Petition for Writ of Certiorari — Allstate Insurance v. Hawkins
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87-40 |
Supreme Court, U.S.
rina28
JUL 6 1987
No. 87-__ JOSEPH F. SPANIOL, JR.
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IN THE
Supreme Court of the Gnited States
OCTOBER TERM, 1987
\
ALLSTATE INSURANCE CoO.,
Petitioner,
Vv.
JACK RANDY HAWKINS and CYNTHIA HAWKINS,
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE SUPREME COURT OF ARIZONA
*THEODORE B. OLSON
LARRY L. SIMMS
GIBSON, DUNN & CRUTCHER
1050 Connecticut Ave., N.W.
Washington, D.C. 20036
(202) 955-8500
Attorneys for Petitioner
Of Counsel:
MARK I. HARRISON
DouGLAS L. CHRISTIAN
Mary E. BERKHEISER
HARRISON & LERCH, P.C.
1001 North Central Avenue
Suite 900
Phoenix, Arizona 85004
(602) 257-5800
*Counsel Of Record
PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203
QUESTIONS PRESENTED
1. Whether the imposition of a $3,500,000 punitive
damage award violates the Due Process Clause of the
Fourteenth Amendment and the Excessive Fines
Clause of the Eighth Amendment because the amount
of that penalty was established and upheld on the
basis of vague, shifting standards and is grossly dis-
proportionate to the compensatory damages awarded
and to monetary punishments inflicted by the Arizona
legislature for similar or more egregious conduct.
2. Whether a defendant in a civil action must re-
ceive some or all of the federal constitutional pro-
tections accorded to defendants in criminal cases
before punitive damages can be imposed.
3. Whether the Due Process Clause of the Four-
teenth Amendment requires that liability for punitive
damages be established by clear and convincing evi-
dence before such damages may be awarded in a civil
action.
4. Whether the Due Process Clause of the Four-
teenth Amendment requires the application to pend-
ing cases of a decision by this Court that the Eighth
Amendment applies to punitive damage awards and
the application to this case of a decision of the
Supreme Court of Arizona requiring that the entitle-
ment to punitive damages be established by ‘“‘clear
and convincing’”’ evidence.*
* All parties to this case are as named in the caption. Pursuant
to Rule 28.1 of the Rules of the Court, the following constitutes
a list of all parent companies, non-wholly owned subsidiaries and
affiliates of petitioner: Allstate Insurance Company is the wholly
owned subsidiary of Sears, Roebuck & Co.
il
TABLE OF CONTENTS
Page
Baemad: COP AUTGETAIS ovisccvsscsnsescsssesersseiornses iv
EMIT SEO scisiilisdnoncansaitvcntivionsncdsiecsbiuies 2
aE EET - disrsisntieischarassianeraianniaddetiniaiguaiioeiann 2
CONSTITUTIONAL PROVISIONS INVOLVED .. 2
STATEMENT OF THE CASE .........ccccccsssccssssoeees 3
A. Facts Relevant to Petitioner’s Constitu-
TEE TIE Sevistvecetctectennadon: 4
B. The Presentation of the Federal Ques-
WOOD ssissaxscisstnnicinnecesiiaaene eel 9
REASONS FOR GRANTING THE WRIT ............ 15
h. PERE tcc namtiicincmnne 16
1. The Asserted Basis for Refusal To
Reach the Federal Questions Is an In-
adequate State Ground and Does Not
Defeat This Court’s Jurisdiction ....... 16
2. Alternative Basis Requiring Decision
of Petitioner’s Federal Questions by the
Supreme Court of Arizona ....cccccccceees i8
B. The Questions Presented Are Important,
Recurring Questions of Federal Consti-
tutional Law That Should Be Settled by
208 SIDE icc 21
1. The Excessiveness of the $3,500,000 Pu-
nitive Damage Award ......cccccccreseees 21
2. The Questun Whether Punitive Dam-
ages May Be Imposed Without Accord-
ing Federal Constitutional Protections
Due to Defendants in Criminal Cases
Should Be Decided by This Court ..... 24
3. The Question Whether Punitive Dam-
ages May, Under the Due Process
Clause of the Fourteenth Amendment,
Be Imposed Only After Liability Is
Demonstrated by “‘Clear and Convinc-
ing” Evidence Should Be Resolved by
TRIS COUTE ....ccccssosorcocccrcceessscccsessccooess 25
4. This Court Should Decide Whether the
Punitive Purposes Advanced by Funi-
tive Damage Awards Require That
Rules Restricting Their Imposition Be
Applied to Cases Pending on Appeal 27
CONCLUSION o.......ssssescssssssscesssesesssessssosccocccceeeeeens 29
Iv
TABLE OF AUTHORITIES
CASES: Page
Addington v. Texas, 441 U.S. 418 (1979) wu. 26
Aetna Life Insurance Co. v. Lavoie, No. 84-1601
(Apr. 22, 1986), 106 S. Ct. 1580 (1986) ......... 10, 15
Bankers Life and Casualty Co. v. Crenshaw, No.
85-1765 (prob. juris. noted Mar. 9, 1987), 107
Be Se IE ecthralncssiiedsnateaiinnesace ye ae a
Barr v. City of Columbia, 378 U.S. 146 (1954) .... 17, 18
Barrio v. San Manuel Division Hospital for Magma
Copper Co., 143 Ariz. 101, 692 P.2d 280
GRE 5: cicsnshadiidnntbandasccdsahecsccel teal ssutes ectiindounsess 16
Brinkerhoff-Faris Trust Co. v. Hill, 281 U.S. 673
SE: | atsissnsiniteiteueiiskiaaatnabatcanddeccdlebisesaestens 20
Chevron Oil Co. v. Huson, 404 U.S. 97 (1971)... 28
Electrical Workers v. Foust, 442 U.S. 42 (1979) 24-25
Gertz v. Robert Welch, Inc., 418 U.S. 323
IE Soren ehasianAdiiahadlicals catelanieheneitabiiasdtapidvauaesansinesns 22, 25
Giacco v. Pennsylvania, 382 U.S. 399 (1966)... 23
Griffith v. Kentucky, 107 S. Ct. 708
SRN sicditeih asses anddnthucomicbansiokadicdindiaktsibseciadans 27, 28, 29
Henry v. Collins, 380 U.S. 856 (1965) oo... 28
Kennedy v. Mendoza-Martinez, 872 U.S. 144 (1963) a
Kolender v. Lawson, 461 U.S. 352 (1983) 0.0... 23, 27
Linthicum v. Nationwide Life Insurance Co., 150
Ariz. 326, 723 P.2d 675 (1986) ...............<.0... passim
Maricopa County v. Corporation Commission of Ar-
vzona, 79 Ariz. 307, 289 P.2d 183 (1955) ....... 14, 18
Mathews v. Eldridge, 424 U.S. 319 (1976) .......... 27
New York Times Co. v. Sullivan, 876 U.S. 254
RE OR eatery ate Spe 28
Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565
Table of Authorities Continued
Page
Rosenbloom v. Metromedia, Inc., 403 U.S. 29
(TQT1) — rerrenccceresssersosssosscccssennecssenssocsoansssncnontusnss 25
Ruth v. Industrial Commission, 107 Ariz. 572, 490
P.2d S28 (1971) .sccscrcscccccesccccssecscrcrsssesscecoesense 16
Santosky v. Kramer, 455 U.S. 745 (1983)... 26
Smith v. Wade, 461 U.S. 30 (1988) «0.0... eseeeeeeeees 25, 26
State v. Yslas, 189 Ariz. 60, 676 P.2d 1718
(19BA) *....ccoressssccsrssorsnsssouersrsnresneoreseconcescnressnness 19
Sullivan v. Little Hunting Park, Inc., 396 U.S. 229
CISC) cccerervssesernvaccsasesssusecsnsesvecsencepsnesaesemiasacene 18
Town of South Tucson v. Board of Supervisors, 52
Ariz. 575, 84 P.2d 581 (1938) ..csssseseseeeseers 16
Travelers Indemnity Co. v. Armstrong, 442 N.E. 2d
B49 (Ind. 1982) ........ccccscccreccsssrsscccssercseooeeees 26
Tuttle v. Raymond, 494 A.2d 1353 (Me. 1985) _ ... 26
United States v. American Railway Express Co.,
965 U.S. 425 (1924) .....ccccccccrcccccccccecccesessneressees 18-19
United States v. Ward, 448 U.S. 242 (1980). ...... 24
Wangen v. Ford Motor Co., 97 Wis. 2d 260, 294
N. W. Bh ABT (190). cnvsncccsscccscccssesccssonssnsssevess 26
FEDERAL CONSTITUTION AND STATUES:
Constitution:
TAR DGD oo ccincvnniccitscscvecconsvssentbusmenantens 24, 25
ie, RN og vc osiicnsinscvastcnsinseesadeobeapanens 24, 25
Eighth Amendment .......ccsssccsseseseesreeeeeeesees passim
Fourteenth Amendment ..........::cseeeeeeereeeeeeeees passim
vi
Table of Authorities Continued
Page
Statutes:
I © ED sca ssp hcdeanvacncuebeecaeanvewlenss 2, 15
STATE STATUTES AND RUiES:
Arizona:
Ariz. Rev. Stat. Ann. § 18-803 (Cum. Supp.
I acaba diualad LORD CRO EEA 21
Ariz. Rev. Stat. Ann. § 13-804 (Cum. Supp.
SENET. >> caluitalelds acces seacgunnensd ne sd ademas dove eomncs 21
Ariz. Rev. Stat. Ann. § 18-2202 (1978) _........ 21
I, UN, I i caclcsacnnmeomcesmmiewens 7
I, FN, Te TE oie sacveisisvecccsactccscornnes 7, 10
Other States:
Act of the State of Alabama, H. 27, §1 (June
i NR i sahitcuiin idanccciedini cendbbieeindaenndlces 26
: Alas. Stat. § 09.17.020 (Supp. 1986) _............ 26
Colo. Rev. Stat. Ann. § 13-25-127(2\Supp.
RR RR eT RENE eae WA ot RO 26
Fla. Stat. Ann. § 768.73 (Supp. 1987) _......... 26
Minn. Stat. Ann. § 549.20 (Supp. 1987) _...... 26
Mont. Code Ann. § 27-1-221(2K1986) ......0..0... 26
Okla. Stat. Ann., Title 23, §9 (1987) ......... 26
Ore. Rev. Stat. Ann. § 30.925 (1983) ........ 26
IN THE
Supreme Court of the GAnited States
OCTOBER TERM, 1987
No. 87-
ALLSTATE INSURANCE CoO.,
Petitioner,
Ve
JACK RANDY HAWKINS and CYNTHIA HAWKINS,
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE SUPREME COURT OF ARIZONA
Allstate Insurance Company petitions the Court to
issue a Writ of Certiorari to the Supreme Court of
Arizona to review four questions raised by that court’s
reinstatement of a $3,500,000 punitive damage award
against petitioner. One of those questions is presently
sub judice in this Court in Bankers Life and Casualty
Co. v. Crenshaw, No. 85-1765 (prob. juris. noted Mar.
9, 1987), 107 S. Ct. 1867 (1987). Petitioner seeks
review of three additional questions not presented in
Bankers Life which also impact broadly on the man-
ner in which punitive damage awards designed to
fulfill the classic objectives of the criminal law—pun-
ishment and deterrence—are imposed in civil litigation
throughout the United States.
OPINIONS BELOW
The February 26, 1987 opinion of the Supreme
Court of Arizona, with dissenting opinion, is reprinted
in the Appendix, App. 1a-33a, and is reported at 733
P.2d 1073 (1987). The opinion of the Court of Appeals
of Arizona, Division One, of August 13, 1985 is re-
printed infra, App. 34a-47a, and is unreported. The
memorandum opinion and order of the Superior Court
of Arizona in and for the County of Maricopa is re-
printed infra, App. 48a-50a, and is unreported. The
order of the Supreme Court of Arizona denying
petitioner’s Motion for Reconsideration, issued on
April 7, 1987, is reprinted infra, App. 51a, and is
unreported.
JURISDICTION
Petitioner seeks review of the February 26, 1987
decision of the Supreme Court of Arizona which va-
cated the decision of the Court of Appeals and re-
manded the case for reinstatement of the original
judgment dated August 3, 1982. The Supreme Court
of Arizona denied petitioner’s timely Motion for Re-
consideration on April 7, 1987. The jurisdiction of this
Court is conferred by 28 U.S.C. §1257(3). This
petition is being filed within ninety days from the
April 7, 1987 order denying petitioner’s Motion for
Reconsideration.
CONSTITUTIONAL PROVISIONS INVOLVED
1. The Excessive Fines Clause of the Eighth
Amendment of the Constitution provides, in pertinent
part, that:
‘“{NJor [shall] excessive fines [be] imposed
2. The Due Process Clause of the Fourteenth
Amendment of the Constitution provides, in pertinent
part, that:
. “{Njor shall any State deprive any person of
. property, without due process of law
” \
3. The Equal Protection Clause of the Fourteenth
Amendment of the Constitution provides, in pertinent
part, that:
‘“(Njor shall any State ... deny to any person
within its jurisdiction the equal protection of
the laws.’
STATEMENT OF THE CASE
This is an insurance “‘bad faith” case arising from
the insureds’ dissatisfaction with an automobile pur-
chased to replace their insured car, which had been
demolished in an accident. Although petitioner re-
placed the insureds’ car within two weeks of the ac-
cident with a car having a value within $200 of the
insured car, the jury awarded the insureds $15,000
in compensatory damages and $3,500,000 in punitive
damages. The trial court set the punitive damage
award aside on a number of grounds, including its
excessiveness, and ordered a new trial. The inter-
mediate appellate court affirmed the grant of a new
trial, holding that there was no basis in the record
to warrant a punitive damage award of $3,500,000.
The Supreme Court of Arizona, applying unfavor-
able Arizona law established after the verdict while
refusing to apply post-verdict Arizona law favorable
to petitioner,’ ordered the jury’s verdict reinstated.
While each discrete act of judicial legerdemain per-
formed by the court below to reach its result may
not be cognizable under the federal constitution, the
ultimate result and the process by which it was
reached, taken as whole, raise substantial and im-
portant federal questions which go to the heart of
the manner in which juries, uncontrolled by any mean-
ingful legal standards, administer an ad hoc, govern-
ment-sponsored system of punishment on a daily basis
in Arizona and other States.
A. Facts Relevant to Petitioner’s Constitutional
Questions
On December 6, 1979, respondent Cynthia Hawkins
was involved in an accident in which respondents’
five-month old car was ‘‘virtually demolished.” The
accident was reported to their insurer, petitioner, that
same day. Within a few days, the damaged car had
been determined by petitioner to be a ‘“‘total loss.”
App. la-3a, 733 P.2d, at 1076.
During the first week after the accident, petitioner’s
total loss adjuster determined the Blue Book value of
respondents’ car to be $6,545 and the market value
(actual cash value) to be $6,165. This latter calculation
took into account a $35 subtraction from the esti-
mated cash value as a reconditioning or ‘‘clean-up”’
deduction. On December 13, respondents requested
that petitioner furnish them with a comparable car
‘The Supreme Court of Arizona issued Rawlings v. Apodaca,
151 Ariz. 149, 726 P.2d 565 (1986), on July 22, 1986; it issued
Linthicum v. Nationwide Life Ins. Co., 150 Ariz. 326, 723 P.2d
675 (1986), on July 23, 1986. As discussed infra, the court below
applied Rawlings but refused to apply Linthicum to the case at
bar.
oe it
rather than the actual cash value of their insured car.
Respondents looked at four similar cars and requested
that petitioner purchase one of them, the cost of which
was $300 more than petitioner was prepared to pay.
On December 20, respondents accepted a check
from petitioner for $6,471, payable to respondents
and a local dealership, which they used to acquire a
car. Respondents subsequently determined that the
car they purchased was not sufficiently comparable
to their insured car because it lacked power windows,
had a larger engine, had dealer-installed rather than
factory-installed cruise control, and lacked several
styling features of their insured car. No evidence of
the replacement car’s actual cash value was presented
at trial. The only evidence on this subject was
petitioner’s acknowledgment on appeal that the list
price of the replacement car was at least $161.45 less
than the list price of respondents’ insured car.
Over petitioner’s objections, the trial court permit-
ted testimony of three former employees of petitioner
on the subject of petitioner’s claims practices. One
witness testified concerning policies of petitioner’s Ta-
coma, Washington, office. Another testified concern-
ing activities in petitioner’s Phoenix office during a
period fifteen years prior to respondents’ claim. Al-
though not involved in the adjustment of respondents’
loss, a third testified concerning practices in the Phoe-
nix office at the time of respondents’ claim. That
latter testimony covered the deduction, in valuing a
“total loss,” of a $35 ‘clean-up’ charge and a $5
“tire wear’ charge in determining the actual cash
value of a car. The ex-employee who had worked for
petitioner for two years in the early 1960s, Mr. Wil-
liam Boettcher, testified, inter alia, that petitioner’s
policy was to settle claims ‘for as low an amount as
possible’ so as to ‘‘save the company money ....”
App. 8a, 733 P.2d, at 1078. No evidence was admitted
regarding the number of times the ‘“‘clean-up’”’ fee had
been deducted with respect to other claims. During
the trial, however, the following colloquy took place
between respondents’ counsel and one of the wit-
nesses:
Q. If Allstate has 100,000 total loss claims
every year, and they take $35 off on each
one of those, that amounts to $3,500,000,
doesn’t it?
A. If you say so. 1 can’t figure that far.
App. 18a, 733 P.2d, at 1083 n.9.
After the jury returned its verdict, petitioner moved
for judgment notwithstanding the verdict and, in the
alternative, for a new trial on a variety of grounds,
including the excessiveness of the punitive damage
award’ and the trial court’s errors in admitting the
testimony of petitioner’s three former employees. In
a memorandum order granting these alternative mo-
tions, App. 48a-50a, the trial court expressly held,
inter alia, that the verdict against petitioner for com-
mitting the tort of bad faith was not justified by the
evidence; that punitive damages were not warranted:
that ‘‘the damages are excessive”; that the verdict
was the result of passion and prejudice on the part
of the jury; and that the court had committed error
2 In its memorandum filed in support of its alternative motion,
petitioner argued that the punitive damage award was more than
230 times the size of the award for compensatory damages and
that the excessiveness of the award as a matter of law was
virtually self-evident.
Pon cieeesn ele
in admitting the testimony of the three former em-
ployees. App. 49a-50a.
On respondents’ appeal to the Court of Appeals,
that court concluded that the testimony of two of the
three former employees was admissible but that the
testimony of Mr. Boettcher was inadmissible under
Rule 404(a), Arizona Rules of Evidence, because it
constituted character evidence which was not suffi-
ciently similar to or contemporaneous with the actual
experience of respondents to qualify for admission
under Rule 404(b) as evidence of a pattern of bad
faith conduct by petitioner. App. 39a.
The Court of Appeals rejected respondents’ argu-
ment that the $3,500,000 punitive damage award could
be sustained on the theory that it bore a “reasonable
relationehip to the nature of the misconduct, All-
state’s profit from such misconduct, its history,
wealth, and income, and the deterrent effect fof that
award].” App. 44a. The Court of Appeals determined
that petitioner’s conduct could be found to be “‘op-
pressive’ as a matter of Arizona law, and therefore
sufficient to sustain a punitive damage award, only
if petitioner was shown at trial to have engaged in
a “corporate policy, sufficient to constitute a pattern,
whereby an insurer chisels an amount small enough
from each claimant such that only the occasional per-
son will object and litigate the matter.’’ App. 4a.
The Court of Appeals held that ‘‘where punitive dam-
ages are based on wrongful corporate policies which
are profit oriented, the supporting evidence [regard-
ing the amount of punitive damages] must go far
beyond informed speculation.” App. 46a.
Finding that the only portion of the record re-
garding the “profits’’ petitioner might have realized
from its $35 “clean-up” deduction practice was the
speculation of respondents’ counsel in the question
quoted above, at p. 6, a majority of the Court of
Appeals held that “‘the amount of punitive damages
is not justified by the evidence,” id., and affirmed
the trial court’s grant of a new trial. Because it found
a basis for sustaining the grant of a new trial on this
ground, the Court of Appeals did not reach the ques-
tions whether the punitive damage award was oth-
erwise excessive or whether the verdict was the result
of passion and prejudice. One member of the Court
of Appeals would have affirmed the grant of judgment
notwithstanding the verdict. App. 47a.
On December 17, 1985 respondents filed in the court
below a Petition for Review of the Court of Appeals’
decision. In the questions presented by respondents
for review, which are reprinted in full infra, App.
66a-67a, respondents did not present to the Supreme
Court of Arizona the questions whether the punitive
damage award was ‘“‘excessive” or whether the ver-
dict was the result of “passion and prejudice’ —
grounds for the grant of the motion for new trial
which had not been passed on by the Court of
Appeals. In that petition, respondents did assert that
Mr. Boettcher’s testimony was admissible to show the
“duration” of petitioner’s alleged pattern of miscon-
duct and that review should be granted on that ques-
tion because “[nJo Arizona decision specifically
indicates whether or not duration of misconduct is a
factor ... in assessing punitive damages.”’ App. 67a.
Respondents also argued that they were not required
to introduce evidence regarding the amount of
petitioner’s ill-gotten ‘‘profits” in order to sustain a
punitive damage award. Respondents acknowledged
that there was ‘“‘no controlling Arizona decision” on
this point, App. 67a, and sought review so that the
court below could “clarify that rule ....’’ App. 72a.
The court below scheduled, oral argument on
respondents’ Petition for Review to determine
whether the case presented issues not presented by
two other cases then pending on its docket, Linthi-
cum v. Nationwide Life Insurance Co., 150 Ariz. 326,
723 P.2d 675 (1986), and Rawlings v. Apodaca, 151
Ariz. 149, 726 P.2d 565 (1986). Oral argument was
presented to the court below in both Linthicum and
the case at bar on May 1, 1986. On July 23, 1986,
the court below handed down its decision in Linthi-
cum, holding that punitive damages may not be
awarded in Arizona unless proof of liability is estab-
lished by “clear and convincing” evidence.
B. The Presentation of the Federal Questions
On May 16, 1986, petitioner filed in the court below
a motion for leave to file a ‘‘supplemental”’ brief in
order to brief a number of issues of state law and
“the federal constitutional implications of the manner
in which this punitive damage award was imposed
....” App. 22a, 733 P.2d, at 1085-86. That motion
was necessary because more than three years had
elapsed since the parties had filed briefs in the case
and, under Arizona practice, the court below disposes
of cases in which it grants review on the basis of the
briefs filed in the intermediate appellate court unless
one or both of the parties request permission to file
“supplemental” briefs or the court directs the parties
to do so sua sponte. Petitioner’s motion was granted
and its Supplemental Brief was filed on June 11, 1986.
In its Supplemental Brief, petitioner drew the at-
tention of the court below to this Court’s then-recent
10
decision in Aetna Life Insurance Co. v. Lavoie, No.
84-1601 (Apr. 22, 1986), 106 S. Ct. 1580 (1986).
Petitioner argued that punitive damages constitute a
criminal penalty and expressly invoked what it char-
acterized as the ‘‘due process” argument in Lavoie—
that the excessive size of the award in this case was
attributable to the lack of sufficient standards for
assessing the size of punitive damage awards in Ar-
izona. Petitioner also argued that it was entitled, un-
der the Due Process Clause of the Fourteenth
Amendment, to the federal constitutional protections
accorded to defendants in criminal cases because pu-
nitive damages in Arizona are imposed to punish and
deter and therefore constitute a criminal penalty. Fi-
nally, petitioner argued that the Due Process Clause
prohibits the imposition of punitive damages absent
“clear and convincing”’ evidence of the underlying li-
ability.
On February 27, 1987, the court below handed down
its decision, vacating the decision of the Court of
Appeals and remanding the case for reinstatement of
the jury’s verdict. In addressing the admissibility of
Mr. Boettcher’s testimony, the court applied its newly
formulated substantive test for punitive damages
adopted on July 22, 1986 in Rawlings v. Apodaca,
151 Ariz. 149, 726 P.2d 565 (1986), to justify an ex-
pansion of Rule 404(b), Ariz. R. Ev. The court then
determined that the testimony was also admissible on
the issue of the “sum of punitive damages’ to be
imposed by the jury because it constituted ‘direct
evidence of the duration of Allstate’s misconduct
.... App. 15a, 783 P.2d, at 1082. ;
1]
With respect to the punitive damage award, the
court below held that Arizona law does not require
any evidence of the profits realized by a defendant
from its misconduct to sustain a punitive damage
award. Following this rationale, the court reversed
the contrary decision of the Court of Appeals on this
point. App. 18a, 733 P.2d, at 1083.
The court below then proceeded to reach several
additional questions which had not been addressed by
the Court of Appeals and had not been presented in
respondents’ Petition for Review. First, the court held
that ‘the amount of punitive damages awarded ...
is neither so excessive nor unreasonable ... as to
show passion or prejudice” on the part of the jury.
App. 20a, 733 P.2d, at 1084. Regarding the amount
of the award, the court next observed that, in Ari-
zona, a punitive damage award is acceptable if it does
not ‘“shock the conscience of the court’” and does
“not financially kill the defendant.” Jd. The court
then went on to observe that it had previously ‘‘up-
held punitive damage awards representing a greater
percentage of the defendant’s wealth against claims
of excessiveness.” App. 20a, 733 P.2d, at 1084-85.
By virtue of these holdings on issues not decided by
the Court of Appeals and not included as questions
in respondents’ Petition for Review, the court below
positioned itself to reinstate the jury’s verdict by elim-
inating the remaining grounds supporting the trial
court’s grant of a new trial.
The court below then turned to petitioner’s federal
constitutional challenges to the punitive damage
award. The court acknowledged that its practice in
the past had been to consider “issues of ‘general
statewide’ significance’ on appeal “as an exception
12
to the general rule that an appellate court will not
consider issues not raised in the trial court.” App.
23a, 733 P.2d, at 1086. Without contesting the dis-
senting Justice’s assertion that the federal questions
raised by petitioner were ones of great statewide and
national significance, App. 33a, 733 P.2d, at 1090,
the court below held, sua sponte and as a matter of
first impression, that whether it would reach a con-
stitutional question raised for the first time in that
court was in its absolute discretion:
Thus, while we agree that this court has the
power to consider the constitutional issues
raised by Allstate, we decline to exercise that
power in this case.
App. 24a, 733 P.2d, at 1086.
Justice Holohan, in dissent, pointed out that the
$3,500,000 punitive damage award is three and one-
half times the maximum fine imposable in Arizona for
the commission of the most serious felony recognized
by the legislature. App. 3la, 733 P.2d, at 1089. Jus-
tice Holohan also recognized that there “appear to
be strong arguments ... that due process requires
... maximum limits [on punitive damage awards] be-
cause of [their] penal nature ....”’ App. 33a, 733
P.2d, at 1090.
Finally, the court considered another dispositive is-
sue which had not been briefed or argued by the
parties. That issue arose as a result of the court’s
holding in Linthicum v. Nationwide Life Insurance
Co., supra, in July of 1986, that the same “clear and
convincing” evidence standard of proof which had
been urged upon it by petitioner in this case under
the federal and Arizona constitutions would be ap-
13
plied to punitive damage cases as a matter of state
“policy.” The issue was whether the standard adopted
in Linthicum would be applied to the case at bar.
The court acknowledged that ‘‘[iJn Arizona, a civil
opinion is presumed to operate retroactively,’’ App.
25a, 733 P.2d, at 1087, and that retroactive appli-
cation of the Linthicum standard of proof to this case
would not result in unfairness to respondents, who
had no “right”’ to punitive damages and who ‘“‘the-
oretically [had been] fully compensated for their actual
injury ....” App. 27a, 733 P.2d, at 1088. Nonethe-
less, the court below held that Linthicum’s “clear and
convincing” evidence standard would not be applied
to this case. This result was said to arise from the
court’s purported concern about “‘the potential burden
on the judicial system from further litigation where
claims have been disposed of by prior litigation ....”
App. 27a-28a, 783 P.2d, at 1088. Without any dis-
cussion of the number of cases which might be af-
fected, the court below determined that Linthicum
would not be applied if a verdict or judgment had
been entered prior to September 15, 1986 and “‘there
is no reason to require a new trial other than appli-
cation of the new burden of proof.” App. 28a, 733
P.2d, at 1088.
In refusing to apply Linthicum to this case, the
court below ignored the fact that petitioner had come
into that court entitled to a new trial and arguing
that it was entitled te a “clear and convincing” stand-
ard of proof. On the other hand, the appellant in
Linthicum had not even raised the ‘‘clear and con-
vincing”’ evidence issue in its Petition for Review;
rather, the parties had been directed by the court
below, sua sponte, to brief and argue that question.
14
150 Ariz., at 327, 723 P.2d, at 676. Justice Holohan,
in dissent, concluded that all of the factors previously
identified by that court as relevant to the “retroac-
tivity” issue favored retroactive application. App. 30a,
733 P.2d, at 1089.
After the decision of the court below, petitioner
filed a timely ‘Motion for Reconsideration.” In that
motion, petitioner pointed out that, by refusing to
reach petitioner’s federal constitutional arguments,
the court had failed to recognize that those arguments
were advanced in support of the judgment of the trial
court under which petitioner was entitled to a new
trial. Because of this, if petitioner prevailed on any
of its federal questions, it would not have expanded
its rights under that judgment nor contracted those
of respondents. App. 58a-55a. Thus, petitioner argued
that the court below was required to consider its
federal constitutional challenge to the excessiveness
of the punitive damage award and the manner in
which that award had been imposed because that court
had adopted and followed the familiar rule that an
appellee is free, without filing a cross-appeal, to raise
arguments on appeal in support of the judgment be-
low so long as those arguments neither expand its
rights nor contract the appellant’s rights under the
judgment from which the appeal has been taken. E.g.,
Maricopa County v. Corporation Commission of Ar-
wzona, 79 Ariz. 307, 310, 289 P.2d 188, 185 (1955).
In addition, petitioner argued for the first time—and
at its first opportunity to do so—that the refusal of
the court below to apply the Linthicum “clear and
convincing”’ evidence standard to its case violated the
Due Process Clause of the Fourteenth Amendment.
et i Tara
15
App. 55a-58a. Petitioner’s motion was denied with-
out opinion. App. 51a.
REASONS FOR GRANTING THE WRIT
Each of the questions presented herein raises fun-
damental federal constitutional issues regarding the
manner in which punitive damage awards are as-
sessed in civil actions in Arizona and all other States
which recognize punitive damages. Question 1 pre-
sented herein is presently sub judice in this Court in
Bankers Life and Casualty Co.-v. Crenshaw, No. 85-
1765 (prob. juris. noted Mar. 9, 1987), 107 S. Ct. 1367
(1987). This question is manifestly deserving of plen-
ary consideration, having been described by this Court
as raising an “important issue[ ] which, in an appro-
priate setting, must be resolved.” Aetna Life Insur-
ance Co. v. Lavoie, slip op., at 13, 106 S. Ct., at
1589.
The remaining questions presented by petitioner are
not yet before the Court. Before discussing the im-
portance of those questions, petitioner shall address
the question whether this Court’s jurisdiction under
28 U.S.C. § 1257(3) may properly be invoked not-
withstanding that the court below expressly refused
to reach any of the federal questions raised by
petitioner in its “supplemental” brief filed in that
court and that the court did not expressly decide any
of the federal questions renewed, or raised initially,
in petitioner’s Motion for Reconsideration.
A. Jurisdiction
1. The Asserted Basis for Refusal To Reach the Federal
Questions Is an Inadequate State Ground and Does Not
Defeat This Court’s Jurisdiction
In a series of cases going back almost five decades,
the court below has made it clear to litigants in Ar-
16
izona that it has the power to decide issues raised
for the first time on appeal and that it will do so if
the issues are sufficiently important. Town of South
Tucson v. Board of Supervisors, 52 Ariz. 575, 84 P.2d
581 (1938). In 1971, the court below reiterated that
although as a general matter it will not decide issues
raised for the first time in that court, it will hear
such issues if they are of “general statewide signif-
icance.”’ Ruth v. Industrial Commission, 107 Ariz.
572, 574, 490 P.2d 828, 830 (1971). In Ruth, the court
entertained and decided a state constitutional chal-
lenge to an Arizona statute raised in neither the trial
court nor the court of appeals.
In 1984, the court below characterized this practice
as ‘‘a well recognized exception’’ to the general rule
when! it decided a dispositive issue of state consti-
tutional law which had been raised for the first time
in a motion for rehearing in the court of appeals.
Barrio v. San Manuel Division Hospital for Magma
Copper Co., 143 Ariz. 101, 692 P.2d 280 (1984). In
Barrio, the court allowed the parties to file supple-
mental briefs, noting that resolution of the constitu-
tional issue did not turn on “disputed” facts. The
court struck down the challenged Arizona statute in
that case. Jd., at 107, 692 P.2d, at 286.
In this case, the court below did not dispute in any
way—nor could it have done so—that petitioner’s fed-
eral questions comprise isSues of “general statewide
significance” for purposes of applying the court’s own
“well recognized exception.”” Nor did the court below
suggest that it needed any additional facts in order
to decide petitioner’s federal questions (which are, in
any event, not dependent on facts). Instead, after
granting petitioner’s motion to brief the issues, the
ote Set
17
court unexpectedly departed from its ‘‘well recog-
nized’? rule and asserted absolute discretion not to
consider an issue of statewide significance raised for
the first time on appeal:
We hold that consideration of a constitu-
tional issue raised for the first time on appeal
is discretionary with this court. This is not
a case involving denial of a fundamental con-
stitutional right in a criminal trial nor con-
tentions which affect the jurisdiction of the
court, and we do not feel compelled to ex-
ercise our discretion.
App. 24a, 733 P.2d, at 1086.°
This Court’s cases establish that a state rule re-
garding the proper presentation of federal questions
may not be invoked successfully to deny this Court
jurisdiction over a case unless that state rvie is
“strictly or regularly” followed. Barr v. City of Co-
lumbia, 378 U.S. 146, 149 (1954). Until the decision
of this case by the court below, the rule in Arizona
was clear: the Supreme Court of Arizona had juris-
diction to entertain questions raised for the first time
on appeal and would exercise that jurisdiction if the
question presented for the first time on appeal was
one of general statewide significance. The complete
3 By holding that this case did not involve a “fundamental
constitutional right in a criminal trial,” the court below implicitly
rejected on the merits petitioner’s federal constitutional argu-
ment that because of the penal nature of the punitive damage
award, it was entitled to all of the federal constitutional pro-
tections accorded to criminal defendants. Thus, at a minimum,
the court below erroneously applied its new rule to this case
because freedom from excessive fines is clearly a right available
under the Eighth Amendment to all defendants in criminal cases.
a Se Te
18
departure from that settled rule in this case cannot,
under Barr, constitute a basis for divesting this Court
of its jurisdiction over the substantial federal ques-
tions raised by petitioner.‘
2. Alternative Basis Requiring Decision of Petitioner’s
Federal Questions by the Supreme Court of Arizona
Although Barr refutes any argument that this Court
does not have jurisdiction over this case, petitioner
would add that its presentation of the federal ques-
tions was also fully consistent with the rule of the
court below that an appellee, without filing a cross-
appeal or cross-petition, may raise on appeal any ar-
gument in support of the judgment below so long as
that argument would not, if successful, expand its
rights under the judgment or contract the rights of
the appellant. See, e.g., Maricopa County v. Corpo-
ration Commission of Arizona, 79 Ariz. 307, 289 P.2d
183 (1955).5
‘The assertion of the court below that it has absolute discre-
tion to hear or not to hear questions raised for the first time
on appeal is itself insufficient to constitute an adequate state
ground for defeating this Court’s jurisdiction because it vests
too much discretion in the court below to discriminate against
the presentation of federal questions. See Sullivan v. Little Hunt-
ing Park, Inc., 396 U.S. 229, 234 (1969) (procedural rule re-
quiring “‘reasonable notice’ to opposing counsel “more properly
deemed discretionary than jurisdictional’ because “‘reasonabie”’
is subject to a variety of interpretations; rule therefore cannot
“bar review [in this Court] by certiorari’’).
* In Maricopa County, the Supreme Court of Arizona embraced
the classic formulation of this principle articulated by Justice
Brandeis in United States v. American Railway Express Co.,
265 U.S. 425 (1924). As stated by Justice Brandeis, an appellee
may “‘‘urge in support of a decree any matter appearing in the
record, although his argument may involve an attack upon: the
° 19
There is no doubt that the favorable resolution of
petitioner’s federal constitutional questions would not
have enhanced its right to a new trial or diminished
respondents’ rights under the trial court’s judgment
as affirmed by the Court of Appeals. It is clear in
Arizona that if a jury verdict is ‘‘excessive,’’ a new
trial on punitive damages is appropriate. Excessive-
ness was a ground for the trial court’s grant of |
petitioner’s motion for a new trial. App. 49a. There-
fore, petitioner was entitled in the Court of Appeals
and the Supreme Court of Arizona to argue exces-
siveness under any theory as long as its argument,
if successful, would not expand its right to a new
trial. As noted above, petitioner argued successfully
to the trial court that the punitive damage award was
excessive because it was grossly disproportionate to
the compensatory damage award. In the court below,
petitioner did nothing more than raise federal grounds
by which the trial court could have reached precisely
the same result using essentially the same analysis.*
The compelling need to apply this principle to this
ease is obvious because, as discussed above, the court
below stripped petitioner of its state-law right to a
reasoning of the lower court or an insistence upon matter over-
looked or ignored by it.”’ Id., at 435 (footnote omitted).
6 Because Arizona courts apply the salutary rule that consti-
tutional questions should be decided only if there is a necessity
for doing so, eg., State v. Yslas, 189 Ariz. 60, 63, 676 P.2d
1118, 1121 (1984), there is no reason to believe that either the
trial court or the Court of Appeals would have resolved
petitioner’s federal questions had they been presented to those
courts. The necessity for deciding petitioner’s federal questions
did not even arise until the court below determined that
petitioner was not entitled as a matter of state law to a new
trial of this case.
20
new trial granted by the trial court and affirmed by
the Court of Appeals by reaching and deciding ad-
versely to petitioner questions regarding the exces-
siveness of the punitive damage award which were
not even presented by respondents to the court below
in their Petition for Review. This Court should not
permit state courts to manipulate its jurisdiction
through the revision, misapplication and failure to ap-
ply state rules regarding proper presentation of fed-
eral (and state-law) questions as occurred in this case.”
B. The Questions Presented Are Important, Recurring
Questions of Federal Constitutional Law That Should
Be Settled by This Court
1. The Excessiveness of the $3,500,000 Punitive Damage
Award
As stated by the court below, the purposes of the
punitive damage award in this case, as in any case,
’ Because, as discussed in the text above, petitioner could not
have anticipated that the court below would reinstate the jury’s
verdict based on its resolution of questions in respondents’ favor
which had been decided adversely to respondents by the trial
court, not ruled on by the Court of Appeals and not presented
as questions for review in respondents’ Petition for Review in
the court below, petitioner would in any event be entitled, under
this Court’s decision in Brinkerhoff-Faris Trust Co. v. Hill, 281
U.S. 673, 677-78 (1930), to raise all of its federal questions for
the first time in this Court.
In addition, it is clear that Question 4 did not arise until the
court below had determined, sua sponte, that it would not apply
its decision in Linthicum to this case without giving petitioner
the opportunity to brief or argue that question.
ied oh be
21
are “‘not to compensate the plaintiff, but to express
society’s disapproval of outrageous conduct,’’ App.
lla, 733 P.2d, at 1080, and to “‘punish the defendant
and serve as an example to deter future similar mis-
conduct.” App. 19a, 733 P.2d, at 1084. In Arizona,
the maximum monetary punishment that could have
been inflicted on petitioner if it had been convicted,
after a criminal trial accompanied by all of the rights
and procedural safeguards accorded to criminal
defendants, of a deceptive business practice would
have been $20,000.8 Thus, petitioner suffered the im-
position of a fine 175 times as great as it could have
received at the conclusion of a criminal trial for what
would appear to be roughly analogous conduct.
In addition, as petitioner argued to the trial court
in successfully urging that the punitive damage award
was excessive, the award is 233 times as great as
the award for compensatory damages. This punitive
fine was imposed in a civil action in which no limit
had been placed on the verdict the jury could return.
Indeed, in Arizona the “gentle rule that [punitive
damages] not be excessive,” Gertz v. Robert Welch,
Inc., 418 U.S. 323, 350 (1974), means that an appel-
8 Arizona punishes the commission of deceptive business prac-
tices as “class 1” misdemeanors, Ariz. Rev. Stat. Ann. § 13-
2202 (1978), which carry a fine of up to $20,000. § 13-803 (Cum.
Supp. 1986). Under Arizona law, all or a portion of that criminal
fine may be paid over to any person who suffered damage be-
cause of the crime. In determining the amount of restitution,
the court cannot take into consideration the ‘‘economic circum-
stances of the defendant.” Ariz. Rev. Stat. Ann. § 13-804C (Cum.
Supp. 1986). As pointed out by Justice Holohan in dissent below,
the highest monetary fine imposed by the legislature of Arizona
for any criminal offense is $1,000,000. App. 3la, 733 P.2d, at
1089.
a
22
late court may intervene to reduce an award only if
the award will “kill” the defendant. App. 20a, 733
P.2d, at 1084.
As appellant Bankers Life and Casualty Company
has demonstrated in its opening brief in this Court,
the concept of proportionality carried from Chapter
20 of Magna Carta into the Eighth Amendment pro-
vides far more protection from the infliction of ex-
cessive monetary punishment than simply preservation
of the financial life of the defendant. Bankers Life
and Casualty Co. v. Crenshaw, Br. of Appellant, at
25-27, 36-39. By any standard this Court might adopt
in that case or the case at bar, the punishment in-
flicted on petitioner is constitutionally excessive.
Furthermore, the jury’s award in this case was rein-
stated only after an extraordinary exercise by the
court below of judicial gymnastics in which the rules
of the game were changed or ignored wherever nec-
essary in order to reinstate the excessive award. The
court held, for the first time, that the “duration” of
the alleged conduct warranting the imposition of pu-
nitive damages is an appropriate consideration in de-
termining the amount of punitive damages which
Should be assessed. App. 15a, 733 P.2d, at 1085. This
holding of substance was then relied upon by the court
below both to justify its refusal to set aside the award
as excessive and to justify the admission of the tes-
timony of a former employee who had not worked
for petitioner for fifteen years, the wrongful admis-
sion of which had been one of the bases for the trial
court’s grant of petitioner’s motion for a new trial
and the affirmance of that grant by the Court of
Appeals. Finally, in order to reinstate the jury ver-
dict, the court below had to decide in respondents’
23
favor two crucial questions that had not been pre-
sented to the court by respondents, while simulta-
neously disallowing petitioner’s attempt to invoke the
protections of the federal constitution for the limited
purpose of preserving its right to a new trial.
Whatever may be said of the due process impli-
cations of these and other similar actions set forth
above in the context of the imposition of compensa-
tory damages, the imposition of a $3,500,000 punitive
fine in this fashion surely is violative of the Due Pro-
cess Clause. The standards and rules under which this
award was reinstated produced the opposite of the
certainty which this Court has required when criminal
penalties are to be imposed. See generally Kolender
v. Lawson, 461 U.S. 352, 359 n.8 (1983). Petitioner
had no fair warning that its conduct in 1979 could
lead, in 1987, to reinstatement of a jury verdict that
was sustained under legal standards that were non-
existent in 1979. This violation of due process was
compounded by the jury’s exercise of its uncontrolled
discretion to assess punitive damages in a virtually
unlimited amount, acting with carte blanche to impose
a punitive fine based upon ‘“‘their own notions of what
the law should be ....’”’ Giaccio v. Pennsylvania, 382
L.S. 399, 403 (1966). This Court should grant
certiorari in order to make clear to all state courts
that the Due Process Clause of the Fourteenth
Amendment precludes the administration of a system
of punitive justice in this fashion.
24
2. The Question Whether Punitive Damages May Be Im-
posed Without According Federal Constitutional Pro-
tections Due to Defendants in Criminal Cases Should
Be Decided by This Court
Punitive damages in Arizona, as in other jurisdic-
tions, comprise a governmentally sponsored system
for imposing penal fines for the purposes of enforcing
society's standards through punishment and deter-
rence. In Kennedy v. Mendoza-Martinez, 372 U.S. 144,
165-66 (1963), this Court struck down a federal stat-
ute under which persons were punished with loss of
citizenship in proceedings that did not afford them
the procedural safeguards guaranteed by the Fifth
and Sixth Amendments. Since that case was decided,
this Court has made clear that the imposition of a
monetary penalty, without more, may also require the
State to provide the same procedural protections as
are available to defendants in criminal cases. United
States v. Ward, 448 U.S. 242, 248-51 (1980).
There can be no dispute that punitive damages are
imposed in Arizona solely for the purposes of pun-
ishment and deterrence. As observed by Justice Ho-
lohan below in this case, jurors in Arizona “are told
that the purpose of punitive damages is to punish the
defendant and to deter others. This also is the pur-
pose of the criminal law.” App. 31a, 733 P.2d, at
1089 (Holohan, J., dissenting). This Court has also
commented on the close relationship between punitive
damages and fines imposed in criminal cases, stating
that
[p]unitive damages ‘‘are not compensation for
injury. Instead, they are private fines levied
by civil juries to punish reprehensible conduct
and to deter its future occurrence.”’
25
Electrical Workers v. Foust, 442 U.S. 42, 48 (1979),
quoting Gertz v. Robert Welch, Inc., 418 U.S., at 350.
Indeed, as Justice Marshall has observed, punitive
damages “serve the same function as criminal pen-
alties and are in effect private fines.” Rosenbloom v.
Metromedia, Inc., 403 U.S. 29, 82 (1971) (dissenting
opinion).
Question 2—whether ‘‘a punitive ‘fine’ should be
imposed after a civil tria ” Smith v. Wade, 461 U.S.
30, 59 (1983) (Rehnquist, J., dissenting) (emphasis
added)—is manifestly of great importance and worthy
of plenary consideration by this Court in the case at
bar. By permitting the award of punitive damages to
private plaintiffs, the States have, for all practical
purposes, conferred on those plaintiffs the power to
prosecute defendants for “reprehensible” conduct and
to impose monetary punishments on defendants which
are constitutionally indistinguishable from the puni-
tive fines imposed after conviction in a criminal trial.
This civil imposition of criminal punishment cannot
be reconciled with this Court’s cases, which require
that before the States may impose sanctions in order
to punish and deter antisocial conduct, the guarantees
of the Fifth and Sixth Amendments must be accorded
to the defendant.
3. The Question Whether Punitive Damages May, Under
the Due Process Clause of the Fourteenth Amendment,
Be Imposed Only After Liability Is Demonstrated by
“Clear and Convincing’’ Evidence Should Be Resolved
by This Court
Like the court below in Linthicum v. Nationwide
26
Life Insurance Co., supra, a number of state courts?
and state legislatures’ have recognized the- penal
function served by punitive damages and the arbitrary
fashion in which punitive damages are imposed—being
“frequently based upon the caprice and prejudice of
jurors,’ Smith v. Wade, 461 U.S., at 59 (Rehnquist,
J., dissenting). Accordingly, these courts and legis-
latures have determined that punitive damages should
not be imposed absent clear and convincing evidence
of liability for such damages.
This Court has similarly recognized that the Due
Process Clause requires a higher standard of proof
when persons are at risk of being deprived of certain
types of rights. See Santosky v. Kramer, 455 U.S.
745 (1982) (clear and convincing evidence required in
order to support extinguishment of parent-child re-
lationship); Addington v. Texas, 441 U.S. 418 (1979)
(clear and convincing evidence required to support
involuntary commitment). This Court has also rec-
°E.9., Tuttle v. Raymond, 494 A.2d 1353, 1363 (Me. 1985);
Travelers Indemnity Co. v. Armstrong, 442 N.E.2d 2d 349, 362-
63 (Ind. 1982); Wangen v. Ford Motor Co., 97 Wis. 2d 260, 294
N.W. 2d 487 (1980).
0 E.g., Act of the State of Alabama, H.27, 1 (June 9, 1987):
Alas. Stat. § 09.17.020 (Supp. 1986); Minn. Stat. Ann. § 549.20
(Supp. 1987); Mont. Code Ann. § 27-1-221(2) (1986); Ore. Rev.
Stat. Ann. § 30.925 (1983); Fla. Stat. Ann. § 768.73 (Supp. 1987)
(clear and convincing evidence required to sustain punitive dam-
age awards greater than three times the amount of actual dam-
ages); Okla. Stat. Ann., Title 23, § 9 (1987) (clear and convincing
evidence required to sustain punitive damage awards in excess
of actual damages). The Colorado legislature has gone even fur-
ther, requiring proof beyond a reasonable doubt to sustain a
punitive damage award. Colo. Rev. Stat. Ann. § 13-25-127(2)
(Supp. 1986).
27
ognized that where criminal penalties are to be im-
posed, “‘the standard of certainty is higher.’’ Kolender
v. Lawson, 461 U.S. 352, 359 n.8 (1983).
This Court should decide in this case whether the
Due Process Clause of the Fourteenth Amendment
requires clear and convincing evidence of a plaintiff's
right to recover punitive damages. Whether or not,
as petitioner argues above, the size of punitive dam-
age awards should be made subject to the restraints
of the Eighth Amendment because of their punitive
purposes, the arbitrariness with which such punish-
ment may be and is routinely imposed implicates sub-
stantial due process considerations. Where the chance
of error is great, this Court has not hesitated to
impose the Due Process Clause as a shield against
arbitrary governmental action. See, e.g., Mathews v.
Eldridge, 424 U.S. 319 (1976). It should do so once
again in this case.
4. This Court Should Decide Whether the Punitive Pur-
poses Advanced by Punitive Damage Awards Require
That Rules Restricting Their Imposition Be Applied to
Cases Pending on Appeal
In Griffith v. Kentucky, 107 S. Ct. 708 (1987), this
Court held that its decisions announcing new federal
constitutional rules for the conduct of criminal pros-
ecutions must, under the Due Process Clause of the
Fourteenth Amendment, be applied retrospectively to
cases pending on direct review or otherwise not yet
final. As the Court observed in Griffith, failure to do
so “violates the principle of treating similarly situated
defendants the same.” Jd., at 713.
If this Court holds, in Bankers Life and Casualty
Co. v. Crenshaw, that the Eighth Amendment applies
to control the size of punitive damage awards in civil
28
cases, the question will necessarily arise whether its
decision will be applied retrospectively to other cases,
like the case at bar, as a matter of constitutional
compulsion or practice.’ Whether the constitutional
dimension of this question is to be governed by the
rule laid down in Griffith, or by the rule established
for civil cases as articulated in Chevron Oil Co. v.
Huson, 404 U.S. 97, 106-07 (1971), is an important
issue which should be decided in this case.
The court below held that it was under no consti-
tutional compulsion to apply its decision in Linthi-
cum—adopting the ‘‘clear and convincing” standard
of proof—“‘retrospectively” to this case. As pointed
out above, this issue had been raised in Linthicum
by the court below sua sponte. It would be difficult
to posit two cases in which two similarly situated
defendants had been subjected to more disparate
treatment than Linthicum and the case at bar. This
Court should decide whether the court below was en-
titled to treat petitioner as a “‘civil’’ defendant for
purposes of its retrospectivity analysis or whether,
instead, petitioner was entitled, as a matter of federal
constitutional right, to ‘‘retrospective’’"? application of
This Court’s decision in Henry v. Collins, 380 U.S. 356
(1965) (per curiam), which applied retrospectively the constitu-
tional rules announced in its decision in New York Times Co.
v. Sullivan, 376 U.S. 254 (1964), establishes that petitioner is
in any event entitled to the benefits of any ruling favorable to
Bankers Life and Casualty Co. in No. 85-1765 as a matter of
this Court’s settled practice.
2 As is evident from the circumstances discussed above, the
evidentiary rule announced in Linthicum was not “applied”’ to
the case at bar solely because the court below chose to use
Linthicum as the vehicle for announcing this new evidentiary
= en ee
ee eee ee
29
Linthicum because the rule announced in Linthicum,
although grounded on state “policy,” nevertheless af-
fected directly the circumstances under which essen-
tially criminal punishment was and is to be
administered in Arizona. In an area of the law in
which the rules are being modified constantly as re-
gards the imposition of punishment, it is particularly
important for this Court to clarify the circumstances
under which similarly situated defendants may be sub-
jected to different punishments on the basis of the
“selective application of new rules ....” Griffith v.
Kentucky, 107 S. Ct., at 718.
CONCLUSION
The questions presented by petitioner are substan-
tial and arise on a daily basis in litigation occurring
throughout the United States. As the dissenting Jus-
tice below noted, these questions ‘‘will not disappear.”
App. 33a, 733 P.2d, at 1090. The petition should be
granted and these questions set for plenary consid-
eration.
July 6, 1987 Respectfully submitted,
*THEODORE B. OLSON
LARRY L. SIMMS
GIBSON, DUNN & CRUTCHER
1050 Connecticut Ave., N.W.
Washington, D.C. 20036
(202) 955-8500
Attorneys for Petitioner
*Counsel of Record
standard rather than this case, which was argued to the court
below on the same day as Linthicum.
30
Of Counsel:
MARK I. HARRISON
DOUGLAS L. CHRISTIAN
MARY E. BERKHEISER
HARRISON & LERCH, P.C.
1001 North Central Avenue
Suite 900
Phoenix, Arizona 85004
(602) 257-5800
APPENDIX
la
IN THE SUPREME COURT OF THE STATE
OF ARIZONA
Supreme Court
No. CV-86-0010-PR
Court of Appeals
No.1 CA-CIV 6881
Maricopa County
No. C-432754
JACK RANDY HAWKINS and CYNTHIA HAWKINS, husband
and wife,
Plaintiffs-A ppellants,
VS.
ALLSTATE INSURANCE INSURANCE COMPANY, a foreign cor-
poration, and Does I through V,
Defendant-A ppellee.
Appeal from the Superior Court of Maricopa County
The Honorable David J. Perry, Judge
REVERSED AND REMANDED
FILED
FEB 26 1987
Memorandum Decision of the Court of Appeals
Filed August 13, 1985
Vacated
2a
Thur, Dawson & O'Sullivan Phoenix
By; Calvin C. Thur
Attorneys for Plaintiffs-Appellants
Harrison & Lerch, P.C. Phoenix
By: Mark I. Harrison
Douglas L. Christian
Attorneys for Defendant-Appellee
Allstate Insurance Company
GORDON, Chief Justice
Jack and Cynthia Hawkins (Hawkins) petitioned this
court to review a decision of the court of appeals reversing
the trial court’s grant of a motion for judgment notwith-
standing the verdict in favor of Allstate Insurance Com-
pany (Allstate) and affirming the trial court’s grant of
Allstate’s motion for a new trial. Hawkins v. Allstate In-
surance Company, No. 1 CA-CIV 6881 (Ariz.Ct.App. filed
Aug. 13, 1985). We granted review to determine the ad-
missibility of an insurer’s past claims practices and policies
and to examine the quantum of proof necessary to sustain
an award of punitive damages. Rule 23, Ariz.R.Civ.App.P.,
17A A.R.S. In its supplemental brief, Allstate questioned
the constitutionality of the manner by which punitive dam-
ages are imposed. We have jurisdiction pursuant to Ariz.
Const. art. 6, §5(3) and A.R.S. §12-120.24.
I. FACTS
In July 1979, the Hawkins purchased a new Chevrolet
Monte Carlo, loaded with options, for approximately
$8,000. Five months after purchasing the Monte Carlo,
Cynthia was involved in an automobile accident that vir-
tually demolished the car.
The Hawkins were insured by Allstate under a standard
automobile liability policy. That policy included a collision
provision limiting Allstate’s liability to either paying the
3a
actual cash value of the car at the time of the loss or to
replacing the car with one of like kind and quality.
The Hawkins reported the accident to A'lstate the day
it happened, December 6, 1979. Within a few days, Allstate
classified the car as a “total loss” after determing that
the actual cash value of the car was less than the estimated
repair cost. The Hawkins’ claim was transferred to a total
loss adjuster, Paul Schwenk. |
According to Allstate’s witnesses, the actual cash value
of a car is its market value. To determine actual cash
value, Allstate’s total loss adjusters first establish a guide
book value by calculating the high retail Blue Book value
of the car and its optional equipment minus deductions for
the car’s condition immediately prior to the loss. Such
deductions represent amounts needed to bring the car to
average retail condition and include deductions for the con-
dition of the exterior of the car, paint, bumpers, uphol-
stery, glass, tires, and clean up. The adjusters then perform
a “market verification” by asking three or four local deal-
erships to estimate the insured car’s worth and sometimes
by checking the selling price of similar cars advertised in
local car magazines. From the range of values resulting
from this procedure, Allstate’s adjusters determine a spe-
cific dollar amount as the actual cash value, apparently
relying most heavily on the low estimates received from
local dealerships.
In the Hawkins’ case, Schwenk determined that the Blue
Book value of the Hawkins’ car was $6,545. Schwenk did
not examine the car and failed to consider many of the
accessories on the insured car. From this figure, Schwenk
deducted a $35 clean-up fee, which resulted in a guide
book value of $6,510. Four dealer estimates of the value
of a similar car ranged from $6,150 to $6,300. These es-
timates were based on Schwenk’s description of the car
and did not reflect all the options on the insured car. The
4a
actual cash value recorded in the Hawkins’ claim file was
$6,165 and was accompanied by the following explanation:
Dealers have replacements, similar equipment but
more miles; say one like this worth $6,200. De-
duction for reconditioning. ACV $6,165.
Schwenk first contacted Hawkins on December 13, 1979,
one week after the accident. At that time, the Hawkins
requested that Allstate provide them with a replacement
car, rather than a sum of money equal to the actual cash
value of their ‘‘totalled’” car. Schwenk sent them to look
at four similar Monte Carlos at a local dealership. Schwenk
would not let the Hawkins have the car they selected
because it was $300 more than Allstate was willing to
pay.’ Instead, Schwenk selected one of the other cars and
insisted that the Hawkins take it. The Hawkins refused
because the car Schwenk selected had few of the options
their insured car had and was not comparable in either
quality or gas mileage.
Four days after Schwenk rejected the car the Hawkins
selected as a replacement, Schwenk told the Hawkins he
would pay them $4,500 in cash unless they took the car
he had selected. The Hawkins refused, explaining that they
had paid over $8,000 for their car five months earlier and
could not purchase a comparable car for $4,500. Later,
during the same conversation, Schwenk threatened to de-
liver a check for $5,000.
By December 20, the Hawkins, desperate for a car,
accepted a check for $6,471, payable to Hawkins and a
local dealership, to purchase the car Schwenk had selected.
It had been approximately a week since the Hawkins
viewed the car, and when Jack Hawkins went to pick up
the car, he again realized the cars were not comparable
‘The evidence is conflicting whether the car the Hawkins selected
was $300 more than the actual cash value of their insured car or $300
more than one of the remaining three cars.
5a
and called Schwenk from the dealership to tell him he did
not want the car. After a lengthy, heated discussion and
assurances from Schwenk that the replacement car would
be brought up to the insured car’s standards after the
holidays, Jack Hawkins reluctantly gave the check to the
dealer.
The replacement car lacked power windows, had a larger
engine and got worse gas mileage, had dealer-installed (not
factory-installed) cruise control, and lacked several styling
features of the original car. After the holidays, Allstate
sent an additional $125 to the Hawkins to install power
windows, but the Hawkins were unable to get the work
done for less than $600. Allstate refused to make any other
adjustments and closed the file. Although no evidence of
the replacement vehicle’s actual cash value was presented,
Allstate conceded on appeal that the list price of the re-
placement vehicle was at least $161.45 less than that of
the insured car.
The Hawkins sued Allstate for fraud and bad faith. At
trial, three former Allstate employees testified about Al-
Istate’s claims procedures and practices. None had any
direct experience with the Hawkins’ claim. In addition,
Schwenk and his supervisor testified.
The trial judge directed a verdict in favor of Allstate
on the fraud count but submitted that bad faith claim to
the jury to consider liability for both compensatory and
punitive damages. The jury awarded the Hawkins $15,000
compensatory damages and $3.5 million punitive damages.
The trial court subsequently granted Allstate’s motion for
judgment notwithstanding the verdict on the ground that
the evidence presented at trial was insufficient to sustain
the verdict. In the alternative, the trial court granted Al-
Istate’s motion for a new trial on five grounds. The court
of appeals held that the trial court erred in entering a
judgment notwithstanding the verdict, but affirmed the
grant of a new trial for two reasons: 1) the testimony of
6a
a former Allstate claims adjuster was improperly admitted,
and 2) the amount of the punitive damages award was not
justified by the evidence.? Hawkins, slip op. at 11, 16.
II. ADMISSIBILITY OF INSURER’S PAST CLAIMS
PRACTICES
During trial, Hawkins called three former Allstate em-
ployees to testify about Allstate’s procedures for handling
total loss claims. Over Allstate’s objection on the grounds
of relevancy, each testified concerning Allstate’s method
of determining the amount of an insured’s loss (the actual
cash value of the property) and general company policies
regarding claims handling.
One former claims representative, Pat Paterno, testified
about Allstate’s claims practices in the Phoenix office at
the time the Hawkins claim was processed. Although she
did not work on the Hawkins claim, Paterno testified that
as a claims representative Allstate instructed her to au-
tomatically make certain deductions in determining a car’s
actual cash value. Specifically, she testified that adjusters
were instructed to deduct an extra $5 for tire wear and
always to deduct a $35 cleaning fee, regardless of the
car’s cleanliness. She testified that her supervisors ex-
plained that a $5 deduction ‘“‘wouldn’t mean much to an
insured or claimant, but $5 on every claim would mean a
lot to the company.”
Another former claims representative, Jan Mauritz, was
employed by Allstate in Tacoma, Washington from 1978
to 1981. Like Paterno, Mauritz testified that he was in-
structed automatically to make certain deductions, includ-
ing a cleaning fee, in valuing a “‘total loss.” He testified
that he was instructed to offer an insured the lowest value
of a claim because the insured probably would take it in
order to get his car fixed quickly. He also testified that
*The Hawkins abandoned their appeal from the directed verdict on
the fraud count. Hawkins, slip op. at 4.
Ta
Allstate used the adjusters’ “severity rating,” a ratio of
total dollars paid out in claims over the number of claims,
to evaluate adjusters’ performance and promotion poten-
tial. Mauritz opined that the claims-handling practices and
policies to which he testified were followed throughout the
company and not merely in the Tacoma office because they
were promulgated through corporate literature and policy
statements. In his opinion, these practices. “may lead to
what one may call chiseling, to calculated offers substan-
tially below fair value... .”
The third former Allstate employee that testified, Wil-
liam Boettcher, was employed by Allstate as a claims ex-
aminer in Phoenix from 1962 to 1964, 15 years before the
Hawkins’ claim. He testified that he was instructed au-
tomatically to take certain deductions on property damage
claims, including amounts for tire wear. He also testified
as to Allstate’s explanation for making the deductions:
Q Was an explanation given as [to] why you
should make various deductions?
A Yes, it was.
Q What explanation was given?
A Basically, that particularly in terms of prop-
erty damage or collision claim, that the owner of
the vehicle was concerned whether or not he was
going to get his vehicle back, how soon he could
! get it repaired and so forth. Therefore, he would
i not perhaps object to some of these small de-
ductions. And you’d be able to settle the claim
at a cheaper rate. The statement was frequently
made that if you could save one dollar on a mil-
lion claims, you would save the company as much
as a million dollars.
Boettcher testified that he heard this explanation from
instructors at an Allstate regional claims school, which he
attended for approximately 2 weeks in 1962, from regional
——————=—
3 > leetiend’ Nae al
8a
claims supervisors, and from his local assistant manager
in the Phoenix office.
Boettcher testified that both the local and regional claims
supervisors’ general policy was to settle claims for as low
an amount as possible. He also testified about the function
of the claims department during his employment: “In gen-
eral terms, I’d say it was perhaps not to settle claims as
much as it was to save the company money, because this
would increase their profits.”
Among other reasons, the trial court granted Allstate’s
motion for a new trial after deciding it had erred in ad-
mitting the testimony of the former Allstate employees.
The trial court did not explain the perceived error, but
only summarily concluded that the testimony of the three
witnesses should not have been admitted.
The court of appeals affirmed the grant of a new trial,
but held that the testimony of only one of the former
employees, William Boettcher, was erroneously admitted.
The appellate court reasoned that Boettcher’s testimony
was inadmissible under Rule 404(b), Ariz. Rules of Evid.,
17A A.R.S.* because Allstate did not deny its acts nor
claim they were unintentional and because the evidence
was irrelevant as the pratices Boettcher described were
not sufficiently similar to the Hawkins’ experience to be
admissible to establish a pattern of bad faith to support
a punitive damages award.
In light of this procedural history, the issue we address
is whether the trial court’s admission of Boettcher’s tes-
* We take this opportunity to voice our objection to such conclusory
rulings because they impair effective appellate review. We urge trial
judges to articulate their reasoning so appellate courts can determine
on appeal whether the ruling was erroneous.
‘The Rules of Evidence, 17A A.R.S., will be referred to as ‘“‘Rule
——’’ throughout this opinion.
9a
timony was an error that justified granting Allstate’s mo-
tion for new trial.
The power to grant a new trial is largely within the
trial court’s discretion, but this power is not unlimited.
King v. Superior Court, 138 Ariz. 147, 151, 673 P.2d 787,
791 (1983). “{I]f it appears clearly from the record that
there was no error in the matters presented in the motion
for new trial, it is an abuse of discretion for the court to
grant a new trial.” Helena Chem. Co. v. Coury Bros.
Ranches, 126 Ariz. 448, 450, 616 P.2d 908, 910 (App.
1980).
A party cannot urge in a motion for new trial that
evidence was erroneously admitted unless a proper objec-
tion, stating the specific ground of the objection, was made
at the time the evidence was offered, unless the error is
fundamental. M. Udall & J. Livermore, Arizona Law of
Evidence, §12, at 14 (2d ed. 1982); see Helena Chem. Co.,
126 Ariz. at 453, 616 P.2d at 913; Rule 103. At trial,
Allstate objected to Boettcher’s testimony only on grounds
of relevancy.’ We disagree with the court of appeals that
Boettcher’s testimony was erroneously admitted because
it was irrelevant.®
A. Relevance
1. Rules of Evidence
Relevant evidence is defined as ‘‘evidence having any
tendency to make the existence of any fact that is of
consequence to the determination of the action more prob-
able or less probable than it would be without the evi-
‘In pre-trial motions, Allstate also objected to Boettcher’s qualifi-
cations as an expert, but his testimony was not offered as expert
opinion evidence.
6 Allstate’s precise objection was that the testimony was “irrelevant
and immaterial.” Modern rules of evidence capture both concepts in
the tern “relevance.” M. Udall & J. Livermore, supra § 81, at 160;
Rule 401.
10a
dence.”” Rule 401. Relevancy is not an_ inherent
characteristic of proffered evidence; instead, it is the re-
lationship between the proffered evidence and the fact
sought to be proved. See M. Udall & J. Livermore, supra,
at 163; 1 Weinstein’s Evidence 4401[03], at 401-17 (1986).
Essentially, relevancy is a two-part test. First, evidence
is relevant only if it relates to a consequential fact; evi-
dence directed to an undisputed issue is irrelevant. What
is at issue in a particular case is determined from the
pleadings and the substantive law. M. Udall & J. Liver-
more, supra, at 161; Weinstein’s Evidence, supra, at 401-
17 to -19. Second, to be relevant, evidence need only alter
the probability, not prove or disprove the existence, of a
consequential fact. M. Udall & J. Livermore, supra, at
162; Weinstein’s Evidence, supra §401[06], at 401-33 to -
36. Allstate’s liability for both the tort of bad faith and
punitive damages was at issue during the trial. Therefore,
evidence that tends to establish a prima facie case of bad
faith or entitlement to punitive damages is relevant.
a. Bad Faith—Prima Facie Case
We recently clarified that tort recovery for bad faith is
allowed if an insurer intentionally breaches the implied
covenant of good faith and fair dealing in the insurance
contract by denying the insured the security and protection
from calamity that is the object of the insurance relation-
ship. Rawlings v. Apodaca, _____ Ariz. , 726 P.2d
565 (1986). To establish a prima facie case of bad faith,
Hawkins had to prove that Allstate acted intentionally,
not inadvertently or mistakenly, and that Allstate dealt
unfairly or dishonestly with the Hawkins’ claim or failed
to give fair and equal consideration to the Hawkins’ in-
terests. Id. at , 726 P.2d at 576.
b. Punitive Damages—Prima Facie Case
Punitive damages are recoverable in insurance bad faith
tort actions only if the insured acted with an “evil mind”
in breaching the implied covenant of good faith and fair
lla
dealing. Rawlings, Ariz. at ——_, 726 P.2d at 578-
79. The requisite evil mind is found if the insurer intended
to injure the insured or consciously pursued a course of
conduct knowing that it created a substantial risk of sig-
nificant harm to the insured. Jd. at ___, 726 P.2d at
578. In addition, the requisite evil mind may be inferred
if the insured’s conduct is sufficiently ‘‘oppressive, out-
rageous or intolerable.’’ Jd. at _—_., 726 P.2d at 578-79.
To recover punitive damages, the plaintiff must also
introduce sufficient evidence to allow the trier-of-fact to
calculate a punitive damage award that is reasonable under
the circumstances. E.g., Nielson v. Flashberg, 101 Ariz.
335, 341, 419 P.2d 514, 520 (1966) Although a precise
laundry list of relevant evidence is impossible, evidence is
properly considered by the trier-of-fact in assessing pu-
nitive damages if it bears upon the purpose and function
of punitive damages. The purpose of punitive damages is
not to compensate the plaintiff, but to express society's
disapproval of outrageous conduct and to deter such con-
duct by the defendant and others in the future. See, ¢.9.,
Nielson v. Flashberg, 101 Ariz. at 341, 419 P.2d at 520;
Acheson v. Shafter, 107 Ariz. 576, 578, 490 P.2d 832, 834
(1971).
One category of relevant evidence is the defendant’s
: financial position. See, e.g., Acheson v. Shafter, 107 Ariz.
at 578, 490 P.2d at 834 (wealth or financial status of
defendant relevant to allow jury to impose an appropriate
punishment), Nielson v. Flashberg, 101 Ariz. at 341, 419
P.2d at 520. Obviously, the goals of punishment and de-
terrence would be circumvented if the financial position of
the defendant allowed it to comfortably absorb the award.
a
Another category of relevant evidence is 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, from the defendant’s
conduct. See Mallor & Roberts, Punitive Damages: Toward
12a
a Principled Approach, 31 Hastings L.J. 639, 667 (1980);
Owen, Punitive Damages in Products Liability Litigation,
74 Mich. L. Rev. 1257 (1976). The more reprehensible the
act and the more severe the resulting harm, the greater
the award of punitive damages that is reasonable under
the circumstances. The duration of the misconduct, the
degree of defendant’s awareness of the harm of the risk
of harm, and any concealment of it are elements to con-
sider in judging the reprehensibility of the defendant’s
conduct. See Neal v. Farmers Ins. Exchange, 21 Cal.3d
910, ___, 582 P.2d 980, 990, 148 Cal.Rptr. 389, 399,
(1978); Chodos v. Ins. Co. of North America, 126
Cal.App.3d 86, 104, 178 Cal.Rptr. 831, 841 (1981); State
ex rel. Young v. Crookham, 290 Or. 61, ___ , 618 P.2d
1268, 1274 (1980).
A third relevant consideration is the profitability of the
defendant’s conduct. See Cox v. Stolworthy, 94 Idaho 683,
——, 496 P.2d 682, 690 (1972); Wangen v. Ford Motor
Co., 97 Wis.2d 260, , 294 N.W.2d 437, 460 (1980);
Mallor & Roberts, supra, at 667-68. A punitive damage
award that disgorges ill-gotten profits serves to deter fu-
ture similar conduct by eliminating any profit incentive.
These factors are presented only as guidelines to the
character of evidence that is relevant to assessing punitive
damages and should be viewed as neither exhaustive nor
exclusive.* Furthermore, it is well settled that not all rel-
evant evidence is admissible and whether such evidence is
admissible in a particular case depends upon the circum-
stances of that case. See Rules 402-411.
‘ Although the authors advocate that the judge, not the jury, assess
the sum of punitive damages, the evidence discussed here is appropri-
ately considered by the trier-of-fact under Arizona’s procedure for im-
posing punitive damages.
*Some courts and commentators suggest that the jury consider the
plaintiff's litigation expenses in assessing punitive damages. We express
no view on this factor in this case.
Peewee See oi
Chel tn ile
13a
Thus, to establish a prima facie case for the recovery
of punitive damages, Hawkins had to prove that an evil
mind—either a desire to harm or conscious disregard of
the Hawkins’ right to a fair valuation of their property
loss—motivated Allstate’s bad faith conduct. To recover
punitive damages Hawkins also had to establish a factual
basis from which the jury could assess a sum of punitive
damages that would accomplish the goals of punishment
and deterrence. |
2. Application to Present Case
Boettcher’s testimony is relevant both to Allstate’s li-
ability for the tort of bad faith and punitive damages. See
Dunlap v. Jimmy GMC of Tucson, Inc., 136 Ariz. 338, 343,
666 P.2d 83, 88 (App. 1983) (evidence of past deceptive
sales practices relevant to whether those practices are cur-
rently used and to issue of punitive damages). Regarding
Allstate’s liability for bad faith, Boettcher’s testimony is
relevant to whether Allstate acted intentionally. Evidence
of previous, similar acts alters the probability that the
conduct in question was unintentional; the more frequently
an act occurs, the more probable it is intentional. Thus,
Boettcher’s testimony made it more probable that the in-
valid $35 cleaning fee deduction used in estimating the
actual cash value of Hawkins’ loss was not mistakenly nor
inadvertently made.
More importantly, Boettcher’s testimony is relevant both
to establish a prima facie case for recovery of punitive
damages and to assess a sum of punitive damages. We
note that unless the defendant is willing to take the stand
and admit its ‘evil mind,” the plaintiff must prove enti-
tlement to punitive damages with circumstantial evidence.
Thus, whether the defendant intended to injure the plaintiff
or consciously disregarded the plaintiff's rights may be
suggested by a pattern of sir ‘lar unfair practices. Colonial
Life & Acc. Ins. Co. v. Superior Court, 31 Cal.3d 785,
792, 647 P.2d 86, 90, 183 Cal.Rptr. 810, 814 (1982); Moore
l4a
v. American United Life Ins. Col., 150 Cal. App.3d 610,
624-25, 197 Cal.Rptr. 878, 886-87 (1984); see Rawlings v.
Apodaca, ____Ariz. at , 726 P.2d at 578-79 (im-
proper motives may be inferred from sufficiently oppres-
Sive, outrageous or intolerable conduct).
We disagree with the court of appeals that the practices
about which Boettcher testified lacked sufficient similarity
to the Hawkins’ experience and the other adjusters’ tes-
timony to constitute such a pattern. All three former em-
ployees described a policy of routine, automatic deductions,
regardiess of their validity, in valuing an insured’s loss.
Boettcher’s testimony is different because he did not de-
scribe the specific cleaning fee deduction testified to by
Mauritz and Paterno and included in the actual cash value
valuations of the Hawkins’ car. This difference is imma-
terial to the purpose for which the evidence was offered.
Boettcher’s testimony was offered to show that Allstate
engaged in a conscious course of conduct, firmly grounded
in corporate policy, which denied Hawkins and countless
other insureds the actual cash value of their property. The
evidence was not offered to establish any particular con-
duct regarding the Hawkins’ claim. This testimony was
offered to explain Allstate’s motive or its state of mind
when dealing with the Hawkins and other insureds.
Boettcher’s testimony also is different because he de-
scribed Allstate’s claims procedures and policies 15 years
before the Hawkins claim. Allstate argues this time span
robs the evidence of its relevance. We disagree. Remote-
ness in time goes to the weight of the evidence, not its
admissibility. State v. Jeffers, 135 Ariz. 404, 418, 661 P.2d
1105, 1119, cert. denied, 464 U.S. 865, 104 S.Ct. 199, 78
L.Ed.2d 174 (1983). As noted above, relevance requires
only a modieum of rationally probative forced. While a
Significant time span may reduce the probative force of
evidence, it does not eliminate it.
15a
Clearly, Boettcher’s testimony concerning Allstate’s past
claims practices also was relevant to assessing an appro-
priate sum of punitive damages. Boettcher’s testimony pre-
sents direct evidence of the duration of Allstate’s
misconduct and establishes evidentiary facts from which
the jury could determine the reprehensibility of Allstate's
conduct. See ante at 12-14.
Because we find Boettcher’s testimony relevant to both
the issue of bad faith and punitive damages, we hold that
the trial court abused its discretion if it granted a new
trial because Boettcher’s testimony was not relevant.
B. Character Evidence
We also disagree with the court of appeals that a new
trial was justified because Boettcher’s testimony was er-
roneously admitted in violation of Rule 404. Because Al-
Istate did not object to Boettcher’s testimony as
impermissible character evidence, this error was not pre-
served as an issue for Allstate’s motion for a new trial.
M. Udall & J. Livermore, supra § 12, at 18; Grant v.
Arizona Public Service Co., 183 Ariz. 434, 450, 652 P.2d
507, 523 (1982) (objection that evidence is irrelevant, with-
out specifying how or why, does not raise any issue on
appeal where the evidence would have been relevant under
any possible circumstance); 1 Weinstein’s Evidence
€ 103[02], at 103-28 to -24 (if a general objection is over-
ruled, party objecting is precluded from asserting a proper
objection on appeal). Therefore, we hold that the trial court
abused its discretion if it granted a new trial because
Boettcher’s testimony was inadmissible character evidence.
However, even if the issue was properly preserved, the
evidence was not admissible pursuant to Rule 404. Sub-
section (b) permits evidence of ‘other crimes, wrongs or
acts’ if the purpose is to show a party’s motive, intent
or absence of mistake or accident. These are precisely the
purposes for which Boettcher’s testimony was admitted.
See ante at 15-17. We disagree with the court of appeals
l6a
that Rule 404(b) “is inapplicable.” See Rawlings slip op.
at 6. We interpret the court’s statement to mean that
because Allstate did not deny its acts nor allege that they
were unintentional, the deliberateness of Allstate’s conduct
was not at issue and Boettcher’s testimony was irrelevant
because it was not directed to a fat of consequence to the
determination of the case. This reasoning ignores that
Boettcher’s testimony is relevant and admissible to prove
Allstate’s improper motives for purposes of punitive dam-
ages. Furthermore, proof of intentional conduct is neces-
sary to establish a prima facie case of the tort of bad
faith. Absent a stipulation by Allstate to this element of
the claim, Hawkins was required to put on such proof to
survive a directed verdict. Also, when Allstate did present
its defense, it took the position that its claims practices
were innocent, cost-saving measures taken to prevent ov-
erpayment of claims. Certainly, Boettcher’s testimony was
admissible to rebut this contention.
C. Unfair Prejudice
Allstate also argues that in granting a new trial based
on erroneously admitted evidence, the trial court properly
exercised its discretion to exclude Boettcher’s testimony
because the probative force of the evidence was substan-
tially outweighed by the danger of unfair prejudice. See
Rule 403. Allstate urges that its objection on grounds of
unfair prejudice. This argument finds support in our case
law. See Jones v. Pak-Mor Mfg. Co., 145 Ariz. 121, 125,
700 P.2d 819, 823 (question of relevancy looks at whether
evidence lacks probative value and whether probativeness
is outweighed by danger of prejudice), cert. denied, ___
U.S. —_., 106 S.Ct. 314, 88 L.Ed.2d 295 (1985). But
see 1 Weinstein’s Evidence 4 103[02], at 103-23 (objec-
tions pertaining to undue prejudice or impermissible char-
acter evidence must be stated specifically and are not
raised by “incompetent irrelevant and immaterial” objec-
tion); Jay Edwards, Inc. v. New England Toyota Distrib-
utor, Inc., 708 F.2d 814, 823 (1st Cir. 1983) (only stated
vaaseculay
eae Wille Beek ai i ete US CT Be
ale mace 6
i
i
‘
i
17a
objection was relevancy and court refused to consider pre)-
udicial effect), cert. denied, 464 U.S. 894, 104 S.Ct. 241,
78 L.Ed.2d 231. However, Allstate misperceives the pos-
ture of this case on review. The issue is not whether the
trial court could have exercised its discretion to exclude
Boettcher’s testimony as unfairly prejudicial, but whether
admitting the testimony was an error that justified a new
trial. Because we discern no legal error in the admission
of Boettcher’s testimony, we hold that the trial court
abused its discretion by ordering a new trial on this basis.
III. PUNITIVE DAMAGE AWARD
The court of appeals reversed the entry of judgment
notwithstanding the verdict, holding that Hawkins had es-
tablished a prima facie case for punitive damages. How-
ever, the court affirmed the grant of a new trial because,
inter alia, ‘“‘the amount of punitive damages award was
not justified by the evidence.” Slip op. at 16. The court
considered evidence of Allstate’s corporate policy to deduct
routinely a $35 cleaning fee from the estimated value of
a total loss vehicle, as well as Allstate’s dealings with the
Hawkins, but concluded that the amount of the punitive
damages award was improper because there was no proof
of the profits made by Allstate from its improper deduc-
tions. See slip op. at 16 (‘Where punitive damages are
based on wrongful corporate policies which are profit ori-
ented, the supporting evidence must go far beyond in-
formed speculation.”’). The court of appeals found the only
reference to either the number of total loss claims adjusted
by Allstate or the amount of illicit profits was by Hawkins’
counsel when he suggested to adjuster Schwenk that if
Allstate improperly deducted $35 from 100,000 total loss
claims, Allstate would gain $3.5 million.®
*“Q, [Hawkins’ counsel] My question was, this decision to take $35
off on every total loss for car cleanup is really quite an important
18a
The court of appeals appears to have carved out a new
requirement of proof to support a punitive damage award.
Neither the court of appeals, the parties, nor our research
reveals any authority that proof of ill-gotten gains is nec-
essary for an award of punitive damage. See Moore v.
American United Life Ins. Co., 150 Cal.App.3d 610, 197
Cal.Rptr. 878 ($2.5 million punitive award for insurance
company’s bad faith upheld without evidence of the profits
from company’s deceptive claims practices); Chodos v. Ins.
Co. of North America, 126 Cal.App.3d 86, 178 Cal.Rptr.
831 ($200,000 punitive award upheld in light of insurer’s
wealth and nature of its acts, without proof of profits
derived from insurer’s appraisal practices). Indeed, Allstate
admits that the ‘‘[a]ppellants were not required to present
evidence of illicit profits to obtain an award of punitive
damages.’’ Appellee’s Supplemental Brief at 34.
Allstate argues that once Hawkins “‘intentionaliy re-
leased the specter of illicit profits’ to solicit punitive dam-
ages, Hawkins must present more than speculative proof
of such profits. Allstate suggests that the $3.5 million
punitive damage award ‘‘bears more than a casual resem-
blance’”” to the amount Hawkins’ counsel hypothetically
suggested Allstate would gain from improperly deducting
$35 from 100,000 total loss claims. See ante at n. 8. In
effect, Allstate contends Hawkins did not meet its burden
of producing evidence that establishes a reasonable basis
from which the jury could estimate damages.
decision from the company’s standpoint; isn’t that true?
A. [Schwenk] I would say so, yes.
Q. As a matter of fact, we could figure it out mathematically. If
Allstate has 100,000 total loss claims every year, and they take $35
off on each one of those, that amounts to $3,500,000; doesn’t it?
Q. If you say so. I can’t figure that far.
Q. If Allstate has one million total loss claims every year in the
United States, if we figure it out mathematically, it would amount to
a 35 million decision; isn’t that right?
A. Yes.”
19a
We agree that a damage award, punitive or otherwise,
must be based on more than mere speculation or conjec-
ture. However, we disagree that the punitive damage
award in this case is the result of speculation or not jus-
tified by the evidence.
Arguably, if it were the only evidence from which to
determine an appropriate award, a hypothetical suggestion
of the profitability of a defendant’s conduct would result
in an award based merely on speculation. However, ample
evidence was presented in this case from which the jury
could assess an amount of punitive damages that would
accomplish the dual goal of punishment and deterrence.
We vest the trier-of-fact with discretion to award an
amount of punitive damages that, in its judgment, will
punish the defendant and serve as an example to deter
future similar misconduct. Once exercised, this discretion
should not be disturbed unless the award is the result of
passion or prejudice. Nielson v. Flashberg, 101 Ariz. at
341, 419 P.2d at 520. The appropriate test of passion or
prejudice is whether the verdict is ‘‘so manifestly unfair,
unreasonable and outrageous as to shock the conscience
of the court.’’ Acheson v. Shafter, 107 Ariz. at 579, 490
P.2d at 835 (citing Young Candy & Tobacco Co. v. Mon-
toya, 91 Ariz. 363, 370, 372 P.2d 703, 707 (1962); accord
Linsenmeyer v. Hancock, 23 Ariz. App. 444, 448, 533 P.2d
1181, 1185 (1985) (quoting Wry v. Dial, 18 Ariz. App. 503,
515, 503 P.2d 979, 991 (1972) (‘‘The test to be applied ...
is whether the ‘verdict is so outrageously excessive as to
suggest, at first blush, passion or prejudice.’”’)). The
amount of the award alone is not sufficient evidence to
prove the jury acted with passion or prejudice. Nienstedt
v. Wetzel, 1383 Ariz. 348, 357, 651 P.2d 876, 885.
The previously outlined categories of evidence relevant
to assess a sum of punitive damages see ante at 13-14,
are equally applicable to determine whether sufficient evi-
dence supports the $3.5 million award. A plaintiff is not
20a
required to put on proof of every factor, nor is any single
factor a prerequisite to recovery of punitive damages. See
Nienstedt v. Wetzel, 133 Ariz. at 357, 651 P.2d at 885
(evidence of defendant’s wealth not required to recover
punitive damages). Rather, the plaintiff must produce evi-
dence so that the amount awarded may not be said to be
‘“‘so unreasonable in regard to the circumstances as to
show the influence of passion or prejudice.’’ Nielson v.
Flashberg, 101 Ariz. at 341, 419 P.2d at 520.
We find that the amount of punitive damages awarded
against Allstate is neither so excessive nor unreasonable
in light of the circumstances as to show the influence of
passion or prejudice. First, the $3.5 million punitive dam-
age award is not disproportionate to Allstate’s financial
position. It is axiomatic that the wealthier the wrongdoing
defendant, the greater the award of punitive damages nec-
essary to punish him. Maxwell v. Aetna Life Ins. Co., 143
Ariz. 205, 219, 693 P.2d 348, 362 (App. 1984). We rec-
ognize, however, that the award must not financially kill
the defendant. Jd. Allstate’s 1981 Annual Statement re-
ported total assets of $8.6 billion, unassigned (surplus)
funds of $2.4 billion, and net income of $346.7 million.
The jury’s award represents approximately 3-1/2 days’ net
income or 1/25 of 1% of total assets. This court, as well
as others, has upheld punitive damage awards representing
a greater percentage of the defendant’s wealth against
claims of excessiveness. See Acheson v. Shafter, 107 Ariz.
576, 490 P.2d 832 (1971) (award representing 5% of net
worth upheld); accord Dodge City Motors v. Rogers, 16
Ariz. App. 24, 490 P.2d 853 (1971) (award representing
2+ weeks’ net income and 4% net worth upheld);'° Moore
v. American United Life Ins. Co., 150 Cal.App.3d 610, 197
Cal.Rptr. 878 (1984) (award representing 3.4 weeks of
© The net worth and income amounts are not set forth in the reported
decision but are contained in the record. See Maricopa Superior Court
Case No. C-222384; Appellee’s brief in CA-CIV 1457.
2la
defendant’s income and 3.2% of net assets upheld); Weth-
erbee v. United Ins. Co., 18 Cal.App.3d 266, 271, 95
Cal.Rptr. 678, 681 (1971) (award equal to one week’s after-
tax earnings upheld). Cf. Egan v. Mutual of Omaha Ins.
Co., 24 Cal.38d 809, 824, 169 Cal.Rptr. 691, 620 P.2d 141
(1979) (award reversed where it represented more than
seven months of net income), cert. denied and appeal dis-
missed, 445 U.S. 912, 100 S.Ct. 1271, 63 L.Ed.2d 597
(1980); Merlo v. Standard Life and Acc. Ins. Co., 59
Cal.App.3d 5, 180 Cal.Rptr. 416 (1976) (punitive award
constituting nearly one-third of defendant’s net worth set
aside).
Second, the amount of punitive damages is not outra-
geous or excessive in light of the particular nature of
Allstate’s conduct. In general, the more reprehensible the
defendant’s conduct and the more serious the harm likely
to occur, the larger the appropriate punishment. See ante
at 13-14. The jury could have rationally concluded that
Allstate’s conduct was highly reprehensible and resulted
in harm to countless insureds. The jury reasonably could
have concluded that Allstate engaged in deceptive claims
practices spanning up to 18 years whereby Allstate took
advantage of its insureds’ predicaments to settle claims at
lesser amounts by deducting relatively small, innocuous
amounts from each total loss claim under the guise of cost
saving. The jury could have found this conduct particularly
reprehensible because the average insured would be un-
likely to discover or prosecute this misconduct, see Moore
v. American Life Ins. Co., 150 Cal.App.3d at 637, 197
Cal.Rptr. at 895, and the deceptive practices were estab-
lished company policy.
We hold that evidence of Allstate’s wealth, the repre-
hensibility and duration of its conduct, and the potential
effect on innumerable claimants is sufficient to support
the $3.5 million punitive damage award.
22a
IV. CONSTITUTIONAL CHALLENGE
After oral argument and after our order granting the
Hawkins’ Petition for Review “on the issues set forth
therein,” filed May 2, 1986," we granted Allstate’s request
to file supplemental briefs. Order (filed May 28, 1986).
Allstate stated that the following reasons necessitated sup-
plemental briefing:
A. It has been more than three years since
the parties briefed the issues on appeal.
B. Significant developments in Arizona law re-
lating to punitive damages have occurred since
the filing of appellate briefs.
C. Since oral arguments were heard before the
petition for review was granted, the entire record
was presumably unavailable at the time of ar-
guments and supplemental reference to the re-
cord is necessary and appropriate.
D. Questions by the court at oral argument
suggest that clarification of certain critical evi-
dentiary facts may be necessary.
Motion for Leave to File Supplemental Briefs and For
Additional Oral Argument (filed May 16, 1986).
In its discussion of reason “‘B,’’ Allstate pointed to three
recent Arizona Court of Appeals cases relating to punitive
damages and also requested ‘that this court allow addi-
tional briefing on the federal constitutional implications of
the manner in which this punitive damage award was im-
posed under Arizona law.”’ Id. at 5-6. Allstate ultimately
argued in its Supplemental Brief that punitive damages
We heard oral argument before accepting review to determine
whether this case raised issues not presented by two other cases pre-
viously accepted for review: Rawlings v. Apodaca, __ Ariz. ___ , 726
P.2d 565 (1986); Linthicum v. Nationwide Life Ins. Co., 150 Ariz. 326.
723 P.2d 675 (1986)
23a
are a criminal penalty, which entitle a civil defendant to
the same constitutional protections as a criminal defendant
(e.g., proof beyond a reasonable doubt, protection against
double jeopardy, privilege against self-incrimination, and
conviction by a unanimous jury in Arizona) and, in the
alternative, that procedural due process requires clear and
convincing proof of entitlement to punitive damages.
Allstate acknowledges that the question of the consti-
tutionality of punitive damage awards was not raised at
trial, but argues that this issue properly may be raised
for the first time on appeal because it involves issues “of
a general public nature, affecting the interests of the state
at large.”’ Appellee’s Supplemental Brief at 35 (citing Town
of South Tucson v. Board of Supervisors, 52 Ariz. 575,
583, 84 P.2d 581, 584 (1938)). We agree that issues of
“general statewide significance” are an exception to the
general rule that an appellate court will not consider issues
not raised in the trial court. E.g., Barrio v. San Manuel
Div. Hosp. for Magma Copper Co., 143 Ariz. 101, 692
P.2d 280 (1984). However, this general rule and its ex-
ception are rules of procedure, not matters of jurisdiction,
established for the purpose of orderly administration and
the attainment of justice. Town of South Tucson v. Board
of Supervisors, 52 Ariz. at 582-83, 84 P.2d at 584.
‘Whether this court should review a question raised here
for the first time depends upon the facts and circumstances
disclosed by the particular record. It undoubtedly has the
power, but ordinarily will not exercise it. The question is
one of administration, not of power.’’ Jd. (quoting Cappon
v. O’Day, 165 Wis. 486, ____ , 162 N.W. 655, 657 (1917)).
Thus, while we agree that this court has the power to
consider the constitutional issues raised by Allstate, we
decline to exercise that power in this case.
Efficient and orderly administration requires some point
in time at which it is too late to raise new issues on appeal.
We note that Allstate did not raise its constitutional ar-
guments in the pleadings, post-trial motions, court of
24a
appeals, petition (or cross-petition) for review, response to
petition for review, or at oral argument. Allstate first
voiced its constitutional concerns after the issues for re-
view by this court were set by our order granting the
petition for review. In light of this procedural history, we
believe it does not promote sound appellate practice to
consider issues so belatedly urged. Our: order allowing is-
sues accepted for review and was premised on the parties’
need to update its briefs ‘filed three years earlier.
We hold that consideration of a constitutional issue
raised for the first time on appeal is discretionary with
this court. This is not a case involving denial of a fun-
damental constitutional right in a criminal trial nor con-
tentions which affect the jurisdiction of the court, and we
do not feel compelled to exercise our discretion.
Our decision to decline consideration of the constitu-
tionality of the manner in which punitive damages were
imposed is bolstered by our recent adoption of the clear
and convincing standard of proof Allstate seeks. Linthicum
v. Nationwide Life Ins. Co., 150 Ariz. 326, 723 P.2d 675,
681 (1986) (recovery of punitive damages “only upon clear
and convincing evidence of defendant’s evil mind’’). Our
decision to require a more stringent standard of proof for
punitive damages than for compensatory damages was
grounded on policy, not constitutional, considerations. Jd.
em , 723 P.2d at 680-81 (higher burden of proof
necessary to preserve deterrent effect and prevent op-
pressiveness of loosely-assessed punitive damages).
V. RETROACTIVITY OF CLEAR AND CONVINCING
BURDEN OF PROOF
Here, the jury was instructed that it could award pu-
nitive damages in its discretion if a preponderance of the
evidence established conduct by Allstate that warranted
such damages. Because we decline to consider whether the
clear and convincing burden of proof is constitutionally
required, the question we must address is whether the
25a
clear and convincing burden of proof for punitive damages
announced in Linthicum applies retroactively to the dis-
pute sub judice.
| In Arizona, a civil opinion is presumed to operate ret-
) roactively, as well as prospectively, unless otherwise stated.
Brannigan v. Raybuck, 186 Ariz. 513, 520, 667 P.2d 213,
220 (1983) (citing Chevron Chemical Co. v. Superior Court,
| 131 Ariz. 431, 435, 641 P.2d 1275, 1279 (1982)). To over-
come this presumption of retroactive application, Arizona
utilizes the three factors set forth by the United States
Supreme Court in Chevron Oil Co. v. Huson, 404 U.S. 97,
106-07, 92 S.Ct. 349, 355, 30 L.Ed.2d 296, (1971):
(1) Whether the decision establishes a new legal
principle by either overruling clear and reli-
able precedent or deciding an issue whose res-
olution was not clearly foreshadowed;
(2) Whether retroactive application will further
or retard operation of the rule, considering
its prior history, purpose and effect; and
(3) Whether retroactive application will produce
_, substantial inequitable results.
See Brannigan v. Raybuck, 136 Ariz. at 520, 667 P.2d at
220; Chevron Chemical Co. v. Superior Court, 131 Ariz.
at 436, 641 P.2d at 1280; Peagler v. Phoenix Newspapers,
Inc., 114 Ariz. 309, 313, 560 P.2d 1216, 1220 (1977). These
factors are sometimes referred to as the reliance, purpose,
and inequity factors, respectively.
The reliance factor strongly favors prospective-only ap-
plication. Linthicum announced a new principle of law that
overruled clear and reliable precedent. Proof by a pre-
ponderance of the evidence is the traditional measure of
proof for most civil cases. See Schwalback v. Jones, 27
Ariz. 260, 232 P. 558 (1925); E. Cleary, McCormick on
Evidence § 339, at 956 (3d ed. 1984). Our research reveals
no reported Arizona decisions foreshadowing this change;
26a
indeed, none even broaches the subject of a higher burden
of proof for punitive damages.
Regarding the purpose factor, retroactive application of
the new clear and convincing burden of proof standard
would not ‘‘affect adversely the purpose behind the new
rule.” See Chevron Chemical Co. v. Superior Court, 131
Ariz. at 436 641 P.2d at 1280 (restating Chevron Oil Co.
v. Huson’s second factor). An important purpose of the
more stringent burden of proof is to assure that punitive
damages are properly awarded. The higher burden of proof
underscores that punitive damages are an extraordinary
remedy, to be assessed only in “the most egregious of
cases.’ Linthicum, 150 Ariz. at , (28 P.2d at 681.
The effect of the Linthicum rule is to allow the trier of
fact to impose punitive damages only where he is con-
vinced to a higher degree. of probability that the defendant
possessed the requisite evil mind. Applying this new rule
retroactively obviously would not impair the purpose of
the rule; however, neither would retroactive application
significantly further its purpose. Current practice provides
several avenues of review to assure that an award of pu-
nitive damages is justified: the plaintiff must get past a
motion for a directed verdict, the jury must exercise its
discretion to award punitive damages, the verdict is subject
to post-trial motions and review by the trial judge, and
the judgment is subject to appeal. All of these procedures
are designed to assure that the award is justified and not
the result of the jury’s passion or prejudice.
The inequity factor also neither strongly favors nor dis-
favors prospective-only application of the change in law.
This factor is closely related to the reliance factor and
focuses on the injustice or hardship resulting from ret-
roactive application of the new rule. See Peagler v. Phoenix
Newspapers 114 Ariz. at 313, 560 P.2d at 1220. Retro-
active application of the new burden of proof would force
further litigation in this and other lawsuits similarly sit-
uated, where the parties have prepared and presented their
ee
27a
cases in reliance upon clear precedent and with adequate
protection against an improper award of punitive damages.
Requiring plaintiffs to retry cases under a higher burden
of proof where the passage of time will have impaired
considerably their ability to discover evidence and prove
their case certainly works an injustice. On the other hand,
plaintiffs are not entitled to punitive damages as a matter
of right; and, theoretically, they are fully compensated for
their actual injury by the compensatory damage award.
Arguably then, retroactive application creates only a minor
hardship and goes one step further in assuring properly
awarded punitive damages.
Whether retroactive application is inappropriate if a sin-
gle factor favors prospective application, or whether all
factors must favor prospective application, is unclear. See
Brannigan-v. Raybuck, 136 Ariz. at 521, 667 P.2d at 221
(‘{E]ven if three-part test of Chevron Oil Co. v. Huson is
interpreted liberally, so that the proponent of prospective
application is not required to satisfy all three elements,
_...”); Chevron Chemical Co. v. Superior Court, 131 Ariz.
at 436-37, 641 P.2d at 1280-81 (decision given retroactive
application where all three factors were satisfied); Peagler
v. Phoenix Newspapers, Inc., 114 Ariz. 309, 560 P.2d 1216
(looked only to lack of substantial inequitable results to
conclude retroactive application proper). See generaliy Note,
Confusion in Federal Courts: Application of the Chevron
Test in Retroactive-Prospective Decisions, 1985 ae eM
Rev. 117. However, we need not establish a precise for-
mula for applying these factors. Whether a judicial holding
will be given only prospective application is a question of
policy. See Lemieux v. Superior Court, 132 Ariz. 214, 644
P.2d 1300 (1982) (United States Constitution does not re-
strict retrospective-prospective decision of state courts).
In this case, we are faced with a judicial decision an-
nouncing an unforeshadowed departure from clear and re-
liable precedent. We are concerned with the potentiai
burden on the judicial system from further litigation where
28a
claims have been disposed of by prior litigation or settle-
ment. See Harmann v. Hadley, 128 Wis.2d 371, , 382
N.W.2d 673, 677 (1986). Under these circumstances, we
hold that the new burden of proof shall be given only
prospective application. After September 15, 1986, the date
Linthicum was mandated, punitive damages are recover-
able only upon clear and convincing evidence of a
defendant’s evil mind.
The new burden of proof shall not apply where a verdict
or judgment based upon proof by a preponderance of the
evidence has been entered and where there is no reason
to require a new trial other than application of the new
burden of proof. See Wangen v. Ford Motor Co., 97 Wis.2d
260, ___, 294 N.W. 2d 437, 458 (1980). Cf. Tuttle v.
Raymond, 494 A.2d 1353 (Me. 1985) (higher standard of -
proof given retroactive application where prior case law
gave notice of intent to reexamine burden of proof).
The opinion of the court of appeals is vacated. The
verdict for compensatory and punitive damages is affirmed
and the matter is remanded for reinstatement of the orig-
inal judgment dated August 3, 1980.
FRANK X. GORDON, JR.
Chief Justice
CONCURRING:
STANLEY G. FELDMAN
Vice Chief Justice
BRUCE MEYERSON
Judge Pro Tempore, Court of
Appeals, Division One
2
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;
3
1
;
;
|
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|
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}
:
,
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4
29a
Justice James Duke Cameron recused himself and did
not participate in the determination of this matter, and
Bruce Meyerson, Judge Pro Tempore, Court of Appeals,
Division One, sat in his place and stead.
Justice Jack D. H. Hays participated in the determi-
nation of this matter but retired before this opinion was
filed.
30a
HOLOHAN, Justice dissenting
The concept of punitive damages has been the subject
of considerable controversy among legal scholars. Punitive
damages are not allowed in some states; in others, re-
strictive rules have been developed to control such dam-
ages. The entire concept of punitive damages has been
subjected to attack from some sources. RESTATEMENT
(SECOND) OF TORTS § 908 comment f (1965). This court
in Rawlings v. Apodaca, 151 Ariz. ____ , 726 P.2d 565
(1986), and Linthicum v. Nationwide Life Ins. Co., 150
Ariz. 326, 723 P.2d 675 (1986), narrowed the field of con-
duct justifying punitive damages and adopted a higher
standard of proof to justify the imposition of punitive dam-
ages. These reforms should not be viewed as the end of
the reexamination of the concept of punitive damages.
The action by the court in this case in declining to apply
the Linthicum standard of proof retroactively does not
appear justified. The three factors of reliance, purpose and
inequity, adopted in Chevron Chemical Co. v. Superior
Court, 131 Ariz. 431, 641 P.2d 1275 (1982), for the ret-
roactive-prospective analysis, weigh heavily for retroactive
application of the Linthicum rule. Reliance on the old rule
is the only factor which favors prospective application. The
purpose of the new rule to avoid loosely assessed punitive
damage favors retroactive application. Finally, the factor
of inequity does not favor the plaintiffs because there is
no particular right to punitive damages—they are a wind-
fall. Punitive damages are a discretionary matter with the
jury, and a retrial of the punitive damage issue does not
deprive the plaintiffs of their right to compensatory dam-
ages—which are the only damages they had a right to
recover.
From my review of the Chevron factors I conclude that
they weigh in favor of the usual rule in civil cases of
retroactive application. I therefore dissent from the deci-
sion of the court.
3la
There is also another matter which deserves comment.
The compensatory damage award in this case is $15,000,
but the punitive damage award is $3.5 million which is
three and one-half times the maximum fine which could
have been imposed upon the defendant if it had been con-
victed of a felony. See A.R.S. § 13-803(A\(1) (Supp. 1986).
The amount of the award in this case is a clear illustration
of the penal nature of such damages. The court, however,
declines to consider the constitutional issues raised by the
defendant concerning the current procedures for assessing
punitive damages. I believe that this case presents the
right opportunity for the court to consider the constitu-
tionality of our procedures in determining and assessing
punitive damages.
Two notableJaw review articles discuss a number of the
constitutional issues arising from the current procedure
employed by a number of states in determining and as-
sessing punitive damages. Wheeler, The Constitutional Case
for Reforming Punitive Damages Procedures, 69 VA. L.
REV. 269 (1983); Grass, The Penal Dimensions of Punitive
Damages, 12 HASTINGS CONST. L. Q. 241 (1985). Es-
sentially, the authors agree that punitive damages are penal
in nature and require a due process procedure greater than
that required for civil matters but not as strict as that
required for criminal matters. The authors note that juries
are usually given no standards to guide them in assessing
the amount of punitive damages. They are told that the
purpose of punitive damages is to punish the defendant
and to deter others. This is also the purpose of the criminal
law. Unlike the criminal law, however, there are no defined
limits to the punishment in the instance of punitive dam-
ages. The jury’s discretion is virtually unlimited save and
except for the occasional finding by an appellate court that
the award was manifestly unfair, unreasonable or outra-
geous so as to shock the conscience of the appellate court.
The authors conclude that such broad unguided discretion
32a
does not meet due process requirements for the assess-
ment of what is in fact a criminal penalty.
At least three minimum requirements have been sug-
gested as necessary for punitive damage procedures to
meet due process standards: (1) the procedure should be
bifurcated from the compensation portion of the case; (2)
proof of the right to punitive damages should be by clear
and convincing evidence; and (3) the maximum amount for
punitive damages should be established by law. Wheeler,
supra.
The United States Supreme Court has not directly ad-
dressed the issue of procedural due process for assessing
punitive damages. That court has noted that the due proc-
ess clause protects civil litigants who seek recourse in the
courts either as defendants hoping to protect their prop-
erty or as plaintiffs attempting to redress grievances. Lo-
gan v. Zimmerman Brush Co., 455 U.S. 422, 102 S.Ct.
1148, 71 L.Ed.2d 265 (1982). On another occasion it has
observed that in most jurisdictions jury discretion over the
amounts awarded is limited only by the general rule that
punitive damages not be excessive. Consequently, juries
assess punitive damages in wholly unpredictable amounts
bearing no necessary relation to the actual harm caused.
Juries remain free to use their discretion selectively to
punish or not punish. Gertz v. Robert Welch, Inc., 418
U.S. 323, 94 S.Ct. 2997, 41 L.Ed.2d 789 (1974). Last year
in Aetna Life Insurance Co. v. Lavoie, U.S. :
106 S.Ct. 1580, 89 L.Ed.2d 823 (1986), the court acknowl-
edged that challenges to the constitutionality of the lack
of standards for the award of punitive damages raised
important issues which, in an appropriate setting, must be
resolved. The case was, however, decided on another basis
which made it unnecessary for the court to resolve the
challenge to the award of punitive damages.
No purpose can be accomplished by delaying a decision
on the important issues raised by the defendant’s challenge
33a
to the corstitutionality of our present procedure for award-
ing punitiy. damages.
In Linthicum this court adopted the higher standard of
proof to establish a claim for punitive damages. This action
brings us part of the way towards meeting the suggested
due process standards for assessing punitive damages. The
mechanism for meeting another requirement—bifurcated
trial—is already in place. Arizona Rule of Civil Procedure
42(b), 16 A.R.S. permits separate trials of claims on any
issue. A claim for punitive damages could and should be
separated from the other issues in the case and tried sep-
arately after the plaintiff has prevailed on the issues for
compensatory damages. The same jury which heard the
first phase of the case could hear the second phase dealing
with the punitive damages issue.
The only matter of real controversy is whether due proc-
ess requires that limits be placed on the maximum amount
which may be awarded for punitive damages. There ap-
pears to be strong arguments for the position that due
process requires such maximum limits because of the penal
nature of punitive damages. In any event, the issue should
be considered and resolved.
The constitutional issues raised in this case will not dis-
appear. Other counsel faced with the problem will, per-
haps, make a better record, but ultimately this court must
decide the issues. The case presented the opportunity for
this court to resolve the challenges to the constitutionality
of the Arizona procedure for awarding punitive damages.
The decision of the court leaves the matter in doubt and
speculation.
WILLIAM A. HOLOHAN, Justice
34a
IN THE COURT OF APPEALS
STATE
OF ARIZONA
DIVISION ONE
1 CA-CIV 6881
Department A
JACK RANDY HAWKINS and CYNTHIA
HAWKINS, husband and wife,
Plaintiffs-A ppellants,
VS.
ALLSTATE
INSURANCE COMPANY, a foreign corporation, and Dogs I
through V,
Defendant-A ppellee.
MEMORANDUM DECISION
(Not for Publication, Rule 28, Arizona Rules of Civil
Appellate Procedure)
An Appeal from the Superior Court for Maricopa County
Cause No. C-432754
The Honorable David J. Perry, Judge
AFFIRMED IN PART; REVERSED IN PART; RE-
MANDED
Thur, Dawson & O’Sullivan
by Calvin C.Thur
Attorneys for Plaintiffs-Appellants
Scottsdale
Harrison & Lerch, P.C.
by Mark I. Harrison
Douglas L. Christian
Attorneys for Defendant-Appellee Phoenix
Phoenix
Filed Aug 13 1985
CORCORAN, Judge
Appellants, Jack and Cynthia Hawkins,.in a two-count
tort action alleging bad faith and fraud in the resolution
of an auto insurance claim, appeal from the trial judge’s
grant of a motion for judgment notwithstanding the ver-
dict, or in the alternative for a new trial. The Hawkins
had obtained a jury verdict for $15,000 compensatory dam-
ages and $3,500,000 punitive damages. We must decide
whether the trial court erred in its assessment of the
evidence as to both type of damages, and if so, also erred
as to the grant of a new trial.
1. The Facts
In July, 1979, the Hawkins purchased a new Chevrolet
Monte Carlo, which included many options, for just over
$8,000. On December 4, 1979, Cynthia had an accident
which resulted in damages to her car totaling $6,900. The
Hawkins were insured under a standard Allstate auto-
mobile liability insurance policy. The collision provision lim-
ited Allstate’s liability to the actual cash value of the car,
or replacement with a car of like kind or quality.
Cynthia reported the accident to her agent the day it
occurred. Once Allstate determined that the actual cash
value of the insured car was less than the estimated cost
of repair, it was classified as a ‘‘total loss” and transferred
to a total loss adjuster, Paul Schwenk. Schwenk contacted
the Hawkins on December 13, 1979. The Hawkins indi-
cated to Schwenk that they wanted a replacement car.
Schwenk sent the Hawkins to look at four similar Monte
Carlos at a local car dealership. The Hawkins chose one
of the vehicles but were told that they could not have it
36a
because its actual cash value was $300 more than their
insured car. Schwenk told the Hawkins they would have
to take one of the other cars or $4,500 in cash. On De-
cember 20, 1979, Schwenk brought the Hawkins a check
for $6,471, payable to the Hawkins and Midway Chevrolet,
intending that they purchase the car he had selected. After
an acerbic exchange between Jack and Schwenk, the
Hawkins reluctantly accepted the replacement vehicle. The
replacement vehicle lacked power windows, got worse gas
mileage due to a more powerful engine, had dealer (rather
than factory) installed cruise control, and lacked several
styling features of the original car. There was no evidence
produced at trial concerning the actual cash value of the
insured vehicle or the replacement vehicle at the time of
the accident. Calculations based on the “‘list price” of the
vehicles indicate a difference of several hundred dollars.
Taking into account all of the amounts paid, Allstate con-
cedes the difference in list price between the insured ve-
hicle and replacement was at least $161.45 in favor of
Allstate.
At trial, the Hawkins testified as to their dealings with
Allstate, and also called three former Allstate adjusters.
The latter group testified as witnesses rather than as ex-
pert witnesses. One adjuster testified as to Allstate’s claim
procedures in Phoenix from 1962 until 1964; another spoke
to its practices in Tacoma, Washington, from 1978 to 1981:
and the last described the practice at the Phoenix office
at the time the Hawkins’claim was processed. Each tes-
tified to Allstate’s methods of determing the loss to the
insured, termed ‘‘chiseling’’ by the Hawkins and ‘‘cost sav-
ing” by Allstate.
At the conclusion of the trial, the trial judge directed
a verdict in favor of Allstate on the fraud complaint and
submitted the bad faith claim to the jury on both com-
pensatory and punitive damages. The jury returned a ver-
dict for the Hawkins. The court subsequently granted
Allstate’s motion for judgment notwithstanding the verdict
= - ey ete Le el
37a
on the basis that there was insufficient evidence presented
at trial to justify the verdict. It further granted Allstate’s
motion for a new trial, in the alternative, for the following
reasons: (1) the verdict was not supported by the evidence;
(2) the verdict was the result of passion or prejudice; (3)
the damages were excessive; (4) the court erred in ad-
mitting the testimony of the former Allstate employees;
and, (5) the court erred in instructing the jury on the
nature of bad faith, the duty owed by Allstate to the
Hawkins, and the extent of the damages.
The Hawkins appeal from the judgment notwithstanding
the verdict and the order for a new trial, and from the
directed verdict on the fraud count. The fraud issue was
not addressed in the briefs or in oral argument and we
deem it abandoned.
2. Standard of Review
On appeal, the standard of review for a judgment not-
withstanding the verdict favors the appellant, whereas his
burden is greater in showing that the trial court should
also not have ordered a new trial. If there is substantial
evidence from which reasonable minds could differ as to
the ultimate facts, a motion for judgment notwithstanding
the verdict should be denied. Times Mirror Co. v. Sisk,
122 Ariz. 174, 593 P.2d 924 (App. 1978). On the other
hand, an appellate court will not disturb an order granting
a new trial in the absence of a clear showing of abuse of
discretion. Suciu v. Amfac Distrib. Corp., 138 Ariz. 514,
675 P.2d 1333 (App. 1983). We discuss separately the per-
tinent evidence as to the judgment and the order.
3. Testimony of Former Allstate Employees
The Hawkins contend that the trial court erred in its
post-trial determination that the testimony of former Al-
Istate employees was inadmissible. They argue that it was
properly received pursuant to rule 404(b), Arizona Rules
38a
of Evidence, to show motive (profit), knowledge (that its
agents knew of the company’s policies), and state of mind
(that it expressly intended to engage in the practices which
were the subject matter of the suit). They also contend
that it was admissible to show a pattern.
Rule 404(b) is a specialized exception to the general rule
excluding circumstantial use of character evidence. 1 M.
Udall and J. Livermore, Arizona Practice: Law of Evidence
§ 84 (2d ed. 1982). It is primarily invoked in criminal cases
but its use in civil litigation is permitted. E.g., Sequoia
Mfg. Co. v. Halec Constr. Co., 117 Ariz. 11, 570 P.2d 782
(App. 1977); American Hot Rod Ass’n v. Carrier, 500 F.2d
1269 (4th Cir. 1974); 10 Moore’s Federal Practice §
404.21[2] (2d ed. 1985). Such testimony generally tends to
prove culpability where the defendant acknowledges an act
but claims it was unintentional, or it shows a compelling
situational similarity with past acts that it makes it more
likely that the defendant was the perpetrator. Allstate does
not deny its acts nor does it claim that they were unin-
tentional. Therefore, we believe this rule is inapplicable.
The pertinent query is whether the testimony is rele-
vant. But see Dunlap v. Jimmy G.M.C., 136 Ariz. 338,
666 P.2d 83 (App. 1983) (holding that evidence of past
unethical] sales practices is relevant on the issue of whether
defendant was currently involved in deceptive sales prac-
tices and on the issue of punitive damages). Plaintiffs,
alleging a pattern of behavior which taken as a whole con-
stitutes bad faith may use indirect evidence to support an
award of punitive damages. Colonial Life & Acc. Ins. Co.
v. Superior Court, 31 Cal.3d 785, 183 Cal.Rptr. 810, 64”
P.2d 86 (1982). In Moore v. American United Life Ins. Cv.,
150 Cal.App.3d 610, 197 Cal.Rptr. 878 (1984), the court
held that evidence of another insured’s claim was admis-
sible to establish a pattern or practice of unreasonable
behavior. In its analysis, the California court stated the
antecedent practice must be substantially similar to the
case before the trial court. We agree.
al cat 6 LS tat MeN le wet the
rai wenas
39a
The first former adjuster testified in very general terms
as to Allstate’s claim practice 20 years ago.
Q. Did they [Allstate] have a general policy re-
garding claims handling?
A. Yes, they did.
Q. What was that general policy?
A. They were interested in settling claims for as
low a dollar possible. Oftentimes, again, if they
could save the company money, or if the adjuster
could, you were doing a good job.
Q. In
other words, you were praised if you could cut
a claim down below its true value?
A. Well, it’s difficult to determine what it’s true
value is, that’s always a matter of opinion. But
you felt you were saving the company money for
what the claimant desired to settle his claim for,
then you were doing a good job.
This testimony is not sufficiently similar to the Hawkins’
experience; rather, it resembles character evidence which
is not admissible for the purpose of proving that Allstate
acted in a specific manner on a particular occasion. Rule
404(a), Arizona Rules of Evidence. This testimony was
improperly admitted.
The second and third former adjusters testified in detail
regarding company procedures for handling total loss
claims. Although neither had any direct experience with
the Hawkins’ claim, each described deductions and settle-
ment practices that were nearly identical to those in the
Hawkins’ adjustment. Nonetheless, the trial court ulti-
mately ruled their testimony inadmissible without stating
any reason. A trial court’s rulings on exclusion or admis-
sion of evidence will not be disturbed on appeal! unless
clear abuse of discretion appears and prejudice results.
40a
Selby v. Savard, 134 Ariz. 222, 655 P.2d 342 (1982). How-
ever, counsel] must state each specific ground of objection.
Cf. State v. Evans, 88 Ariz. 364, 373, 356 P.2d 1106, 1111,
cert. denied, 371 U.S. 835 (1960). Our review of the record
indicates no substantial objections to the adjusters’ testi-
mony, other than those pertaining to relevancy which we
answered adverse to Allstate’s position. An objection as
to relevance may constitute a waiver of other specific
grounds of objection. See Killingsworth v. Nottingham, 18
Ariz. App. 356, 501 P.2d 1197 (1972); 1 M. Udall and J.
Livermore, Arizona Practice: Law of Evidence § 12 (2d
ed. 1982); McCormick on Evidence § 52 at 129 (8rd Cleary
ed. 1984). For the remainder of this decision we will refer
to the testimony of those witnesses where relevant.
4. Bad Faith: Compensatory Damages
Under this bad-faith claim, the Hawkins were required
to prove that Allstate violated the implied promise of good
faith and fair dealing which an insurance company owes
to its insured. Sparks v. Republic Nat’l Life Ins. Co., 132
Ariz. 529, 647 P.2d 1127 (App. 1982). The promise carries
the obligation to process claim applications in a timely and
thorough manner. A plaintiff must show, on the basis of
an objective standard, that an insurer unreasonably denied
or delayed payment of a claim under the facts and cir-
cumstances of the case. Noble v. National Am. Life Ins.
Co., 128 Ariz. 188, 624 P.2d 866 (1981); Continental Life
& Acc. Co. v. Songer, 124 Ariz. 294, 603 P.2d 921 (App.
1979). Allstate contends that the Hawkins did not meet
their burden of proof on several grounds.
Allstate first argues that it neither failed nor delayed
payment of the claim. It points to the fact that it provided
a replacement vehicle with a retail value of 97.5% of the
insured car within 14 days of the loss. In offering these
facts as dispositive of one of the core issues, Allstate im-
plicitly assumes that the final sum paid is the only cri-
terion, and that shaving a point here or there is not bad
Sen ne Le eee ene Eee
4la
faith. We believe Allstate construes this tort too narrowly:
it is a cause of action which arises out of contract but
stands on an independent footing as a means to redress
injuries which occur when an insurer unreasonably refuses
to recognize a valid claim. Noble v. National Am. Life Ins.
Co., supra. Unlike other contracts in which the parties
seek pecuniary advantage, an insurance contract protects
in the event of a calamity. Egan v. Mutual of Omaha Ins.
Co., 24 Cal.3d 809, 157 Cal.Rptr. 482, 487, 598 P.2d 452,
457 (1979). Therefore, when an insured, who has already
suffered an accident or other misfortune, has also been
forced to jump through his own insurer’s hoops to receive
the policy benefits, the trier of fact must look beyond the
bottom line to the facts and circumstances of the claims
transaction in determining whether there was a breach of
good faith. See Comment, Good Faith and Fair Dealing
in Insurance Contracts: Gruenberg v. Aetna Insurance Co.,
25 Hastings L.J. 699 (1974). Where, as in this case, an
insurer presents an offer significantly below the amount
it actually settles for, the offer is made in a take-it or
leave-it fashion, and there are other hard-ball tactics, suf-
ficient evidence is present to go to the jury on bad faith.
Allstate next contends that a breach of contract action
is the gravaman of a bad faith claim. It relies upon lan-
guage from Sparks, 132 Ariz. at 539, 647 P.2d at 1137,
that the trial court’s determination of a breach, taken in
conjunction with other facts, is sufficient to take the mat-
ter to the jury. We disagree with this procedural inter-
pretation. It goes without saying that where an insurer
fully complies with the provisions of its contract in a timely
manner there can be no bad faith; however, to require the
plaintiff to first plead and prove a breach of contract claim
is both inefficient and ignores the policy behind the bad
faith tort. The plaintiff must offer evidence which would
constitute breach of contract if so pleaded, but this is not
a pleading requirement nor is it necessary for the trial
court to so find. See Safeco Ins. Co. v. Sims, 435 So.2d
42a
1219, 1224-1225 (Ala. 1983) (Jones concurring). Allstate’s
concession that the value of the replacement car was less
than the value of the insured car satisfies this element.
We hold that the trial court erred in granting Allstate’s
motion for judgment notwithstanding the verdict as it ap-
plies to the award for compensatory damages. As discussed
above, we agree with the trial court’s determination that
the general testimony of an adjuster from 20 years ago
is not relevant without more to establish a pattern of bad
faith. Therefore, we affirm the trial court’s grant of the
alternative motion for a new trial on the basis that the
trail court improperly admitted testimony.
5. Bad Faith: Instruction
The trial court also concluded that it erroneously in-
structed the jury on “the nature of bad faith, the duty
owed by the defendant to plaintiffs, and the extent of
damages.’ We address this issue for the guidance of the
parties at the new trial.
The principal instruction given to the jury defining the
tort of bad faith read as follows:
Every insurance contract contains an implied
promise of good faith and fair dealing which the
insurance company owes to its insured. This
promise imposes an obligation on the insurance
company to deal fairly in handling a claim made
by its insured under the policy; and to not un-
reasonably delay, withhold, or fail to make full
payment of promised benefits to its insured. Rea-
sonableness is to be determined on the basis of
whether the conduct of the parties was justified
and reasonable under all of the circumstances.
Allstate first contends that the language “failed to make
full payment of promised benefits,’”’ implies that the simple
payment of less than full benefits constitutes bad faith.
43a
We do not read this instruction so narrowly; further, we
have discussed and resolved the issue of partial payment
of benefits in relation to Allstate’s contention that a breach
of contract was neither pleaded nor proven.
Allstate next contends that the jury should have been
instructed on intent. While acknowledging that our
Supreme Court has held that “[a] jury need not be spe-
cifically instructed that an intent element is necessary to
establish the tort of bad faith,’ Sparks v. Republic Nat’l
Life Ins. Co., 182 Ariz. at 588, 647 P.2d at 1136, Allstate
characterizes Sparks and Noble as involving a clear intent
on the part of the insurer to deny the claims. We do not
agree. The evidence supports the inference that Allstate
fully intended to pay the amount offered, or replace the
Hawkins’ car with a vehicle equal to the amount offered.
Since, as Allstate now acknowledges, the value of the re-
placement vehicle was less than the insured vehicle, the
determination by the trier of fact turns on ‘‘whether the
insurer failed to honor a claim without a reasonable basis
for doing so.’’ Sparks, 132 Ariz. at 538, 647 P.2d at 1136.
The instruction correctly informed the jury that failure to
make full payment of the contracted benefits must be un-
reasonable under all of the circumstances to justify a find-
ing of bad faith. We find no error in the jury instruction.
6. Bad Faith: Punitive Damages
Our conclusion that there was sufficient evidence to take
the matter to the jury on compensatory damages does not
necessarily apply to punitive damages. Bad faith which is
sufficient to support a punitive damages award must re-
flect conduct in excess of the reckless disregard that is
needed to support the bad faith claim. Farr v. Transa-
merica Occid. Life Ins. Co., ——Ariz.__, 699 P.2d 376
(App. 1984). There must be a showing of motive and intent
indicative of aggravation, insult, vindictiveness, or malice.
Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 686,
271 N.W.2d 368, 379 (1978).
44a
The Hawkins first argue that the behavior of the claims
adjuster was egregious, supporting the award of punitive
damages. They do not serious pursue this line of argument,
as neither do we, but instead concentrate on their primary
contention that the punitive award bore a reasonable re-
lationship to the nature of the misconduct, Allstate’s profit
from such misconduct, its history, wealth, and income, and
the deterrent effect. We agree with the Hawkins that the
purpose of punitive damages is not only to punish the
offender, but also to serve as a deterrent to others. Price
v. Hartford Acc. & Indem. Co., 108 Ariz. 485, 502 P.2d
522 (1972); Pistorious v. Prudential Ins. Co., 123 Cal.App.
3d 541, 176 Cal.Rptr. 660 (1981); D. Dobbs, Law of Rem-
edies § 3.9 (1973). As noted in the Restatement (Second)
of Torts § 908, (1979) the purpose of punitive damages is
“to deter him and others like him from similar conduct in
the future.’’ The California Supreme Court has concluded,
and we agree, that punitive damages may serve a partic-
ular purpose in instances of bad faith:
[T]he principal purpose of ... [punitive damages]
is to deter acts deemed socially unacceptable and
consequently, to discourage their perpetuation of
objectionable corporate policies.
As one commentary has noted, ‘‘the insurers’
obligations are ... rooted in their status as purv-
eyors of a vital service labeled quasi-public in-
nature. Suppliers of services affected with a pub-
lic interest must take the public’s interest seri-
ously, where necessary placing it before their
interest in maximizing gains and limiting dis-
bursements ... [A]s a supplier of a public service
rather than a manufactured product, the obli-
gations of insurers go beyond meeting reasonable
expectations of coverage. The obligations of good
faith and fair dealing encompass qualities of de-
el
45a
cency and humanity inherent in the responsibil-
ities of a fiduciary. Insurers hold themselves out
as fiduciaries, and with the public’s trust must
go private responsibility consonant with that
trust.’’ Furthermore, the relationship of insurer
and insured is inherently unbalanced; the adhe-
sive nature of insurance contracts places the in-
surer in a superior bargaining position. The
availability of punitive damages is thus compat-
ible with recognition of insurers’ underlying pub-
lic obligations and reflects an attempt to restore
balance in the contractual relationship.
Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 820,
157 Cal.Rptr. 482, 487, 598 P.2d 452, 457 (1979), cert.
denied., 445 U.S. 912, 100 S.Ct. 1271, 68 L.Ed.2d 597
(1980). See also, Walker v. Sheldon, 10 N.Y.2d 401, 223
N.Y.S.2d 488, 179 N.E.2d 497 (1961).
Allstate contends that punitive damages should be lim-
ited to cases in which there was an actual intent to cause
injury, an evil motive, horrendous injuries, or flagrantly
oppressive conduct by the insurer. We believe that ‘‘op-
pressive conduct” as set out in Farr encompasses a cor-
porate policy, sufficient to constitute a pattern, whereby
an insurer chisels an amount smal] enough from each
claimant such that only the occasional person will object
and litigate the matter.
The testimony concerning Allstate’s corporate policies
came from Schwenk and the three claims adjusters.
Schwenk testified that in his initial work-up of the value
of the car he deducted a $35 “‘clean-up fee.’’ Further, he
was instructed by his supervisor to always deduct some
amount for clean-up on a total loss.
While the clean-up fee was not actually deducted from
the Hawkins’ settlement because it was not a cash settle-
ment, it would lower the amount that Allstate would pay
for a replacement vehicle and presumably is reflected in
46a
the settlement. If the Hawkins had instead been given the
“actual cash value’’ for the car, the deduction would have
reduced that figure accordingly. Schwenk acknowledged
that he had deducted the $35 fee without actually inspect-
ing the car or having any information as to its cleanliness.
Two of the claims adjusters, Mauritz and Paterno, tes-
tified that they were instructed to routinely deduct the
$35 clean-up fee from the estimated value of total loss
vehicles. There is no evidence, however, concerning the
number of total loss claims each vear or for any time
period. In fact, the only suggestion of a number is from
counsel for the Hawkins:
Q. [by Mr. Thur] As a matter of fact, we could
figure out mathematically. If Allstate has 100,000
total loss claims every year, and they take $35
off on each one of those, that amounts to
$3,500,000; doesn’t it?
A. [by Mr. Schwenk] If you say so. I can’t figure
that far.
This evidence of Allstate’s corporate policy, combined with
the Hawkins’ testimony regarding their dealings with AI-
Istate, is sufficient to support a jury instruction on punitive
damages. We do not believe, however, that there is any
relationship between that evidence and a $3,500,000 pu-
nitive damage award. Where punitive damages are based
on wrongful corporate policies which are profit oriented,
the supporting evidence must go far beyond informed spec-
ulation. Cf Farr, supra.
We find that the Hawkins met their burden of estab-
lishing a prima facie case for punitive damages; therefore,
the trial court erred in granting Allstate’s motion for
judgement notwithstanding the verdict. We affirm the trial
court’s grant of Allstate’s motion for a new trial on the
basis that the amount of punitive damages award is not
justified by the evidence.
47a
We remand to the trial court for a new trial as to
liability and both compensatory and punitive damages. The
testimony of the first Allstate adjuster should be precluded
unless it rises above mere character evidence.
/si/ ROBERT J. CORCORAN
ROBERT J. CORCORAN
Presiding Judge
CONCURRING:
/s/ JACK L. OGG
JACK L. Occ, Judge
Froeb, Judge Dissenting in Part, Concurring in Part
In my opinion, the trial court correctly granted judg-
ment in favor of appellee Allstate notwithstanding the ver-
dict and I would therefore affirm the judgment appealed.
I concur with the portion of the decision which affirms
the order granting the alternative motion for new trial.
/s/ DONALD F. FROEB
DONALD F. FROEB, Judge
48a
IN THE SUPERIOR COURT OF THE STATE OF
ARIZONA
IN AND FOR THE COUNTY OF MARICOPA
No. C 432754
JACK RANDY HAWKINS, et uz.,
Plaintiffs,
VS.
ALLSTATE INSURANCE COMPANY, a foreign corporation, et
al.,
Defendants.
JUDGMENT N.0.V. OR IN THE ALTERNATIVE
ORDER FOR NEW TRIAL PURSUANT TO RULE
50(c)
(Assigned to Honorable David J. Perry, Division 16)
This cause came on regularly for trial on July 27, 1982.
The plaintiffs and the defendant appeared through their
attorneys, and a jury was regularly empanelled and sworn
to try said cause. At the close of all the evidence the
defendant moved the court for a directed verdict which
the court denied. After returning to consider its verdict,
the jury returned a verdict in favor of plaintiffs and against
defendant in the amount of $15,000.00 for compensatory
damages and 3.5 million dollars in punitive damages.
The defendant, thereafter, having timely moved the court
to set aside the verdict and the judgment entered thereon,
and to enter judgment notwithstanding the verdict on be-
half of the defendant; and the court having considered the
memoranda filed by the defendant in support of the Judg-
ment N.O.V. and the memoranda filed by plaintiff in op-
49a
position thereto; and the court having heard oral argument
in open court;
And the court further making a determination that the
evidence presented at trial was insufficient to justify the
granting of a verdict in favor of plaintiffs;
NOW, THEREFORE, it is hereby
ORDERED, ADJUDGED AND DECREED pursuant to
Rule 50(b) granting judgment notwithstanding the verdict
in favor of the defendant and against the plaintiffs; and
awarding the defendants their taxable costs incurred
herein.
The defendant having moved the court for Judgment
N.O.V. or in the alternative, new trial, and the court hav-
ing granted the defendant’s motion for Judgment N.O.V.;
and the court having considered the memoranda of the
defendant in support of the alternative motion for new
trial and the memoranda of the plaintiffs filed in opposition
thereto; and the court having considered oral argument of
the parties offered in open court on the defendant’s motion
for new trial in the alternative;
And the court finding that the motion for new trial in
the alternative pursuant to Rule 50(c) of the Arizona Rules
of Civil Procedure should be granted for the following
reasons:
1. The verdict in resulting judgment determining that
the defendant committed a tort of bad faith is not justified
by the evidence.
2. The verdict in resulting judgment imposing punitive
damages on the defendant for the tort of bad faith is not
justified by the evidence.
3. The verdict is the result of passion or prejudice.
4. The damages are excessive.
50a
5. The court committed error in the admission of tes-
timony by William Boettcher, Jan Mauritz and Pat Pa-
terno.
6. There was error in instructing the jury on the nature
of bad faith, the duty owed by the defendant to plaintiffs,
and the extent of damages.
NOW, THEREFORE, pursuant to Rule 50(c) it is hereby
ORDERED conditionally granting the defendant’s motion
for new trial, so that if this judgment is reversed on appeal
the new trial shall proceed.
DATED this 1st day of October, 1982.
/s/ Davip J. PERRY
DAVID J. PERRY
Judge of the Superior Court
COPY of the foregoing mailed/delivered this __day of
Septernber, 1982, to:
Calvin C. Thur, Esq.
THUR & PRESTON
7007 East Indian School Road
Scottsdale, Arizona 85251
Attorneys for Plaintiffs
5la
Supreme Court
STATE OF ARIZONA
251 West Wine STATE Capitol
1700 West Washington
Phoenix Arizona 14021 255-4534
Telephone (602) 255-4534 .
April 8, 1987
RE: JACK RANDY HAWKINS et ux vs. ALLSTATE
INSURANCE CO et al
Supreme Court No. CV-86-0010-PR
Court of Appeals No. 1 CA-CIV 6881
Maricopa County No. C-482754
GREETINGS:
The following action was taken by the Supreme Couri of
the State of Arizona on April 7, 1987, in regard to the
above-referenced cause:
ORDERED: Motion for Reconsideration En Banc—DE-
NIED.
Justices Cameron and Moeller recused themselves and did
not participate in the determination of this matter.
DAVID R. COLE, Clerk
TO: Calvin C. Thur, Esq., Thur, Dawson & O’Sullivan,
7007 E. Indian School Road, Scottsdale, AZ 85251
Douglas L. Christian, Esq., and Mark I. Harrison,
Esq., Harrison & Lerch, P.C., 1001 N. Central, Suite
900, Phoenix, AZ 85002
Hon. B. Michael-Dann, Presiding Judge, Maricopa
County Superior Court, 201 W. Jefferson, Phoenix,
AZ 85003
jeh
52a
IN THE SUPREME COURT
FOR THE STATE OF ARIZONA
NO. CV-86-0010-PR
Court of Appeals
No. 1 CA-CIV 6881
Maricopa County
Superior Court
No. C-432754
JACK RANDY HAWKINS and CYNTHIA HAWKINS, husband
and wife,
Plaintiffs-Appellants,
VS.
ALLSTATE INSURANCE COMPANY, a foreign corporation, et
al.,
Defendant-A ppellee.
MOTION FOR RECONSIDERATION EN BANC
The defendant-appellee, Allstate Insurance Company,
through its counsel, Mark I. Harrison and Douglas L.
Christian of Harrison & Lerch, P.C., moves this Court,
pursuant to Rule 22, A.R.C.A.P., to reconsider en banc its
decision issued and filed in this case on February 26, 1987.
DATED this 20th day of March, 1987.
HARRISON & LERCH, P.C.
By:/s/ MARK I. HARRISON
MarRK I. HARRISON
DouGLas L. CHRISTIAN
1001 North Central Avenue
_ ee eee
53a
Suite 900
Phoenix, Arizona 85004
Attorneys for Defendant/Appellee
I. Introduction
The issues presented in this Motion for Reconsideration
should be viewed in the context of three circumstances
which must govern the Court’s disposition of the Motion.
First, appellee came into this Court legally entitled to
advance all available arguments in support of the Order
entered by the trial court granting a new trial. See cases
cited infra at 4.
Second, this Court decided, sua sponte, that Linthicum
v. Nationwide Life Insurance Co., 150 Ariz. 326, 723 P.2d
675 (1986) should not be applied ‘“‘retrospectively” to the
disposition of this appeal without affording appellee notice
or the opportunity to present argument that Linthicum
must, aS a matter of the Due Process Clause of the Four-
teenth Amendment of the United States Constitution, be
applied “‘retrospectively”’ to this case.
Third, appellee stands convicted of bad faith under a
sentence of $3,500,000 in punitive damages on the basis
of decision of this Court which post-date the underlying
facts of this case and which created rules of substantive
conduct of which appellee could not have been aware when
the conduct occurred. This combination of circumstances
has led this Court to reinstate a judgment which is vio-
lative of the Due Process Clause of the Fourteenth Amend-
ment and all other rights incorporated by that Clause,
including the Excessive Fines Clause of the Eighth Amend-
ment.
II. The Posture of This Case Before This Court.
Appellee successfully argued to the trial court its en-
titlement to a new trial based upon five separate grounds.
Thus, at that time the question whether appellee had raised
54a
any federal constitutional objections to the jury’s verdict
was irrelevant because a new trial was to be conducted
and all such objections could have been raised to any new
verdict against appellee. Indeed, at most what can be said
of appellee’s failure to present to the trial court its federal
constitutional challenges to the judgment is that appellee
did not advance arguments which the trial court would
not have decided in any event because of their gravity
and the lack of necessity for the trail court to decide them.
State v. Yslas, 139 Ariz. 60, 63, 676 P.2d 1118, 1121
(1984); Hare v. Superior Court of the State of Arizona, in
and for the County of Pima; 138 Ariz. 540, 548, 652 P.2d
1387, 1390 (1982); School District No. 26 (Bouse Elemen-
tary) of Yuma County v. Strohm, 106 Ariz. 7, 9, 469 P.2d
826, 828 (1970); County of Maricopa v. Anderson, 81 Ariz.
339, 341, 306 P.2d 268, 269 (1957).
On appeal to the Court of Appeals, the same result
obtains. If appellee had presented its federal constitutional
objections to the jury’s verdict there, that court would
presumably not have decided those objections in light of
its determination that the Order granting a new trial had
to stand as a matter of state law. Furthermore, appellee
was entitled in this Court to raise any and all available
arguments in support of the trial court’s Order so long as
it did not seek to expand its rights under that Order.
Madisons Chevrolet, Inc. v. Donald, 109 Ariz. 100, 505 P.2d
1039 (1973); Talley v. Paradise Memorial Gardens, Inc.,
107 Ariz. 585, 491 P.2d 439 (1971); Santanello v. Cooper,
106 Ariz. 262, 475 P.2d 246 (1970); Maricopa County v.
Corporation Commission of Arizona, 79 Ariz. 307, 289
P.2d 183 (1955); Rogers v. Mountain States Telephone &
Telegraph Co., 100 Ariz. 154, 412 P.2d 272 (1966); Mer-
ryweather v. Pendleton, 90 Ariz. 219, 367 P.2d 251 (1961);
Arizona Public Service Company v. Mountain States Tele-
phone and Telegraph Company, Inc., 149 Ariz. 239, 717
P.2d 918 (App. 1985); Lake Havasu Resort, Inc. v. Com-
mercial Loan Insurance Corporation, 139 Ariz. 369, 678
\
' — cect iii ctl
55a
P.2d 950 (App. 1983); Stiles v. Industrial Commission, 25
Ariz. App. 548, 545 P.2d 54 (1976); City of Kingman v.
Havatone, 14 Ariz. App. 585, 485 P.2d 574 (1971); Wagner
v. Coronet Hotel, Inc., 10 Ariz. App. 296, 458 P.2d 390
(1969); Aegerter v. Duncan, 7 Ariz. App. 239, 437 P.2d
991 (1968). Appellee was and is entitled to raise on direct
appeal and have decided its federal constitutional objec-
tions to the jury’s verdict if this Court’s decision is to
reinstate that verdict.
In addition, appellee could not have anticipated that this
Court would, inconsistently with the well-established pre-
sumption of retrospective application of its decisions, see,
e.g., Chevron Chemical Co. v. Superior Court, 131 Ariz.
431, 485, 641 P.2d 1275, 1279 (1982), decide, swa sponte
and without hearing any argument from appellee, not to
apply retrospectively its decision in Linthicum to this case.
This action by the Court is exacerbated becuase at the
same time the Court did apply retrospectively its decision
in Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986),
in order to justify the admission of blatantly prejudicial
testimony and thereby reverse the grant of appellee’s mo-
tion for a new trial.
The only interest present in this case which even re-
motely justifies this Court’s refusal to consider and decide
appellee’s federal objections to the jury’s verdict is the
interest of appellants in collecting the enormous windfall
represented by the $3,500,000 punitive damage award.
However, the State of Arizona has no interest in securing
to litigants the collection of palpably unconstitutional judg-
ments. Therefore, the decision of this Court must be re-
considered en banc and vacated and this case remanded
to the trial court for additional proceedings.
56a
IlI. The Failure of This Court To Apply Linthicum
“*Retrospectively’’ Violates Appellee’s Rights Un-
der the Due Process Clause of the Fourteenth
Amendment.
In Linthicum, after argument on the petition for review
which did not specifically raise the issue, this Court asked
the parties to address the standard of proof required to
justity an award of punitive damages. That suit had been
brought in 1982 based upon conduct of the defendant in-
surer alleged to have occurred in the summer of 1980 at
the earliest. On appeal to the Court of Appeals, the insurer
successfully challenged the sufficiency of the evidence to
sustain the award of punitive damages. This Court af-
firmed and, in doing so, announced that “the burden of
proof for punitive damages is by clear and convincing evi-
denee.”’ 150 Ariz. at 332, 723 P.2d at 681.
In the case at bar, appellee’s conduct alleged to have
been in bad faith occurred in December of 1979. The in-
sufficiency of the evidence to sustain the punitive damage
award was successfully urged in support of appellee’s post-
trial motions. Appellant subsequently brought this case to
this Court. In defense of the decision of the Court of Appeals,
under which appellee retained its right to a new trial,
appellee advanced, inter alia, the argument that the Due
Process Clause of the Fourteenth Amendment required
proof by ‘‘clear and convincing’ evidence in order to sus-
tain the punitive damage award. This argument was not
one which, if accepted by this Court, would have expanded
appellee’s rights under the decision of the Court of
Appeals, because under that decision appellee was entitled
to demand that the jury be instructed on the ‘clear and
convincing’ standard.!
Thus, and totally contrary to the result reached by this
Court in declining to consider appellee’s Due Process
‘As held by this Court in this case, Linthicum is to be applied to
ali trials held after September 15, 1986.
eS eT me
57a
Clause challenge, appellee had an absolute right under this
Court’s precedents to raise and have decided its Due Proc-
ess Clause , including its argument involving the standard
of proof required in order to impose punitive damages. At
the worst, appellee was situated no differently than the
defendant in Linthicum. Indeed, the operative facts and
trial of this case pre-dated the facts and trial in Linthicum;
further, these cases were argued to this Court on the same
day. Thus, it is somewhat facile to say that appellee’s
entitlement to the ruling in Linthicum required that de-
cision to be applied ‘‘retrospectively.”” This Court’s denial
to appellee of the rule laid down in Linthicum is violative
of the Fourteenth Amendment and necessitates a decision
by this Court of appellee’s Due Process Clause contentions.
This inexplicable departure from the Court’s historic
practice is not cured by its incorrect suggestion, slip op.
at 32-33, that the question of Linthicum’s retrospective
application is one of policy having no federal constitutional
dimension. Because punitive damages are imposed to fulfill
the same purposes as are punishments administered in
criminal proceedings—to punish and deter, retrospective
application of any decision recognizing any of the federal
constitutional rights asserted by appellee in its Supple-
mental Brief and again urged in this Motion for Recon-
sideration would be required under the Supreme Court’s
recent decision in Griffith v. Kentucky, 107 S. Ct. 708
(1987).?
2In declining to reach appellee’s federal constitutional challenges to
the jury’s verdict, the Court observed that it did so because, ‘‘This is
not a case involving denial of a fundamental right in a criminal trial
....” Slip op. at 28. But appellee argued in its Supplemental Brief
that it was and is constitutionally entitled to certain guarantees afforded
by the Federal Constitution to criminal defendants before punitive dam-
ages may be imposed, which include the right to various procedural
protections as well as the right to be free from the imposition of
excessive fines. If appellee’s federal constitutional challenges are well
taken, then this case does involve the same consideration that this
—--
58a
In Griffith, the Supreme Court squarely rejected the
proposition, implicit in the opinion of this Court in the
case at bar, that a decision which implicates federal con-
stitutional rights of citizens who are subjected to criminal
punishments and which constitutes a “‘clean break” with
precedent need not be applied retrospectively. This Court
cannot avoid the Griffith rule simply by adopting the ‘‘clear
and convincing” standard as a matter of state policy. If
the Court’s decision in Lithicum is constitutionally com-
pelled, that decision must be extended to this case.
The failure of this Court to apply Linthicum retrospec-
tively is especially troubling because, as discussed infra,
the Supreme Court has recently set for argument the ques-
tion whether excessive punitive damage awards are subject
to the constraints of, inter alia, the Due Process Clause
ex proprio vigore and as that clause incorporates the Eighth
Amentment. Under Griffith, appellee would be entitled to
the retrospective application of any such constitutional rule
in this case.
IV. Addition
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