McClellan v. Brown

Steele Hays, Justice, dissenting. I believe the trial court was entirely correct in awarding punitive damages. First, the pleadings and proof were sufficient to support a cause of action in tort and, second, under the circumstances of this case, punitive damages are appropriate to a cause of action for breach of contract, I agree that ordinarily punitive damages are not recoverable in breach of contract cases, but the rule is hot absolute and there are exceptions. The elements that make this case exceptional are found in the fact that the breach of contract was accompanied by intentionally dishonest acts by the appellant for his own personal gain.

Actions brought by an insured for breach of duty owing to him by an insurance agent may be laid in contract or in tort. 44 C. J.S. Insurance 172b, p. 863. By amended complaint Brown alleged “willful and wanton” conduct on McClellan’s part and prayed for punitive damages. The trial court expressly found McClellan had acted willfully, wantonly and maliciously in twice misappropriating Brown’s insurance premium payments while representing to him that he was covered. Thus, elements of a cause of action sounding in both tort and contract were pleaded and proved at trial. The trial court also found McClellan’s actions in placing Brown’s premium payment in his own personal account while representing that he had paid the insurance company amounted to theft. The majority opinion discounts McClellan’s intentional dishonesty, focusing only on his breach of contract. In fact, the majority treats McClellan exactly as if he had been merely negligent.

The effect of the majority opinion is to allow an insurance agent by practicing a fraud and deception upon his principal, to act as an insurance carrier, gambling that no loss will occur. Since an individual agent rarely has the financial reserves of an insurance carrier, the likelihood that in the event of a loss the “insured” will not be compensated, is greatly increased. Public policy demands such practices be penalized.

Assuming, for the sake of argument, that appellee’s cause of action is based solely on contract, recovery of punitive damages will still lie where the breaching party’s conduct is willful and malicious. Curtis v. Partain, 272 Ark. 400 , 614 S.W.2d 671 (1980). Also, where breach of contract includes elements that enable the court to regard the case as falling within the field of tort, or closely analogous, punitive damages may be awarded by way of punishment. 5 Corbin on Contracts § 1077 at 439. “Thus where the acts constituting a breach of contract also amount to a cause of action in tort, there may be recovery for exemplary damages on proper allegations and proof.” 25 C.J.S. Damages § 120at 1128.

As a general rule, damages for breach of contract are limited to the pecuniary loss sustained. . . . This rule does not obtain, however, in those exceptional cases where the breach amounts to an independent, willful tort, in which event exemplary damages may be recovered under proper allegations of malice, wantonness or oppression. 22 Am. Jur. 2d Damages § 245 at 337.

The cases cited in the majority opinion are distinguishable from the case under review. In Morrow v. First Nat. Bank of Hot Springs, 261 Ark. 568 , 550 S.W.2d 429 (1977), no intentional wrongful acts were alleged or proven. In Curtis v. Partain, supra, this court said punitive damages may lie in a breach of contract action, but there the plaintiff had waived punitive damages by seeking them against only one of four co-defendants involved in the same scheme and because there was no claim of willful or malicious conduct.

Other cases recognize punitive damages are appropriate where, as here, an agent maliciously breaches a duty to his principal based on contract. Brown v. Coates, 102 App. DC 300, 253 F. 2d 36 , 67 ALR 2d 943 (1958). See also 67 ALR 2d 952 . In Brown a real estate broker acted fraudulently in conveying his client’s house to himself without applying the value of the equity toward the client’s purchase of a second house as he represented he would do. The court said:

. . . [0]nce it has been shown that one trained and experienced holds himself out to the public as worthy to be trusted for hire to perform services for others, and these so invited do place their trust and confidence, and that trust is intentionally and consciously disregarded, and exploited for unwarranted gain, community protection, as well as that of victim, warrants the imposition of punitive damages. (At 950.)

And at 949:

We believe the better view in certain, narrowly defined circumstances, where a breach of contract merges with, and assumes the character of a willful tort, calculated rather than inadvertent, flagrant, and in disregard of obligations of trust punitive damages may be assessed.

In Speir Insurance Agency, Inc. v. Lee, 281. S.E.2d 279 (1981), the Court of Appeals of Georgia upheld an award of punitive damages in an action for breach of contract brought by the insured against an insurance agent upon proof the agent had issued a binder insuring the plaintiff’s automobile with American Reserve for $500 from July 15, 1978, to July 5,1979. On August 11, 1978, American Reserve notified the agent the binder had expired “pending receipt of additional information” from the agent. The agent failed to obtain additional coverage and also failed to refund the unused portion of the $500 payment, and on September 2, 1978, the plaintiff was involved in an automobile collision without coverage. Upholding the trial court’s award of punitive damages the court said:

To authorize the imposition of punitive or exemplary damages there must be evidence of wilful misconduct, malice, fraud, wantonness, or oppression, or that entire want of care which would raise the presumption of a conscious indifference to consequences. Southern R. Co. v. O’Bryan, 119 Ga. 147 (1), 45 S.E. 1000 (1903). Under the circumstances in this case the trial court was authorized to impose punitive damages against Speir. See Patterson v. Castellaw, 119 Ga. App. 712 (1), 168 S.W.2d 838 (1969).

Similarly, in Patterson v. Castellaw, 168 S.E.2d 838 (1969), the same court in an action for deceit held an insurance broker was liable for compensatory and punitive damages to a plaintiff by accepting an insurance premium and causing him to believe his automobile was covered against theft when in fact it was not. The broker was found to have willfully misrepresented to a second broker, also acting for the plaintiff in attempting to secure coverage, that he had placed a binder on the automobile which was knowingly false and made to induce placement of the insurance through his own firm.

The Supreme Court of Alabama in Proctor Agency, Inc. v. Anderson, 358 So. 2d 164 (1978), set aside an award of punitive damages against an insurance agent who, when asked by his insured if he was covered for the costs of corrective surgery for an inguinal hernia under his policy with St. Paul Fire & Marine, told the insured to go ahead and have the operation. Coverage was denied by St. Paul and a jury awarded punitive damages which the Supreme Court disallowed, saying there was no evidence the agent’s misrepresentation was committed with an intention to injure and defraud. But, significantly, the opinion recognizes that punitive damages will lie where, as here, an agent misrepresents coverage with an intention to injure or deceive the insured.

In sum, I believe the majority opinion errs in concluding that an agent who is guilty of intentionally dishonest acts against his principal for his own gain cannot be punished by punitive damages if the suit is basically for breach of contract; in necessarily concluding, though without discussion of the issue, that the trial court lacked discretionary power to treat the pleadings and proof as sounding in tort rather than in contract; and, in effect, disregarding the fact that punitive damages are intended to punish a wrongdoer rather than to compensate an injured party. Ray Dodge v. Moore, 251 Ark. 1036 , 479 S.W.2d 518 (1972); Holmes v. Hollingsworth, 234 Ark. 347 , 352 S.W.2d 96 (1961); Dunaway v. Troutt, 232 Ark. 615 , 339 S.W.2d 613 (1960).

I would affirm the judgment.