City of Hobbs v. Hartford Fire ( 1998 )


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  •                                                                              F I L E D
                                                                          United States Court of Appeals
                                                                                  Tenth Circuit
                                           PUBLISH
                                                                                  NOV 9 1998
                         UNITED STATES COURT OF APPEALS
                                                                              PATRICK FISHER
                                                                                      Clerk
                                      TENTH CIRCUIT
    
    
    
     CITY OF HOBBS,
    
           Plaintiff-Appellant,
    
     v.
    
     HARTFORD FIRE INSURANCE
     COMPANY,                                                   No. 96-2212
    
           Defendant,
    
     and
    
     NUTMEG INSURANCE COMPANY,
    
           Defendant-Appellee.
    
    
               APPEAL FROM THE UNITED STATES DISTRICT COURT
                      FOR THE DISTRICT OF NEW MEXICO
                          (D.C. No. CIV-95-79-PJK/MV)
    
    
    K. Stephen Royce, Albuquerque, New Mexico (Eric Scott Jeffries of Jeffries & Rugge, P.C.,
    Albuquerque, New Mexico, with him on the brief), for Plaintiff-Appellant.
    
    William P. Gralow of Civerolo, Gralow & Hill, Albuquerque, New Mexico (Jennifer L.
    Weed with him on the brief), for Defendants-Appellees.
    
    
    Before PORFILIO, HOLLOWAY, and EBEL, Circuit Judges.
    
    
    HOLLOWAY, Circuit Judge.
           Plaintiff-Appellant City of Hobbs sued Nutmeg Insurance Company (Nutmeg) in
    
    New Mexico state court alleging bad faith, breach of contract, and unfair claims practices in
    
    defense of a federal court damage claim brought earlier under 42 U.S.C. § 1983 and a
    
    supplemental wrongful death claim against Hobbs and Officer Harrison of the Hobbs police
    
    force. Nutmeg removed the state court action for bad faith and related claims to the United
    
    States District Court for the District of New Mexico on diversity grounds.
    
           Following discovery, the federal district court granted Nutmeg’s motion for summary
    
    judgment as to the breach of contract and unfair claims practices claims but ordered the bad
    
    faith claim to go to trial. After the close of all of the evidence, the district court granted
    
    Nutmeg’s motion pursuant to Rule 50 of the Federal Rules of Civil Procedure for judgment
    
    as a matter of law on the bad faith cause of action.1 Hobbs appeals the district court’s ruling
    
    on the Rule 50 motion and the judgment entered pursuant to that ruling. Hobbs also asserts
    
    error below in rejecting opinion testimony by a Hobbs’ expert on Nutmeg’s handling of the
    
    § 1983 and wrongful death claims and its failure to settle the claims and protect Hobbs from
    
    
    
           1
            Rule 50 provides:
    
                   (a)(1) If during a trial by jury a party has been fully heard on an issue
           and there is no legally sufficient evidentiary basis for a reasonable jury to find
           for that party on that issue, the court may determine the issue against that party
           and may grant a motion for judgment as a matter of law against that party with
           respect to a claim or defense that cannot under controlling law be maintained
           or defeated without a favorable finding on the issue.
    
    Fed. R. Civ. P. 50.
    
                                                  -2-
    a large verdict rendered in excess of Nutmeg’s liability coverage.
    
                                                   I
    
                                                   A
    
                     The Civil Rights and Supplemental Claims Litigation
    
           This case has its roots in the tragic shooting death of 21-year-old Jorge Perez. On
    
    December 25, 1991, police officers of the City of Hobbs, New Mexico, responded to a report
    
    of a domestic disturbance at the home of Mrs. Nieto, Perez’ mother-in-law. Upon arriving
    
    at the scene, officers Ben Harrison and Jim Bob Hardy encountered Mr. Perez. Mr. Perez
    
    held what was later determined to be a “2x4” piece of lumber, some ten feet four inches in
    
    length. III App. at 623. Mr. Perez advanced on the officers and yelled obscenities at them.
    
    III App. at 734. Officer Harrison aimed his service weapon at Mr. Perez, firing twice and
    
    hitting Mr. Perez once in the chest. Mr. Perez died shortly thereafter. He was survived by
    
    his 19-year-old wife and three-year-old son.
    
           The City of Hobbs carried liability insurance with Nutmeg that was effective the day
    
    of the shooting. I App. Ex. 1. The policy contained a $300,000 limit for claims arising under
    
    New Mexico law and a $1,000,000 limit for claims arising under law other than that of
    
    New Mexico. Id. at 37. As a condition of the insurance policy, Nutmeg had the right and
    
    duty to defend any claim or suit seeking damages covered by the policy and the discretion
    
    to investigate any occurrence and settle any claim. Id. City of Hobbs officials immediately
    
    notified Nutmeg of the shooting. I App. Ex. 4.
    
    
                                                -3-
           Michael Tompkins (Tompkins), an adjuster for Nutmeg, was assigned to the Perez
    
    matter. Tompkins asked a lawyer, R.E. Richards, to defend Officer Harrison and the City
    
    against the Perez Estate claim and to lead the investigation. I App. Ex. 9; I App. Ex. 5.
    
    Richards in turn relied on the Hobbs Police Department to conduct an investigation. III App.
    
    at 777. The police department began investigating the claim, including having a diagram on
    
    the incident scene prepared. Mr. Richards also retained an expert witness on civil rights
    
    actions under § 1983 for the City, Dr. Parsons, who later made a report saying that Officer
    
    Harrison’s use of force was according to his training. III App. at 793.
    
           A few days after the shooting Mrs. Perez hired Brad Hall, an Albuquerque attorney
    
    who had previously handled excessive force cases. Mr. Hall filed suit on January 23, 1992,
    
    on behalf of the Perez Estate and Mr. Perez’s young son in the United States District Court
    
    for the District of New Mexico against the City of Hobbs, Marshall Newman individually
    
    and in his official capacity as Chief of Police, Officer Harrison individually and in his official
    
    capacity as a Hobbs police officer, and John Does 1-8, Supervisors and Trainers of Harrison,
    
    alleging claims for damages pursuant to 42 U.S.C. § 1983 and damage claims for assault,
    
    battery, wrongful death, negligent training, and negligent infliction of emotional distress
    
    pursuant to New Mexico law as supplemental jurisdiction claims. I App. Ex. 7. The district
    
    court had jurisdiction of the § 1983 claims pursuant to 28 U.S.C. §§ 1331 and 1343(a) and
    
    supplemental jurisdiction over the state law claims pursuant to 28 U.S.C. § 1367(a). A first
    
    amended complaint filed for the Perez Estate named only Officer Harrison individually and
    
    
                                                   -4-
    in his official capacity as a Hobbs police officer. I App. Ex. 18.
    
           This civil rights and supplemental claims litigation later fomented the instant bad faith
    
    claim litigation by the City of Hobbs against Nutmeg, its liability insurer. This bad faith
    
    controversy arose because of a large liability the City of Hobbs had to bear by payment of
    
    some $1,700,000 above its insurance coverage to settle liability on a $3,335,000 judgment
    
    recovered by the Perez Estate in the underlying § 1983 and wrongful death case. The bad
    
    faith complaint was filed in a New Mexico District Court and was removed to the federal
    
    court below on diversity grounds on January 24, 1995. I App. at 1. The instant appeal is
    
    from a judgment entered August 2, 1996, for the defendant insurers after the trial judge
    
    sustained a Rule 50 motion in the federal bad faith claim trial. The trial below on that claim
    
    produced our record that contains considerable evidence on events surrounding the earlier
    
    trial in the underlying § 1983 and wrongful death litigation. While we necessarily will be
    
    discussing evidence introduced in that underlying § 1983 and wrongful death trial, this is
    
    evidence that was admitted at the bad faith trial itself.
    
           We turn now to the bad faith claim trial and to consideration whether the trial judge
    
    correctly took the case away from the jury after the bad faith trial evidence was completed.
    
                                                   B
    
                                    The Bad Faith Trial Record
    
           The Perez Estate’s attorney, Brad Hall, employed Rocky Stone, a scene reconstruction
    
    witness, who developed a diagram that contradicted the City of Hobbs police department
    
    
                                                  -5-
    measurements. III App. at 640-41; IV App. at 936-37. Mr. Hall testified that Mr. Stone’s
    
    reconstruction also conflicted with Hobbs’ police department accounts, including Officer
    
    Harrison’s statements. III App. at 625. Officer Harrison presented problems for the City and
    
    for Nutmeg. He contradicted himself regarding the Perez shooting. On one occasion, he
    
    stated that Perez carried the wood board over his right shoulder. In the next statement he said
    
    the board was over Mr. Perez’s left shoulder. Moreover, Mr. Hall brought former police
    
    officers to the shooting scene and they concluded that Officer Harrison’s actions resulted in
    
    a “bad shooting.” III App. at 626-27.
    
           Internally, some senior staff members at Nutmeg expressed some concerns about the
    
    Perez case. Ron Kubas, a senior claims adjuster for ITT Hartford, the parent company of
    
    Nutmeg, stated: “Given that there were two officers involved in this investigation, you would
    
    think that they should have been able to subdue this individual without requiring the firing
    
    of a gun . . . .” I App. Ex. 8, p. 1. Defense counsel expressed his view that “a ‘runaway jury’
    
    could really tag us, although [he did] not think this will be a ‘runaway jury.’” I App. Ex. 26,
    
    p. 4. The record indicates that Nutmeg’s concerns were passed along to City of Hobbs
    
    officials. II App. at 392, 395-96; I App. Ex. 2, p. 73. However, there is evidence that
    
    despite weaknesses, Nutmeg’s defense counsel Richards and the defense expert witness
    
    viewed the Perez Estate claim as defensible. III App. at 793; IV App. at 951; I App. Ex. 20,
    
    p. 2; Ex. 21, p. 10.
    
           Prior to trial, defense counsel informed City of Hobbs officials that a comparative
    
    
                                                 -6-
    negligence defense would substantially mitigate what damages the city would have to pay
    
    if a jury found in favor of the Perez Estate. II App. at 382, 560; I App. Ex. 2, p. 65. Defense
    
    counsel made these assertions despite adjuster Tompkins’ knowledge that a comparative fault
    
    defense was not available for the § 1983 claim. IV App. at 893-96. City officials were not
    
    informed until trial that the comparative negligence defense was not applicable to either
    
    Perez’s § 1983 cause of action or the supplemental wrongful death cause of action. II App.
    
    at 438; III App. at 575.       Earlier defense counsel and adjuster Tompkins discussed
    
    comparative fault and its potential effect of reducing an adverse jury verdict. III App. at 799;
    
    IV App. at 893 (discussion among Tompkins and City of Hobbs representatives Gallagher
    
    and Thomas).
    
             During preparation for the § 1983 and wrongful death suit, Hall hired an economist,
    
    Brian McDonald, to prepare an estimate of economic and money loss caused by Mr. Perez’s
    
    death.       McDonald concluded earnings loss and loss of household services to be
    
    approximately $825,000. I App. Ex. 17. Tompkins testified that he saw from the report that
    
    McDonald had submitted a government report that OSHA had come up with figures of
    
    between $1,000,000 and $4,000,000 for loss of enjoyment of life. III App. 790-91. This
    
    injury was referred to as supporting hedonic damages.2 Exhibit 17 is an August 13, 1992,
    
    
    
    
             The term “hedonic” has been defined as “of, pertaining to, or characterized by
             2
    
    pleasure.” Webster’s II New Riverside Univ. Dictionary 572 (1984). Hedonic damages
    covers the loss of the value of life itself. See Bell v. City of Milwaukee, 
    746 F.2d 1205
    , 1236
    (7th Cir. 1984).
    
                                                  -7-
    letter from Hall to Mr. Richards, the attorney for Hobbs, which forwarded the McDonald
    
    damages estimate and concluded: “However, I am as always willing to discuss any
    
    reasonable resolution of a lawsuit.” Id. Defense counsel Richards forwarded Hall’s letter
    
    and the McDonald report to Nutmeg and the City of Hobbs. I App. Ex. 17.1. Defense
    
    counsel dismissed the report as “bullshit,” II App. at 402, because Dr. McDonald’s
    
    conclusions were felt by counsel to be inflated. III App. at 791. Neither Tompkins nor any
    
    other agent at Nutmeg conducted an independent appraisal of Perez’s lost earnings,
    
    household services or hedonic damages. III App. at 791; IV App at 866-67. Risk Manager
    
    Thomas of the City of Hobbs testified that there were no discussions by him with Adjuster
    
    Tompkins about Dr. McDonald’s evaluation of economic damages or the larger damages
    
    item for loss of enjoyment of life. III App. at 572-73. Thomas also said he did not discuss
    
    the $1,000,000 to $4,000,000 item on hedonic damages in the McDonald report with defense
    
    attorney Richards. Id.
    
           Two weeks before the trial in Roswell, New Mexico, Nutmeg offered the Perez family
    
    $50,000 to settle the case. III App. at 651. The Nutmeg adjuster Tompkins and Nancy
    
    Downing, a Nutmeg claims representative, were concerned that “the police officer was
    
    Caucasian and the victim was Hispanic; that it had happened on Christmas day; that the
    
    police department is sometimes a target defendant and we need to take a look at those type
    
    of things; that a fatality claim is a concern that we should talk about.” III App. at 785-86.
    
    The Estate’s attorney, Hall, rejected the $50,000 offer as unreasonable. III App. at 651. Hall
    
    
                                                 -8-
    had informed defense counsel that excessive force cases in Albuquerque tended to settle for
    
    between $250,000 and $400,000 but that the Perez case was stronger than usual. III App. at
    
    643, 653. Shortly before trial, on November 20, 1993, Hall sent a letter to defense counsel
    
    Richards that stated he would recommend his client accept any offer above $600,000. The
    
    letter read:
    
                  As you recall, I told the Court in the Pre-Trial Conference that I could
           send a demand in this case. My recollection is that you informed me early on
           after meetings with Judge McCoy that not much money is available, if any, and
           certainly nothing like the City of Albuquerque pays in police shooting cases
           ($250,000-$400,000). I believe this case is worth significantly more. The
           damages testimony will center around three to three point five million.
           However, I obviously would have to recommend to my client that she accept
           any offers over $600,000.
    
    II App. Ex. 28.1 (emphasis added). Hall himself referred to the letter as an offer. I App. at
    
    87. Moreover, the addressee, Richards, defense counsel for the City of Hobbs, also referred
    
    to the letter as an offer. Richards forwarded Hall’s letter of November 20, 1993, to Nutmeg’s
    
    adjuster Tompkins, saying in part: “I enclose offer of settlement dated November 20, 1993
    
    from Brad Hall.” II App. Ex. 28 (emphasis added).
    
           Settlement negotiations did not proceed because Nutmeg valued the Perez Estate
    
    claim at less than six figures. III App. at 790. Hobbs officials did not express interest in
    
    settling the Perez Estate claim for a substantial amount of money. III App. 785-86, 799-800.
    
    The City of Hobbs officials were concerned that a settlement, in light of Nutmeg’s assurances
    
    that the Perez claim was defensible, would upset the morale of the city police department.
    
    Nutmeg based its decision to litigate in part on the City of Hobbs’ reluctance to settle. III
    
                                                -9-
    App. at 799-800.
    
           A five-day trial of the § 1983 and wrongful death claims commenced on
    
    December 13, 1993. The Perez Estate was able to introduce their expert Stone’s opinion
    
    testimony in making its case. Nutmeg agents themselves felt that Stone testified well at trial.
    
    I App. Ex 3, p. 14. On December 17, 1993, the jury returned a verdict in favor of the Perez
    
    Estate for $3,335,000. This verdict was within the range that McDonald’s report presented
    
    for the Estate. IV App. at 973. Richards, defense counsel at the underlying § 1983 and
    
    wrongful death trial, testified at the bad faith claim trial that the large verdict for the Perez
    
    Estate was a complete surprise to him. IV App. at 952. The parties reached a settlement of
    
    the appeal of the case for $2,700,000. II App. Ex. 32. Nutmeg paid the Perez Estate
    
    $1,000,000, its full coverage; the City of Hobbs paid the estate $1,700,000.
    
           Following the underlying § 1983 and wrongful death claim trial, the City of Hobbs
    
    filed suit on January 24, 1995, in New Mexico state court against Nutmeg for bad faith,
    
    breach of contract and unfair trade claims practice. Nutmeg removed the case to the
    
    New Mexico federal court on diversity grounds. Nutmeg moved for summary judgment as
    
    to all of Hobbs’ claims against it. The district court granted Nutmeg summary judgment on
    
    the breach of contract and unfair trade claims practice claims but denied summary judgment
    
    on the bad faith claim. IV App. at 1068.
    
           Trial began on July 30, 1996 on the bad faith claim. Hobbs called Keith Charleston
    
    as an expert in insurance claims handling practice to provide an expert opinion on Nutmeg’s
    
    
                                                  -10-
    handling of the Perez Estate’s claim. Nutmeg objected to Charleston’s testimony pursuant
    
    to Rule 702 of the Federal Rules of Evidence. The trial judge sustained the objection,
    
    concluding that Charleston lacked specific knowledge as to insurance claims handling
    
    practice in New Mexico. III App. at 694. An offer of proof of Charleston’s testimony was
    
    made, which was rejected.
    
           On completion of the City of Hobbs’ case, Nutmeg moved for judgment as a matter
    
    of law pursuant to Fed. R. Civ. P. 50. III App. at 708. The district court denied that motion.
    
    Nutmeg then presented its own case and on resting, renewed its Rule 50 motion. The district
    
    court then granted the motion concluding, inter alia, that the City of Hobbs failed to show
    
    that Nutmeg placed its interests above the interests of the City of Hobbs, IV App. at 1045-46;
    
    II App. at 311, and entered judgment for Nutmeg and Hartford. The instant appeal followed.
    
                                                  II
    
                  The Appeal from Judgment for the Insurers Under Rule 50
    
                                                  A
    
                     Governing Federal and New Mexico Legal Principles
    
           The City of Hobbs raises two issues on appeal. First, it argues that the district court
    
    erred in granting Nutmeg’s motion for judgment as a matter of law, taking the case away
    
    from the jury, because Hobbs presented sufficient evidence that could reasonably support a
    
    jury determination that Nutmeg acted in bad faith by failing to settle with the Perez Estate
    
    within the $1,000,000 coverage that the City of Hobbs had, leaving the City exposed to a
    
    
                                                -11-
    large excess verdict like that which resulted. Second, Hobbs contends that the district court
    
    abused its discretion in sustaining Nutmeg’s objection to testimony by Hobbs’ insurance
    
    claims expert Charleston, who was qualified as an expert and who offered an opinion that
    
    would have been helpful to the jury.
    
           We review the grant of a motion for judgment as a matter of law de novo, see Doan
    
    v. Seagate Tech., Inc., 
    82 F.3d 974
    , 976 (10th Cir. 1996), applying the same standard as the
    
    district court. See also Harold Stores, Inc. v. Dillard Dep’t Stores, Inc., 
    82 F.3d 1533
    , 1546
    
    (10th Cir. 1996), cert. denied, 
    117 S. Ct. 297
     (1996). In diversity cases, the substantive law
    
    of the forum state generally governs our analysis of the underlying claims, but “[t]he
    
    appropriateness of a Rule 50 judgment as a matter of law is a federal procedural question.”
    
    Lyon Dev. Co. v. Business Men’s Assurance Co., 
    76 F.3d 1118
    , 1121-22 (10th Cir. 1996).
    
           The City of Hobbs contends that the district court erred in granting Nutmeg’s motion
    
    for judgment as a matter of law because the City offered testimony and documentary
    
    evidence that gave rise to inferences sufficient to support a jury verdict in its favor that
    
    Nutmeg acted in bad faith in failing to settle with the Perez Estate within the $1,000,000
    
    policy coverage. Judgment as a matter of law is appropriate only where, with all reasonable
    
    inferences from the evidence drawn in the nonmovant’s favor, a jury verdict for the
    
    nonmovant would be improper. Thompson v. State Farm Fire & Cas. Co., 
    34 F.3d 932
    , 941
    
    (10th Cir. 1994). If we determine that the record could reasonably support a jury verdict in
    
    favor of the City of Hobbs, we must reverse the district court’s ruling and judgment.
    
    
                                                -12-
           Before we can decide whether the district court erred in granting Nutmeg’s Rule 50
    
    motion, we must first look to the law of the forum state for guidance on the City of Hobbs’
    
    substantive claim. Under New Mexico law, an insured has a cause of action against its
    
    insurer for bad faith for failing to settle where its insurer breaches an “implied covenant of
    
    good faith and fair dealing that the insurer will not injure its policyholder’s right to receive
    
    the full benefits of the contract.” Dairyland Ins. Co. v. Herman, 
    954 P.2d 56
    , 60 (N.M.
    
    1997). New Mexico does not adhere to a single definition of bad faith in the context of
    
    insurance matters. Ambassador Ins. Co. v. St. Paul Fire & Marine Ins. Co., 
    690 P.2d 1022
    ,
    
    1025 (N.M. 1984). The key principle underlying the covenant of good faith in an insurance
    
    contract is that the insurer treat the interests of the insured equally to its own interests. See
    
    Dairyland, 954 P.2d at 61. Thus an insurance company acts in bad faith when it places its
    
    own interests ahead of the interests of the insured.        Id.; see also N.M. Uniform Jury
    
    Instruction 13-1704.3
    
    
           3
            Jury Instruction 13-1704 is entitled “Bad faith failure to settle,” and it provides:
    
                   A liability insurance company has a duty to timely investigate and fairly
           evaluate the claim against its insured, and to accept reasonable settlement
           offers within policy limits.
                   An insurance company’s failure to conduct a competent investigation
           of the claim and to honestly balance its own interests and the interests of the
           insured in rejecting a settlement offer within policy limits is bad faith. If the
           company gives equal consideration to its own interests and the interests of the
           insured and based on honest judgment and adequate information does not settle
           the claim and proceeds to trial, it has acted in good faith.
    
           The New Mexico Supreme Court has provided in its orders on “Uniform Jury
    
                                                  -13-
            The crux of City of Hobbs’ complaint is that Nutmeg acted in bad faith by failing to
    
    settle with the Perez Estate within the limits of the $1,000,000 coverage. City of Hobbs
    
    argues that bad faith is evidenced by Nutmeg’s failure to adequately investigate and evaluate
    
    the Perez Estate’s claim, failure to reasonably consider Hall’s discussion of a settlement
    
    recommendation at $600,000, or pursue settlement negotiations, and failure to adequately
    
    inform City of Hobbs on the prospects of a jury verdict in excess of the $1,000,000 policy
    
    limits. The City also claims there was error in rejecting its expert’s testimony on insurance
    
    claims handling.
    
            Nutmeg responds that the City failed to present “clear and convincing evidence” to
    
    support its bad faith claim; that the trial judge found no evidence indicating that “anyone
    
    from the insurance side . . . disregarded the interest of the insured in deciding to try the case”;
    
    and that there was a lack of evidence that Nutmeg preferred its own interest to that of the
    
    City.
    
            Two New Mexico cases and New Mexico Uniform Jury Instruction 13-1704 are
    
    instructive. In Dairyland Ins. Co., the New Mexico Supreme Court responded to a question
    
    certified to it by our court, which is set out in the footnote below.4 The New Mexico Court
    
    
    Instructions - Civil” at vi that the above instruction was approved July 17, 1991. The Court’s
    rules further provide in their preface that “the trial judge shall instruct the jury in the
    language of the Uniform Jury Instructions . . . .”
    
            The certified question read:
            4
    
    
    
                    Does an insurer satisfy its duty to treat its interests and the interests of
            its insured equally, as a matter of law, when it requires a release of all claims,
    
                                                   -14-
    responded “No” to that question. In discussing the issues, the New Mexico Court said that
    
    the plaintiff husband had presented sufficient evidence to defeat a motion for summary
    
    judgment against the husband’s bad faith counterclaim. Dairyland, 954 P.2d at 65. The
    
    Court stated that:
    
             We conclude that when there is a substantial likelihood of recovery in excess
             of limits, an insurer’s unwarranted refusal to settle is a breach of the implied
             covenant of good faith and fair dealing.
    
    Dairyland, 954 P.2d at 61. The New Mexico Court further held that under its insurance
    
    decisions, conflicting interpretations of the facts on the bad faith issue should be resolved at
    
    trial:
    
             It is possible to interpret the events in this case as Herman would,
             characterizing Dairyland’s conduct as a complete disregard for the interests of
             its insured. . . . On the other hand, Dairyland’s conduct may be interpreted as
             a good-faith effort to protect its insured. Since the parties urge conflicting
             interpretations of the facts, the question of whether Dairyland acted in bad
             faith should be resolved at trial.
    
    Id., 954 P.2d at 65. In Dairyland, the New Mexico Court further noted an insurer’s good
    
    faith evaluation of costs and benefits of settlement is generally accorded deference, 954 P.2d
    
    at 61, adding that “[h]owever, judicial deference lessens whenever there is a substantial
    
    likelihood of a recovery that exceeds policy limits.” Id.
    
             In Ambassador Ins. Co., 
    690 P.2d 1022
    , the New Mexico Court addressed similar
    
    
    
             including subrogation claims, against its insured as a condition precedent to a
             policy limits settlement when there is a substantial likelihood of recovery in
             excess of policy limits?
    
    
                                                  -15-
    questions. It held that there is no cause of action in New Mexico for negligent failure to
    
    settle, but there can be liability for bad faith failure to settle. The Court said that such bad
    
    faith conduct for failing to settle within policy limits must be of an arbitrary and reprehensive
    
    nature, but it approved instructions as a whole that included a charge that
    
           an insurer cannot be partial to its own interests, but must give its interests and
           the interests of its insured equal consideration. . . . The failure of an insurance
           company to fairly balance those interests can constitute bad faith.
    
    690 P.2d at 1025-26 (emphasis added).
    
           The district judge below stated from the bench the reasons why Nutmeg was entitled
    
    to judgment as a matter of law. IV App. at 1044-49. In essence, the trial judge stated two
    
    grounds for granting the Rule 50 motion. First, under Ambassador Ins. Co., the City of
    
    Hobbs could not recover for Nutmeg’s negligent failure to settle and that the City had not
    
    provided evidence sufficient to show that Nutmeg disregarded the interests of its insured in
    
    deciding to try the Perez case. Id. at 1046. Second, the district court emphasized that the
    
    case was tried as a bad faith failure to settle claim but that the Perez Estate never made an
    
    offer of settlement or an unconditional demand. Id. at 1045, 1047-48. We disagree, being
    
    persuaded that the New Mexico courts would not follow the restrictive view that the absence
    
    of a firm offer to the insurer forecloses the possibility of a claim of bad faith failure to settle.
    
           In Dairyland, 954 P.2d at 61, the New Mexico Court stated that when a claimant
    
    makes a firm reasonable offer to settle within policy limits, the implied duty of good faith
    
    and fair dealing may require the insurer to settle. However, Dairyland does not analyze the
    
    
                                                   -16-
    insurer’s duty in circumstances where a firm offer is not made or set any parameters
    
    prohibiting recovery for a bad faith failure to settle in other circumstances where a firm offer
    
    to the insurer has not been made. We turn now to cases that do address that situation.
    
           First, our court in Coleman v. Holecek, 
    542 F.2d 532
     (10th Cir. 1976), a Kansas law
    
    insurance controversy presented the question whether a liability in excess of coverage should
    
    be imposed on the insurer where it had been found in bad faith in failing to defend a suit
    
    against its insured. The insurer argued that since the claimant had never made a settlement
    
    offer, its liability is limited to that which it faced had it defended the personal injury suit and
    
    lost (the policy limits). Id. at 536. We looked to analogous Kansas law involving a bad faith
    
    refusal to settle and noted that excess liability of the insurer arises under Kansas cases not
    
    only where there is a bad faith refusal to accept a settlement offer made to the insurer by the
    
    claimant, but also where the insurer fails to initiate settlement negotiations; the duty to
    
    consider the insured’s interest arises because of a claim for damages in excess of the policy
    
    limits, not because a settlement offer had been made. Id. at 537. Applying these principles,
    
    our Coleman opinion held the insurer subject to excess liability above the policy limits
    
    because of bad faith by the insurer in withdrawing from defense of the case and from
    
    embryonic settlement negotiations, and that the duty to settle did not hinge on the existence
    
    of an offer from the plaintiff. Id. at 537. See also Farmers Ins. Exchange v. Schrapp, 
    567 P.2d 1359
    , 1366 (Kan. 1977) (noting our Coleman opinion and citing its statement that the
    
    duty to settle does not hinge on the existence of a settlement offer from the plaintiff).
    
    
                                                   -17-
           We note that there are numerous jurisdictions which likewise reject limitation of the
    
    insurer’s duty of good faith in settlement to cases where a settlement offer has been made.
    
    See Maine Bonding & Cas. Co. v. Centennial Ins. Co., 
    693 P.2d 1296
    , 1299 (Ore. 1985)
    
    (under Oregon law, insurer’s duty “may require that an insurer make inquiries to determine
    
    if settlement is possible within the policy limitations.”); Rova Farms Resort, Inc. v. Investors
    
    Ins. Co. of America, 
    323 A.2d 495
    , 506-07 (N.J. 1974) (insurer, having restricted negotiating
    
    power of insured, has positive fiduciary duty to take the initiative and attempt to negotiate
    
    a settlement within the policy coverage); State Auto Ins. Co. v. Rowland, 
    427 S.W.2d 30
    ,
    
    32-34 (Tenn. 1968) (“to hold as a matter of law that an [insurer] cannot be guilty of bad faith
    
    unless it received an offer . . . within the policy limits could most certainly lead to inequitable
    
    results.”); Fulton v. Woodford, 
    545 P.2d 979
    , 984 (Ariz. 1976); Alt v. American Family Mut.
    
    Ins. Co., 
    237 N.W.2d 706
    , 710-11 (Wis. 1976); Hartford Ins. Co. v. Methodist Hospital, 
    785 F. Supp. 38
    , 40 (E.D.N.Y. 1992) (New York law). But see Commercial Union Ins. Co. v.
    
    Mission Ins. Co., 
    835 F.2d 587
    , 588 (5th Cir. 1988) (Louisiana law); Seward v. State Farm
    
    Mut. Auto. Ins. Co., 
    392 F.2d 723
    , 727-28 (5th Cir. 1968) (applying Florida law but
    
    questioning the logic of Florida’s rule); Ranger Ins. Co. v. Home Indem. Co., 
    741 F. Supp. 716
    , 718 (N.D. Ill. 1990) (Illinois law); American Physicians Ins. Exchange v. Garcia, 
    876 S.W.2d 842
    , 850 n.17-18 (Tex. 1994).
    
           Good faith in New Mexico imposes “upon the insurer the duty to settle whenever
    
    practicable.” Dairyland, 954 P.2d at 61. We believe that New Mexico would not limit this
    
    
                                                   -18-
    duty to cases only where the claimant made a firm offer; instead, we are persuaded that
    
    New Mexico would follow the several decisions cited above to hold that an insurer can be
    
    liable for a bad faith failure to settle even though a claimant has not submitted a firm
    
    reasonable offer.
    
           New Mexico follows the rule that an insurer who fails to settle in bad faith is liable
    
    for the entire judgment against the insured, including the amount in excess of policy limits.
    
    Dairyland, 954 P.2d at 61; Lujan v. Gonzales , 
    501 P.2d 673
    , 684 (N.M. 1972); see also
    
    Highlands Ins. Co., 64 F.3d at 517 (applying California law, “[a]n insurer who violates the
    
    covenant of good faith is liable for the entire judgment.”). To use any other measure of
    
    damages would allow insurers to “profit from their own wrongs,” Dairyland, 954 P.2d at 61,
    
    an inequity the New Mexico courts do not allow. Id.
    
           We reviewed earlier the basic proof bearing on the bad faith claim, but we note below
    
    particular evidence convincing us that there was a submissible case for the jury.
    
                                                  B
    
                 The Factual Support for the City of Hobbs’ Bad Faith Claim
    
           The record shows that the Perez Estate’s claim presented a serious risk of a substantial
    
    verdict against the insured. Adjuster Mike Tompkins on February 12, 1991, stated to trial
    
    counsel Richards his opinion that liability was a “very tough call, clmt [claimant] was killed
    
    by officer on insd [insured] force during a domestic dispute.” I App. Ex. 9. Tompkins stated
    
    in a “Trial Alert” document on December 3, 1993, that special damages were sought for
    
    
                                                 -19-
    “meds, lost wages, loss of consortium, violation of civil rights” and that as to “Exposure to
    
    Verdict” on a 1-10 scale, with one as high, Tompkins rated the risk as “5 perhaps we have
    
    a strong technical case but this is a jury emotion exposure & coming to trial at Christmas.”
    
    Tompkins added, however, that defense counsel “feels we have strong case.” II App. Ex. 29.
    
           Among the unfavorable emotional factors facing the defense was the Christmas Day
    
    1991 shooting death of Perez who was armed only with a 2x4 piece of lumber approximately
    
    ten feet long. The insurer’s activity log noted on February 20, 1992. that “the initial Fax was
    
    in error in stating 2x8x8 . . . appears to be a mute [sic] point, either board is awkward, and
    
    fact remains officer could have shot clmt. in arm, leg, or whatever.” II App. Ex. 2, p. 86.
    
    Perez was shot in the chest. I App. Ex. 12, p. 2. The log recorded a comment that “This is
    
    difficult case and will not be resolved easily.” II App. Ex. 2, p. 86.
    
           Other difficulties for the defense are apparent from the record. Officer Hardy, who
    
    accompanied Officer Harrison, had an account that conflicted with Harrison.                  On
    
    December 25, 1991 (the day of the shooting), Harrison stated that “Perez raised the board up
    
    and advanced ‘in a fast motion’ ‘Had it over his head like he was gonna hit me.’” “I felt he
    
    was gonna hit me over the head with it.” II App. Ex. 25.2. Hardy said on December 26: “He
    
    sees Perez carrying a 2x4 like he’s jousting, running south.” “. . . . most of the stick in front
    
    of him” “flat out in front of him.” Id. at 2. Exhibit 25.2 is the notes of Mr. Stone (who
    
    testified for the Perez Estate) and they were admitted at the bad faith trial. Mr. Stone’s
    
    conclusions therein stated in part: “Given the overhanging trees along the east side of the
    
    
                                                  -20-
    garage, the narrowness of the walkway between the garage and the house, the overhang of
    
    the garage and house roofs, and the wires overhanging that walkway, I don’t feel that Perez
    
    could possibly have swung the 2x4 like baseball bat and struck Harrison while either of them
    
    were still in the walkway.” Id. at 2.
    
           In addition, Nutmeg was on notice that damages here could be very large. It received
    
    a copy of Dr. McDonald’s report from plaintiff’s counsel which analyzed the substantial
    
    elements of damages that the Perez Estate might recover. This report was sent to the attorney
    
    for the City, Mr. Richards, see I App. Ex. 17, by the Estate’s attorney, Mr. Hall. The
    
    McDonald report details a lost earning capacity of $527,826 through a work life of 33 years,
    
    after federal and state income taxes, social security contributions and personal maintenance.
    
    Dr. McDonald also calculated some $297,570 in household services rendered by the average
    
    21-year-old male through a life expectancy of age 73. Furthermore, McDonald estimated
    
    “hedonic damages or the value of life itself.” This report was acknowledged by Adjuster
    
    Tompkins to have been received by him, and he referred to it and the details therein from a
    
    government OSHA report with figures between $1,000,000 and $4,000,000 for loss of the
    
    enjoyment of life. III App. at 790-91. Tompkins admitted on cross-examination that the
    
    defense had no expert witnesses to challenge the $527,826 loss of earnings item in the
    
    McDonald report, or the $297,570 item for lost household services. IV App. 866-67. We
    
    have alluded earlier to Nutmeg’s recognition that the Perez Estate claim was emotionally
    
    dangerous and this is a factor which must be taken into account. See Magnum Foods, Inc.
    
    
                                                -21-
    v. Continental Cas. Co., 
    36 F.3d 1491
    , 1508 (10th Cir. 1994) (applying Oklahoma law)
    
    (noting probable jury sympathy for the victim which strengthened a case against an insured).
    
    The insurer was on notice of the risk of a verdict well over the $1,000,000 coverage.
    
           The insurer did not make serious efforts to settle the case or engage in settlement
    
    discussions. In May 1992, Hall discussed the possibility of settling the case for an amount
    
    within the Albuquerque Police Department (APD) range of $250,000 to $400,000. III App.
    
    at 643, 645-46. Defense counsel responded that Hobbs “won’t pay what Albuquerque pays,”
    
    which ended the discussion. III App. at 643. On August 13, 1992, Hall submitted to
    
    Richards a letter containing McDonald’s report and stated in the letter that he was “willing
    
    to discuss any reasonable resolution of a lawsuit.” I App. Ex. 17. The defense made no
    
    response to Hall’s suggestion to negotiate a settlement until the offer by the City to settle for
    
    $50,000, submitted some two weeks before the trial began in December 1993, III App. at
    
    644, which was rejected by plaintiff’s attorney as unreasonable. III App. at 651. And as
    
    noted, plaintiff’s attorney Hall had advised the City’s attorney Richards that he “obviously
    
    would have to recommend to my client that she accept any offers over $600,000.00.” II App.
    
    Ex. 28.1, and this was forwarded to Tompkins with a cover letter by the City’s attorney
    
    Richards, stating that he “enclose[d] offer of settlement dated November 20, 1993 from Brad
    
    Hall.” II App. Ex. 28.
    
           This evidence could reasonably support an inference of bad faith by the insurer in
    
    light of the risk of a substantial verdict above the insurance coverage of the City of Hobbs.
    
    
                                                  -22-
    In Dairyland, 954 P.2d at 61, the New Mexico Supreme Court held that “when there is a
    
    substantial likelihood of recovery in excess of limits, an insurer’s unwarranted refusal to
    
    settle is a breach of the implied covenant of good faith and fair dealing.” During Mr. Hall’s
    
    testimony at the bad faith trial, he was asked whether he recalled any conversations with
    
    Richards, the City’s defense attorney, on the possibility of settlement. Hall recalled vaguely
    
    that he had mentioned the Albuquerque Police Department range; that this range was from
    
    $300,000 to $400,000; and that this was not an offer, but was “an opening the door to a
    
    possible conversation.” Richards did not open the door any further, and there is no other real
    
    discussion of settlement in our record beyond the $50,000 earlier offer by the insurer, and the
    
    $600,000 comment in Mr. Hall’s letter. And as discussed above, we feel that New Mexico
    
    would hold that a cause of action for bad faith failure to settle can exist in the absence of a
    
    firm offer in accord with the several cases adopting that view.
    
           In sum, in light of the circumstances before it, the jury could reasonably have
    
    determined that the insurer acted in bad faith, placing its interests above those of its insured.
    
    Thus it was error to sustain the motion for judgment as a matter of law, taking the bad faith
    
    case away from the jury.
    
                                                   C
    
                    The Claim of Error in the Exclusion of Testimony by the
                     City of Hobbs’ Expert on Insurance Claims Handling
    
           At trial, the City of Hobbs called Keith Charleston as an opinion witness. The district
    
    court permitted voir dire by Nutmeg’s counsel and sustained an objection by Nutmeg to the
    
                                                  -23-
    offer of proof of Charleston’s proposed testimony. III App. at 694. The district court held
    
    that Mr. Charleston did not satisfy Rule 702 of the Federal Rules of Evidence,5 finding that
    
    he lacked specialized knowledge about handling of bad faith cases in New Mexico involving
    
    third party insurance disputes.
    
           We review the exclusion of an expert witness’ testimony, which is challenged here,
    
    for an abuse of discretion. Compton v. Subaru of America, Inc., 
    82 F.3d 1513
    , 1517-18
    
    (10th Cir. 1996). There are two requirements that a party seeking to offer expert testimony
    
    must satisfy before the trial judge may permit the witness to testify. First, the witness must
    
    be expert. In re Paoli R.R. Yard PCB Litigation, 
    35 F.3d 717
    , 741 (3d Cir. 1994),
    
    cert. denied, 
    513 U.S. 1190
     (1995). “The fields of knowledge which may be drawn upon are
    
    not limited merely to the scientific and technical but extend to all specialized knowledge.”
    
    Fed. R. Evid. 702 advisory comm. note (1972). The district court appeared to accept
    
    Mr. Charleston as an expert in some respects. III App. at 694. Mr. Charleston has
    
    approximately 30 years of experience in claims adjustment and claims handling. Id. at 674,
    
    685-87.
    
           Second, the expert’s testimony must assist the trier of fact. The trial judge here found
    
    
    
           5
              Rule 702 provides:
    
                    If scientific, technical, or other specialized knowledge will assist the
           trier of fact to understand the evidence or to determine a fact in issue, a witness
           qualified as an expert by knowledge, skill, experience, training, or education,
           may testify thereto in the form of an opinion or otherwise.
    
                                                  -24-
    that Mr. Charleston’s opinion would not be helpful to the jury because: (1) the jury was
    
    capable of determining the bad faith issue on its own, E.G. Thompson, 34 F.3d at 941; and
    
    (2) Mr. Charleston lacked specialized knowledge on New Mexico bad faith cases and his
    
    experience was with first party, not third party insurance disputes. III App. at 694.
    
           We feel that the judge did not abuse his discretion by refusing to admit
    
    Mr. Charleston’s proffered testimony on this record. Though a proffered expert possesses
    
    knowledge as to a general field, the expert who lacks specific knowledge does not necessarily
    
    assist the jury. Broadcort Capital Corp. v. Summa Medical Corp., 
    972 F.2d 1183
    , 1195 (10th
    
    Cir. 1990); but see Compton v. Subaru of America, Inc., 82 F.3d at 1519-20 (district court
    
    did not abuse its discretion in admitting expert witness’ testimony though witness possessed
    
    general knowledge). Mr. Charleston did not demonstrate knowledge specific to New Mexico
    
    and the handling of third party claims. Therefore, the judge did not abuse its discretion in
    
    relying upon these factors to exclude the testimony. See Broadcort Capital, 972 F.2d at 1195.
    
           We are remanding the case for further proceedings. Of course, expert testimony along
    
    the line that the City proffered below may be produced again with different supporting
    
    qualifications. That offer of proof should be assessed in light of qualifications then shown
    
    and the requirements of Rule 702 and it might then be found proper for admission. We only
    
    hold here that the specific ruling on this record, challenged on this appeal, was not an abuse
    
    of discretion.
    
    
    
    
                                                -25-
                                           Conclusion
    
           Accordingly, we REVERSE the district court’s judgment for the defendants based
    
    on the grant of Nutmeg’s motion for judgment as a matter of law and REMAND the case for
    
    further proceedings consistent with this opinion.
    
    
    
    
                                               -26-
    

Document Info

DocketNumber: 96-2212

Filed Date: 11/9/1998

Precedential Status: Precedential

Modified Date: 12/21/2014

Authorities (20)

Doan v. Seagate Technology , 82 F.3d 974 ( 1996 )

Harolds Stores, Inc. v. Dillard Department , 82 F.3d 1533 ( 1996 )

Edwin B. Seward v. State Farm Mutual Automobile Insurance ... , 392 F.2d 723 ( 1968 )

robert-a-coleman-individually-and-as-surviving-spouse-and-next-of-kin-of , 542 F.2d 532 ( 1976 )

patrick-bell-sr-etc-v-city-of-milwaukee-howard-johnson-and-edwin , 746 F.2d 1205 ( 1984 )

Commercial Union Insurance Company, Cross v. Mission ... , 835 F.2d 587 ( 1988 )

E.G. Thompson and Betty Thompson v. State Farm Fire and ... , 34 F.3d 932 ( 1994 )

In Re Paoli Railroad Yard PCB Litigation , 35 F.3d 717 ( 1994 )

magnum-foods-inc-dba-little-caesars-pizza-of-oklahoma , 36 F.3d 1491 ( 1994 )

lyon-development-company-a-new-mexico-corporation-jeanne-lyon-doing , 76 F.3d 1118 ( 1996 )

44-fed-r-evid-serv-312-prodliabrep-cch-p-14649-steven-d-compton , 82 F.3d 1513 ( 1996 )

Maine Bonding v. Centennial Ins. Co. , 298 Or. 514 ( 1985 )

Ambassador Ins. Co. v. St. Paul Fire & Marine , 102 N.M. 28 ( 1984 )

Farmers Ins. Exchange v. Schropp , 222 Kan. 612 ( 1977 )

Alt v. American Family Mut. Ins. Co. , 71 Wis. 2d 340 ( 1976 )

Rova Farms Resort v. Investors Ins. Co. , 65 N.J. 474 ( 1974 )

Hartford Ins. Co. v. Methodist Hosp. , 785 F. Supp. 38 ( 1992 )

Ranger Ins. Co. v. Home Indem. Co. , 741 F. Supp. 716 ( 1990 )

State Auto. Ins. Co. of Columbus, Ohio v. Rowland , 427 S.W.2d 30 ( 1968 )

American Physicians Ins. Exch. v. Garcia , 876 S.W.2d 842 ( 1994 )

View All Authorities »