Arizona Court of Appeals Division One Affirms Jury Verdict Against Insurer For Bad Faith Claims Adjustment, and Holds That Due Process Requires a 1:1 Ratio Among Punitive and Compensatory Damages In Particular Circumstances.

The Nardellis insured an automobile under a policy from MetLife.  Under the insurance policy, in the event of a loss, MetLife was required to pay the lesser of (1) the value of the vehicle at the time of the loss; or (2) the cost to repair the vehicle if it could be so repaired to its pre-loss condition.  After the Nardellis’ vehicle was stolen and discovered in Mexico, MetLife appraisers made the decision that the vehicle would not be totaled, but subsequently changed its position and sought to repair it even though the vehicle had suffered irreparable damage. The Nardellis brought an action for breach of the implied covenant of good faith and fair dealing.  After hearing evidence that MetLife had turned to their claims department to help meet a profit goal, the jury found in favor of the Nardellis, and awarded them $155,000 in compensatory damages and $55 million in punitive damages.  The trial court subsequently reduced the punitive award to $620,000 – a ratio of 4:1 to the compensatory damage figure.  The trial court also denied MetLife’s renewed motions for judgment as a matter of law on bad-faith liability and entitlement to punitive damages.

The appellate court held that substantial evidence supported the jury’s findings on both the bad-faith and punitive damages issues.  Specifically, the court held that MetLife’s decision to repair rather than total the vehicle, to send the Nardellis a check for an amount that did not cover the repair costs, and to not advise the Nardellis of policy provisions relevant to their claim supported the bad-faith finding.  The appellate court also held that the Nardellis were entitled to punitive damages because they had shown that MetLife adopted a business-wide approach to minimizing pay outs on claims, and had acted in accordance with this financial self-interest approach when it handled Nardellis’ claim.

The appellate court reduced the punitive damage award, however, holding that due process required a ratio of no more than 1:1 to the compensatory damages.  Applying the guideposts for determining the appropriate ratio, as pronounced by the U.S. Supreme Court in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003), the court held that because the compensatory damages were high relative to the actual damage, and because the degree of reprehensibility of MetLife’s conduct was not egregious, the 1:1 ratio was appropriate.

Judge Swann dissented because he did not believe sufficient evidence supported the award of punitive damages.    

Patricia K. Norris authored the opinion, Presiding Judge Brown concurred.