Case Briefs

MetLife arranged to have the vehicle delivered to a tow yard in Arizona and hired an appraiser to inspect the Explorer. The appraiser estimated only $815 in damages. According to an employee at the tow yard, the appraiser did not even lift the hood in making his assessment.

The Nardellis then elected to have the vehicle towed to the Earnhardt Ford body shop for further inspection. When the tow truck driver attempted to put the vehicle in neutral, the gear shift broke off in his hand. After the second inspection, the MetLife adjuster estimated the damages at $7,000-8,000.

Thereafter, the Nardellis learned from Earnhardt that the Explorer needed a new engine, and continued to find additional damage. A MetLife adjuster again examined the vehicle, increased the repair cost estimate to $11,009, but still would not agree to total the Explorer. The Nardellis vigorously disagreed with that decision. They disputed that it was possible to restore the vehicle to its pre-loss condition, a prerequisite for repairing the vehicle rather than deeming it a total loss. Nevertheless, a check for $10,759.13 (MetLife's calculation minus the deductible) was sent to the Nardellis to repair the vehicle. The Nardellis received the check, turned it over to Earnhardt, and voluntarily allowed their lender to repossess the Explorer.

The Nardellis sued MetLife for breach of the implied covenant of good faith and fair dealing, and the case was tried to a jury. The jury awarded the Nardellis $155,000 in compensatory damages and $55 million in punitive damages. After the jury rendered its verdict, the trial court upheld the jury's award of compensatory damages, but reduced the punitive damages award to $620,000. Both parties appealed.

On appeal, the Nardellis argued that the trial court should not have reduced the punitive damages award from $55 million to $620,000. In its cross-appeal, MetLife argued that the evidence did not support bad faith liability or punitive damages. In the alternative, MetLife argued that the punitive damages award should be reduced even further.

With regard to the bad faith finding, the Court of Appeals agreed with the Nardellis, and held that there was substantial evidence from which a reasonable jury could find that MetLife acted in bad faith in making at least three decisions. First, according to the court, a jury could have found that MetLife acted in bad faith by deciding to repair rather than total the Explorer. The court recounted substantial evidence that the Explorer could not be returned to its pre-loss condition, that MetLife improperly calculated the cost to repair the vehicle and ignored information that the Explorer was coming close to a total loss, and that MetLife failed to investigate a salvage bid to determine exactly how “close” was close. The Nardellis also presented evidence that in so doing, MetLife acted knowingly and subjectively unreasonably. Second, a jury could have found that MetLife acted in bad faith by knowingly and unreasonably sending the Nardellis a check for an amount that did not cover the repair costs. The evidence showed, among other things, that MetLife calculated the repair cost using an hourly rate $33 per hour less than was charged to complete mechanical repairs. Third, the jury could have found that MetLife acted in bad faith because it failed to advise the Nardellis of policy provisions potentially relevant to their claim. MetLife failed to advise the Nardellis of a policy endorsement that could have resulted in additional coverage if it was determined that their vehicle was less than one year old, was driven less than 15,000 miles, and was a total loss, and also failed to advise the insured of their right to appraisal. MetLife's own employees admitted that the company should have alerted the Nardellis to both provisions, and indeed, MetLife's internal training manuals supported this conclusion.

The Court of Appeals next addressed whether punitive damages were appropriate, and agreed with the Nardellis that the clear and convincing evidence entitled them to such an award. According to the court, the evidence supported a finding that the decisions MetLife made with regard to this claim were driven by financial self-interest and not by the merits of the claim or the terms of the policy. Specifically, the Nardellis presented evidence that MetLife had instituted an aggressive company-wide profit goal ($155 million) for 2002, assigned the claims department a significant role in achieving that goal, aggressively communicated this goal to the claims department, tied the benefits of claims offices and individuals to the average amount paid on claims, and implemented these actions without taking steps to ensure that the fair treatment of its insureds would not be affected.

Nevertheless, the Court of Appeals agreed with MetLife that the jury's $55 million punitive damages award (a 355:1 ratio to the compensatory damages) was unconstitutionally excessive, as was the reduced $620,000 punitive damages award imposed by the trial court (a 4:1 ratio to the compensatory damages). The Court of Appeals considered, among other things, the reprehensibility of the conduct, and found that it was low to moderate. The court concluded that the record did not support the 355:1 ratio imposed by the jury or the 4:1 ratio imposed by the trial court, and in fact did not justify an award of punitive damages at a ratio above 1:1. As such, the Court of Appeals reduced the punitive award to $155,000.

Julia Karen Ulrich Barrueco, a senior trial attorney with the Chartis Errors & Omissions Office in New York, contributed this month's Case Brief. She acts as national coordinating counsel with regard to bad faith and other extra-contractual claims against Chartis member companies.

Bad Faith Verdict Affirmed; $55 Million Punitive Damages Award Held to Be Unconstitutionally Excessive

The Arizona Court of Appeals, Division One recently affirmed a $155,000 bad faith verdict against an auto insurer, and further held that punitive damages were also warranted. The court nevertheless concluded that the jury's $55 million punitive damages award was unconstitutionally excessive, as was the trial court's reduction of that award to $620,000. Accordingly, the Court of Appeals further reduced the punitive damages award to $155,000, a 1:1 ratio to the compensatory damages. Nardelli v. Metropolitan Group Prop. and Cas. Ins. Co., 2012 WL 1514671 (Ariz. App. Div. 1, May 1, 2012).

Plaintiffs Kenneth and Tammy Nardelli (“the Nardellis”) purchased a new 2002 Ford Explorer in December 2001 for $35,750 from Earnhardt Ford in Gilbert, AZ. Nine months later, the vehicle was stolen, and the Nardellis reported the theft to their auto insurer, Metropolitan Group Property and Casualty Insurance Company (“MetLife”). Fifteen days later, the Explorer was found in Mexico with slit seats, cut wires, a torn interior, a missing battery, and missing VIN plates, among other problems.

MetLife arranged to have the vehicle delivered to a tow yard in Arizona and hired an appraiser to inspect the Explorer. The appraiser estimated only $815 in damages. According to an employee at the tow yard, the appraiser did not even lift the hood in making his assessment.

The Nardellis then elected to have the vehicle towed to the Earnhardt Ford body shop for further inspection. When the tow truck driver attempted to put the vehicle in neutral, the gear shift broke off in his hand. After the second inspection, the MetLife adjuster estimated the damages at $7,000-8,000.

Thereafter, the Nardellis learned from Earnhardt that the Explorer needed a new engine, and continued to find additional damage. A MetLife adjuster again examined the vehicle, increased the repair cost estimate to $11,009, but still would not agree to total the Explorer. The Nardellis vigorously disagreed with that decision. They disputed that it was possible to restore the vehicle to its pre-loss condition, a prerequisite for repairing the vehicle rather than deeming it a total loss. Nevertheless, a check for $10,759.13 (MetLife's calculation minus the deductible) was sent to the Nardellis to repair the vehicle. The Nardellis received the check, turned it over to Earnhardt, and voluntarily allowed their lender to repossess the Explorer.

The Nardellis sued MetLife for breach of the implied covenant of good faith and fair dealing, and the case was tried to a jury. The jury awarded the Nardellis $155,000 in compensatory damages and $55 million in punitive damages. After the jury rendered its verdict, the trial court upheld the jury's award of compensatory damages, but reduced the punitive damages award to $620,000. Both parties appealed.

On appeal, the Nardellis argued that the trial court should not have reduced the punitive damages award from $55 million to $620,000. In its cross-appeal, MetLife argued that the evidence did not support bad faith liability or punitive damages. In the alternative, MetLife argued that the punitive damages award should be reduced even further.

With regard to the bad faith finding, the Court of Appeals agreed with the Nardellis, and held that there was substantial evidence from which a reasonable jury could find that MetLife acted in bad faith in making at least three decisions. First, according to the court, a jury could have found that MetLife acted in bad faith by deciding to repair rather than total the Explorer. The court recounted substantial evidence that the Explorer could not be returned to its pre-loss condition, that MetLife improperly calculated the cost to repair the vehicle and ignored information that the Explorer was coming close to a total loss, and that MetLife failed to investigate a salvage bid to determine exactly how “close” was close. The Nardellis also presented evidence that in so doing, MetLife acted knowingly and subjectively unreasonably. Second, a jury could have found that MetLife acted in bad faith by knowingly and unreasonably sending the Nardellis a check for an amount that did not cover the repair costs. The evidence showed, among other things, that MetLife calculated the repair cost using an hourly rate $33 per hour less than was charged to complete mechanical repairs. Third, the jury could have found that MetLife acted in bad faith because it failed to advise the Nardellis of policy provisions potentially relevant to their claim. MetLife failed to advise the Nardellis of a policy endorsement that could have resulted in additional coverage if it was determined that their vehicle was less than one year old, was driven less than 15,000 miles, and was a total loss, and also failed to advise the insured of their right to appraisal. MetLife's own employees admitted that the company should have alerted the Nardellis to both provisions, and indeed, MetLife's internal training manuals supported this conclusion.

The Court of Appeals next addressed whether punitive damages were appropriate, and agreed with the Nardellis that the clear and convincing evidence entitled them to such an award. According to the court, the evidence supported a finding that the decisions MetLife made with regard to this claim were driven by financial self-interest and not by the merits of the claim or the terms of the policy. Specifically, the Nardellis presented evidence that MetLife had instituted an aggressive company-wide profit goal ($155 million) for 2002, assigned the claims department a significant role in achieving that goal, aggressively communicated this goal to the claims department, tied the benefits of claims offices and individuals to the average amount paid on claims, and implemented these actions without taking steps to ensure that the fair treatment of its insureds would not be affected.

Nevertheless, the Court of Appeals agreed with MetLife that the jury's $55 million punitive damages award (a 355:1 ratio to the compensatory damages) was unconstitutionally excessive, as was the reduced $620,000 punitive damages award imposed by the trial court (a 4:1 ratio to the compensatory damages). The Court of Appeals considered, among other things, the reprehensibility of the conduct, and found that it was low to moderate. The court concluded that the record did not support the 355:1 ratio imposed by the jury or the 4:1 ratio imposed by the trial court, and in fact did not justify an award of punitive damages at a ratio above 1:1. As such, the Court of Appeals reduced the punitive award to $155,000.

Julia Karen Ulrich Barrueco, a senior trial attorney with the Chartis Errors & Omissions Office in New York, contributed this month's Case Brief. She acts as national coordinating counsel with regard to bad faith and other extra-contractual claims against Chartis member companies.