwithstanding the Sobieskis' contention, employee
personnel files in the record offer no support for the argument that

negotiations by settling and providing the best customer experience in the
industry." "Verna is proactive in her discussions with her customers to be
sure they are prepared for the claim process." "Verna displays genuineness
in dealing with others. She conveys a willingness to help that lends itself
to reaching agreement on situations that invoke conflict. She delivers
difficult messages with tact and diplomacy." "Verna takes care of people's
problems, needs and explains the process thoroughly, thus setting the
[stage] for successful negotiations. Verna seldom sees her files go to suit
and yet pays what we owe on the claims she is presented." Her self-
evaluations were along similar lines: "To increase customer satisfaction and
to control severity, I will answer demand letters and extend an offer within
the date requested on each letter." "To improve customer and employee
satisfaction, I will respond timely and appropriately to all customer
communications."

9 "Katie is a good listener. She communicates well with her customers
making sure that she explains the process thoroughly and asks questions to
verify what people need in relation to their claim." "Katie has a passion for
taking care of her customers whether the[y] b[e] claimants or insured's [sic].
. . . Katie wants people's problems to be taken care of. I appreciate this as
do her customers." "Katie is customer focused." "Always listen to the
customer and their concern, and understand why or how they could be
feeling that way. Work to resolve any issues. Investigate, review and
completely understand all points before delivering what may be difficult
news. If the customer disagrees, listen to what they have to say and address
those concerns. Must also be firm, but with the respect that the customer
deserves."

10 "To control collision severity, I will refer a minimum of three to five
files per month to the subrogation department." "To improve customer
satisfaction and collision severity, I will complete file set up and make
contact within one (1) business day of receipt of a new loss. I will continue
to follow up until required initial information is obtained."

16
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

American Standard management encouraged claims workers to arbitrarily
or unreasonably deny claims.

¶39 Fourth, the Sobieskis cite training materials for company
claims managers, noting that one of the topics was "How can a manager
control severity." But the answer stated in the materials belies the Sobieskis'
contention that the company trained its managers to control severity by
short-changing claimants:

By using the tools that we've provided [claims managers] by
exercising the curiosity that they had as an adjuster. About
the claims that they supervised. By developing that curiosity
in the people who work for them so that we have these great
investigations, so that you develop a file so that there aren't
any questions about it. So that you can apply your
comparative negligence if there is one. So that your file
supports the information that's in it, so that people know
what needs to be done.

¶40 Fifth, the Sobieskis argue the punitive damage award was
supported by corporate documents urging claims employees to take into
account principles of comparative fault when they adjust claims. The
Sobieskis argue that American Standard encouraged adjusters to assess
comparative fault, even one percent comparative fault where appropriate,
on the theory that "it all adds up."

¶41 In a state such as Arizona that recognizes comparative
negligence (comparative fault), when an insurer receives a claim from
someone injured in an accident with a company policy-holder, the insurer's
liability for the third-party claimant's damages may be reduced to the extent
that the claimant is at fault in the accident, even to a small degree.
Similarly, when the insurer's policy-holder is injured in an accident with a
third party, even if the policy-holder is principally at fault, to the extent the
third party also is at fault, that party's insurer is proportionately liable.
Notwithstanding the Sobieskis' argument, there is nothing wrong in the
abstract with an insurer seeking to lay off an appropriate share of the
liability on a third party's insurer when the third party is at fault.

¶42 The record contains no support, moreover, for the proposition
that an improper company focus on comparative fault drove American
Standard to deny the Sobieskis' claim. To the contrary, the Sobieskis
contend the insurer acted in bad faith by failing to apply comparative fault
principles to their uninsured-motorist claim. That is, they argue American

17
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

Standard should have recognized that under Arizona's comparative-fault
regime, even a small amount of fault on the part of the motorist with whom
Sobieski collided would open the insurer to liability for some part of its
policy limits.11

¶43 As outlined above, the Sobieskis did not question American
Standard's claims policies; nor did they argue American Standard denied
their claim because it intended to harm them. Instead, citing Nardelli, the
Sobieskis argued their claim was denied because of business policies and
programs at American Standard that compelled claims adjusters to
promote company profits at the expense of its insureds. A close review of
the evidence on which the Sobieskis rely, however, reveals nothing
resembling the Nardelli-like profit-driven atmosphere the Sobieskis argue
existed at American Standard. In the absence of corporate programs or
compensation or evaluation policies that favored company profits over the
interests of insureds, the Sobieskis cite isolated phrases in business plans
and other records, but those isolated phrases are wholly insufficient to
constitute the clear and convincing evidence required to support their claim
for punitive damages.

¶44 We have discussed Nardelli at some length because that case
is the centerpiece of the Sobieskis' argument on appeal that American
Standard acted with a conscious and deliberate disregard of the rights of its
insureds in denying their claim. We do not mean to imply that a punitive-
damage claim against an insurer necessarily will fail in the absence of facts
as egregious as those in Nardelli. To the contrary, each case will depend on
its own distinct facts; that is why we have cited and quoted from the record
at length in evaluating the Sobieskis' contention that the jury in this case
heard and saw clear and convincing evidence of the requisite "evil mind."

¶45 Our close review makes clear that the record contains no
evidence that American Standard's business plans, employee evaluations,
compensation programs or training materials were designed or applied
with the purpose of arbitrarily reducing or denying claims to further the

11 The Sobieskis also argue American Standard knew the accident had
put Sobieski out of work for a year or more, thereby rendering the Sobieskis
in particular need of the uninsured motorist benefits they had purchased
from American Standard. But knowledge of the harm that denial of a claim
will cause an insured, without evidence the insurer deliberately ignored the
insured's "rights and needs," is not sufficient to establish the "evil mind"
required to support an award of punitive damages. Linthicum, 150 Ariz. at
333.

18
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

company's bottom line, or that those plans, materials or programs had any
inappropriate effect whatsoever on how claims employees handled the
Sobieskis' claim. The Sobieskis' expert witness testified that American
Standard's business policies "could" or "might" result in pressure on the
claims department because he had seen that happen in other insurance
companies. But "expert opinion evidence based on sheer speculation is not
competent." Aida Renta Trust v. Maricopa County, 221 Ariz. 603, 611, ¶ 19
(App. 2009). An award of punitive damages must be supported by clear
and convincing evidence of the requisite "evil mind." The record here
contains no such evidence.

D. Rule 68 Sanctions and Attorney's Fees.

¶46 American Standard urges us to vacate the attorney's fees and
Rule 68 sanctions awarded to the Sobieskis. The court awarded the
Sobieskis $364,963 in attorney's fees pursuant to A.R.S. § 12-341.01 (2016).
American Standard does not question the statutory authority for the fees
award, but argues that to the extent any part of the judgment is vacated, the
fees award should be remanded. Given that we have affirmed the
compensatory damages verdict but reversed the punitive damages verdict,
we vacate and remand the attorney's fees award for reconsideration by the
superior court.

¶47 The Sobieskis served American Standard with a pretrial offer
of judgment in the amount of $70,000, which American Standard rejected.
Because the compensatory damage verdict exceeded the Sobieskis' offer of
judgment, we affirm the sanctions of double taxable costs and expert
witness fees imposed pursuant to Arizona Rule of Civil Procedure 68.

19
 SOBIESKI v. AM STANDARD, et al.
Opinion of the Court

¶48 American Standard and the Sobieskis both request costs and
their fees on appeal pursuant to A.R.S. § 12-341.01. We deny both requests.

CONCLUSION

¶49 For the reasons stated above, we affirm the judgment and
award of compensatory damages on the Sobieskis' claim for breach of the
covenant of good faith and fair dealing and affirm the Rule 68 sanctions.
We reverse the award of punitive damages, vacate the award of attorney's
fees and remand to the superior court for further proceedings consistent
with this opinion.

AMY M. WOOD • Clerk of the Court
FILED: AA

20