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holding that "[Defendant] asserts that the 150 -day time period begins to run after the last-filed answer but cites no law to support this reading of Rule 26(b). The text of Rule 26(b) makes no suggestion that the 150 days should be counted from anything but the initial answer."
Summary of this case from Sippe v. Travelex Ins. Servs., Inc.Opinion
No. CIV 00-0040-PHX-SRB
July 16, 2002
ORDER
This matter comes before the court on the Plaintiffs' Motion for Partial Summary Judgment (Doc. 65-1), the Motion of Defendant Royal Insurance Company (Royal) for Summary Judgment (Doc. 71-1), the Plaintiffs' Cross-Motion for Partial Summary Judgment (Doc. 103-1), and the Defendant's Motion to Strike the Plaintiffs' Cross-Motion for Partial Summary Judgment (Doc. 109-1).
I. BACKGROUND
On November 9, 1995, Mr. Patrick Daly was killed when his vehicle was struck by a drunk driver. At the time of the collision, Mr. Daly was driving a vehicle owned by his employer, Coburn Optical (Coburn), and was acting in the course and scope of his employment with Coburn. Mr. Daly's surviving family members are his wife, Plaintiff Lori S. Daly, and their two children, Plaintiffs Bridget A. Daly and Abigail S. Daly. The Dalys filed a lawsuit against the at-fault driver, Patrick Casey, and his insurer, and eventually recovered Mr. Casey's available policy limits of $50,000. Coburn was covered under an automobile insurance policy issued by Royal, which provided for liability and Underinsured Motorist (UIM) coverage. The Dalys pursued a UIM claim against Royal. While this UIM claim was pending, a question arose regarding whether the UIM policy provided a limit of $1,000,000 or $2,000,000 in coverage. Although the text of the policy listed only $1,000,000 in coverage, Arizona Revised Statutes (A.R.S.) § 20-259.01(B) requires insurers to provide UIM coverage in an amount at least equal to the amount of liability coverage, unless a written waiver is obtained. Coburn was insured with $2,000,000 in liability coverage, so the Plaintiffs maintained that the UIM limits were constructively raised to $2,000,000. In July 1998, Mr. Wesley Loy, counsel for the Plaintiffs, and Mr. Edward Hochuli, counsel for the Defendant, reached an agreement to proceed to arbitration without resolving the UIM coverage limits issue. The parties proceeded with arbitration in August 1999. Before the conclusion of the arbitration hearings, the parties settled the UIM claim for $1,500,000 and ultimately entered into a Settlement Agreement (Agreement) executed on October 19, 1999.
The Plaintiffs' Amended Complaint alleges claims for breach of the implied covenant of good faith, constructive fraud, and common law fraud committed in Royal's handling of the Plaintiffs' UIM claim. Royal presently moves for summary judgment on all of the Plaintiffs' claims, while the Plaintiffs assert entitlement to summary judgment only on certain issues.
II. LEGAL STANDARDS AND ANALYSIS
A. Motion to Strike
The court first considers the Defendant's Motion to Strike the Plaintiffs' Cross-Motion for Summary Judgment as untimely. Although the Plaintiffs' February 25, 2002 Cross-Motion was filed subsequent to the court-ordered deadline for dispositive motions, the Plaintiffs' Cross-Motion requests the determination of purely legal issues initially raised and argued in the Defendant's Motion for Summary Judgment. Royal has had ample opportunity to address the legal issues identified by the Plaintiffs' Cross-Motion, and these issues are appropriately decided at the summary judgment stage. The court will consider the Plaintiffs' February 25, 2002 Cross-Motion.
B. Motions for Summary Judgment
The standard for summary judgment is set forth in Rule 56(c) of the Federal Rules of Civil Procedure. Under this rule, summary judgment is properly granted when: (I) no genuine issues of material fact remain; and (2) after viewing the evidence most favorably to the non-moving party, the movant is clearly entitled to prevail as a matter of law. Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53 (1986); Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir. 1987).
In considering a motion for summary judgment, the court must regard as true the non-moving party's evidence, if it is supported by affidavits or other evidentiary material. Celotex, 477 U.S. at 324, 106 S.Ct. at 2548; Eisenberg, 815 F.2d at 1289. However, the non-moving party may not merely rest on its pleadings, he must produce some significant probative evidence tending to contradict the moving party's allegations, thereby creating a material question of fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256-57, 106 S.Ct. 2505, 2513-14 (1986) (holding that the plaintiff must present affirmative evidence in order to defeat a properly supported motion for summary judgment); First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 1592 (1968).
As an initial matter, the court considers the parties' objections to the submitted Statements of Facts. Royal argues that several paragraphs in the Plaintiffs' Statement of Facts cannot create a triable issue of material fact as a matter of law because these paragraphs form a table of contents instead of a list of specific facts. Although the Plaintiffs' Statement of Facts may include the descriptions of certain documents rather than facts, these descriptions do not preclude them from raising triable issues of material fact which block summary judgment.
Additionally, Royal objects to the remaining paragraphs in the Plaintiffs' Statement of Facts because they are "misleading," rely on "quoted language taken out of context," not supported by the record, "overstate the testimony cited," or raise objectionable "innuendo." Several of the Defendant's objections relate to the Plaintiffs' interpretation of the evidence. The Plaintiffs also raise similar objections to the Defendant's Statement of Facts in support of its Motion for Summary Judgment. Both parties may provide their interpretations of the evidence, and the court will jointly consider both parties' views. To the extent that either party's stated facts are not properly supported by the record, the court will not consider them in deciding the pending motions.
1. Accord and Satisfaction
The Defendant initially argues that all of the Plaintiffs' claims are barred by the executed Settlement Agreement pursuant to the principles of accord and satisfaction. Accord and satisfaction is a method for discharging a cause of action, whereby the parties enter into a new agreement (accord), and the new agreement is performed (satisfaction). Green v. Huber, 184 P.2d 662, 664, 66 Ariz. 116, 119 (1947). The elements of an accord and satisfaction are as follows: (1) A proper subject matter; (2) competent parties; (3) an assent or meeting of the minds of the parties; and (4) a consideration. Vance v. Hammer, 464 P.2d 340, 343, 105 Ariz. 317, 320 (1970). The claim that is discharged is defined by the terms of the accord. See Solar-West, Inc. v. Falk, 687 P.2d 939, 944-45, 141 Ariz. 414, 419-20 (1984) (holding that the accord created by the parties served as a substitute for the parties' agreement governing the schedule and purchase of stock shares, but was not contemplated to bar claims arising from unauthorized acts or breaches of duty).
In the present case, the Defendant relies on the release of claims provided in the Settlement Agreement and specifically cites to paragraph ten of the Agreement. However, upon review of the Agreement, the court finds that paragraph eleven is more relevant to defining the discharged claims. Paragraph eleven states:
The Parties hereby acknowledge and agree that the Release set forth in Paragraph 1 hereof is not a general release, but is intended only to apply to the value of the wrongful death claim and the amount of coverage available under the Policy to compensate the Claimants for damages incurred as a result of the wrongful death of Patrick Russell Daly, and Claimants further expressly waive and assume the risk of any and all claims for damages arising out of the wrongful death of Patrick Russell Daly. . . . The parties acknowledge that the release provided in paragraph 1 hereof does not apply to any extra contractual claims Claimants may have against Insurer, including, but not limited to any claim of "Bad Faith" by the Insurer.
Under the terms of the Settlement Agreement, the parties entered into an accord and satisfaction only with respect to the Plaintiffs' wrongful death claim and the dispute regarding the amount of coverage available under the UIM policy. The present claims asserted in this litigation involve alleged misconduct and bad faith in Royal's handling of the Plaintiffs' UIM claims, which are entirely separate from the underlying coverage claims and which were specifically excluded in the release of claims provision. Based on the terms of the Settlement Agreement, the Defendant's position is wholly without merit. The claims asserted by the Plaintiffs in this lawsuit are not barred by the Settlement Agreement.
2. Constructive Fraud
Royal argues that the Plaintiffs cannot establish their claim for constructive fraud because there was no fiduciary relationship between the parties. Liability for constructive fraud involves "a breach of duty actionable at law irrespective of moral guilt, and arising out of a fiduciary or confidential relationship." In re McDonnell's Estate, 179 P.2d 238, 241, 65 Ariz. 248, 251 (1947). The type of relationship necessary to sustain a claim for constructive fraud has been described as "`something approximating business agency, professional relationship, or family tie impelling or inducing the trusting party to relax the care and vigilance he would ordinarily exercise.'" Taeger v. Catholic Family Cmt'y Servs., 995 P.2d 721, 726, 196 Ariz. 285, 290 (Ct.App. 1999) (quoting McDonnell's Estate, 179 P.2d at 241, 65 Ariz. at 253). The fiduciary relationship is characterized by the "superiority of position" which the fiduciary holds over the beneficiary. Id. at 727, 291. "Mere trust in another's competence or integrity does not suffice; `peculiar reliance in the trustworthiness of another' is required." Id. (citing Stewart v. Phoenix Nat'! Bank, 64 P.2d 101, 106, 49 Ariz. 34, 44 (1937)). A beneficiary's reliance on a fiduciary's superior knowledge of relevant information does not establish a fiduciary relationship "`unless the knowledge is of a kind beyond the fair and reasonable reach of the alleged beneficiary and inaccessible to the alleged beneficiary through the exercise of reasonable diligence'" Id. (quoting Standard Chartered PLC v. Price Waterhouse, 945 P.2d 317, 335-36, 190 Ariz. 6, 25 (Ct.App. 1996) (emphasis added in Taeger)).
The Arizona Supreme Court has recognized the disparity in bargaining power between an insurer and its insured and has acknowledged that an insurer has some duties of a fiduciary nature. Rawlings v. Apodaca, 726 P.2d 565, 570-71, 151 Ariz. 149, 154-55 (1986). However, the Rawlings court specifically refrained from going "so far as to hold that the insurer is a fiduciary." Id. at 571, 155. The existence of a fiduciary duty is generally a question of fact. Taeger, 995 P.2d at 727, 196 Ariz. at 291 (quoting Standard Chartered PLC, 945 P.2d at 335, 190 Ariz. at 24). However, the Plaintiffs have presented no argument to support a finding of a fiduciary relationship and no evidence showing the peculiar reliance or the type of superior knowledge necessary to sustain a claim for constructive fraud. Summary judgment is appropriate for the Plaintiffs' constructive fraud claim.
3. Common Law Fraud
Next, Royal contends that the Plaintiffs cannot establish any of the elements required to prove common law fraud. A showing of common law fraud requires the concurrence of nine elements:
(1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) the speaker's intent that it be acted upon by the recipient in the manner reasonably contemplated; the hearer's ignorance of its falsity; (7) the hearer's reliance on its truth; the right to rely on it; [and] (9) his consequent and proximate injury.
Echols v. Beauty Build Homes, Inc., 647 P.2d 629, 631, 132 Ariz. 498, 500 (1982) (citing Nielson v. Flashberg, 419 P.2d 514, 517-18, 101 Ariz. 335, 338-39 (1966)); see Enyart v. Transamerica Ins. Co., 985 P.2d 556, 562, 195 Ariz. 71, 77 (Ct.App. 1998). Fraud must be proven by clear and convincing evidence, Enyart, 985 P.2d at 562, 195 Ariz. at 77, and cannot be established by "doubtful, vague, speculative, or inconclusive evidence." Echols, 647 P.2d at 631, 132 Ariz. at 500.
The Defendant first argues that Royal never made a representation because the representation identified as fraudulent was made by Royal's attorney, Mr. Hochuli, and, therefore, this representation cannot be attributed to Royal. A lawyer is the agent of his client, and the rules of agency law generally apply to the attorney-client relationship. Cahn v. Fisher, 805 P.2d 1040, 1042, 167 Ariz. 219, 221 (Ct.App. 1990). If the client acts in a manner in which third persons of ordinary prudence and discretion would justifiably assume that the attorney was acting within his authority, then the client is bound by the attorney's acts within the scope of his apparent authority. Ariz. Title Ins. Trust Co. v. Pace, 445 P.2d 471, 473-74, 8 Ariz. App. 269, 271-72 (1968); see also Restatement Law Governing Lawyers § 26 cmt. d, illus. 1 (1998) (illustrating that when Lawyer is authorized to negotiate a sale on behalf of Seller and Lawyer knowingly makes misrepresentations to Buyer in the course of negotiations, Seller is liable to Buyer for the misrepresentation because it was made within Lawyer's scope of authority).
In the present case, Royal asserts that Mr. Hochuli's authority was limited to examining the legal effect of not obtaining a written waiver for the lower UIM limits from Coburn. The Plaintiffs, however, could justifiably assume that all representations made by Mr. Hochuli regarding the limits of UIM coverage or the value of the claim were within the scope of his authority. The Defendant presents no evidence showing that the Plaintiffs knew or should have known about the stated limits to Mr. Hochuli's authority or that any of Mr. Hochuli's representations were made outside the scope of his authority. Thus, the representations made by Mr. Hochuli regarding the UIM claim may be attributed to Royal.
Second, the Defendant contends that any representations made on behalf of Royal were not false. An affirmative misrepresentation is not necessary to meet the false representation element of common law fraud. Wells Fargo Bank v. Ariz. Laborers, Teamsters Cement Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 36, 201 Ariz. 474 (2002) ("[F]raudulent concealment — without any misrepresentation or duty to disclose — can constitute common law fraud."); see also Restatement (Second) of Torts § 550 (1976). In Wells Fargo, the Arizona Supreme Court quoted with approval Prosser's description of active concealment as follows:
Any words or acts which create a false impression covering up the truth, or which remove an opportunity that might otherwise have led to the discovery of a material fact . . . or even a false denial of knowledge by one in possession of facts — are classed as misrepresentation, no less than a verbal assurance that the fact is not true.
Wells Fargo, 38 P.3d at 36.
In the present case, the record shows that in a letter dated November 11, 1996, Mr. Loy requested from Mr. Harry Hawblitzel, Claims Specialist for Royal, a copy of "the notice required under Arizona Revised Statutes § 20-259.01(B), which was sent by Royal Insurance to Coburn Optical, and returned by Coburn Optical to Royal Insurance, where Coburn waived its rights to accept coverage in an amount less than the liability limits for bodily injury or death contained within this policy." The record demonstrates that Mr. Hawblitzel made several inquiries and conducted some investigation into whether Royal had obtained a written waiver from Coburn and the effect of failing to obtain this waiver. On November 22, 1996, Mr. Hawblitzel wrote an internal memorandum to Mr. Ron Murtlow of Royal, in which he stated: "We have checked Arizona law and confirmed with coverage counsel, althought [sic] the latter was not necessary, the statute is clear, we will have UIM limits of 2,000,000 instead of the stated 1,000,000. We will raise the reserves today although they may not show up until next week. . . ." In a letter dated November 22, 1996, Mr. Hawblitzel responded to Mr. Loy's November 11, 1996 request by stating: "From what we are told, it appears that no written rejection of higher limits was obtained from the insured." Mr. Hawblitzel further declared that he could not supply Mr. Loy with the written waiver of the higher limits "because the notice does not exist in either Royal's files or those of Marsh McLennan." A few days later, on November 26, 1996, Mr. Hawblitzel entered a note into the claim file, which provided:
New information is now that coverage for UIM was 2M in prior policy and was reduced by Royal unilaterally, which is, I think, a no-no. Other problems too. At the time I wrote clmt atty last week I thought we might have some U/W defenses but research and discussion with coy counsel offer no reason to hope, it appears that 2M limits become effective, will see if dint atty reads the law in this fashion, we all need to be on the same page.
Counsel for Royal had reached the same conclusion regarding coverage limits, as evidenced by Mr. Hochuli's letter of July 16, 1997 to Mr. Hawblitzel, which stated: "As Royal has acknowledged, the policy limits available for the purposes of this claim are $2,000,000 due to the fact that no written waiver of this amount of uninsured motorist coverage was obtained from the insured."
In a letter to Royal's counsel dated July 16, 1998, Mr. Loy represented that despite repeated requests for Royal's position on the coverage issue, he had not received any response to his assertion that the coverage limits were constructively raised to $2,000,000. In a note to the claim file dated July 21, 1998, Mr. Hawblitzel recorded that Mr. Loy "says he believes that we have 2M not 1M and will not give up that issue. (Ed and I believe the 2M would eventually apply, would prefer not to get into the underwriting issue)." On or about July 28, 1998, Mr. Loy reiterated: "[M]y clients have previously made a demand of payment of $2 million upon Royal Insurance as this appears to be the amount of coverage available under that policy at the time of the death of the insured, Patrick Daly. At the date of this letter, I have not received any indication that Royal disputes that this is the amount of the available coverage." In response, Mr. Hochuli wrote his letter of July 31, 1998, which provided: "I am not quite prepared to concede the $2 million versus $1 million issue." The parties subsequently decided to proceed to arbitration without resolving the coverage limits issue, but before the arbitration proceedings began, Mr. Gary Nielsen, who took over the Daly case after Mr. Hawblitzel took early retirement, noted in the claim file: "There is no longer any issue over what the limits are. They are $2 million, we will proceed to arbitration in order to resolve this loss." There is no evidence that Royal informed the Plaintiffs before the settlement agreement of its conclusion regarding coverage limits.
The evidence in the record presents a triable issue of fact regarding whether Royal affirmatively concealed the truth. The record shows that Royal's representatives internally conceded that the coverage limit on the UIM claim was increased to $2,000,000. Despite these internal concessions, the evidence suggests that Royal refused to respond to the Plaintiffs' assertion of a constructive increase and that when Royal finally addressed the issue, over a year after a formal demand for $2,000,000, Mr. Hochuli admitted nothing, stating that he was "not quite prepared to concede" the issue regarding coverage limits. A reasonable jury could conclude that Royal's conduct and representations actively covered up the truth, resulting in a false misrepresentation.
The Defendant also claims that it cannot be liable for fraud based on Mr. Hochuli's representation because this representation involved a legal opinion and was not a misrepresentation of fact. In support of its argument, the Defendant relies on Pleasants v. Home Fed. Sav. Loan Assoc., 569 P.2d 261, 116 Ariz. 319 (App. 1977) and Page Inv. Co. v. Staley, 468 P.2d 589, 105 Ariz. 562 (1970). These cases stand for the proposition that misrepresentations of the law and expressions of opinion cannot serve as the basis for actionable fraud. See Pleasants, 569 P.2d at 264, 116 Ariz. at 322; Page, 468 P.2d at 591, 105 Ariz. at 564. The Plaintiffs, however, have presented evidence of a misrepresentation of fact — the amount of coverage available under the insurance policy. The evidence shows that Royal covered up the fact that it knew that the coverage limits were $2,000,000. This active concealment constitutes a misrepresentation of fact which may support a finding of actionable fraud.
Third, the Defendant argues that any false misrepresentation in Mr. Hochuli's statement is not material because the parties had agreed that resolution of the coverage issue was not necessary to proceed to arbitration. Although the parties may have agreed to set aside the coverage limits issue, Royal never relinquished its right to contest the limits issue if the arbitrator awarded an amount greater than $1,000,000. A reasonable jury could find that Royal's concealment of their internal concessions regarding the coverage limits was material because it induced the Plaintiffs to settle the insurance claim for less than the $2,000,000 both parties believed to be the coverage limit. Mr. John Oberg, Ms. Daly's attorney, testified at his deposition that the remaining dispute over the coverage limits affected his advice to Ms. Daly during the settlement negotiations. Mr. Oberg stated that his discussions with Ms. Daly included the following:
[Royal] agreed that there was at least a million dollars' worth of coverage, and that they had indicated that they were going to file a declaratory relief action determining the amount of coverage, if the award by the arbitrators was in excess of a million dollars, and that I wasn't sure of the outcome of that declaratory relief action, that I assumed that Royal must have at least an arguably sound legal reason to conclude that there wasn't two million dollars' worth of coverage, and specifically that there was no guarantee in the declaratory relief faction that we would prevail.
In addition, Mr. Oberg advised Ms. Daly that even if the arbitrator awarded $2,000,000 or more, she could risk receiving only $1,000,000 if she decided not to accept the $1,500,000 settlement offer. In addition, Ms. Daly testified that she accepted the $1,500,000 settlement offer because no one could guarantee the amount of the coverage limits. Ms. Daly stated: "There was never any guarantee of the two million, but I knew I was guaranteed a million, but if they only had a million, then I would not get that five or something to that effect." Royal's view of the coverage limits issue constituted material information.
Fourth, the Defendant contends that there was no intent to defraud. The party asserting the fraud claim bears the burden of demonstrating the intent to deceive. McAlister v. Citibank, 829 P.2d 1253, 1260, 171 Ariz. 207, 214 (Ct.App. 1992). Despite the numerous internal documents which show that Royal representatives, after investigating the coverage issue, believed that the coverage limit was $2,000,000 and despite numerous inquiries from the Plaintiffs, Royal did not comment on the coverage issue until more than a year after the Plaintiffs' first demand for $2,000,000, ultimately declaring only that it was still "not quite prepared to concede" the $2,000,000 coverage limit. Moreover, Royal admits that in October 1998, when Mr. Hochuli determined that the coverage limit was in fact $2,000,000, he neglected to inform Mr. Loy of his ultimate conclusion, and the Plaintiffs entered into settlement negotiations carrying the false impression of a coverage dispute. Although Royal seeks to characterize Mr. Hochuli's behavior as mere negligence, there is sufficient evidence to raise a triable issue of fact regarding whether Royal intended to deceive the Plaintiffs by manufacturing a non-existent dispute to gain an advantage in the litigation.
Fifth, Royal claims that the Plaintiffs did not rely on Mr. Hochuli's statement. The Plaintiffs, however, presumably would not have settled for less than $2,000,000 if they believed that the coverage limits were undisputed. The evidence shows that the perceived coverage dispute played a factor in Mr. Oberg' s advice to Ms. Daly and that Ms. Daly agreed to the settlement in part because of the uncertainty surrounding the coverage limits. The Defendant points to the Plaintiffs' filing in the Probate Court, in which the Plaintiffs requested court approval of the settlement and represented that the settlement was "fair and equitable," "reasonable," and in their "best interests." Royal takes issue with the Plaintiffs' failure to qualify their statements to the Probate Court, noting the absence of any statement that the settlement was fair only in the context of the uncertainty about the coverage limits. The Plaintiffs' failure to qualify their statements to the Probate Court does not preclude a showing of reliance. The Plaintiffs had no obligation to explain to the Probate Court that they settled for only $1,500,000 because they believed there was a dispute over the coverage limits.
In addition, the Defendant asserts that because the Plaintiffs consistently maintained their position of $2,000,000 in coverage, they could not have relied on any misrepresentation. The Defendant essentially argues that because Royal did not succeed in convincing the Plaintiffs of its erroneous view, there could be no reliance. The Plaintiffs, however, need not retreat from their interpretation of the limits to demonstrate reliance. The Plaintiffs relied upon the false impression of a dispute — not upon any legal opinion provided by Royal. The Plaintiffs have evidence showing that they settled for less than $2,000,000 because of the perceived coverage dispute. The evidence in the record presents a triable issue of material fact regarding the Plaintiffs' reliance on Royal's misrepresentation.
Sixth, Royal asserts that there is no evidence to satisfy the "speaker's knowledge of falsity" or the "hearer's ignorance of falsity" elements. The record contains evidence that Royal representatives had assessed that the coverage limits for the Daly claim were $2,000,000. One note in the claim file indicates that Mr. Hawblitzel communicated with Mr. Hochuli regarding the coverage issue. Furthermore, as Royal's attorney, Mr. Hochuli should have received and reviewed the claim file. Mr. Hochuli waited for over a year after the Plaintiffs' first demand for $2,000,000 to inform the Plaintiffs that he was "not quite prepared to concede" the $2,000,000 in coverage limits. This evidence is sufficient to raise a triable issue of fact regarding Mr. Hochuli's knowledge that Royal was obligated to provide up to $2,000,000 in coverage.
Regarding the hearer's ignorance of falsity element, the evidence proffered to show the Plaintiffs' reliance is relevant to the Plaintiffs' awareness of the falsity of Royal's misrepresentation. Considering the evidence showing that the Plaintiffs and their counsel were influenced by the perceived coverage dispute, a reasonable jury could find that they were unaware of Royal's active concealment of the facts. There is sufficient evidence showing the Plaintiffs' ignorance concerning Royal's misrepresentation to survive summary judgment.
Seventh, Royal contends that the Plaintiffs had no right to rely on Mr. Hochuli's representation. Royal again misses the point by focusing on the absence of a duty to provide the Plaintiffs with legal advice. Although the Plaintiffs may have no right to expect legal advice from Mr. Hochuli, the Plaintiffs have a right to rely on their insurer's representations regarding the coverage limits available under the policy. Royal also relies on the opinion in Linder v. Brown Herrick, 943 P.2d 758, 189 Ariz. 398 (App. 1997) for the proposition that a plaintiff has no right to rely on statements made by opposing attorneys. In Linder, the court noted that no Arizona authority existed for bringing a fraud claim against opposing counsel for statements made during litigation. Id. at 766, 406. The Linder court, however, specifically distinguished its case from cases which "concerned an insured's bad faith claim against its own insurer" because of the "fiduciary loyalties" existing in the insured-insurer relationship. Id. at 768, 408.
Additionally, Royal cites to Voland v. Farmers Ins. Co. of Ariz., 943 P.2d 808, 189 Ariz. 448 (App. 1997) to support its argument that the Plaintiffs had no right to rely on Royal's representations because "the insured and the insurer occupy adverse positions until the uninsured motorist's liability is fixed." Although Royal correctly quotes from the Voland decision, this assertion does not support Royal's position. The Voland court recognized that the nature of uninsured motorist (UM) coverage initially situates the insurer and the insured as adversaries only "until the uninsured motorist's liability is fixed." However, in this case, at the time of Royal's alleged misrepresentation, the fact of the other driver's liability and the extent of the at-fault driver's insurance coverage had been determined. Once Mr. Casey's liability became fixed, Royal had a responsibility to act as the Plaintiffs' insurer rather than their adversary and to fulfill its fiduciary duties. Thus, neither Linder nor Voland are dispositive on this issue. The Plaintiffs have presented sufficient evidence to submit the right to rely issue to a jury.
Finally, Royal contends that the Plaintiffs have suffered no damages. Royal provides evidence that its expert witness, Attorney Ted Schmidt, testified that $1,500,000 was a reasonable settlement. However, the Plaintiffs' expert, Rodney Ball, stated that his valuation of the case was roughly in the range of $1,500,000 to $2,000,000. According to the range provided by Mr. Ball, a settlement of $1,500,000 almost certainly reflects an amount lower than the actual value of the case because $1,500,000 represents the absolute minimum value of the case. The exact amount of damages remains undefined, but there is evidence of damages from the alleged fraud. Thus, the record reflects sufficient evidence to survive summary judgment on the common law fraud claim.
4. Bad Faith
Royal argues that it is entitled to summary judgment on the bad faith claim because none of the Plaintiffs' claims of allegedly tortious conduct meet the requirements for bad faith and because the Plaintiffs cannot prove damages resulting from the alleged instances of bad faith. In Arizona, insurance contracts include an implied covenant of good faith and fair dealing, which requires the parties to refrain from any action which would impair the benefits or rights expected from the contractual relationship. Rawlings v. Apodaca, 726 P.2d 565, 570, 151 Ariz. 149, 154 (1986). The benefits sought by an insured in obtaining an insurance policy include more than the insurer's express agreement to pay certain claims; they also include "protection and security from economic catastrophe" as well as the peace of mind accompanying such security. Id. Thus, the insurance contract implicitly creates an obligation on the part of the insurer "to play fair with its insured," Id., and to fulfill the duties of "[e]qual consideration, fairness, and honesty." Id. at 571, 155.
To establish bad faith, "`a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.'" Deese v. State Farm Mut. Auto. Ins. Co., 838 P.2d 1265, 1267-68, 172 Ariz. 504, 506-07 (1992) (quoting Noble v. Nat'l Life Ins. Co., 624 P.2d 866, 868, 128 Ariz. 188, 190 (1981)). The initial inquiry focuses on whether the insurer acted unreasonably, while the second involves "whether the insurer knew that its conduct was unreasonable or acted with such reckless disregard that such knowledge could be imputed to it." Id. at 1268, 507 (emphasis in original). The insurer must form the intent to commit the challenged act or omission "`without reasonable or fairly debatable grounds.'" Id. (quoting Rawlings, 726 P.2d at 576, 151 Ariz. at 160). The requisite state of mind is established "`when the insurer either knows that its position is groundless or when it fails to undertake an investigation adequate to determine whether its position is tenable.'" Filasky v. Preferred Risk Mut. Ins. Co., 734 P.2d 76, 82, 152 Ariz. 591, 597 (1987) (quoting Rawlings, 726 P.2d at 576, 151 Ariz. at 160). Although an insurer may reasonably challenge "fairly debatable" claims, its assertion of fair debatability "`is a question of fact to be determined by the jury'" Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 279, 196 Ariz. 234, 237 (2000) (quoting Sparks v. Republic Nat'l Life Ins. Co., 647 P.2d 1127, 1137, 132 Ariz. 529, 539 (1986)).
The insurer's ultimate payment of the benefits due under the contract does not affect the bad faith analysis because the implied covenant is breached when the insurer's conduct "`damages the very security which the insured sought to gain by buying insurance'" Id. at 1269, 508 (quoting Rawlings, 726 P.2d at 573, 128 Ariz. at 157). Bad faith may be predicated on the manner in which an insurer processes a claim. See id. at 1270, 509. Thus, an insurer may be liable for bad faith "`when it seeks to gain unfair financial advantage of its insured through conduct that invades the insured's right to honest and fair treatment.'" Zilisch, 995 P.2d at 279-80, 196 Ariz. at 237-38 (quoting Rawlings, 726 P.2d at 572, 151 Ariz. at 156). Consistent with the implied covenant of good faith and fair dealing, the insurer "should not force an insured to go through needless adversarial hoops to achieve its rights under the policy. It cannot lowball claims or delay claims hoping that the insured will settle for less. Equal consideration of the insured requires more than that." Id. at 280, 238.
As an initial matter, the Defendant argues that the Plaintiffs "lack standing" to challenge the reduction in UIM limits from $2,000,000 to $1,000,000 because Coburn was the named insured and because the Dalys were not involved in the purchase of insurance from Royal. Royal cites no law in support of its "standing" argument, so the court can only surmise the basis for this argument. In Arizona, the question of standing involves the "consideration of prudential and judicial restraint to ensure that courts do not issue mere advisory opinions, that the case is not moot, and that the issues will be fully developed by true adversaries." Alliance Marana v. Groseclose, 955 P.2d 43, 45, 191 Ariz. 287, 289 (Ct.App. 1997). To this end, standing requires that a party must have a "direct stake" in the outcome of the case. City of Tucson v. Pima County, 19 P.3d 650, 655, 199 Ariz. 509, 514 (Ct.App. 2001). Royal has presented no evidence showing that the concerns underlying the standing requirement would arise in this case. The Plaintiffs have a direct interest in ensuring that the resolution of its claims was not infected with bad faith on the part of the insurance company. The Plaintiffs were intended beneficiaries to the insurance contract between Royal and Coburn and have standing to bring the present claims. The court will proceed to consider each instance of bad faith alleged by the Plaintiffs.
a. Failure to Pay Undisputed Damages
The Plaintiffs contend that Royal's failure to pay the undisputed amount of their claim constitutes bad faith. In the first-party insurance context, Arizona courts have held that "[wlhere coverage is not contested but the amount of the loss is disputed, the insurer is under a duty to pay any undisputed portion of the claim promptly. Failure to do so amounts to bad faith." Borland v. Safeco Ins. Co. of Am., 709 P.2d 552, 557, 147 Ariz. 195, 200 (Ct.App. 1985); see also Filasky, 734 P.2d at 82, 152 Ariz. at 597. However, in Voland v. Farmers Ins. Co. of Ariz., 943 P.2d 808, 812, 189 Ariz. 448, 452 (Ct.App. 1997), the court found that Borland and Filasky did not represent controlling precedent in cases involving UM claims for personal injury. The Voland court reasoned that the imprecise nature of personal injury claims provides a meaningful distinction from the personal property and lost earnings claims involved in Borland and Filasky. Id. The Voland court held: 1) that the failure to advance the amount of an unaccepted settlement offer does not constitute bad faith and 2) that the failure to gratuitously advance undisputed medical bills and lost wages without a specific request from the claimant does not constitute bad faith. Id. at 813, 453.
In the present case, the record shows internal documents created within a few months of Mr. Daly's death, indicating Royal's recognition that this appeared to be "a very bad damages case" and Royal's preliminarily estimate that "$1.5 million may be the low range value of this case." In a letter dated July 16, 1997, Mr. Hochuli estimated that the Plaintiffs' economic loss fell within the range of $400,785 to $746,300 and that the value of the loss of consortium was between $800,000 to $1,100,000. After accounting for possible offsets, Mr. Hochuli calculated the net claim value to be within $700,000 to $1,350,000. Ultimately, the economic analyst retained by Royal issued a report dated May 12, 1999, which concluded that the Plaintiffs had suffered an economic loss of approximately $499,681.
The Plaintiffs apparently argue that Royal was obligated to pay the undisputed amount of $499,681, which represented the Plaintiffs' minimum economic losses and the amount of $1,000,000, which the Plaintiffs characterize as the "minimum total value of the claim." Regarding the value of the total claim, the record shows that Royal consistently disputed the Plaintiffs' valuation of the claim and that Mr. Hochuli had calculated an estimated range which included amounts below $1,000,000. Regarding the amount for economic loss, the evidence demonstrates that although Royal's analyst concluded that the value of the economic loss was $499,681, Royal did not indicate its acceptance of this analysis until August 10, 1999, when Royal requested the arbitrator to enter an award in the amount of $499,681. Upon acceptance of this calculation of economic loss, Royal soon thereafter agreed to settle the entire claim in the amount of $1,500,000.
The Plaintiffs have failed to present evidence showing that a truly undisputed minimum amount of economic loss or total loss had developed. Royal's calculations of the value of the Plaintiffs' claims were merely tentative, preliminary estimates which were not intended to represent the absolute minimum value of the claims. In light of the acknowledged challenges surrounding the valuation of claims for personal injury, the court finds that the decisions in Borland and Filasky are not controlling. Royal is entitled to summary judgment regarding its alleged failure to advance undisputed damages.
b. Concealment of Absence of Coverage Dispute
Royal argues that it acted reasonably in its handling of the policy limits dispute and that, therefore, the evidence cannot support a claim for bad faith. As noted above, the evidence demonstrates that Royal's representatives and Royal's own counsel had determined prior to the arbitration proceeding that Arizona law required a constructive increase of the policy limits to $2,000,000. Despite these internal concessions, Royal never confirmed nor denied the Plaintiffs' assertion that they were entitled to a maximum of $2,000,000 in UIM insurance. Furthermore, in a letter dated July 31, 1998, Mr. Hochuli stated that he was "not quite prepared to concede the $2 million versus $1 million issue" despite his statement in a July 16, 1997 letter to Mr. Hawblitzel, which declared: "As Royal has acknowledged, the policy limits available for the purposes of this claim are $2,000,000. . . ." The Plaintiffs have proffered sufficient evidence to show that Royal acted unreasonably by creating the false impression of a dispute over policy limits with the apparent purpose of inducing the Plaintiffs to settle for less than the limits. Additionally, the evidence shows that Royal knew that its refusal to concede the policy limits issue was groundless because it had determined the applicability of the $2,000,000 limit after conducting research. The record presents a triable issue regarding whether Royal invaded its insured's right to the peace of mind and security arising from the insurance relationship. Royal is not entitled to summary judgment on the issue involving its alleged bad faith refusal to concede the $2,000,000 in coverage limits.
c. Destruction of "working papers"
Royal contends that its acquiescence in allowing its expert to follow its custom of destroying working papers does not constitute bad faith. The record demonstrates that the Plaintiffs requested drafts of the economic loss report prepared by Ms. Petra Watjen of PriceWaterhouseCoopers and the working papers related to producing this report. At Ms. Watjen' s deposition, she testified that in accordance with her policy, she destroyed all previous drafts of her final May 19, 1999 report and all working papers two days before her deposition. Mr. Hochuli testified at his deposition that before Ms. Watjen's drafts and working papers were destroyed, he was consulted regarding whether Ms. Watjen should follow her standard procedure. Mr. Hochuli communicated to her that he saw no reason for her to deviate from her standard practice. The record shows that Royal's counsel simply permitted Ms. Watjen to follow her customary procedure regarding the destruction of the drafts of her final reports and her working papers. The Plaintiffs have not cited and the court has not uncovered any case law interpreting the implied covenant of good faith and fair dealing as obligating an insurer to prevent the destruction of any documents related to an insured's claim, regardless of any pre-existing policy regarding the destruction of documents. The Plaintiffs have also failed to present any evidence which suggests that any previous drafts or working papers may have uncovered evidence revealing improper conduct on the part of the insured. The Plaintiffs have not presented sufficient evidence to raise a material issue of fact regarding whether Royal's failure to prevent the destruction of Ms. Watjen's drafts and working papers constituted bad faith.
d. Questioning of Ms. Daly at her Deposition
The Plaintiffs also base their bad faith claim on allegedly insulting and irrelevant questions posed to Ms. Daly during her deposition on September 15, 1998. The Plaintiffs specifically object to questions involving whether Ms. Daly was sleeping with her current boyfriend and whether she or Mr. Daly had engaged in any affairs during the course of their marriage. The evidence, however, does not support a showing that Royal's deposition questions were unreasonable or calculated to cause harm to Ms. Daly. Ms. Daly indicated during her deposition that she had planned to volunteer the information regarding whether she was sleeping with her current boyfriend. Furthermore, in a subsequent deposition on August 7, 2001, Ms. Daly testified that the manner of opposing counsel's questioning during the September 15, 1998 deposition had not upset or offended her in any way. The questions posed by Royal's counsel were reasonably related to Royal's potential liability for the loss of consortium claim asserted by Ms. Daly. The Plaintiffs have failed to produce sufficient evidence to survive summary judgment on the alleged bad faith manifested by Royal's questioning at Ms. Daly's September 15, 1998 deposition.
During her deposition the following exchange took place:
Q. And I think you were going to say this earlier, and part of the loss of consortium is — are you sleeping presently with Gordon?
A. Yes.
Q. And I think you were going to volunteer that.
A. Yes, for six months I thought that he was gay, like I said.
e. Arguments Regarding Reductions for Other Payments
In their Amended Complaint, the Plaintiffs alleged that Royal exhibited bad faith when it argued during arbitration that the Plaintiffs' recovery should be reduced by the amount of certain collateral source payments. The Plaintiffs allege that a reasonable lawyer would know that these arguments were not relevant. Royal's arguments for reductions based on the anticipated income taxes owed on Mr. Daly's earnings, the household services provided by Ms. Daly's boyfriend, the amount of life insurance benefits received, and the amount of social security benefits received were reasonable arguments to make at arbitration. The Plaintiffs have not presented any evidence or cited any law demonstrating otherwise. Royal is entitled to summary judgment on the bad faith claim based on its arguments for reductions during arbitration.
f. Delay in Acknowledging Fault of Patrick Casey
The Plaintiffs further claim that Royal's delay in admitting that Mr. Casey was 100% at fault for the Plaintiffs' injuries constituted bad faith. The Plaintiffs specifically point to Royal's October 20, 1998 interrogatory responses. In response to the Plaintiffs' inquiry of whether Royal would contend that any other party other than Patrick Casey was at fault for the Plaintiffs' injuries, Royal stated: "Discovery is continuing and whether or not any other person was wholly or partially at fault is unknown at this time. Respondent will supplement this as discovery continues." However, as early as January 31, 1996, Mr. Nielsen concluded: "This will be a case of 100% liability on the part of the other driver, Patrick Casey." In a July 16, 1997 letter written by Mr. Hochuli to Mr. Hawblitzel, Mr. Hochuli confirms Mr. Nielsen's finding by stating: "Liability is not an issue. Mr. Casey was 100 percent at fault for the resulting injuries." Royal's failure to admit Mr. Casey's sole liability in their responses to interrogatories when Royal had internally conceded the liability issue may constitute bad faith. A reasonable jury could infer that Royal refused to admit liability to create doubt intended to pressure the Plaintiffs into settling for less than the coverage limits. The Plaintiffs have proffered sufficient evidence to bring the bad faith issue before a jury.
g. Refusal to Pay Cash Proceeds upon Request
In the Plaintiffs' Amended Complaint, they allege that following settlement, Royal refused to immediately tender the $1,000,000 in cash proceeds after repeated demands by the Plaintiffs. The record shows that the parties reached a settlement agreement on the UIM claim on August 30, 1999. In an August 31, 1999 letter, Mr. Oberg requested that Royal immediately tender $1,000,000 of the settlement. Royal did not tender the $1,000,000 in response to Mr. Oberg' s demand, but paid the cash portion of the settlement after the Settlement Agreement was executed and after the court order approving the settlement was issued. Royal has presented testimony from the Plaintiffs' expert, Mr. Rodney Ball, indicating that delaying the disbursement of settlement proceeds until after an executed release and court approval were obtained would not be unreasonable. The Plaintiffs have produced no evidence demonstrating that Royal's delay in paying the cash portion of the settlement was unreasonable. Royal is entitled to summary judgment for the bad faith claim based on its timing of the payment of the cash proceeds of the settlement.
h. Reasonableness of Royal's Initial Offer
The Plaintiffs also allege that Royal "low-balled" the Plaintiffs by offering a $750,000 (present value) settlement offer on August 19, 1997 when the minimum valuation of the claim was $1,000,000. Royal denies any bad faith, noting that the $750,000 was within the valuation ranges calculated by Royal. On July 31, 1996, Royal estimated the claim's value within a range of $507,500 and $2,012,000 after offsets in its Bodily Evaluation Worksheet, and in a July 16, 1997 letter, Mr. Hochuli estimated a range of $700,000 to $1,350,000 after offsets. In response and in their Motion for Partial Summary Judgment, the Plaintiffs contend that Royal's bad faith is rooted in the fact that it had no basis for relying on any offsets in developing its initial settlement offer. In essence, the Plaintiffs argue that Royal blindly applied an offset without investigating whether an offset could be validly applied. An insurer acts unreasonably if it fails to conduct "a neutral and detached investigation" to determine whether it may not be responsible for the payment of benefits. See Linthicum v. Nationwide Life Ins. Co., 723 P.2d 703, 712, 150 Ariz. 354, 363 (Ct.App. 1985), rev'd on other grounds, 723 P.2d 675, 150 Ariz. 326 (1986). Although a failure to adequately investigate a claim may serve as the basis for a bad faith action, an insurer's failure to investigate "only becomes material when a further investigation would have disclosed relevant facts." Aetna Cas. Sur. Co. v. Superior Court, 778 P.2d 1333, 1336, 161 Ariz. 437, 440 (Ct.App. 1989).
Royal argues that as a matter of law, it was entitled to offset any payment to the Plaintiffs by their workers' compensation recovery, and therefore, it cannot be liable for any failure to investigate. In Arizona, a contractual non-duplication clause which precludes double recovery of benefits is enforceable "so long as applying the [non-duplication] endorsement will not deprive the insured of full recovery for her loss." Schultz v. Farmers Ins. Group of Cos., 805 P.2d 381, 385, 167 Ariz. 148, 152 (1991); see also Terry v. Auto-Owners Ins. Co., 908 P.2d 60, 64, 184 Ariz. 246, 250 (Ct.App. 1995) (holding that a policy provision reducing the uninsured motorist payment by the amount of workers' compensation benefits paid was enforceable when it did not deprive the claimant of full recovery).
In the present case, Royal relies on the following non-duplication clause of Coburn's insurance policy:
We will not pay for any element of "loss" for which an insured is entitled to receive payment under any workers' compensation, disability benefits or similar law, if an insured is injured while occupying a vehicle which is used as a public or livery conveyance; or which is rented to others; or is used in a business primarily to transport property or equipment.
The parties' key dispute centers on whether Mr. Daly was fatally injured while occupying a vehicle used "primarily to transport property or equipment." The record demonstrates that Mr. Daly worked as a field technician, traveling to various sites to install and repair equipment and to train customers on how to use the equipment. Ms. Daly testified that he often kept his tool box and certain parts in his car. The evidence in the record fails to demonstrate that Mr. Daly used the company car "primarily to transport property or equipment." Although he carried some equipment with him in the car, the evidence shows that he used the vehicle primarily to transport himself to the various sites where his repair services were required. There is no evidence in the record showing any reasonable basis for the application of the non-duplication clause in Royal's calculations. In fact, according to the record, both Mr. Hochuli and Mr. Hawblitzel testified that Royal ultimately determined that an offset would not apply.
Royal argues that it made its determination regarding the offset based on Mr. Daly's "job title and other factors" and the fact that "Mr. Daly was driving his company vehicle in the course of doing business at the time of his accident." Royal's offset analysis apparently lacked any focused consideration of whether the Plaintiffs' injuries fit within the specific requirements of the non-duplication clause. Mr. Hochuli's letter setting forth his valuation of the Plaintiffs' claim estimated a $400,000 offset for workers' compensation but noted that this estimate was "[alssuming standard offset language in UIM policy." There is no evidence showing that Mr. Hochuli's assumption was reviewed before Royal opted to use Mr. Hochuli's valuation range to make an initial settlement offer. The evidence shows that Royal acted unreasonably in relying on a worker's compensation offset without conducting "a neutral and detached investigation." Royal has failed to produce evidence suggesting that its reliance on the offset was reasonable. The Plaintiffs are entitled to summary judgment on the issue regarding Royal's unreasonable reliance on the non-duplication clause. The question of whether Royal improperly applied the offset with the requisite state of mind for bad faith liability remains an issue for the jury. Summary judgment is not appropriate on the bad faith claim involving Royal's alleged efforts to "low-ball" the Plaintiffs.
i. Damages Resulting from the Alleged Bad Faith
The Defendant argues that the Plaintiffs have no evidence that they suffered any recoverable damages. Recoverable damages under a bad faith claim include "[d]amages for pain, humiliation, or inconvenience, as well as pecuniary losses for expenses such as attorney's fees." Filasky, 734 P.2d at 82, 152 Ariz. at 597; see also Rawlings, 726 P.2d at 577, 151 Ariz. at 161. When these damages are experienced, an invasion of property rights occurs, so an insured may also recover emotional distress damages. Filasky, 734 P.2d at 82, 152 Ariz. at 597.
Here, there is evidence that the Plaintiffs were charged more in attorneys' fees because of Royal's failure to properly concede the absence of a dispute over the coverage limits, in addition, there is some evidence that the Plaintiffs could have recovered more than $1,500,000 from the arbitrators if they had refused to settle with Royal for this amount. Because the Plaintiffs have evidence of damage to protected property interests, the Plaintiffs may also recover for any emotional distress caused by the uncertainty of the perceived coverage limits dispute. The issue regarding the existence of damages is properly decided at trial.
5. Non-Party Designation at Fault
The Plaintiffs argue that Royal's Non-Party at Fault designation must be stricken because it was untimely filed. Because the deadline for the filing of the Non-Party at Fault designation is inextricably intertwined with Arizona's substantive law, this deadline protects substantive rights, and therefore, Arizona law applies in federal court. See Wester v. Crown Controls Corp., 974 F. Supp. 1284, 1288 (D. Ariz. 1996). The fault of a nonparty may be considered by the trier of fact if the defending party gives the appropriate notice in accordance with court rules. A.R.S. § 12-2506(B) (West 1994 Supp. 2001). Rule 26(b)(5) of the Arizona Rules of Civil Procedure requires that any party alleging that a nonparty was at least partially at fault for the plaintiff's damages must provide certain information about the nonparty "within one hundred fifty (150) days after the filing of that party's answer." The trier of fact may not apportion any percentage of fault to a nonparty not timely disclosed except upon written agreement of the parties or "upon motion establishing newly discovered evidence of such nonparty's liability which could not have been discovered within the time periods for compliance with the [deadline) requirements." Ariz. R. Civ. P. 26(b).
In the present case, the Plaintiffs filed their initial Complaint in Arizona state court on December 15, 1999. Royal filed an answer to the Complaint on January 14, 2000. According to Royal, the Plaintiffs filed an Amended Complaint on January 25, 2001, and Royal filed its answer to the Amended Complaint on February 8, 2001. Royal argues that its Non-Party at Fault designation was filed timely because the 150 days ran from the date of the filing of the February 8, 2001 Answer, because the "newly discovered evidence" exception applies, and because the Plaintiffs suffered no prejudice from the timing of Royal's designation.
Upon review of the court's file, the court finds that although the parties both refer and rely on an Amended Complaint filed by the Plaintiffs and an Answer to this Amended Complaint, these documents do not appear in the court's file and apparently were not properly filed with the court. Because both parties rely on these documents and because the Amended Complaint was provided in the record, there appears to be no prejudice resulting from the failure to properly file these documents with the court. Upon motion, the court will permit the filing of the Amended Complaint purportedly filed on January 25, 2001 and the Answer to the Amended Complaint purportedly filed on February 8, 2001.
For the purposes of the pending request to strike the Defendant's nonparty designation, the court will assume that these documents will be filed with the court. The filing of this Amended Complaint, however, does not change the analysis for applying the Rule 26(b)(5) requirement. Based on the filing date of its initial Answer, Royal was required to file any designation of a nonparty at fault by June 12, 2000. Royal did not file its Non-Party at Fault designation until November 6, 2000. Royal asserts that the 150-day time period begins to run after the last-filed answer but cites no law to support this reading of Rule 26(b)(5). The text of Rule 26(b)(5) makes no suggestion that the 150 days should be counted from anything but the initial answer. Moreover, the Amended Complaint does not raise issues relevant to Royal's determination of whether the Plaintiffs' counsel may have been at least partially responsible for the Plaintiffs' injuries because Royal's designation was filed before the Plaintiffs' Amended Complaint was provided to the Defendant. Additionally, Royal claims that it could not develop its basis for issuing a nonparty at fault designation until the Plaintiffs had produced certain documents and that this production did not occur until November 14, 2000. However, this allegedly late production of documents cannot represent a newly-discovered basis for the designation because this production also occurred after Royal had filed its designation. Royal apparently had sufficient evidence to file the designation without the allegedly late-produced documents, so the review of these documents could not have affected its decision to file the designation.
Finally, any absence of prejudice suffered by the Plaintiffs does not determine the applicability of the Rule 26(b)(5) requirement. Rule 26(b)(5) imposes a mandatory and clearly defined deadline and does not require a finding of prejudice to the plaintiff in order to preclude the allocation of fault to a nonparty not properly identified. Royal alternatively requests that its response be treated as a motion to accept the late nonparty designation. Royal has not identified any "newly discovered evidence" which could not have been discovered within the time frame established in Rule 26(b)(5). Thus, Royal's Non-Party at Fault Designation will be stricken.
6. Punitive Damages
Royal contends that the Plaintiffs do not have sufficient evidence of the "evil mind" required for liability for punitive damages. Punitive damages are recoverable in bad faith cases when the evidence reflects "something more" than the elements necessary for tort liability. Rawlings, 726 P.2d at 577, 151 Ariz. at 161. The determination regarding punitive damages "focuses on the defendant's state of mind, which may be established by either direct or circumstantial evidence." Gurule v. Ill. Mut. Life Cas. Co., 734 P.2d 85, 87, 152 Ariz. 600, 602 (1987). The requisite "evil mind" is established by evidence of the wrongdoer's "`inten[t] to injure the plaintiff'" or its conscious pursuit of "`a course of conduct knowing that it created a substantial risk of significant harm to others.'" Id. (quoting Rawlings, 726 P.2d at 578, 151 Ariz. at 162). The necessary state of mind is shown if the plaintiff demonstrates that "defendant's wrongful conduct was motivated by spite, actual malice, or intent to defraud." Id. Punitive damages may be assessed when a tort "is committed for an outrageous purpose, but no significant harm has resulted." Restatement (Second) of Torts § 908, cmt. c (1979), cited favorably by Gurule, 734 P.2d at 87, 152 Ariz. at 602.
In determining the existence of the requisite "evil mind," the court considers, in part, "`the nature of the defendant's conduct, including the reprehensibility of the conduct and the severity of the harm likely to result, as well as the harm that has occurred[,] . . . [tlhe duration of the misconduct, the degree of defendant's awareness of the harm or risk of harm, and any concealment of it.'" Thompson v. Better-Bilt Aluminum Prods. Co., Inc., 832 P.2d 203, 209, 171 Ariz. 550, 556 (1992). The "evil mind" required for the imposition of punitive damages must be established by "clear and convincing evidence," which is evidence showing that the truth of the contention is "highly probable." Id. at 210, 557.
In the present case, the Plaintiffs have presented evidence from which a reasonable jury could conclude that Royal intentionally concealed its understanding that the Plaintiffs' were entitled to coverage limits of $2,000,000, thereby manufacturing a dispute over coverage limits in the hopes that the resulting uncertainty would induce the Plaintiffs to settle for less than the available coverage limits. Royal's internal communications and the notes made in its claim file suggest that Royal intended to defraud the Plaintiffs out of the maximum coverage to which they were entitled. The record supports a finding that Royal concealed the amount of available coverage for over a year and knew that the Plaintiffs had entered into settlement discussions under the false impression that Royal could legitimately dispute the $2,000,000 in coverage. A reasonable jury could find to a degree of "high probability" that Royal mishandled the Plaintiffs' claim with the requisite "evil mind."
IT IS ORDERED denying the Defendant's Motion to Strike the Plaintiffs' Cross-Motion for Summary Judgment (Doc. 109-1).
IT IS FURTHER ORDERED granting the Plaintiffs' Cross-Motion for Partial Summary Judgment (Doc. 103-1).
IT IS FURTHER ORDERED granting in part and denying in part the Plaintiffs' Motion for Partial Summary Judgment (Doc. 65-1). The Plaintiffs' request to strike the Defendant's Non-Party at Fault designation (Doc. 31) is stricken as untimely.
IT IS FURTHER ORDERED granting in part and denying in part the Defendant's Motion for Summary Judgment (Doc. 71-1). The Plaintiffs' constructive fraud claim and their bad faith claims based on Royal's failure to immediately tender the "undisputed" amounts, Royal's acquiescence to its expert's custom for destroying documents, Royal's questioning during Ms. Daly's deposition, Royal's arguments concerning income tax, remarriage benefits, life insurance benefits, and social security benefits reductions, and Royal's failure to immediately tender the cash portion of the settlement are dismissed.