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Teague-Strebeck Motors Inc. v. Chrysler Insurance Co.3/8/1999
s against one's insurer is necessarily synonymous with conduct sufficient to support an award of punitive damages. With this we disagree. Rather, New Mexico and other jurisdictions require the presence of aggravated conduct beyond that necessary to establish the basic cause of action in order to impose punitive damages. We rely on Paiz v. State Farm Fire & Casualty Co., 118 N.M. 203, 210, 880 P.2d 300, 307 (1994), and Allsup's, 1999-NMSC- 006, 46, for our Conclusion. See generally Stephen S. Ashley, Bad Faith Actions § 8.06 (2d ed. 1997); John C. McCarthy, Recovery of Damages for Bad Faith §§ 1.60 (5th ed. 1990).
{79} Paiz was a first party insurance-bad-faith case. Plaintiffs in Paiz sued their insurer and insurance agent because the insurer denied a fire-loss claim. See 118 N.M. at 205, 880 P.2d at 302. The trial court directed a verdict against Plaintiffs on their bad faith tort- based claim. See id. at 206, 880 P.2d at 303. However, the case was submitted to the jury on several theories including breach of contract, negligent misrepresentation, negligent investigation and negligent delay in making payment. See id. at 205, 880 P.2d at 302. The trial court also submitted a punitive damages instruction against the insurer alone based on a theory of gross negligence. See id. The jury returned a verdict of $380,000 in compensatory damages and $485,000 in punitive damages. See id. at 206, 880 P.2d at 303. On appeal our Supreme Court re-examined the basis for punitive damages in breach-of-contract cases. The Supreme Court first acknowledged that it had previously applied a more relaxed standard for punitive damages in insurance-contract cases. See id. at 210-11, 880 P.2d at 307-08; see also Romero v. Mervyn's, 109 N.M. 249, 255 n.3, 784 P.2d 992, 998 n.3 (1989) ("We have allowed the award of punitive damages in insurance cases under a more relaxed standard in part because of the fiduciary obligations inhering in insurance relationships and because of concerns arising from the bargaining position typically occupied by the insured and insurer."). The court then held:
"However, to reaffirm that this Court has not lost sight of the limited purpose of punitive damages--to punish and deter persons from conduct manifesting a "culpable mental state"--we now disavow the proposition that in a contract case, including one involving an insurance contract, punitive damages may be predicated solely on gross negligence. In addition to, or in lieu of, such negligence there must be evidence of an "evil motive" or a "culpable mental state."
A mental state sufficient to support an award of punitive damages will exist when the defendant acts with "reckless disregard" for the rights of the plaintiff--i.e., when the defendant knows of potential harm to the interests of the plaintiff but nonetheless "utterly fail to exercise care" to avoid the harm." 118 N.M. at 211, 880 P.2d at 308 (citation absent from original) (alteration in original).
Paiz thus brought the standard for awarding punitive damages in contract-based insurance-bad-faith cases into line with other contract cases. Cf. Eckhardt v. Charter Hospital, 1998-NMCA- 017, 57, 124 N.M. 549, 953 P.2d 722 (applying the same standard and rationale to punitive damages in tort cases).
{80} We note that in Paiz the Supreme Court cited with approval Linthicum v. Nationwide Life Insurance Co., 723 P.2d 675 (Ariz. 1986) (in banc). See 118 N.M. at 211, 880 P.2d at 308. Linthicum was an insurance-bad-faith and breach-of-contract case in which compensatory and punitive damages had been awarded against the insurer. The Arizona Court of Appeals affirmed the compensatory award but reversed
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