5.3 Punitive Damages

• Jurisdiction: Arizona

In 1986 the court changed the judicial standard under which it would consider imposition of punitive damages. In Linthicum v. Nationwide Insurance Co.,^[234] the court recognized that in order to recover punitive damages, evidence of something more than the prima facie case had to be presented to establish the tort of bad faith. The court stated:

The wrongdoer must be consciously aware of the wrongfulness or harmfulness of his conduct and yet continue to act in the same manner in deliberate contravention to the rights of the victim. [Citation omitted.] It is only when the wrongdoer should be consciously aware of the evil of his actions, of the spitefulness of his motives or that his conduct is so outrageous, oppressive or intolerable in that it creates a substantial risk of tremendous harm to others that the evil mind required for the imposition of punitive damages may be found.^[235]

The court in Linthicum adopted a clear and convincing evidence standard for the imposition of punitive damages.

In similar pronouncements the supreme court has reinforced the high standard of proof required to establish a claim for punitive damages in insurance bad faith cases. For example, the court noted that punitive damages are not appropriate even when the court has determined that the insurance company was "bungling and negligent, and should have investigated [the claim] further."^[236] In a second opinion issued along with the Linthicum decision, the supreme court in Apodaca^[237] observed that "[i]ndifference to facts or failure to investigate are sufficient to establish the tort of bad faith but may not rise to the level required by the punitive damage rule." The court in Apodaca stated, "Such damages are recoverable in bad faith tort actions when, and only when, the facts establish that defendant's conduct was aggravated, outrageous, malicious or fraudulent."^[238] In 1987, the court in Filasky v. Preferred Risk Mutual Insurance Co.^[239] also acknowledged that "evidence of 'something more' than indifference to facts and failure to properly and timely investigate an insurance claim must exist before the trial court can instruct the jury on punitive damages."

An award of punitive damages in the bad faith context "requires more than the reckless disregard of the insured's interests than is needed to support the bad faith claim."^[240] Proof that an insurance company's employees were "untrained or inexperienced, and careless" is not sufficient to establish punitive damages.^[241] Punitive damages are inappropriate even when the court has determined that the insurance company was in fact "bungling and negligent" and should have investigated the claim further.^[242]

The difficulty in sustaining a punitive damage verdict in insurance bad faith cases is exemplified by the facts presented to the court in Filasky. In Filasky, the supreme court reversed the jury's verdict on punitive damages, holding that the trial court erred in submitting the issue to the jury on insufficient evidence. In viewing the evidence before it, the court in Filasky concluded that the evidence suggested that the insurance company's lengthy delays in settling each of Filasky's three claims resulted from Preferred Risk taking a "groundless position or failing to adequately investigate its position," and that the settlements reached with the insured were the product of "dilatory" conduct.^[243] The court in Filasky then found that the evidence to support the punitive damage claim, even under a "preponderance" standard, was "slight and inconclusive at best."^[244]

Recently, punitive damage awards have come under strict judicial scrutiny. Some scholars have opined that punitive damages are awarded more frequently, they are unpredictable, and not in proportion to compensatory damages.^[245] In an effort to make judicial review of punitive damages awards more consistent, the United States Supreme Court established three guidelines in BMW of North America, Inc. v. Gore.^[246] The Court held that all reviewing courts should use the following factors when determining whether the defendant received adequate notice of the proposed punishment.^[247] These include: (1) the degree of reprehensibility; (2) the disparity between the harm or potential harm suffered and the punitive damages; and (3) the difference between this remedy and any other criminal penalties that are applicable.^[248]

In an attempt to further clarify the guideposts identified in Gore, the United States Supreme Court, in State Farm Mutual Automobile Insurance Co. v. Campbell^[249] announced two important concepts in punitive damages: (1) a constrained view of the type of...