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.