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$3.5 million in punitives not excessive

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“The grievousness or reprehensibility of Tower’s conduct is clear from the record. Tower engaged in prohibited conduct while knowing or recklessly disregarding the lack of a reasonable basis for denying the claim. This court told Tower more than 30 years ago about the duty of an insurer to reform an insurance policy upon a discovery of mutual mistake.”

Justice N. Patrick Crooks
Wisconsin Supreme Court

Where an insurer failed to provide coverage even though it knew coverage was lacking only because of a mutual mistake, it was proper for the trial court to grant summary judgment in favor of the insured on a bad faith claim, the Wisconsin Supreme Court held on May 23.

The court also held that a $3.5 million punitive damage award was not excessive where the underlying lawsuit against the insured was worth $490,000.

Trinity Evangelical Church and School (Trinity) operates a grade school in Mequon. In 1994, Trinity sought to obtain hired and non-owned automobile insurance coverage, because its teachers sometimes transport students in the course of their employment using their own vehicles.

Trinity explained to Tower Insurance Company (Tower) agent Jim Rodrian its need for such coverage, and Rodrian passed this information on to Harold Fischer, a Tower underwriter.

Fischer gave Rodrian a quote, which Rodrian believed included the requested coverage, and Rodrian subsequently provided the quote to Trinity, which accepted it, believing it would be covered for hired and non-owned automobiles.

On the application, however, Rodrian inadvertently failed to check the hired and non-owned box. Tower issued the policy without any of the parties involved being aware of the omission of the requested coverage.

In 1995, a teacher at Trinity, was transporting students, when she ran a stop sign and collided with another vehicle. The collision resulted in serious injuries to the other vehicle’s driver and passenger.

Trinity notified Rodrian of the potential claim. Upon review of the policy, Rodrian discovered his omission. Rodrian informed Tower of the accident and that he had mistakenly failed to request hired and non-owned automobile coverage on the application. Rodrian also requested that Tower backdate Trinity’s coverage.

Gene Gallagher, the vice president and director of operations at Tower, decided not to backdate Trinity’s coverage, writing a memo stating as follows: “Your referral says that this is agency error and not ours. We didn’t get request to provide [hired and non-owned coverage] didn’t get copy of binder till now, so [we] don’t have any reason to backdate. Suggest agent [Jim Rodrian] alert his E and O carrier if he hasn’t already. I’m not going to put backdate and add with uncertainty as to possible exposure. We could be facing big dollars due to liab[ility]?? If you want to discuss further let me know.”

Thereafter, Tower was asked on several occasions to reconsider its position. One request for reconsideration came from Jim Reynolds, the adjuster for Rodrian’s Errors and Omissions (E & O) carrier. This letter, mailed to Gallagher, included a citation to Trible v. Tower Insurance Co., 43 Wis. 2d 172, 168 N.W.2d 148 (1969), in which the Wisconsin Supreme Court held that an insurer must reform a contract upon discovery of a mutual mistake.

Gallagher did not read the case, and Tower did not change its decision.

A suit arising out of the accident was filed, and Tower filed a motion for summary judgment asking to be dismissed as a party in the case. The motion was based solely on language of the written policy, and failed to bring to the court’s attention that Tower had been informed by its agent that the written policy was in error.

In response to the motion, Trinity hired an attorney to represent it on the question of insurance coverage, and filed a cross-claim for reformation and breach of contract. Shortly thereafter, Tower withdrew its motion.

Conducting discovery, Trinity deposed Fischer, who stated that four months after the initial decision to deny coverage, he provided a statement to Rodrian making it clear that Rodrian had indeed asked Fischer to include hired and non-owned automobile coverage in the policy.

Two days later, Tower stipulated to reform Trinity’s policy, and paid approximately $490,000 to discharge Trinity’s liability.

Trinity then amended its cross-claim to assert a bad faith cause of action against Tower. Tower moved for summary judgment. Waukesha County Circuit Court Judge Marianne E. Becker denied the motion, and sua sponte granted summary judgment for Trinity, holding that Tower’s conduct constituted bad faith.

A jury trial was then held, the only factual issue being punitive damages, and the jury awarded $3.5 million.

In a published opinion, Trinity v. Tower, 2002 WI App 46, 251 Wis.2d 212, 641 N.W.2d 504, the court of appeals upheld the punitive damages award. However, the court held that it was error to grant summary judgment, and made the punitive damage award contingent on a trial with a finding of bad faith.

Tower petitioned for review on the punitive damages award, and Trinity cross-petitioned on the bad faith claim.

The Supreme Court accepted review, and, in a decision by Justice N. Patrick Crooks, reversed the court of appeals’ holding that summary judgment was improper, and affirmed the punitive damages award. Both Justices Diane S. Sykes and David T. Prosser wrote dissents.

What the court held

Case: Trinity Evangelical Lutheran Church and School — Freistadt v. Tower Insurance Company, 01-1201.

Issue: Does a trial court have authority to grant summary judgment to a plaintiff on a bad faith claim.

Is a punitive damages award of $3.5 million on an insurance bad faith claim excessive?

Holding: Yes. The defendant’s subjective bad faith can be inferred.

No. Where the underlying claim settled for $490,000, a 7:1 ratio of punitive damages to the plaintiff’s potential harm is not excessive.

Counsel: M. Christine Cowles, Barbara A. O’Brien, Milwaukee, and Edward M. Crane, Charles F. Smith, Chicago, Ill., for appellant; Merrick R. Domnitz, Robert L. Jaskulski, Milwaukee, for respondent.

Bad Faith

The court concluded that the evidence supported the grant of summary judgment to Trinity on the bad faith claim. Quoting Anderson v. Continental Ins. Co., 85 Wis.2d 675, 693, 271 N.W.2d 368 (1978), for authority, the court wrote, “the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless disregard of a lack of a reasonable basis for denial or a reckless indifference to facts or to proofs submitted by the insured.”

Applying the “knowledge or reckless” disregard standard, the court concluded, “the record in this case clearly indicates that the facts regarding what Tower knew were not in dispute at the time of the granting of summary judgment. While there may be some factual disputes, those disputes do not involve genuine issues of material fact. Indeed, the undisputed material facts in this case lead to only one reasonable inference — an inference of bad faith on the part of Tower.”

The court concluded that, when Tower learned of the mistake by its agent, it should have understood its obligation to provide coverage. As other evidence of bad faith, the court noted the summary judgment motion by Tower, which failed to inform the court of Rodrian’s error and his request for backdating the coverage.

The court also emphasized that in the case of Trible v. Tower Ins. Co., 43 Wis.2d 172, 168 N.W.2d 148 (1969), the case involved the same insurance company.

Punitive Damages

Applying de novo review, and the six factor test set forth in BMW of N. Am., Inc., v. Gore, 517 U.S. 559 (1996), the court then upheld the $3.5 million punitive damage award.

The six factors are: (1) the grievousness of the acts; (2) the degree of malicious intent; (3) whether the award bears a reasonable relationship to the award of compensatory damages; (4) the potential damage that might have been caused by the acts; (5) The ratio of the award to civil or criminal penalties that could be imposed for comparable misconduct, and (6) the wealth of the wrongdoer.

Discussing the first two factors, the court concluded, “The grievousness or reprehensibility of Tower’s conduct is clear from the record. Tower engaged in prohibited conduct while knowing or recklessly disregarding the lack of a reasonable basis for deny
ing the claim. This court told Tower more than 30 years ago about the duty of an insurer to reform an insurance policy upon a discovery of mutual mistake. See Trible v. Tower Ins. Co., 43 Wis. 2d 172, 168 N.W.2d 148 (1969). Not only was Tower told what to do in such a situation of mutual mistake, but Tower was reminded of this decision by Jim Reynolds in his letter.”

The court further noted, “Gallagher, on behalf of Tower, made the decision to deny coverage without investigating Rodrian’s requests for backdating, and without seeking available in-house legal counsel. Not only did Gallagher, on behalf of Tower, fail to investigate the situation properly, but the record reveals that Gallagher failed to contact Fischer, Tower’s own underwriter, … about whether he understood Trinity to have requested hired and non-owned coverage. Furthermore, Tower decided to ask for summary judgment without informing the court of the dispute regarding Rodrian’s error, and the request for backdating. These decisions, acts, and omissions on the part of Gallagher, on behalf of Tower, illustrate a continuing, egregious, and flagrant pattern of disregard toward Tower’s duty owed to its insured.”

Turning to the third and fourth factors — the relationship of the award to the award of compensatory damages, and the potential damage — the court found there was only a 7:1 ratio between the punitive damages award, and the potential harm of $490,000 had Tower succeeded in denying coverage. The court rejected Trinity’s argument that the proper damage figure is not $490,000 but only the $17,000 compensatory award that Trinity received for its having to litigate coverage.

Turning to the fifth factor, the ratio of the award to civil or criminal penalties that could be imposed for similar misconduct, the court found a relevant penalty in sec. 601.64(4), which imposes a penalty including a fine of up to $10,000 for violating any insurance state or rule.

The court concluded that this factor has “less utility” than the ratio of the award to compensatory damages, however. Finding that Trinity’s great wealth also supports the large award, the court accordingly reinstated the jury’s $3.5 million dollar award.

The Sykes Dissent

Justice Diane S. Sykes dissented, in an opinion joined by Justices David T. Prosser and Jon P. Wilcox.

Noting that the tort of bad faith includes both an objective and subjective element, the dissent concluded that summary judgment is not suitable for such cases.

Sykes wrote, “While the evidence cited by the circuit court strongly supports a finding of reckless disregard, Tower was entitled to have a jury decide the matter after a trial rather than have the circuit court do so on the basis of a paper record. Evaluating issues of knowledge or recklessness involves weighing credibility and drawing inferences, a task for a jury at trial, not a court on summary judgment.”

The dissent also disagreed with the affirmance of the punitive damages award. Sykes concluded, “Here, the entry of summary judgment eliminated Tower’s ability to present evidence that it did not possess the requisite level of intent to establish liability for the intentional tort upon which any award of punitive damages would necessarily be premised. The starting point for the jury was the fact that Tower’s bad faith had already been conclusively established. The circuit court instructed the jury that bad faith and reckless disregard had been determined by the court as a matter of law on the basis of ‘undisputed material facts,’ which necessarily influenced the jury’s consideration of the appropriateness and amount of punitive damages. For this reason alone, I would reverse the award of punitive damages.”

The dissent further concluded that the award could not stand because it is excessive. The dissent concluded that the $490,000 figure used to calculate the punitive damages to compensatory damages ratio is inapplicable, and the $17,000 figure should have been used instead.

Sykes reasoned, “Inexplicably, the maj-ority fails to undertake the proper comparison (punitive damages to actual compensatory damages) and instead endorses (apparently) an improper comparison of punitive damages to a measure of ‘potential harm’ that has no relationship to the bad faith claim upon which the punitive damages award was premised. As noted above, there was no ‘potential’ that Trinity would have to pay the claimant in the underlying lawsuit, because either the insurance agent or Tower would be required to do so depending upon the result of the coverage litigation.

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Case Analysis

In any event, a comparison of punitive damages to a creative (but obviously inapplicable) measure of ‘potential harm’ is entirely inappropriate where, as here, actual compensatory damages have in fact been determined. Indeed, the jury was instructed that the compensatory damages were $17,570 and that punitive damages may be awarded based upon that amount of compensatory damages. The majority’s position, apparently adopting Trinity’s, amounts to nothing more than a manipulation of the ratio for purposes of due process scrutiny.”

The Prosser Dissent

Justice Prosser wrote separately, al-though he also joined the Sykes dissent without reservation, because, “for me, this case raises disconcerting questions about the future of trial by jury in civil cases.”

Citing extensively from a law review article, Frank T. Boesel, Summary Jud-gment Procedure, 6 Wis. L. Rev. 5 (1930), Prosser questioned whether the majority opinion was consistent with the constitutional right to try issues of fact.

Prosser concluded, “What the majority decision seems to ignore is that the tort of bad faith is inextricably linked to the punitive damages issue that went to the jury. At trial, Tower Insurance was not able to defend itself on a level playing field. The circuit court left handprints on the scales of justice by taking the bad faith issue from the jury and instructing the jury as to the defendant’s bad faith.”

“The plaintiff was a church, the defendant was an insurance company, and the judge was making official pronouncements about the defendant’s bad faith. Is there any wonder that the jury awarded $3,500,000 in punitive damages?” Prosser asked.

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David Ziemer can be reached by email.

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