Opinion
No. CIV 04-0342-PHX-SMM.
February 8, 2006
ORDER
Pending before the Court is Defendant American Family's Motion for Summary Judgment [Doc. No. 59] and a Motion for Partial Summary Judgment [Doc. No. 61] filed by James and Martha Winston, Plaintiffs. Defendant American Family has also filed an Objection to Plaintiffs' Separate Statement of Facts [Doc. No. 83]. After considering the arguments raised in the parties' briefs and asserted at oral argument, the Court issues the following Memorandum of Decision and Order.
BACKGROUND
On January 13, 2004, Plaintiffs filed a Complaint in Maricopa County Superior Court alleging two counts: 1) Count I: Breach of Contract and 2) Count II: Breach of Implied Covenant of Good Faith and Fair Dealing/Bad Faith. Plaintiffs have also sought punitive damages. On February 17, 2004, this case was removed from State court under 28 U.S.C. § 1332(a) [Doc. No. 1]. On August 11, 2005, Defendant filed a Motion for Summary Judgment addressing Plaintiffs' bad faith claim and claim for punitive damages. On August 12, 2005, Plaintiffs filed a Motion for Partial Summary Judgment on Count I regarding the first $15,000 in damages [Doc. No. 61].
STANDARD OF REVIEW
A court must grant summary judgment if the pleadings and supporting documents, viewed in the light most favorable to the nonmoving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Jesinger v. Nevada Federal Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). Additionally, upon motion at any time, a party defending against a claim may move for "partial summary judgment," that is, "summary judgment in the party's favor as to . . . any part thereof." FED. R. CIV. P. 56(b). A court must grant summary judgment if the pleadings and supporting documents, viewed in the light most favorable to the nonmoving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). Substantive law determines which facts are material. See Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986); see also Jesinger, 24 F.3d at 1130. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. The dispute must also be genuine, that is, the evidence must be "such that a reasonable jury could return a verdict for the nonmoving party." Id.;see Jesinger, 24 F.3d at 1130.
A principal purpose of summary judgment is "to isolate and dispose of factually unsupported claims." Celotex, 477 U.S. at 323-24. Summary judgment is appropriate against a party who "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322; see also Citadel Holding Corp. v. Roven, 26 F.3d 960, 964 (9th Cir. 1994). The moving party need not disprove matters on which the opponent has the burden of proof at trial. See Celotex, 477 U.S. at 323-24. The party opposing summary judgment "may not rest upon the mere allegations or denials of [the party's] pleadings, but . . . must set forth specific facts showing that there is a genuine issue for trial." FED. R. CIV. P. 56(e); see Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 585-88 (1986); Brinson v. Linda Rose Joint Venture, 53 F.3d 1044, 1049 (9th Cir. 1995).
DISCUSSION
Unless otherwise indicated, the following facts are undisputed. On February 3, 2002, Jason Schroeder ("Schroeder"), an insured under Defendant's automobile insurance policy with limits of $15,000 per person and $30,000 per occurrence, hit Plaintiff James Winston ("Winston") in a crosswalk. Winston was in his wheelchair at the time of the accident. On February 6, 2002, Schroeder reported the claim to Defendant's call center. During the call, Schroeder admitted he had received a ticket for failure to yield and indicated Winston had signed a release at the scene and did not go to the hospital.
On February 12, 2002, Elizabeth Cole (Defendant's adjuster assigned to Schroeder's case) ("Cole") contacted James Marner (Winston's Attorney at that time) ("Marner") and was informed that Winston had suffered a concussion and was taken to an emergency room. Marner also informed Cole that Winston was confined to a wheelchair because he suffered from multiple sclerosis. During the call, Cole informed Marner that Schroeder had $15,000 per person and $30,000 per occurrence policy limits. On March 22, 2001, Cole informed Marner Defendant would pay Winston's property damage claim thereby eliminating that issue.
There was no further activity in the case from the end of March until the end of May when Cole called Marner and left a message requesting an update regarding the medical claim. Marner did not return Cole's phone call. Cole then went on vacation from July 4 through July 15, 2002.
Sometime after July 15, 2002, Cole reviewed a demand letter dated June 18, 2002 which included Winston's medical records that demanded payment of the policy limits by July 8, 2002. On August 1, 2002, Cole contacted Marner regarding the settlement demand and informed him that after a review of the medical records she concluded that she needed to refer the file to Defendant's medical services unit. Cole also informed Marner that she needed copies of the medical bills before the referral could be made. On September 5, 2002, Marner sent Cole medical bills in excess of $20,000, reiterated Schroeder's demand for the policy limit, and imposed a new deadline of September 12, 2002.
On September 11, 2002, Cole mailed a letter to Schroeder informing him, for the first time, of the policy limit demand made by Plaintiffs and informed him that the ultimate value of the claim may exceed those limits. Cole also sent Marner a letter on September 11, 2002 informing him that she was referring the file to Defendant's medical services unit for review but did not request an extension of the September 12, 2002 deadline which subsequently passed without payment being tendered. On September 23, 2002, Marner sent Cole a letter withdrawing the offer to settle for the policy limits.
Defendant contends this letter was not reviewed until October 10, 2002.
On September 27, 2002, Cheryl Oliver, a registered nurse employed in Defendant's medical services unit, produced a written report that stated it was possible Winston's rehabilitation treatment was "necessary as a result of some level of worsening of his pre-existing MS symptoms due this MVA." Cole reviewed this report on October 10, 2002.
On October 11, 2002, Cole called Marner's office and left a message and informed the receptionist that the purpose of the call was for Defendant to make an offer to pay the policy limit of $15,000. Cole again called Marner to make the same offer on October 21, 2002 and then sent a letter on October 28, 2002 reiterating Defendant's desire to settle Plaintiffs' claim for the policy limits.
On November 12, 2002, Marner sent Cole a letter reminding Cole that the offer to settle for the policy limit of $15,000 was withdrawn on September 23, 2002, and that Plaintiffs would be filing a complaint against Schroeder. On November 13, 2002, Winston filed a Complaint against Schroeder in Maricopa County Superior Court alleging negligence. On May 8, 2003, Schroeder stipulated to the entry of a $275,000 judgment against him in exchange for an agreement that Winston would not execute the judgment against Schroeder's personal assets (a Morris Agreement). As part of the agreement, Schroeder assigned his bad faith claim against Defendant to Winston.
On August 21, 2003, the Maricopa County Superior Court entered judgment against Schroeder for $275,000 pursuant to the parties' stipulation.
I. Defendant's Motion for Summary Judgment A. Bad Faith Claim
A federal court sitting in diversity must look to the forum state's choice of law rules to determine the controlling substantive law. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Under Arizona law, "the insurer owes the insured an implied contractual duty to `treat settlement offers with equal consideration' to its interests and those of the insured." Safeway Ins. Co., Inc. v. Guerrero, 106 P.2d 1020, 1024 (Ariz. 2005) (quoting Ariz. Prop. Cas. Ins. Guar. Fund v. Helme, 735 P.2d 451, 459 (Ariz. 1987). This duty arises from the implied covenant of good faith and fair dealing. Id. (citing Hartford Acc. Indem. Co. v. Aetna Cas. Surety Co., 792 P.2d 749, 752 (Ariz. 1990) ("It is settled law in Arizona, based on a covenant of good faith and fair dealing, that an insurance company owes its insured a duty of good faith in deciding whether to accept or reject settlement offers.")).
Plaintiffs contend that the obligation of good faith and fair dealing requires the carrier to keep its insured informed. "[F]ailure of the insurer to inform the insured of a compromise offer" is among the factors to be considered by the trier of fact in a third-party bad faith claim set forth by the Arizona Supreme Court. Clearwater v. State Farm Mutual Auto. Ins. Co., 792 P.2d 719, 722 (Ariz. 1990) (citing Farmers Ins. Exch. v. Henderson, 313 P.2d 404, 406 (Ariz. 1957); see also Anguiano v. Allstate, 209 F.3d 1167 (9th Cir. 2000) (recognizing that an insurer has an obligation to forward settlement offers to the insured and that failure to do so can constitute bad faith under California law).
Under California law, the implied covenant of good faith is remarkably similar to Arizona law and requires an insured to "take into account the interest of the insured and give it at least as much consideration as it does to its own interest."Anguiano, 209 F.3d at 1169.
It is undisputed that Defendant first attempted to inform Schroeder of Plaintiffs' offer to settle for the policy limit of $15,000 by mailing a letter on September 11, 2002 (a date well past the July 8, 2002 deadline and the day before the September 12, 2002 deadline expired). Furthermore, it is undisputed that Defendant was concerned with determining whether Winston's injuries were caused by the accident yet it did not seek additional information regarding the accident and Winston's condition immediately after the accident from Schroeder. Plaintiffs have also put forth evidence that suggests the failure to keep the insured informed violated Defendant's own Company Claim Bulletin #16 and that Defendant has not undertaken any formal effort to ensure compliance with this internal directive.
Plaintiffs also allege that Defendant deliberately failed to perform a diligent and adequate investigation of Plaintiffs' claim. After listing several specific factors to be considered by the trier of fact in third-party bad faith cases, the Arizona Supreme Court has also stated that the Court must consider any other factors "tending to establish or negate bad faith on the part of the insurer." Clearwater, 792 P.2d at 722.
The Court finds that Defendant did not respond to a letter dated June 18, 2002 until August 1, 2002 despite the fact that the letter contained a July 8, 2002 deadline and that Defendant allowed a second deadline to lapse without requesting an extension. The Court also finds that Cole waited until October 10, 2002 to review the report from Defendant's medical services unit dated September 27, 2002 despite informing Marner that once she had the medical services report "they could begin the process of concluding the claim" and knowing that Defendant had already missed two deadlines set by Marner.
The Court finds that the issue of whether Plaintiffs have created a question of fact regarding Plaintiff's bad faith claim is a close one. Specifically, the Court finds that the tone of Marner's letters unduly accusatory and lacking in professional tenor. This notwithstanding, the finds that Defendant's failure to inform Schroeder of Winston's settlement offer prior to the expiration of two deadlines and in contravention of Defendant's own written policy, creates an issue of material fact to whether Defendant's acted in bad faith. The Court also finds that Plaintiffs have set forth evidence that creates an issue of material fact to whether Defendant's failure to perform an adequate and diligent investigation of Schroeder's claim constitutes bad faith. Thus, Defendant's Motion for Summary Judgement is denied as to Plaintiffs' bad faith claim.
B. Punitive Damages
At oral argument, Plaintiffs' counsel stated that the egregiousness of Defendant's conduct required the imposition of punitive damages. The opinion of counsel notwithstanding, under Arizona law "[t]o obtain punitive damages, a plaintiff must prove that `defendant's evil hand was guided by an evil mind.'" Volz v. Coleman Co., Inc., 748 P.2d 1191, 1194 (Ariz. 1987) (citingRawlings v. Apodaca, 726 P.2d 565, 578 (Ariz. 1986)). Plaintiffs must do so by clear and convincing evidence. Thompson v. Better-Bilt Aluminum Products, Co., Inc., 832 P.2d 203, 209 (Ariz. 1992). The requisite evil mind may be established in two ways: 1) "defendant intended to injure the plaintiff" or 2) "defendant consciously pursued a course of conduct knowing that it created a substantial risk of harm to others." Volz, 748 P.2d 1191 at 1194.
The Arizona Supreme Court has also recognized that motions for summary judgment regarding claims for punitive damages are more complicated given Plaintiffs' more onerous burden of proof and held that "a motion . . . for summary judgment must be denied if a reasonable jury could find the requisite evil mind by clear and convincing evidence." Thompson, 832 P.2d at 210-11.
While addressing the propriety of punitive damages in bad faith cases, the Arizona Supreme Court has stated: "punitive damages are recoverable in a bad faith action when the defendant's conduct is `aggravated, outrageous, malicious or fraudulent' combined with an evil mind as evidenced by a showing that the defendant was consciously aware of the needs and rights of the insured and nevertheless, ignored its obligations." Linthicum v. Nationwide Life Ins. Co., 723 P.2d 675, 681 (Ariz. 1986) quoting Rawlings 726 P.2d at 578 (Ariz. 1986). The Court must now apply these principles to the instant case.
The Arizona Supreme Court has found that even where an insurance company does not deal with an insured in good faith, there still must be evidence of an evil mind "illustrating a desire to harm or consciously disregard" an insured's rights.Linthicum 723 P.2d at 681 (finding that denying all claims upon any supportable basis is not in the insured's interest and is evidence relevant to a bad faith claim, but also finding this evidence was insufficient to establish punitive damages were appropriate). In Nationwide, the Court also specifically noted that while the insured was not satisfied with the procedures utilized by insurance company, the procedures were not designed to deny valid claims. Id. at 682.
A year later, the Arizona Supreme Court also found that even where the jury's finding of bad faith was supported by the evidence and the insurance company's "reasons for its dilatory settlement of Filasky's three claims were either groundless or inadequately investigated," the insured failed to meet its burden to establish punitive damages were appropriate. Filasky v. Preferred Risk Mutual Ins. Co., 734 P.2d 76, 84 (Ariz. 1987).
Despite finding that Plaintiffs have presented sufficient evidence to create an issue of fact as Plaintiffs' bad faith claims, the Court finds that Plaintiffs (like the plaintiff inNationwide) have failed to present evidence that Defendant's conduct was specifically designed or intended to deny Plaintiffs' claim. Furthermore, under Filasky, the Court finds even if a jury finds that Defendant did not adequately investigate the claim or that its grounds for the delay were baseless, these findings are not sufficient to establish punitive damages are appropriate.
The Court also finds that Defendant has put forth evidence that Marner's letters were combative and imposed a deadline that expired before Marner had sent Defendant Winston's medical bills and that Marner failed to contact Defendant from the end of March until June. While the Court recognizes that a jury will have to weigh this evidence against the evidence put forth by Plaintiffs to evaluate Plaintiffs' bad faith claims, the Court finds that such evidence further establishes that a reasonable jury could not find Defendant possessed the requisite evil mind by clear and convincing evidence.
In Plaintiffs' separate statement of facts, Plaintiffs contend that Defendant has been involved in other bad faith cases (resulting in two settlement agreements and a jury verdict in the Kamiab case against Defendant) and has failed to modify its claim handling procedures thereby allowing a reasonable jury to impose punitive damages. Defendant, however, has objected to these statements because they are unsupported by admissible evidence.
The Ninth Circuit has clearly stated that a party cannot manufacture a genuine issue of material fact merely by making assertions. S.A. Empresa de Viacao Aerea Rio Grandense v. Walter Kidd Co., 690 F.2d 1235, 1238 (9th Cir. 1982).
The Court finds that the record does not contain an affidavit attesting to the judgment nor does it contain a copy of the judgment. Rather, the only evidence in the record regarding Kamiab case are references to the name of the case by Plaintiffs' counsel during depositions. Additionally, the Court notes that Plaintiffs own statement of facts sets forth two different dates for Kamiab case, thereby only further highlighting the need for counsel's allegations to be supported by admissible facts in the record. Thus, the Court finds that Plaintiffs attempt to rely on counsel's assertions to create an issue of material fact fail as a matter of law.
The Court notes that because Plaintiffs' assertions that defendant was involved in prior bad faith lawsuits are not supported by admissible facts, the Court makes no finding as to the propriety of Plaintiffs' attempt to rely on evidence of prior lawsuits or settlements or whether this evidence would be admissible.
After examining the evidence contained in the record, the Court finds that even assuming that Defendants' conduct in this case constitutes bad faith, Plaintiffs have failed to present evidence that Defendant intended to injure Plaintiffs or consciously disregarded a substantial risk of significant harm to Plaintiffs. Accordingly, the Court finds that a reasonable jury could not find Defendant possessed the requisite evil mind by clear and convincing evidence. Thus, Defendant's Motion for Summary Judgment as to Plaintiffs' claim for punitive damages is granted.
II. Plaintiffs' Motion for Partial Summary Judgment
Plaintiffs contend that Defendant breached its insurance contract with Schroeder (its insured) by failing to indemnify Schroeder for the policy limit of $15,000 once the judgment was entered against him for $275,000. Plaintiffs further contends they are entitled to summary judgment on their breach of contract theory. Defendant, however, argues that Schroeder's alleged breach of the cooperation clause and Winston's wrongful inducement of the alleged breach create issues of fact as to Plaintiffs breach of contract claim.
In support of their contentions, Plaintiffs rely on Arizona's Financial Responsibility Act (A.R.S. § 28-4009) which states in pertinent part:
(a) The liability of the insurance carrier with respect to the insurance required by this chapter becomes absolute when injury or damage covered by the motor vehicle policy occurs. The policy may not be cancelled or annulled as to that liability by an agreement between the insurance carrier and the insured after the occurrence of the injury or damage, and a statement made by the insured or someone on the insured's behalf or a violation of the policy shall not defeat or void the policy. (emphasis added)
The Arizona Court of Appeals has held that an insurance company's liability becomes absolute upon the occurrence of the accident even where the insured fraudulently entered into the insurance contract. Midland Risk Mgmt. Co. v. Watford, 876 P.2d 1203, 1207 (Ariz.Ct.App. 1994) (interpreting A.R.S. § 28-1170 (the prior version of A.R.S. § 28-4009(C)(5)(a)). In Midland, the court also found that the provisions of A.R.S. § 28-1170 that provided "that the liability of an insurance carrier becomes absolute when injury or damage occurs" and "no statement made by the insured or on his behalf and no violation of the policy shall defeat or void the policy" were clear and unequivocal. Id.
The Ninth Circuit has also interpreted A.R.S. § 28-1170 and found that "to the extent of the limits required by the Arizona Financial Responsibility law, `noncooperation' is no longer a valid defense in Arizona. . . ." State Farm Mut. Auto. Ins. Co. v. Thompson, 372 F.2d 256, 260 (9th Cir. 1967).
Initially, the Court finds that the current statute is almost identical to the prior version interpreted both by the Ninth Circuit and Arizona Court of Appeals. Accordingly, the Court also finds, based on the plain language of the statute and existing precedent, that even if Schroeder violated the non-cooperation clause of the policy, Defendant cannot escape liability under § 28-4009(C)(5)(a).
Plaintiffs contend that summary judgment is also appropriate as to damages in the policy limit of $15,000. In support of this contention, Winston argues that Defendant is collaterally estopped from re-litigating liability and damages.
The Arizona Court of Appeals has recently addressed the interplay between Morris Agreements and collateral estoppel principles and held: "issues subsumed in a Morris Agreement and relating strictly to liability and damages rather than coverage must be given the same binding collateral effect as if the judgment underlying the action had been entered after a fully litigated trial subject only to a judicial determination that settlement is reasonable and non-collusive." Associated Aviation Underwriters v. Wood, 98 P.3d 572, 587 (Ariz.Ct.App. 2004);See also Himes v. Safeway Ins. Co., 66 P.3d 74, 84 (Ariz.Ct.App. 2003) (finding that an insurer is entitled to contest the reasonableness of damages in spite of allegations that insurer failed to treat settlement offers with equal consideration).
Accordingly, even applying the principles of collateral estoppel, the amount of damages Plaintiffs may recover is far from settled because the Court may be required to conduct a reasonableness hearing regarding the settlement terms and Defendant will not be bound by the stipulated judgment if the jury finds that Defendant did not act in bad faith.
Safeway Ins. Co., 106 P.2d at 1024 (stating "if bad faith is not established, the Morris Agreement will be a breach of the cooperation clause and the insurer will be excused from any duty to pay the stipulated judgment, no matter how reasonable the amount" but failing to address the interplay between a breach of the cooperation clause and A.R.S. § 28-4009).
Thus, the Court's finds that even if Schroeder violated a non-cooperation clause in the policy, Defendant cannot escape liability under § 28-4009(C)(5)(a) and therefore grants Plaintiffs' motion for partial summary judgment on the narrow issue of liability up to the policy limits under A.R.S. § 28-4009(C)(5)(a).
CONCLUSION
IT IS HEREBY ORDERED that Defendant's Motion for Summary Judgment as to Plaintiff's Bad Faith Claim is hereby DENIED. IT IS FURTHER ORDERED that Defendant's Motion for Summary Judgment as to Plaintiff's claim for punitive damages hereby GRANTED. IT IS FURTHER ORDERED that Plaintiffs' Motion for Partial Summary Judgment on its breach of contract claim is hereby GRANTED only as to the narrow issue of whether Defendant can escape liability under § 28-4009(C)(5)(a) even if Plaintiffs violated a non-cooperation clause contained in the policy.