Document X8rmDD3BRqQwBZErZe2VXbx4G

DEC 19 '94 04:12PM SIDLEY AUSTIN NY P.10 D6C-19-1994 14:29 FROM DRPYDEH UYOC l LDQD LLP TO 12129065821-02030004 P.01 DRAYDEN, WYCHE & WOOD, L.L.P. 1360 POST OAK BLVD. surra 1650 HOUSTON, TEXAS 7705$ Tel: (713) 965-0120 F*xt (713) 960-0010 Toll Frees (900)969-0067 wwwifwiMwww<i<pifiCfl/ff.g TRANSMITTAL TO DATE: December 19, 1994 FAX NO: (212) 906-2021 PLEASE DELIVER THE FOLLOWING PAGES TO: TO: Mr. Theodore J. Tbeophilos FROM: Reginald H. Wood PAGES (INCLUDINGCOVER): 9 CASE#: CASE NAME: Union Carbide XX ORIGINAL WILL NOT FOLLOW ___ ORIGINAL WILL FOLLOW VIA: _ Regular Mail ___ Certified Mail ___ Overnight Delivery _ Messenger MESSAGE: IF YOU DO NOT RECEIVE ALL PAGES, PLEASE CONTACT (713) 965-0120 IMMEDIATELY THIS FACSIMILE MESSAGE 35 PRIVILEGED AND CONFIDENTIAL COMMUNICATION AND IS TRANSMITTED FOR THE EXCLUSIVE INFORMATION AND USE OF THB ADDRESSEE. PERSONS RESPONSIBLE FOR DELIVERING THIS COMMUNICATION TO THE INTENDED RECIPIENT ARE ADMONISHED THAT THIS COMMUNICATION MaY NOT BE COPIED OR DISSEMINATED EXCEPT AS DIRECTED BY THE ADDRESSES. IF YOU RECEIVE THIS COMMUNICATION IN ERROR, PLEASE NOTIFY US IMMEDIATELY BY TELEPHONE AND MAIL THB COMMUNICATION TO US IMMEDIATELY BY TELEPHONE TO OUR LETTERHEAD ADDRSS. THANK YOU. ucc 073262 CHICAGO LOS ANGELES WASHINGTON, D.C. WBHEB'S DTHECT NTTMBEH (212) 906-2380 Sidley 6c Austin A PABTNERSHIF fNCLUDING PROFESSIONAL CORPORATIONS STS Ttttt?D A-VENTTE New York. New York 10022 Telephone 212: 0Q-2000 Telex 97-1Q9Q Facsimile 212: 09-2021 125^ AivUlvtlSaiy 1866-1991 December 7, 1994 CrV IS'rO't'? C& LONDON SINGAPORE TOKYO Gregory D. Winfree, Esq, Union Carbide Law Dept. 39 Old Ridgebury Road Danbury, CT 06817-0001 E3-282 Re: Transportation Insurance Company v. Moriel Dear Greg: Enclosed is a copy of a casenote from the Tort & Insurance Law Journal regarding substantive and procedural controls by the Texas Supreme Court on punitive damages awards. Sincerely, TJT/sr Enclosure cc: Scott Solberg, Esq. PRIVILEGED AND "CONFIDENTIAL MATERIAL SUBJECT TO PROTECTIVE ORDER" Theodore J. Theophilos IfnjJLIg i fl WE rr 'lIlI; dec | 2 IS94 J ^ . UCC 073268 %p I FALL 1994 Tort & Insurance LawJournal In This Issue: Contributions from Past Chairs Regional and Global Trends in Torts and Insurance ...................... Peter B. Prestley Ethical Issues Relating to Staff Counsel Representation of Insureds ..................... Leo J. Jordan Hiloe E. Kahn Choice of Law for Bad Faith Insurance Claims .............. Douglas G. Houser A Perspective on Jury Perspectives ............. R. Harrison Pledger. Jr. Articles Use of Summary Judgment in Defense of Bad Faith Actions ......................... William T. Barker Paul E.B. Glad Misrepresentation of Smoking History in Life Insurance Applications .............. Gary Schuman Insurance issues in Bankruptcy: An Insurer's Perspective.............. Robert J. McKennon Mischief or "Manifest Intent"? Looking for Employee Dishonesty in the Uncharted World of Fiduciary Misconduct.................... Christopher Kirwan Employee Liability for Economic Losses of the Employer's Customers: A California-Based Examination of the Question of Duty ................... Richard Malamud Casenote Transportation Insurance Company v. Moriel ............................................. Richard C. Mason UCC 073269 XXX, Number 1. Fall 1994 to inspect because the allegation sion on the parr ot the foreman d repair.1" ise in which the detendant-agent s$ held chat an agent who omits r misfeasance in respect to a third he principal. Bv implication, the no dutv to the plaintiff cion generally will not lie against tion brought against the secretary ansfer of the plaintiffs stock, a .at the action could be brought not be held liable for an official ''vision. v Thus, when an em- wsuit, or repair a customer's ? of action against the employee, c employer for either breach of :eory of respondeat superior.1 0 V in is the Cause of a customer's to the customer. The employer mages sustained by the customer, m the customer s suit or motion iun. jwe a dutv to customers under limitations on that duty. Assump* he plaintiff and the nonfeasance tc cases. (91 (N.D. Okla 1928>. Aop. 1969). .anply because the principal is liable, be liable even it the agent does not owe CASENOTE TRANSPORTATION INSURANCE COMPANY v. MORIEL THE TEXAS SUPREME COURT SETS SUBSTANTIVE AND PROCEDURAL CONTROLS ON PUNITIVE DAMAGES AWARDS Richard C. Mason In its June 8, 1994, decision in Transportation Insurance Co. v. Monel1 the Texas Supreme Court held that punitive damages are not justified in bad faith cases unless the insurer's actions threatened its insured with extraordinary harm, such as "death, grievous physical injury, or financial ruin.1,2 The court also required trial courts to bifurcate punitive damages trials to withhold from the jury evidence of a defen dant's net worth until the liability phase of the trial has concluded.' Morsel had been body anticipated by both sides ofthe tort reform battle, and the case attracted national anention, including that of the U.S. Chamber of Commerce, which targeted the case as a "vehicle" for changing Texas punitive damages law 4 A representative ofCNA Insurance Company described the outcome as "spectacu lar,"' but the insured's attorney complained, "[t]his is the result of all the insurance companies trying to do away with people's right to be able to punish them."4 In part, Moriel owes its pedigree to a trio of decisions by the U.S. Supreme Court recognizing that, absent appropriate procedural safeguards, punitive damage awards threaten defendants' due process rights. Despite these Supreme Court pro nouncements, however, insurance companies would not be celebratingMoriel today 1. 879 S.W 2d 10 (Tex. 1994). 2. Id, a 24 3. Id. a 29-30. 4 George Tavior. Tougher Tor Set far Puruava by Texas Supreme Court. Natl L-J-. Jan. 21. 1994. u 3 5. Janet Elliot./vinca Untie Against Pvmtwct; MorieTi him Rules. Bifurcated Trials, MonAppellate Scrutiny, Tex. Law, Feb. 27, 1994, at I. 6. Id Riebard C. Mourn is oh aimurtr with Palmer, Biezup & Henderson tn Philadelphia. 22 S UCC 073270 226 Tort & Insurant* Law Journal, Volume XXX. Number 1. Fall 1994 were it not for events that have transformed the Texas Supreme Court in the last five years. I PRECURSORS OF CHANGE A. Tbe Rise of tbe Phillips Court In the late i 980s, Texas was perceived to be a magnet for personal injury attorneys and plaintiffs. ' The Texas Supreme Court had handed down a series of pro-plaintiff decisions, beginning in 1981 with Burk Royalty Co. v. Walls* in which the court overruled a line of decisions allowing a defendant to escape liability for punitive damages if it had exercised "some care" with respea to the plaintiff.4 In 198J the court handed down Williams v. Steves Industries, Inc. ,710* 9holding chat plaintiffs could prove gross negligence by evidence of "surrounding circumstances" tending to show that a "reasonable person would have realized that his conduct created an extreme degree of risk to the safety of others."11 1P2e1rh3aps the proverbial straw was the court's remarkable conclusion in Dow v. Castro Alfaro12 that the 1913 Texas Legislature abolished the doctrine of forum non conveniens, which in the interven ing seventy-eight years had allowed Texas judges to dismiss lawsuits having little or no connection with Texas.1' Defense attorneys and their clients complained of increasing numbers of punitive damage awards based on findings of mere negli gence.14 15 The Texas Medical Association and insurance and business lobbies ultimately awoke to the concerted efforts of the Texas Trial Lawyers Association and began to participate seriously in funding and promoting candidates for the Texas Supreme Court.1' Texans elected Tom Phillips as ChiefJustice in 1988, and he became the 7. In DowChem Co. v. Castro Alfaro. 786 S.W.2d 674 (Tex. 1990), justice Gonzalez com plained that a Texas lawyer had flown to Scotland in I9B8 and hdd a press conference regarding an od rig disaster there The lawyer had written the victims or their families, advising them that awards in Texas would be "much higher than elsewhere." Id. ac 690 (Gonzalez. J., concurring) a. 616 S.W.2d 911 (Tex. 1981). 9. Id. at 922 (overruling Sheffield Div , Armco Steel Corp. v. Jones. 576 S.W.2d 82* (Tex 1964); Missouri Valley, Inc v. Putman. 604 S.W.2d 545 (Tex. Civ, App 1980); Delgadillo v Tex-Con Util. Contractors. Inc . 526 S W.2d 208 (Tex. Civ App. 1975); Thomas v. T.C. Bateson Co . 4?7 SW.2d 586 (Tex. Civ App 1969); Stephens v Dunn. 417 SW.2d 608 (Tex. Cis App 1967i. Lejeure v. Gulf States Utils. Co., 410 S.W.2d 44 (Tex Civ. App 1966): Lloyd Elec Co v DeHovo-, 409 SW.2d 895 (Tex Civ App 1966); and Armstrong v Texas Power & Light. 599 S W 2d V22 (Tex. Civ. App. 1966)1 10. 699 S.W 2d 570 (Tex. 1985) 11. Id. at 575-74 12. 786 S.W 2d 674 (Tex. 1990) 13. Id. at 691 (Gonzalez, J., dissenting) In 199 5 the Texas Legislature responded to justice Gonza lez's concerns and statutorily "overruled" much of the Castro Alfaro holding. Set Te.\ Civ Pr\c A Rem Code Ann 71.051 (West Supp. 1994). 14. Elliot, supra note 5. at 1 15. Walter Borges. Masny Eclipsed, but New Stars Come Out. TEX Law.. Oct 26. 1992. at 2 Casenote: Texas Supr< first Republican to sit as is said to have undertaken In the 1992 elections con a former plaintiffs' attorn conservatives and, with th liberals, such as Rose Spc member of the Texas Legi ance Agents of Texas.11 J stria construaionists.19 Ir business and trade groups for the Court.20 Comyn. Justice C.L. Ray, one of tl the author of Burk Royal. B. Tbe U.S. Supreme Cou The Moriel court was gu Supreme Court between 1 Browntng-Fcms Industries i whether the Due Process ( on awards of punitive darr authority in our opinions limits on the sue of a civil but held that the petitione it until after they had pet The due process issue . in Pacific Mutual Life Insut 16 UPI Texas. Newsfcatur 1 ` Laura Tuma. Insurance i at 2 18 Id 19 Janet Elliot / Advertise, ll\ Law Nov [2. 1990. at 20 Id The TMA also hack 21 Id 22 109 S Ct 2909 (1989 2? Kelco had sued Brown with Kelco s contractual relatior liable on both counts and awarde< damages Id The Court, after an chat the award v iolated the "Exi 24 Id at 2921 (cuing St. L '< Id 26 1115 Ct 1032 (1991) form ot pavroll deductions, me authorized to receive the pavmem life insurance under a municipal received its premium payments. Catenate: Texas Supreme Court Sets Controls on Pumave Damage Awards 227 first Republican to sit as Chief Justice of the Texas Supreme Court .16 *The court is said to have undertaken a stricter interpretation of Texas law since his election.'' In the 1992 elections conservative Craig Enoch decisively defeated Oscar Mauzy, a former plaintiffs' attorney. By 1994, the Phillips Court had become a blend of conservatives and, with the exception of former legislator Lloyd Doggert. moderate liberals, such as Rose Spector. Justice Jack Hightower, a Democrat and former member of the Texas Legislature, was endorsed in 199 2 by the Independent Insur ance Agents of Texas.18 Justices Hecht and Gonzalez have earned reputations as stria construaionists.19 In 1990 the Texas Medical Association, joined by other business and trade groups, successfully backed John Comyn and Bob Gammage for the Court.20 Comyn, a conservative, and Gammage, a moderate, replaced Justice C.L. Ray, one of the Court's foremost liberals, and Justice Franklin Spears, the author of Burk Royalty 21 22 * B. The US. Supreme Court Recognizes Due Process Concerns The Moriel court was guided by a trio of decisions issued by the United States Supreme Court between 1989 and 1993. In 1989, theU.S. Supreme Court decided Browntng'Ferris Industries v. Kelco Disposal, Inc.,21 in which the Court first considered whether the Due Process Clause ofthe Fourteenth Amendment imposes constraints on awards of punitive damages.2' The Court acknowledged the existence of "some authority in our opinions for the view that the Due Process Clause places outer limits on the size of a civil damage award made pursuant to a statutory scheme,"24 but held that the petitioners had waived their due process argument by not raising it until after they had petitioned for certiorari.2'* The due process issue raised in Brownmg-Fems was considered again in 1991 in Pacific Mutual Life Insurance Co. v. Haslip26 The hopes of the insurance industry 16 UPl Texas, Newsfeature, Super Collider So 1 Total News Story m 1988 (Dec 21. 1988) 17 Laura Tuma. Insurance Istua at Stake m Texas Supreme Court Rate. Tex Law . Oct 26.1992. at 2. 18 Id. 19. Janet Elliot. 1 Advertise. Therefore I Wm. Voters Show They Will Split Tickets dawn the Ballot. TEX. Law., Nov 12. 1990, at 10 20. Id The TMA also backed Chief justice Phillips in his winning campaign IJ 21. Id 22. 109 S Cc 2909 (1989) 25. Kelco had sued Browning-Ferns Industries (BF1) for antitrust violations and for interfering with Kelco's contractual relations in violation of Vermont tort law. Id. at 29] 1 A iurv found BF1 liable on both counts and awarded Kelco %5 1.146 in compensatory damages and 16.000.000 in punmve damages. Id. The Court, after an extensive "original intent" analysis, rejected BFl 's primary argument-- that the award violated the "Excessive Fines" Clause of the Eighth Amendment. Id at 291 5-20 24. Id. at 2921 (citing St. Louis. I.M. fit SR Co. v Williams. 251 US. 65. 66-67 (1919H 25. Id. 26. 111 S Ct. 1052 (1991). In HaiBp Pacific Mutual's agent received premium payments in the form of payroll deductions, most of which he misappropriated Id at 1036 The agent had been authorized to receive the payments on behalfofUnion Fidelity Life Insurance Company, which provided life insurance under a municipal group health plan arranged by Pacific Mutual Because it had not received its premium payments. Union Fidelity cancelled its policies and issued cancellation notices to 228 Tort & Insurance Law Journal, Volume XXX, Number I, Fail 1994 were largely frustrated when the Court held in Hastip that a large punitive damage verdict was constitutional because Alabama's trial procedures provided adequate due process safeguards.27 28 29 30 31 32 Another challenge fell short in 1993, when in TXO Production Corp. v. Alliance Resownes Corp1* the Court found a $10,000,000 award constitutional even though it was accompanied by only % 19,000 in compensatory damages. The punitive damage award in TXO was objectively justifiable because it was predicated on a pattern of "fraud, trickery and deceit."" Although the Supreme Court rejected the defendants' arguments in each of these cases, in Hastip and TXO the Court carefully scrutinized the state procedural mechanisms.50 In both cases the Court reviewed the applicable procedural standards, such as jury instructions and trial court review of the defendant's new trial motion, and concluded that the defendants had received due process.51 Both decisions con tained implicit warnings that some state procedures may be so inadequate as to violate the U.S. Constitution.57 When the Texas Supreme Court decided Moriel, it did so in light of these recent, repeated U.S. Supreme Court pronouncements regarding due process concerns in punitive damages cases. the Pacific Mutual agent, who neglected to forward the notices to the formerly insured municipal employees. Id Haslip was a municipal employee who was hospitalized and incurred hospital and physician $ charges Because Union Fidelity had cancelled her coverage, the hospital required Haslip to pay her bill upon discharge. Her physician ultimately obtained a judgment against her. which had a predictable effect on her credit rating. Id. After trial Haslip obtained a general verdict of 11.040,000, roughly 1840,000 of which represented punitive damages. Id. at 1037 & n.2. 27. Id. at 1043-46 28. 113 S. Ct. 2711 (19931 29. Id. at 2723-24. Oi June 24, 1994. the U.S. Supreme Court decided that an Oregon law restricting judicial review of punitive damage awards violated the Due Process Clause Honda Motor Co. v. Oberg. 1 ] 4 S Ct 23 31, 2 541 (1994). The state law in question, an amendment to the Oregon Constitution, prohibited judicial review of the amount of punitive damages awarded " 'unless the court can affirmatively sav there is no evidence to support the verdict ' W. at 2 338 n 5 (quoting OR CONST art VII. i> The Court hddthat the law effectively denied judicial review of the size of punitive damage awards, providing "no assurance that those whose conduct is sanctionable by punitive damages are not subjected to punitive damages of arbitrary amounts.'' Id. at 2339 30. Set TXO, 113 S. Ct. at 27 2 3-24. Haslip. 109 S. Ct. at 1043-46 31. TXO. 113 S. Ct. at 2724; Hasbp. II1 S. Ct. at 1046 In TXO the Court declined to address TX.O's jury instruction challenge, but agreed with TXO "that the emphasis on the wealth of the wrongdoer increased the risk that the award may have been influenced bv prejudice against large corporations'' 113 S. Ct at 2723. 32. Set TXO. 113 S Ct. at 272 3 f`We agree with TXO that the emphasis on the wealth of the wrongdoer increased the risk that the award may have been influenced by prejudice against large corporations. . . Haslip, 111 S. Ct. at 1046 ("While the monetary comparisons are wide and. indeed, may be dose to the line, the award here did not lack objective criteria. We condude. after careful consideration, that in this case it does not cross the line into the area of constitutional impropriety ' ) Casenote. Texas Supn II MORIEL FROM T1 PU In Moriel the Texas Suprer apply the definition of gro: punitive damages mav be gross negligence to support the majority opinion." Tf intended generally to "dar faith insurance practices.56 workers' compensation da. daimant's two-year quest t A. The Insureds Very Pen Juan Moriel was an emph counter tops fell on him, t and a fractured pelvis. M< workers' compensation ca tion), paid his hospitalizatio the hospital, Moriel began It was not until he attemp after the'accidem. howeve of medical examinations ar dtst, who referred him to E to Pathlab. an El Paso insti for Monel's impotence, h Searching for an answer, I Towers Sleep Disorder Cc but the equipment failed ai equipment lailurc preclude of Dr Diaz. Moriel undei Disorders and Research Ct Jailor iuprj note 4. t>! the L S Chamber m Commc 8`VNW 'jji Theco ol tnc punitnc.damati' verdict. L issue oi iiue prtH.cs- in punitive c lower muris rrn hricht line guida pumtne damage-, uhuli made th ' He wa- nuiuil li\ Jusnce *rvs \\ _\i ] ' 57 Id 3'8 IJ 3V IJ Catenate: Texas Supreme Court Sets Controls an Punitive Damages Awards 229 II MORIEL FROM THE "BACKWATERS" TO THE "FOREFRONT" OF PUNITIVE DAMAGES REFORM** In Moriel i\\t Texas Supreme Court resolved two substantive legal issues; (l)how to apply the definition of gross negligence under Texas state law to determine whether punitive damages may be awarded, and (2) what constitutes sufficient evidence of gross negligence to support an award of punitive damages.'4 Justice Comyn delivered the majority opinion." The court commenced by explaining that its opinion was intended generally to "clarify" the standard for imposing punitive damages for bad faith insurance practices.56 The underlying facts in Moriel involved a genuine injury, workers' compensation claims embracing rather unusual medical treatment, and the claimant's two-year quest tor reimbursement from the insurer. A. The Insured's Very Personal Injury and His Pursuit of Coverage Juan Moriel was an employee of a building materials company when a stack of counter tops fell on him, causing him to suffer three broken ribs, a broken wrist, and a fractured pelvis. Moriel was hospitalized for twelve days. His employer's workers' compensation carrier. Transportation Insurance Company (Transporta tion), paid his hospitalization costs." Complications arose when, shortly after leaving the hospital, Moriel began experiencing "periodic" loss of movement in one leg.58 It was not until he attempted to resume sexual relations with his wife six weeks after the accident, however, that Moriel discovered he was impotent. A plethora of medical examinations and opinions followed, beginning with Monel's orthope dist, who referred him to Dr. Abel Garduno, a urologist. Dr. Garduno sent Moriel to Pathlab, an El Paso institution, for tests, but the tests revealed no physical cause for Monel's impotence. Hormones prescribed by Dr. Garduno had no effect. Searching for an answer, Dr. Garduno referred Moriel to Dr. Diaz at the "Sun Towers Sleep Disorder Center" for further testing. Moriel underwent the tests, but the equipment failed and nothing could be made of the test results. The same equipment failure precluded further testing for months. Eventually, on the advice of Dr. Diaz. Moriel underwent testing at the Baylor College of Medical Sleep Disorders and Research Center in Houston."* 34 * 36 37 38 39 ii See Tavlor. supra note 4. at 3 (quoting Stephen A. Bokai, Vice President and General Counsel of the U.S. Chamber of Commerce) 34. 879 S WJdat 12 The court declined Transportations invttauon to review theconstitutionality of the punitive damages verdict id The court noted that the U.S. Supreme Court had considered the issue of due process in puidfec damages cases in Bmmmg-Ferris. Hasltp. and TXO bui had given lower count no bnehc-iinrtftitdance " Id n. I. The coun decided that Moriel was not entitled to punitive damages, which made the question of their constitutionality moot. Id. at 1? 15. He was loined by Justices Phillips. Gonzalez. Hightower, Hecht. Enoch, and Speaor 36. 879 S.VV.2d at 12. 37. Id 38. Id 39. Id 2 30 Tort & Insurance Law Journal, Volume XXX, Number J, Fall 1994 On August 9. 1986, Les Huss, a claims adjuster for Crawford & Company, an independent adjusting company employed byTransporration, entered the picture 40 Moriel wanted Transportation to pay for his tests at the Baylor Sleep Disorders Center. Moriel testified that Huss demanded he obtain an authorization letter from his orthopedist, the doctor from whom he had first sought treatment. Moriel testified that he sent Huss the requested letter within three days, but Huss then demanded a letter from Moriel's urologist, Dr. Garduno. After Moriel provided that letter, Huss advised him that the company also required a letter from Dr. Diaz. Moriel testified that he complied with the further request and Huss then advised he could not authorize the Baylor tests without approval from his superiors at Transportation's Dallas office.41 By September 10, 1986, Moriel had retained an attorney.42 4M3 oriel's attorney accepted Transportation's proposal to pay for the Bavlor tests, but Transportation refused to pav for his travel expenses to Houston. According to Moriel, Transporta tion's delav in approving the tests held up the tests for ten days. The tests at Baylor revealed that his impotence could be attributed at least in pan to physical causes. The Baylor report recommended, however, that Moriel obtain counseling for "emotional" problems. Moriel underwent therapy until April 1987 for problems characterized bv his therapist as having physical and mental components. He ulti mately overcame the "mental component" of his impotence, which allowed him to resume sexual relations with his wife 41 When Moriel received a $3,155 bill for the Baylor test he presented it to Transportation Insurance Company.44 Transportation denied payment on the ground that no medical report had accompanied the Baylor bill, although Moriel testified he personally delivered the Baylor report to Huss shortly after the tests were completed. When Transportation eventually received the report, it denied payment on the ground that Moriel's impotence was unrelated to his on-the-job injury. Transportation did not pay for the Baylor test until two years after Moriel submitted the bill For more than one year Transportation declined to pay $2,075 for Monel's therapist's services on the ground it had not received the therapist's report. Dr. Perez, however, testified he had submitted his detailed report promptly at the conclusion of Moriel's treatment.45 Transportation also delayed paving a bill for $ 3 82.25 for follow-up outpatient tests, responding 40. Id. The court ol appeals noted that the adjuster had visited Moriel in the hospital to arranci compensation tor his lost wages Transportation Ins. Co v. Moriel. 814 S W 2d 144 147 (Tex Ci\ App. 1991) ("Moriel l 'l. rtvd. 879 S W.2d 10 (Tex. 1994) 41. Id.879 S W 2d at 1 3 42 Id 43. Id.at 13-14. 44 Id 45. Id at 14. Transportation did not pav a 1278.20 Pathlab bill until Moriel filed hu lawsuit but Pathlab had mailed the bill to the wrong address, and Transportation did not receive the bill until after Monel filed suit. Id. Catenate: Texas Supn only when the hospital collection action against While he was being teste against Transportation and Transportation appealed, } additional compensation.45. ers' compensation dairn, lc After trial of the bad faith $ 1,000 in actual damages, $ in punitive damages. The ji no reasonable basis to delay disregard" of Moriel's right B. The Court's Clarification The Texas Supreme Court with a brief discussion of t) Comyn's opinion on puni remedy in civil cases is com the plaintiff "whole."10 In consequence of civil law t noted that one of its first punitive damages are a ch conduct that is "morally c defendants guilty of "outr duct," as provided in the T the court explained that, ur become ``a private windfal 46. Id Under the Texas wo against Transportation, not again at 25 n 18 47 Under Texas law. an "a iurv trial "to set aside (the Board' (Repealed 1989) 48 079 S\V 2d at 12. 49 Id. at 16 50 Id (ciung Cavnar v Qua 51 Id (quoting W Page Kl (5th Ed 1984j) Justice Doggen p Code of Hammaxabi in 2000 B.C & Kenneth R Redden. Punit) 52. Id. at 16 (opinion of the c 587. 600-01 (1880)) 53 Id As pan of the 1987 Texas Omi by providing a definition of "gm the defendant's actual' conscious might be attributable to a "hypoth Catenate: Texas Supreme Court Sets Controls on Punitive Damages Awards 2 31 only when the hospital that conducted the tests filed an (apparently illegal) collection action against Moriel.4* While he was being tested and treated, Monel filed a workers' compensation daim against Transportation and obtained a verdict of slighdy more than $ 30,000. After Transportation appealed, Monel counterclaimed for bad faith claims practices and additional compensation.4' In July 1988, Morid and Transportation settled the work ers' compensation daim, leaving the bad faith claim to be litigated in the trial court. After trial of the bad faith daim, the jury found Transportation liable to Morid for $ 1,000 in actual damages, $100,000 in damages for "mental anguish," and $ 1,000,000 in punitive damages. The jury found that Transportation should have known it had no reasonable basis to delay payment and that it had acted with "heedless and reckless disregard" of Monel's rights. The Texas Court of Appeals affirmed the verdict 4* B. The Court's Clarification of the Punitive Damages Standard The Texas Supreme Court prefaced its explication ofthe punitive damages standard with a brief discussion of the "Exceptional Nature of Punitive Damages."49 Justice Comyn's opinion on punitive damages begins by pointing out that the standard remedy in civil cases is compensatory damages, which are deemed sufficient to make the plaintiff "whole.,':l0 In contrast, punitive damages are a " `rather anomalous* " consequence of civil law borrowing from the field of criminal law/1 The court noted that one of its first opinions addressing punitive damages emphasized that punitive damages are a child of criminal jurisprudence and are merited only by conduct that is "morally criminal."fJ Punitive damages in Texas are reserved for defendants guilty of "outrageous, malicious, or otherwise morally culpable con duct," as provided in the Texas Civil Practice and Remedies Code." Furthermore, the court explained that, unlike compensatory damages, punitive damages proceeds become "a private windfall," demonstrated in part by the fact the proceeds are 46. Id. Under the Texas workers' compensation laws, the hospital should have sought recourse against Transportation, not against Morid. who was only secondarily liable for health care costs. Id. at 25 n.18. 47. Under Texas law, an `appeal" of a decision by the Industrial Accident Board resulted in a jury trial "to set aside [the Board's] final ruling and decision " Tex. Rev. Civ Stat Ann. an. 8507a (Repealed 1989). 48. 879 S.W.2d at 12 49. Id. at 16. 50. Id (citing Cavnar v. Quality Control Parking. Inc.. 696 S W.2d 549. 552 (Tex 1985)) 51. Id. (quoting W. Page Keeton et al.. Prosser and Keeton on the Law or Torts 82 (5th Ed. 1984)). Justice Doggctt pointed out that punitive damages have been in existence " since the Code of Hammarabi in 2000 B.C.' " Id. at 36 (Doggctt, J., concurring) (quoting Linda L Schlufter & Kennetw R Redden. Puntttve Damages I 1.0. at 3 (2d ed 1989)) 52. Id. at 16 (opinion of the court) (citing Southern Cotton Press & Mfg Co v Bradley, 52 Tex 587. 60(H)) (1880)). 53. Id. As pan of the 1987 Texas Omnibus Ton Reform Act, the Texas Legislature modified Burk Royally by providing a definition of ' gross negligence'' which emphasizes that the evidence must "establish'' the defendant's 'actual'' conscious indifference, asopposed-to a 'mere belief' that conscious indifference might be attributable to a "hypothetical reasonable defendant." Tex Crv PraC. & REM CODE ANN. 232 Tort & Insurance Law Journal, Volume XXX, Number 1, Fall 1994 taxable under federal law as "income," whereas compensatory damages are not.'* Consequently, "[t]he legal justification for punitive damages is similar to that for criminal punishment, and like criminal punishment, punitive damages require appro priate substantive and procedural safeguards to minimize the risk of un;ust punishment. *i 55 I. Bad Faith Revisited and Distinguished Having prefaced the discussion, the court turned co an analysis of the nature of bad faith insurance disputes. Texas insurance law, the court stated, has three "tiers" of insurance coverage disputes, each providing for a different kind of damages: (1) benefit of bargain damages for breach of contract; (2) compensatory damages for the tort of bad faith; and (3) punitive damages for incentional, malicious, fraudulent, or grossly negligent conduct.'15 The court's concern was that failure to preserve distinct boundaries between these bases of recovery could result in arbitrary verdicts/' Neither "mental anguish"* * * * * * * * * 55 56 57 41,001(f) (West Supp. 1994). The new law further provides that exemplary damages may be awarded only if the claimant proves "fraud." ''malice," or "gross negligence '' Id. 41.001. The amount of exemplary damages recoverable is limned to four times actual damages or 1200.000, whichever is greater. Id. 41.007 The cap does not apply, however, to exemplary damages accompanying an intentional tort or a finding of "malice " Id. 41.008 The Monel suit was filed prior to the effective date of the Act. The court stated: "Because the Tort Reform Act codified the common law definition and made no change affecting the basic elements of gross negligence . the language defining gross negligence to be applied in a particular case should not cum on the applicability of the Act " Monel, 879 S.W.2d at 20. 74. 879 S.W.2d at 17 n 7 (citing HasUp. 111 S. Ct. at 1045). " 'The impact of such a windfall recovery is likely to be both unpredictable and. at times, substantial' " Hajhp, 111 S Ct at 1040 (quoting Newport v. Fan Concerts, Inc., 453 U.S. 247. 270-71 (1981)) 55. 879 S.W.2d at 16-17 Justice Doggett criticized the majority for regarding Texas civil courts "soldy as forums for compensation." Id at 38 (Doggctt, J, concurring). Justice Doggctt went on to suggest that the majority's view that punitive damages are a "windfall" and cause "overdeterrence ' betrayed its affinity forjudge Richard Posner's law and economics school of thought Id. (citing Richard A. Posner. Economic Analysis of Law 147-52. 176-77. 191-95 (3d ed 1986)) As evidence that this view had been discredited bv the courts, justice Doggett referred to the California Court of Appeals opinion in Grimshaw v Ford Motor Co , 174Cal. Rptr 348 (Ct App 1981) (courts explicitly reject the economic view that the optimal level of violations is greater than zero ' ) 879 SW 2d at !8 (Doggett,-j., concurring) According to Justice Doggctt, the danger is not ` overdeterrence.' but the risk that "some may think it cheaper co pay damages or a forfeiture than to change a business practice ' Id. (citing Sturm. Ruger & Co v Day. 594 P.2d 38. 47 (Alaska 1979). and Wangen v Ford Motor Co.. 294 N'.W.2d43 7fWis 1980)) InSrvrm. Ruger and Wangen there was direct evidence of knowledge of the likelihood of serious harm Snrrm, Auger. 594 P.2d at 47 ("(T]op officials at Sturm, Ruger knew that the safety and loading notches of their single action revolver presented a danger of accidental discharge . . "); Wangen. 294 N W.2d at 440 ("Ford knew' that the fuel tanks on [plaintiff s car were) dangerously defective 56. 879 S.W.2d at 17 "). 57. 14. (citing Lyons v Millers Casualty Ins. Co.. 866 S.W 2d 597. 598-99 (Tex 199 3)) In Lvons the court, in an opuuon by justice Comyn. held that an insured must offer at least a scintilla oi evidence of bad faith 866 S.W.2d at 601 n. 3. The insurer in Lyons had relied on two expen report' in concluding that structural damage plaintiff claimed had been caused bv a windstorm actually had resulted from "settling,'' a cause of loss excluded under the policy. Id. at 599-600 The coun affirmed the lower court's decision that the insured had offered "no evidence" on the critical bad faith issue-- "the reasonableness of the insurer's conduct ut refecting the claim. " Id at 601 Catenate. Texas Supreme damages nor exemplary dama mem ofa covered claim.'1 Exe company commies a "bad fait Moreover, an insurer who s legaj position on proper poli> faith requires proof contradic basis for denying or delaying That an insurer has acred guilty of conduct worthy of Justices Doggett. Gammage, and H violated the Texas Constitution, whi facts Id at 602 (Doggett, J . dissen S.W.2d 594, 597 (Tex 1989)). 58 879 S.W 2d at 17 (citing Dt Texas rule to allow mental anguish d 711 S W 2d 617 (Tex I986)("brea< 59 Id 60. Id. at 17-18 (cuing Z.wm, 86 guez, 873 SW.2d 373. 376-77 <Te insured's doctor to his attorney statin of evidence that the workers compel 376-77. Justices Doggett and Gammage dt informed his supervisor that his injur had contained misrepresentations Id between Justices Doggett and Gamma "review must be narrowly focused o (emphasis original). To Justice Doggett bv the insurance carrier--supports a 1 requires the insured io prove a negs therefore, the insured must offer somt See 879 S W.2d ai 18 61 879 S W 2d at 18 (citing Ar (Tex 1987). and Aranda v Insurance obtected that the maitmn wnhoucha rule adopted in National Lmon Fire 1989). afd. 811 S\\ 2d <f2 (Tex. legitimate policy position, the insured > and unconscionable interpretation of | fide dispute rule. Justice Doggett dedai because the Texas Constitution bars . <9~H) (Doggett. J . concurring) (citing Supreme Court is not invested with th taith claims lor deiai and inconvenienc defense Id He aCTeed with the major from bad laith claims id From thu he not breach the contract The majority responded to this part insurer who invencs a pretexual covera. does not create evidence of bad faith 62 879 S.W.2d at 18 Catenate: Texas Supreme Court Sea Controls on Punitive Damages Awards 2 3 i damages nor exemplary damages should ordinarily accompany an insurer's nonpay ment ofa covered daim.51 Exemplary damages are not permitted unless the insurance company commits a ``bad faith" tort in addition to being wrong about coverage.5598 Moreover, an insurer who simply misconstrues the facts or takes an erroneous legal position on proper policy interpretation does not act in "bad faith."40 Bad faith requires proof contradicting the insurer's evidence that it had a reasonable basis for denying or delaying payment of the daim 6' That an insurer has acted in bad faith, however, does not mean the insurer is guilty of conduct worthy of punishment.61 6T2he remedy for bad faith conduct is justices Doggett. Gammage. and Hightower dissented, arguing that the court s review oi the evidence violated the Texas Consucuuon, which ban the supreme court from deciding the "sufficiency' of the facts Id. at 602 (Doggett. j., dissenting) (citing Couison v Lake LBJ Municipality Util Dist , 78 ] S.W.2d 594. 597 (Tex 1989)) 58. 879 S W.2d at 17 (citing Dean v. Dean. 837 F.2d 1267 (5 th Cix. 1988) (declining to extend Texas rule to allow mental anguish damages in contract action), and Jim Walter Homes, Inc v. Reed. 711 S.W.2d 617 (Tex 1986) ("breach of contract cannot support recovery of exemplary damages")) 59. Id 60. Id. at 17-18 (citingLyons. 866 S.W. 2d at 598-99. and National Union Fire Ins. Co v. Domin guez. 873 S.W.2d 373, 376-77 (Tex. 1994)). In Dommguez the court held that a letter from the insured's doctor to his attorney stating that his injury was work-rdared amounted to only a "scintilla" of evidence that the workers' compensation earner had denied the claim in bad faith. 873 S.W.2d at 376-77. justices Doggett and Gammage dissented, arguing that there was evidence that the insured had informed his supervisor that his injury was work-related and that the insurer's claims adjuster s report had contained misrepresentations. Id. at 378 (Doggett, J , dissenting). Dommguez exemplifies the rift between justices Doggett and Gammage and the Monel majority. Justice Doggett wrote that the court s "review must be narrowly focused on what supports the judgment, not what opposes it " Id. at 379 (emphasis original). To justice Doggett, evidence tending to establish coverage--if ignored or disregarded by the insurance carrier--supports a bad faith verdict. Justice Comyn opined in Monet that bad faith requires the insured to "prove a negative"--that the insurer had no reasonable basis for denial--and. therefore, the insured must offer some evidence contradicting the insurer's excuse for declining to pav See 879 S.W.2d at 18. 61. 879 S.W .2d at 18 (citing Arnold v. National County Mut. Fire Ins. Co . 72 5 S W.2d 16* (Tex. 1987), and Aranda v. Insurance Co of N. Am., 748 S.W.2d 2 10 (Tex 1988)) justice Doggett objected that the majority, without having the dispute before it. had embraced the "bona fide' dispute rule adopted in National Union Fire Ins. v. Hudson Energy Co., 780 S W.2d 41 7 (Tex Ct. App 1989). ajfd, 811 S.W.2d 552 (Tex. 1991). Under the bona fide dispute rule, if the insurer has a legitimate policy position, the insured cannot prove gross negligence unless the insurer offers a strained and unconscionable interpretation of policy coverage " Id. at 427. Though not disapproving the bona fide dispute rule, Justice Doggett declared that courts of appeals are poorly suited for this sort ot review because the Texas Constitution ban appellate review of factual sufficiency. Monel. 879 5 W 2d at 39-40 (Doggett, J . concurring) (citing Wilson v Wilson. 201 S W 2d 226. 227 (Tex 1947) ("(The) Supreme Court is not invested with the power to determine tacts ")). Justice Doggett wrote that bad faith claims for delay and inconvenience should be allowed even if the insurer has a reasonable coverage defense. Id. He agreed with the majority in only one respect breach of contract dauns are distinct from bad faith claims. Id. From this he concluded that bad faith can exist even when the insurer doe' not breach the contract. The majority responded to this part of the concurrence by stating that Hudson does not insulate an insurer who invents a pretexua) coverage defense from bad faith Rather. Hudson means that an insured does not create evidence of bad faith merely by filing suit. Id. at 18. n 8 (opinion of the court) 62. 879 S.W.2d at 18. 234 Tort & Insurance Law Journal, Volume XXX, Number 1, Fall 1994 compensatory damages, not punitive damages.4* Punitive damages are justified only when bad faith is accompanied by '`malicious, intentional, fraudulent or grossly negligent conduct."*4 Because civil "punishment" by way of punitive damages may result in "overdeter- rence and overcompensation," the court deemed it critical to accentuate the distinc tion between "simple" and "aggravated" bad faith.61 That distinction is illuminated by the Arizona Supreme Court's holding in Rawlings v. Apodaca,*666*4In6685Rawlings the court held that, to obtain punitive damages, a plaintiff must show "that the evil hand that unjustifiably damaged the objective ... of the insurance contract was guided by an evil mind."47 Justice Comyn observed that the prevailing case law yields "two core requirements": (1) the insurer must have acted with an "aggravated mental state," such as intent, recklessness, or gross negligence involving at least an "actual subjective awareness that serious injury is highly probable"; and (2) this incended or probable injury must be "independent and qualitatively different" from the breach of contract and the compensable harms associated with it.6' 6). id 64 Id. (citing Arnold. 72S S W 2d at 168. and Ware v Paxton, 359 S W.2d 897 (Tex. 1962)) In Worr the court noted, as an example of the standard for "outrageous" conduct, the exploits of a collection agency whose behavior, though vile, did not mem punitive damages: "Daily telephone calls to {the debtors.) Mr. and Mrs. Duty, which extended to greatlength: threatening to blacklist them with the Merchants' Retail Credit Association; accusing them of being deadbeats; talking to them in a harsh, insinuating, loud voice; stating to their neighbors and employers that they were deadbeats; asking Mrs. Duty what she was doing with her money; accusing her of spending money in other ways than in payments on the loan transaction; threatening to cause both plaintiffs to lose their jobs unless they made die payments demanded; calling each of the plaintiffs at the respective places oftheir employment several times daily; threatening to pmishee their wages; berating plaintiffs to their fellow employees: requesting their employers to require them to pay; calling on them at their work, flooding them with a barrage of demand letters, dun cards, special delivery letters, and telegrams both at their homes and their places of work; sending them cards bearing this opening statement: "Dear Customer: We made you a loan because we thought that you were honest."; sending telegrams and special delivery letters to them at approximately midnight, causing them to be awakened from their sleep; calling a neighbor in the disguise of a sick .brother of one of the plaintiffs, and on another occasion as a stepson; calling Mr. Duty's mother at her place of employment in Wichita Fails long distance, collect; leaving red cards in their door, with insulting notes on the back and thinly-veiled threats; calling Mr Duty's brother long distance, collect. in Albuquerque. New Mexico, at his residence at a cost to him in excess of S11, and haranguing him about the alleged balance owed by plaintiffs." 359 S.W.2d at 899-900 (quoting Duty v. General Fin. Co., 273 S W.2d 64. 65 (Tex 1954)) 65 . 879 S.W.2d at 18. 66 752 P.2d 565 (Am. 1986). 67. Id. at 578 68 879 S.W.2d at 19 (citing Continental Assurance Co v. Kountz 461 So 2d 802. 809 (Ala 1984); Rawbngt, 726 P.2d at 578; Lymphicom v. Nationwide Life Ins. Co., 723 P.2d 675 (Anz 1986) (cn banc); Borland v Safeco Ins. Co.. 709 P.2d 552 (Ariz. Ct. App. 1985): Weisman v Blue Shield, 209 Cal Rptr. 169. 173-74 (Ct. App. 1984); Newton v. Standard Fire Ins. Co., 229 S.E.2d 297. 302 (N.C. 1976); ShimoU v. Nationwide Ins. Co., 495 N.E.2d 391. 393 (Ohio 1986) (per cunam); Anderson v. Continental Ins. Co., 271 N.W.2d 368, 378-79 (Wis. 1978); and Guaranty Abstract & Title Co. v. Interstate Buyer & Casualty Co.. 652 P 2d 665, 668 (Kan. 1982)) In Kountz Casenott: Texas Supreme Although a consensus appe gence on the probability of an of contract injury, no jurisdicti between gross negligence an> endeavored to add its refiner objective of harmonizing the 2. Dethroning Burk Royalty-. Requires Proof of More tl The Court s first step was d In Burk Royalty v. Walls'1 th for "gross negligence" for c requirement of "conscious it Burk Royalty had emphasizec dam's mental state, as oppose to exercise care. ' Because th requires appellate courts to 1 and to ignore facts that tend had proved arbitrary in praci Although the court agreed concluded that the Burk Royalty the gross negligence standard.7' the Alabama Supreme Court found ev when a group health insurer advised r but denied payment alter the insured 69 879 S W 2d at 19 -0 IJ '1 616 S W 2d u | | i I c\ 1981 "2 Id at 920 (citim: Missouri Pat Lotion Prey, & Mtg (.u \ Bradley. * 3 Id it 922 74 n*9 s \\ 2d at 2n 2 I (citing (hem Corp v IX l,,i l.astra. 852-S h9V S Vt 2d Cl!, t-4 i 1 e\ 1985); 1 (lev 198*1 ] rcnhoiiT: s Ratchffe, 6 Properties. Iik 6*9 S \\ 2d 452, 45 irMimonv or that ol hi- doctors. Stt l IJ jt 2 I bu'k Royalty was i current iuxiiic' The vourr overruled a nediitcnie cannot exist it some cart defendant in Burk Royalty argued that insulated it trom a lindim: >>1 gross ne devices ano warnings at tnc time of th< the court could not question Id The di is that' the conduct in Burk Royalty a narurailv to serious phwical barm--wh according to Monel--*! tank drawn, lor (jreenhill. w ho j' C hiel Justict Catenate: Texas Supreme Court Sets Controls on Punitive Damages Awards 235 Although a consensus appears to be emerging in favor of predicating gross negligence on the probability of an injury "qualitatively different'' from bad faith breach of contract injury, no jurisdiction had satisfactorily addressed the critical distinctions between gross negligence and bad faith conduct*69 *T*h7e2 *M* o7r5iel court therefore endeavored to add its refinement to the existing case law, with the overriding objective of harmonizing the emerging consensus with Texas law. 0 2. Dethroning Burk Royalty-. The Objective Component of "Gross Negligence" Requires Proof of More than "Some Negligence" The Court's first step was to identify the basic elements of gross negligence. In Burk Royalty v. Walls'1 the court had recognized that the standard in Texas for "gross negligence'' for over one hundred years had contained a general requirement of "conscious indifference' to the well-being of other persons. 2 Burk Royalty had emphasized that courts must demand evidence of the defen dant's mental state, as opposed to focusing exclusively on the defendant s failure to exercise care ' Because the Texas appeals process of "no evidence" review requires appellate courts to look only to the evidence that favors the verdict and to ignore facts chat tend to contradict the verdict, however. Burk Royalty had proved arbitrary in practice.'4 Although the court agreed with much of Burk Royalty's holding, the court concluded that the Burk Royalty method had given lower courts difficulty in applying the gross negligence standard. ' Under Burk Royalty, "some negligence" commonly the Alabama Supreme Court found evidence of' malice, wilfulness, or wanton and reckless disregard" when a group health insurer advised its insured that n would pay for an emergency dental operation, but denied payment after the insured underwent the operation 461 So 2d at 809 69 879 S \V.2d at 19 70. Id 71. 616 S W 2d 9 N flex 19fil) 72 Id at 920 Iciting Missouri Pac Rv v Shulord. 10 SW 408. 411 (Tex 1888). and Southern Cotton Press fix Mfg Co \ Bradlex. 52 Tex. 587. 600-01 {1880)) 75 Id at 922 74. 879 S W .2d at 20-2 1 iciting Garza v Alviar. 595 S.VV.2d 821. 824 (Tc\ 196'). General Chem. Corp v Dc La Lastra. 852 SW.2d 916. 921 Tex 19951. Williams ' Steves indu' In,. . 699 S.VV.2d 570. ^74 Tex 19851; International Armament Corp v. King. 68o SW 2d <9* (Tex 1985). Trenholm x Ratchffe, 646 S VV.2d 927. 93 1 (Tex 1985), and Neelx x Lommunitx Properties. Inc.. 639 S VV 2d 452. 454 Tex. 1982)). Virtually all of Monel s evidence was no own testimony or that ol his doctors. See id. at 13-14 75 Id. at 21 Burk Royalty was decided bv a Texas Supreme Court consisting n: none nr the current |ustices The court oxerruled a line of cases holding that "legally sufficient' evidence- or gro" negligence cannot exist if ' some care" was exercised bv the defendant 616 S \V 2d at *>2 2 1 hs defendant tn Burt Royally argued that evidence it conducted safety meetings and posted saictv notice- insulated it from a finding of "gross negligence.'' Id at 92 3. The court held that the absente m sairu devices and warnings at the time of the accident constituted some evidence ol gross negligence, which the court could not question. Id. The difficuitv in applying Burk Royalty to insurance disputes how ever is that the conduct in Burk Royalty arose in the context of oil ng work--where malteasance lead- naturallv to serious physical harm--while in coverage disputes the inference is not--or should not be according to Monel--so easily drawn Joe Greenhdl. who was Chief Justice when the court decided Burk Royalty, filed an amicus briel in 236 Tort & Insurance Law Journal, Volume XXX. Number 1, Fall 1994 led reviewing courts to find "some evidence" of gross negligence.76 *In78effect, Burk Royalty's holding that courts couJd infer subjective awareness from surrounding circumstances, when filtered through Texas's "no evidence" review process, obliter ated the distinction between "gross" and "ordinary" negligence.7' Appellate courts were affirming punitive damage verdicts when there was no evidence of gross negligence In General Chemical Corp. t>. De La Lastra,71 for example, a chemical manufacturer had been held "grossly negligent" in failing to include the word "death" in a lengthy-warning label, based on evidence it knew of an incident involving misuse of an unlabeled product fifteen years earlier.79 80 Mindful of Burk Royalty's troubled reign, the Moriel court endeavored to devise a "gross negligence" evidentiary standard that would work in practice to distinguish gross negligence from lesser degrees of misconduct, such as bad faith. 3. Actual Conscious Indifference Means Awareness of an "Extreme" Risk of a "Serious Injury" Under Texas law, plaintiffs must prove two aspects of wrongful conduct: (1) the defendant's act or omission and (2) the defendant's mental state.81 To constitute gross negligence, the act or omission must imperil the "rights, safety, or welfare" Morul on behalf of Transportation He had concurred in Burk Royalty because "the faces were so bad," but by 1993 had concluded that "the scales were tipped very strongly toward exemplary damages (under Burk Royalty)." Elliot, supra note 5, at 1. 76. 879 S.W 2d at 21 77 Id. Monel followed on the heels of the court's exegesis on the Texas " no evidence' appellate review standard. Lyons v Millers Casualty Ins. Co.. 866 S.W.2d 597 (Tex 1993) Under the "no evidence" standard. Texas appellate courts must consider an appeal based on the "legal sufficiency" of the facts presented at trial Id. at 599 Traditionally, this standard of review called for the reviewing court to "consider only the evidence favoring the judgment for the insured and to disregard all evidence to the concrarv " Id 78. 852 S W.2d 916 Tex. 199 3) 79. Id. at 921. Justice Hecht. concurring, noced that the chemical manufactured bv the defendant contained a warning stating "WARNING! REACTS WITH ACIDS AND WATER. RELEASING TOXIC SULFUR DIOXIDE GAS . . USE WITH PROPER VENTILATION " Id at 926 (Hccht. J.. concurring). The label covered about two-thirds of each side of each package. Id. 80. Set 879 S.W.2d at 21-23 A Texas statute provides " `Gross negligence means more than momentary choughdessness. inadvertence, or error of judgment It means such an entire want of cart as to establish that the act or omission was the result of actual, conscious indifference to the rights, safety or welfare of the person affected." TEX Civ Prac. & Rem. Code Ann 41.00 ID (West Supp. 1994). The legislative sponsor of this statute explained its objective during hearings in the-state senate "\W]bat wt'rt trying to do is go back to .. . what tbt law was intended to be [before Burk Rovaltv) and that is tobm you have the imposition ofpunishment for an act that u more than ordinary negligence but less than criminal or intentional there should be a requisite burden ofproofand evidentiary standard required that meets that test John T. Montford & Will G. Barber, 1987 Texas Tort Reform: Tbt Questfor a Fairer and More Predictable Total Cavil Justta System. 25 Hoc L. REV 245. 32 3 (1988) (quoting Texas Senate debate) lemphasu original in Montford & Barber). 81. 879 S.W.2d at 21 Catenate Texas Supreme ( of the affected panv ' This rr an " extreme degree ot risk.' conduct was wrongful, gross defendant's conduct actually c Because the "extreme risk" harm, there must in fact have i or a gross negligence finding c. subject to punishment under [ relatively minor risk . . "86 Thus, even a high probabil risk" prong of the gross negligt "extreme risk" mav be establisi the Williams v. Sieves Industrie a jurv to infer from the circu circumstances from the positior the court held in Moriel that serious harm unless that risk ' wrongfully.91 Nonetheless, evet grossly negligent if his act or creates a great peril."7 4 Gross Negligence in Insura Tantamount to a "Senous Having clarified the distincti court turned to application o Because refusal to pay an insi 82 Id Rt Id (quoting William* v Steve ol loaded 20-ton truck to unlicensed not make probabiJitv ol harm extreme \pp I980i iupholding gro-> negligence 84 8-u S U 2u at 21 22 k ? /j it 12 86 U at 20 8" Wail* 88 Id (citing Williams 699 S W a daneerou' instrumcntalit' -- a 20-tot mdiirerent because the driver had a < 8V isqq S W 2d t'O ilex 1985 90 8 T9 S VS" 2d at 2 * In tact, the to remedc the verv problem created bv supra note 80. at 324 ("To prove ob|i establish chat a particular defendant w: 9] 897 S W 2d at 2 5 92 Id nl< Catenate: Texas Supreme Court Sea Controls on Punitive Damage Awards 237 of the affected party.82 8T3h8is4 8m5e8a6ns* *a8d9efendant must engage in conduct creating an " `extreme degree of risk.' "8i Even if. subjectively, the defendant knew his conduct was wrongful, "gross negligence" does not exist unless "objectively" the defendant's conduct actually created an extreme degree of risk.8* Because the "extreme risk" element takes into account the magnitude of the harm, there must in fact have been a likelihood of "serious injury" to the plaintiff or a gross negligence finding cannot be made.8' The court noted that "nobody is subject to punishment under [Texas Criminal law] if they are aware of [only] a relatively minor risk . . . Thus, even a high probability of minor harm does not satisfy the "extreme risk" prong of the gross negligence definition.*' The court conceded that proof of "extreme risk" may be established by circumstantial evidence." The problem with the Williams v. Steve Industrie8'1 objective standard, however, was that it invited a jury to infer from the circumstances that danger existed without viewing the circumstances from the position of the defendantprior to the injury90 9C1o9n2sequently, the court held in Muriel that a plaintiff cannot prove gross negligence based on serious harm unless that risk was present at the time when the defendant acted wrongfully.Nonetheless, even a person who causes a minor injury may be found grossly negligent if his act or omission--firing a gun in a crowd, for example-- creates a great peril.^ 4. Gross Negligence in Insurance Coverage Disputes; "Inconvenience" Is Not Tantamount to a "Serious Injury" Having clarified the distinction between gross negligence and bad faith, the court turned to application of the distinction to insurance coverage disputes. Because refusal to pay an insured's claim without reasonable basis is bad faith, 82. Id. 83. Id (quoting Williams v. Steves Indus. Inc . 699 S.W 2d 570, 373 (Tex 1983) (entrustment of loaded 20-ton truck to unlicensed driver was not gross negligence because absence of license did not make probability of barm extreme)): cf Go lnt'1. inc v. Lewis. 601 S \V 2d 493. 500 Tex Civ App 1980) (upholding gross negligence finding when truck driven by underage driver earned explosives) 84. 879 S W.2d at 21-22 85. Id at 22 86. Id at 20 87 Id at 23 88 Id (citing Williams. 699 S.W.2d at 57 3) In Williams the defendant was negligent in entrusting a dangerous instrumentality--a 20-ton truck--to an unlicensed driver, but he was not consciously indifferent'' because the driver had a dean driving record 699 S.W.2d at 37? 89. 699 S.W.2d 570 Tex. 1985) 90. 879 S.W.2d at 23. In fact, the 1987 Tort Reform Act's gross negligence standard was designed to remedy the very problem created by the Williams reasonable person' test Set Montford & Barber supra note 80. at 324 ("To prove objectively what a reasonable person should have realized is not to establish that a particular defendant was actually indifferent ") (emphasis original) 91. 897 S.W.2d at 23. 92. Id n.l 5 238 Tort & Insurantz Law Journal, Volume XXX, Number 1, Fall 1994 not gross negligence, punitive damages are available only upon proof of different, and worse, conduct than that which ordinarily constitutes bad faith insurance claims practices.91 Insurance bad faith arises in the context of a contractual relationship, and an insured who has merely proved breach of contract has as yet offered no proof of "serious injury.''99439N5or do injuries such as delay or inconvenience satisfy the requirement.91 Because inconvenience accompanies any breach of contract, inconve nience (or annoyance) is not "qualitatively different" from breach of contract injuries.96 Nonetheless, some forms of insurance, such as disability insurance, are of such a nature that an insurer can expea denying coverage will likely result in extreme hardship to an insured, warranting punitive damages in some cases.9 Although the court declined to enumerate the circumstances in which gross negligence can arise, the most notable phrase in the court's holding clearly indicates that the threatened harm must be extraordinary: *'[d]eath, grievous physical injury , or financial ruin" are sufficiently "serious'1 to support a punitive damages claim, the court held, but anything less may not suffice."98 99 5. The Standard in Application: Legally Insufficient Evidence of Gross Negligence Having prescribed firm guidelines for application ofthe Texas gross negligence standard, the court applied the standard to the facts of the Morsel case. The court's task was to determine whether there was "legally sufficient" evidence of gross negligence, which under Texas law means sufficient evidence that reasonable people could conclude that Transportation consciously disregarded an extreme risk of harm to Morid.TM 93. Id at 23 (citing Aranda v Insurance Co. of N Am., 748 S W 2d 210. 21 $ (Tex. 1988). and Arnold v. National County Mur. Fire Ins. Co., 723 S.W.2d 165. 168 (Tex 1987)). Aranda, like Monel, arose from a workers' compensation claim against the carrier. The court, in a 1986 opinion by justice Spears, established as Texas law that a contractual relationship exists between a workers' compensation earner and a worker, creating a `duty of good faith and fair dealing" between the two 748 S.W.2d at 212 Associate (now Chief) justice Phillips dissented on the ground that no contractual relationship exists in this scenario. Id at 216 (Phillips. J.. dissenting) 94."879 S.W.2d at 23 95. Id at 24 96. The court noted that bad faith may justify an award of consequential damages for mental anguish, id., but recovery for mental anguish does not mean that punitive damages should follow in the ordinary course. Id. The court was pointing out that the harm caused by a bad faith breach often will be the same as the harm caused bv an innocent breach. An unreasonable denial of coverage might enrage a policyholder, but it is not necessarily criminally punishable See id. tt 2 3-24 97. Id at 24 (citing Delgado v. Heritage Life Ins. Co.. 203 Cal. Rptr 672, 68081 (Ct App 1964)) In Delgado a disability earner urged chat it could not be guilty of "conscious disregard' ot an insured's rights absent proof that it actually knew its denial of coverage would cause harm 203 Cal Rptr. at 681. The court observed that "[wjhen a person buys disability insurance '(t]he very risks insured against presuppose that if and when a daun is made, the insured will be disabled and in strait financial circumstances (Ct. App 1970)). Id (quoting Fletcher v. Western Nat`1 Life Ins Co . 89 Cal Rptr 78 98. 879 S.W.2d at 24 99. Id. at 24-23 Casenott: Texas Supreme The court noted chat the e to pay for Moriel's testing, decidingwhether to pay cause for two years before paying over one year before paying s paid for the treatment only collection efforts.100 Based or acted with "heedless and rec The court held chat the ju knew or should have known, to prove gross negligence.102 proof that Transportation ws harm.101 The evidence prese knew of an extreme risk of favorable light, Moriel's evidc portation had "subjeaive aw. because of its delay or (2) a probability of serious injury Transportation's delay causec bills until Providence Hospiti Transportation paid him.106 The degree of anxiety Mo must be deterred by punitive circumstances" had existed, N portation had subjeaive awaj Transportation's "legal sufficit evidence of bad faith. there w 100 Id at 25 1 ransportation di was not work-reiaicd However. Tt without reasonable basis and was lia 101 Id 102 Id at 23-26 103 Id 104 Id 105 Id at 26 106 Id 107 IJ 108 Id The court wrote "We ca stances might, in a different case, ju; the probability of mental anguish." I. stances have been grounds for puni 8SW 32 2. 32 3 (Tex 1888) (plains and the marten alleged might be loo developed generally to mean that, in breaching a contract, the defendant a. the plainuff. Set. e.g.. Anthonv Pools 1990) (defendant s ` protit-motivaiec Casenott: Texas Supreme Court Sets Qmtrois on Punitive Damages Awards 239 The court noted that the evidence showed: {1) Transportation agreed in advance to pay for Model's testing, but not his travel; (2) Transportation's process of decidingwhether to pay caused a ten-day delay in testing; (3) Transportation delayed for two years before paying the testing expenses; (4) Transportation delayed for over one year before paying subsequent treatment expenses; and (5) Transportation paid for the treatment only after it learned that Monel had become subject to collection efforts.100 Based on these facts, the jury had found that Transportation acted with "heedless and reckless disregard," or gross negligence.101 The court held that the jury could reasonably have found that Transportation knew or should have known Model's claims were covered, but that no facts tended to prove gross negligence.10i *T1o04establish gross negligence. Monel had to offer proof that Transportation was "consciously indifferent" to the likelihood of great harm.10' The evidence presented did not support a finding that Transportation knew of an extreme risk of serious harm to Model.10* Even viewed in its most favorable light. Model's evidence did not support either (1) an inference that Trans portation had "subjective awareness" that Model would likely suffer serious harm because of its delay or (2) an inference that Transportation's action created any probability of serious injury to Moriel.105 1T0h6e10e7vidence showed the only harm Transportation's delay caused Moriel was his "anxiety" in knowing he had unpaid bills until Providence Hospital filed a collection action against him, at which time Transportation paid him.109 The degree of anxiety Moriel endured was not "serious" harm of the sort that must be deterred by punitive damages Moreover, even assuming "aggravating circumstances" had existed, Moriel had offered nothing at all indicating that Trans portation had subjective awareness Model would suffer mental anguish.108 Thus, Transportation's "legal sufficiency" point was sustained because, although there was evidence of bad faith, there was no evidence of "serious harm" or Transportation's 100. Id at IS Transportation did offer evidence, which it had bdieved, that Monel's impotence was not work-related However, Transportation conceded for purposes of appeal that it had acted without reasonable basis and was liable for bad faith. Id 101. Id. 102. Id. at 25-26 103 Id. 104. Id. 105. Id. at 26 106. Id 107. Id 108 Id The court wrote: "We cannot rule out the possibility that evidence of aggravating circum stances might, in a different case, justify punitive damages for an insurer s conscious indifference to the probability of mental anguish." Id. Although the court did not define them, "aggravating circum stances" have been grounds for punitive damages in Texas since at least 1888, itt Freiberg v Elliot 8 S.W. 322. 323 (Tex. 1888) (plaintiff "asserted a claim for punitory as well as actual damages and the matters alleged might be looked to show the aggravating circumstancesand the phrase has developed generally to mean that, in addition to engaging in wrongful behavior, such as intentionally breaching a contract, the defendant also had an illicit motive, desiring to harm or revenge himself upon the plaintiff. Ste. t.g.. Anthony Pools v. Charles & David; Inc., 797 S.W.2d 666, 677 (Tex Civ App 1990) (defendant's "profit-motivated business interests," though "self-serving," did not amount to 240 Tort & Insurance Law journal. Volume XXX, Number 1, Fall 1994 knowledge of the likelihood thereof.1051 Although reversal on this point of error usually would result in judgment for the appellant, the court remanded the case because, at the time of trial, no opinion had specifically addressed standards govern ing the imposition of punitive damages in bad faith lawsuits.111009 C. Tbt Court Sets New Procedural Standards to Provide Safeguards Against "Grossly Excessive" Punitive Damage Awards The court's articulation of the gross negligence standard was plainly momentous, but the court did not stop there. Exercising its common-law power, the court identified "procedural standards" to govern trial courts.111 1T1h2e1c1o3urt acknowledged theU.S. Supreme Court's decision in Pacific Mutual Life Insurance Co. v. Haslip,'1' in which the Supreme Court expressed its concern that unlimited jury discretion could "invite extreme results."ll! The Texas Supreme Court noted that Hasitp had approved Alabama's controls on punitive damages, which include {1) piry instructions explaining that punitive damages are "not compulsory," but should be awarded "only where necessary to prevent similar wronp," which has the effect of limiting the jury's discretion; (2) a postverdict review system, which examines the "culpability" of the defendant, the need for discouraging others from similar con duct, and the impact of the award on the parties and on innocent third parties; and (3) appellate review, which in Alabama requires that the award not exceed the amount needed to "accomplish society's goals of punishment and deterrence."114 * Justice Comyn also looked to the U.S. Supreme Court's opinion in TXO Products "ill-will. spue, evil malice" or other "aggravating circumstances"); Group Hosp. Servs., Inc. v. Daniel, 704 S.W.2d 870. 875 (Tex Civ. App 1986) (health insurance provider's representative did not know his statements were false; no aggravating circumstances present); Top Value Enters.. Inc. v Carlson Mktg. Group, Inc . 70 J S W 2d 806. 813-14 (Tex. Civ. App 1986) (puniuve damages not justified absent "presence of spite and revenge" or "concealed plan to bnng about the contractual breach"). Lubbock Bail Bond v. Joshua. 416 S W.2d 52J (Tex. Civ. App. 1967) (bail bondsman, who entered woman's home, harassed her and her children, pursued her to work, "tussled" with her in parking lot, and attempted to handcuff her without warrant or other authority, guilty of aggravated conduct, but S5.000 award "excessive") Given that Tex Civ Prac & Rem Code Ann 41 003 (West Supp 1994) expressly coniines recovery of exemplary damages to three categories--gross negligence, `'fraud," and "malice"--Texas plaintiffs should take notice that "aggravating circumstances" must fall into one of the three categories 109. 879 S W 2d at 26 110. Id. 111. Id. The Texas Constitution authorizes the state supreme court to ordain rules of practice and procedure for the proper administration of justice. TEX Const, art. V. 31. In July 1987 the Texas Supreme Court cited article V as authority to amend Texas Rule of Gvil Procedure 13. See Bruce L Dean. Rule-Making ro Texas: Clarifysttg tbt Judiciary's Power w Promulgate Rules of Civil Procedure. 20 ST. MaRY'S L.J. 1 39. 139-40 (198B) Rule 13, aimed at curtailing die filing of frivolous pleadings, had been passed nine months earlier as part of the 1987 Tort Reform Act. Id. 112. Ill S. Ct. 1032 (1991). 113. Id. at 1043 114. Id. at 1045 (citing Hammond v. City of Gadsden. 49 S So. 2d 1 374, 1379 (Ala. 1986); Green Oil Co. v. Hornsby. 539 So 2d 218. 222 (Ala. 1989); and Wilson v Dukona Corp . 547 So 2d 70. 73 (Ala. 1989)) CasenoteTexas Supreme Corp. v. Alliance Resources Corp.. dures for punitive damages 116 " Alabama procedures affirmed i trial courts to articulate their n Texas courts had not obse and TXO."* The Texas Suprt procedure: (1) trial courts were not rec forth reasons on the record fc (2) the courts of appeals we of the evidence supporting a j (J) Texas courts of appeals the factors for reviewing punr The court maintained chat c< affecting ``{t]he broad |ury di punitive damages system."IJ0 . enhance the fairness and predi 1 Bifurcated Trials The court held that trial coui cases.1" Proceedings determini separately from the main pro though relevant to the amour very real potential for prejudici in a tort case."124 At least thir which punitive damages arc so 11? I 13 S Cl 27!! (1993) I 16 Monti 879 S U 2d at 28 117 Id 118 Id it 28-29 119 IJ (citing Alamo Sit'l Bank Motor Co . 71* S \\- 2d 629 635fl I 20 IJ at 2v 121 IJ 122 IJ at 30 In Justuc Doggctt' biiurcarion bv fading to make a requ-. n I iDoggcn. J ..concurring) 123 IJ (opinion ol the court) 124 IJ Evidence ol net worth w. Lunslord v Morns 74tt S \\ 2d 471 court could not make such a rule in th reversal on mandamus is clear abuse < trial court had followed 100 vears of 125 Hodges v SC Tool & Co.. 1121. 1132 (Wvo 19811. Cm Civ ( < 1(d) (Michie Supp 1992) Kan. S' *49 20(4) (West Supp |9v3). Mo Catenate: Texas Supreme Court Sets Controls on Punitive Damages Awards 241 Carp. v. AUiana Resources Corp.,11' in which the Court reviewed West Virginia's proce dures for punitive damages.110 The West Virginia procedures nearly equated with the Alabama procedures affirmed in Hasltp, though West Virginia does not require its trial courts to articulate their reasons for upholding punitive damage verdicts.11 Texas courts had not observed procedures similar to those extolled in Haslip and 7X0.1,1 The Texas Supreme Court identified several shortcomings in Texas procedure: (1) trial courts were not required to scrutinize punitive damage awards and set forth reasons on the record for refusing to disturb jury verdicts; (2) the courts of appeals were precluded from reviewing for factual sufficiency of the evidence supporting a punitive damage award; and (?) Texas courts of appeals were not required to enumerare in their opinions the factors for reviewing punitive damage awards.11119 5 116 117 118 The court maintained that certain procedural safeguards could be added without affecting "[t]he broad jury discretion that is the hallmark of the common law punitive damages system."120 Accordingly, the court announced two changes to enhance the fairness and predictability of punitive damage awards.121 I. Bifurcated Trials The court held that trial courts must bifurcate proceedings in punitive damage cases.122 *P*ro1c2e5edings determining the amount of punitive damages should be held separately from the main proceedings 121 Evidence of a defendant's net worth, though relevant to the amount of punitive damages justifiably awarded, "has a very real potential for prejudicing the jury's determination of other disputed issues in a tort case."'2* At least thirteen states currently require bifurcation of trials in which punitive damages are sought.122 The court declined to take a step adopted 115. 113 S Ct 2*11 (1995) 116. Monti. 879 S W.2d at 28 117. Id 118. id at 28-29 119. Id. (cuing Alamo Nat'l Bank v. Kraus. 616 S W 2d 908, 910 (Tex 1981). and Pool * Ford Motor Co.. 715 S W.2d 629, 615 (Tex 1986)). 120. Id. at 29 121. Id. 122. Id. at 10 In Justice Doggett's opinion. Transportation had waived its complaint regarding bifurcation bv failing to make a request for bifurcation until its motion for new trial Id at 14 & n I (Doggett, J . concurring! 123 Id. (opinion of the court) 124 Id. Evidence of net worth was inadmissablc in Texas before the court's 1988 decision in Lunsford v Morris. 746 S W.2d 471 (Tex 1988). In that casejusuce Gonzalez complained that the court could not make such a rule in the context of a mandamus proceeding because the standard for reversal on mandamus is ' dear abuse of discretion.'' and in refusing to admit net worth evidence the trial court had followed 100 years of Texas precedent Id. at 474 (Gonzales. J . dissenting 125. Hodges v S.C. Toof it Co.. 833 SW2d 896 (Tenn. 1992); Campcn v Stone. 635 P 2d 1121. 1132 fVVyo 1981). Cal. Civ Code 3295(d) (West Supp. 199 3); Ga Code Ann 51-125.1(d) (Michie Supp. 1992); Kan StaT ANN 6O-3701(a> (Supp 1993); Minn STat Ann 549.20(4) (West Supp 1993); Mo. Ann StaT 510.263 (Vernon Supp 1992). Most C.ODF 242 Tort & Insurance Law Journal, Volume XXX, Number 1, Fall 1994 by three other states and require a separate trial on punitive damages liability.u< instead, the court held that trial courts must separately cry the issue of the amount of punitive damages to eliminate the "most serious risk of prejudice, while minimiz ing the confusion and inefficiency that could result from a bifurcated trial.''*1271*26129 2. Appellate Articulation The court imposed one additional procedural safeguard. In Texas a court of appeals may vacate a damage award or suggest a remittitur only if the award is` 'so factually insufficient or so against the great weight and preponderance of the evidence as to be manifestly unjust."12* In reviewing the reasonableness of punitive damages awards courts of appeals are expected to consider the factors set forth in Alamo National Bank v. Kraus '" (1) the nature of the wrong, (2) the character of the conduct, (3) the degree of culpability of the wrongdoer, (4) the situation and sensibilities of the parties concerned, and (5) the extent to which such conduct offends a public sense ofjustice and propriety.130 T* he court took care not to interfere with the existing level of appellate deference, but emphasized that appellate courts "must carefully scrutinize punitive awards to ensure that they are supported by the evidence."111 In so doing, Texas courts of appeals now must state the relevant evidence in their opinions and explain "why that evidence either supports or does not support the punitive damages award in light of the Kraus factors."132 3. Two Safeguards Deferred The court declined, however, to impose two additional safeguards recommended by the United States Supreme Court. The Texas Supreme Court noted that many states now require "dear and convincing evidence" to support findings of gross ANN. 27-1-221(7) (1991); NEv. Rev StaT. 42.00*0) (1991); NJ STAT. ANN 2A;58C-5(b) (West 1987); N.D. CENT CODE 32-03.2-11(2) to-11{4}(1993); OHIO Rev. Code Ann 2315 21(0 (Baldwin 1993); Utah Code Ann. 78-18-1(2) 0992). 126. 879 S W 2d at 30. 127. Id The court did not hold that bifurcation is constitutionally required. It found bifurcation necessary to provide needed "procedural safeguards" against "grossly excessive" punitive damages awards. Id 12B. Pope v. Moore. 7tt S W.2d 622 (Tex. 1986) 129. 616 S.W.2d 908 (Tex. 1981) 130. Id. at 910. The standards approved by the U.S. Supreme Court in Heshp included (a) whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct, as well as the harm that actually has occurred; (b) the degree of responsibility of the defendant's conduct, the duration of that conduct, the defendant's awareness, any concealment, and the existence and frequency of similar past conduct; (c) the profitability to the defendant of the wrongful conduct and the desirability of removing that profit and of having the defendant also sustain a loss; (d) the "financial position" of the defendant; (e) all the costs of litigation, (f) the imposition of criminal sanctions on the defendant for its conduct (to be considered m mitigation); and (g) the existence of other civil awards against the defendant for the same conduct (also to be considered in mitigation) til S. Ci. at 1045. 131 879 S W.2d at 32. 132. Id. at 31. Casenott: Texas Supreme G negligence and punitive damage favorably on the "clear and co Monel court noted the Texas L the "dear and convincing stan legislation 1,1 Accordingly, the c emed by the 1987 act. which some tort actions are not subjt to create different evidentiary s legislation." Finally, Justice Cornvn obsei the practice of requiring trial coi on the record their reasons for i a practice has much to recomm< whether the jury has acted wit too small or too large in light c court decisions have remanded their reasons for upholding punir an apparent trend since Hashp in 133. Id 134 lllS Ct at UW 135 879 S W.2d at 52 136 U.setJt\ Cis Pk & Re.' I ? 879 s w 2d at 13 8 W. w II! S Li a; jus articulation since Hashp Mvnri 879 S I 374. 1 379 (Ala 19861. O IXIl s BaSi Ins Soc y v B Dixon tvandcr & Assc required per se. but trial court s I adore 1 Danavo. Inc v Starkcs Lalo Inc . 47f S Ct 2940 (1992). Oanit>ie c Stevens (k Co 8 3 3 S W 2d 9o 9<'2 i I enn. I l 99 11 (requiring trial umn inn uiauon ' 3 11 Games v Fleming l-indl'ili Inc.. t ]ty fi "9 S \\ 2djt ! 2 u iting Croo Lruoettan the L tih Suprcrtu 1 < iurt emp on ina! and appellate court' although ' ohiections under the state convolution, considering an award.ui pumme damn stareJ that " jai formula of punitive da good standard against hi J: t" assess wh > Opprnheimer 4s Co n " 1 ,'J 11 8. 3 that J exas procedure' tor imiu I'liig pumti ' Armstrong Cork l v-o- I 2d 108` 140 8"9S\V2iljt !2 uitmu Cole Lmon Natl Bank \ Mosiu,her 93 3 F II9V2, American Lmplmers hi' Co s (it 199-|and Robertson l hi ( o v PI srralso Honda Motor ( o s Ol.crg. I I4S tionaj because it presented review ing co passion or preiudice ' CasenoU Texas Supreme Court Sets Controls on Punitive Damages Awards 243 negligence and punitive damage awards.111 The U.S. Supreme Court commented favorably on the "clear and convincing" standard in Haslip.1 14 Nonetheless, the Morsel court noted the Texas Legislature had specifically considered and rejected the "clear and convincing" standard in the course of approving 1987 tort reform legislation.115 Accordingly, the court would not impose the standard on cases gov erned by the 1987 act, which applies to most common-law tort actions Although some tort actions are not subject to the 1987 legislation,116 the court declined to create different evidentiary standards depending upon the applicability of the legislation.117 Finally, Justice Comyn observed that in Hasltp the Supreme Court endorsed the practice of requiring trial courts to scrutinize punitive damage awards and note on the record their reasons for upholding or refusing to uphold an award.118 Such a practice has much to recommend it, given that only the trial court can evaluate whether the jury has acted with "passion or prejudice" and rendered an award too small or too large in light of the evidence.119 Several recent federal appellate court decisions have remanded cases to- trial courts with instructions to articulate their reasons for upholding punitive damage awards.140 Despite this fact and despite an apparent trend since Haslip in favor of requiring state courts to articulate reasons m. u 134. Ill S Ct. 1046 133. 879 S W 2d at 32. 136. Id; see Tex Civ. Prac & Rem Code Ann 41.002(b) (Wesr Supp. 1994). 1 37. 879 S W 2d at 32. 138 Id.: iff 111 S Ct at 1045. justice Comyn noted that eight jurisdictions have required such articulation since Haslip Morsel. 879 S W.2d at 32. set Hammond v. Citv of Gadsden. 493 So. 2d 1374, 1379 (Ah 1986): O'Dell v Basabe. 810 P.2d 1082. 1092 (Idaho 1991); Medical Muc Liab Ins. Soc'y v. B. Dixon Evander & Assocs., 609 A.2d 353, 368-69 (Md. Ct. Spec. App. 1992) (not required per se. but trial court's failure to explain reasoning may constitute abuse of discretion); G N Danavo. inc. v Starkev Labs. Inc.. 476 N VV.2d 172, 177 (Minn. Ct. App. 1991). ten. denied. 112 S. Ct. 2940 (1992), Gamble v Stevenson, 406 S.E.2d 350. 354 (S C. 1991); Hodges v SC Toof & Co.. 833 S M .2d 896, 902 (Tenn. 1992); Crookston v. Fire Ins. Exch ,81?P.2d789.8l! (Utah 1991) (requiring trial court articulation whenever ratio of punitive damages to actual damages exceeds 31). Games v Fleming Landfill. Inc . 413 S E 2d 897. 910 (W Va 1991) 139 879 S W 2d at 32 (citing Crookston v Fire Ins. Exch.. 817 P,2d 789. 804 (Utah 1991 In Crookston the Utah Supreme Court employed its common-law power to impose procedural guidelines on trial and appellate courts, although the insurer in that case had failed to preserve its due process objections under the state constitution. 817 p.2d at 800. The court noted that the Fifth Circuit, in considering an award of punitive damages in an intentional business tort case under Texas law. had stated that " (a] formula of punitive damages equal to three tunes compensatory damages is a fairis good standard against which to assess whether a |urv abused its discretion ' " Id. at 809 (quoting Miles v. Oppenheimer & Co . 637 F.2d 318. 3 31 (5th Cir 1981)). The Fifth Circuit, however, has concluded that Texas procedures for imposing punitive damage awards do not violate federal due process Glasscock v Armstrong Cork Co , 946 F 2d 108 5 (5th Cir 1991). cm. demed. 112 S. Ct. 1778 (1992) 140. 879 S \V.2d at 32 (citing Cole v. Control Data Corp., 947 F.2d 313. 321 18th Clir 19911 Union Nat'l Bank v Mosbacher. 933 F.2d 1440. 1448 (8th Cir. 1991). an demed. ! 12 S Ct 87u (1992); American Employers Ins Co v. Southern Seeding Sens.. Inc.. 931 F.2d I4<3. 14*8 (11th Cir. 1991); and Robertson Oil Co v Phillips Petroleum Co . 930 F.2d 1342. 1 3-4T <8th Cir 19V|. see also Honda Motor Co. v Obcrg, 114 S. Ct 2 3 3 1.2 3 39-41 (1994) (holdingOregon statute unconstitu tional because n prevented reviewing courts from overturning punitive damage awards resulting from "passion or prejudice'') 244 Tort & Insurance Law Journal, Volume XXX, Number 1, Fall 1994 for awarding punitive damages, the Moriel court declined to require such a standard in Texas.141 The court was hesitant to increase demands placed on its trial courts, most of which are understaffed in terms of both secretaries and law clerks.The court restrained its holding to a recommendation that such findings be made "to the extent practicable."141 143 D. Justices Doggett and Gammage Find Little with Which to Concur Justice Doggett, joined only by Justice Gammage, concurred but took issue with much of the majority opinion. Justice Doggett's concurring opinion opens with the statement: "{T]he majority's mission in recent months has been to dismantle ... the different safeguards that insurance policyholders and beneficiaries have been previously assured by the laws of Texas."1*4 Continuing, Justice Doggett inveighed: "Instead of fairness to all, the majority has replaced protection of insureds with protection of insurers, leaving the insurance industry largely free to do as it pleases. "141 The apparent motive: "[T]his majority never met an insurance company it didn't like."146 Contrary to the majority, the concurring justices would have remanded Moriel for trial court articulation of the reasons for denying the insurer's motion for new trial.147 Justice Doggett explained that articulation is a valuable and "meaningful" procedure to aid the trial court in deciding whether the jury exceeded its proper bounds.148 *The concurring justices would have granred Transportation's request for articulation--to " facilitate meaningful post-verdict review of punitive damage awards' "--and remanded the case to the trial court on that basis.144 Justice Doggett moved on to criticize the majority's holding that, for gross negligence to exist, the injury risked by the insurer s misconduct must be "indepen dently and qualitatively different" from the injuries that typically follow from bad faith or breach of contract.150 *A*c*cording to Justice Doggett, this opinion has "absolutely no basis in Texas law" and represents a "notorious first" in Texas jurisprudence.111 Justice Doggett pointed to the Martel case itself as an example of "arbitrary" use of the majority's requirement that the insured's harm ditler qualitatively from breach of contract damages To the concurring justices, the 141. 879 S.W.2d at 3 3. 142. Id. 143. Id. 144. Id ar 33 (Doggett. J . concurring! 145. Id. 146. Id. 147. Id. at 34. 148 Id 149 Id. at 34-33 (quoting opinion of the court, 879 S W.2d at 33) 130. Id. at 40-41 131 Id. at 40 The majority responded to thus pan of the concurrence, noting that numernu' jurisdictions require a separate iniurv" (other than breach of contract iniury) to justify an award ot punitive damages). Id. at 19 n 9 (opinion ot the court) 132. Id at 41 (Doggett, J . concurring). Casenotc Texas Supreme severity of Monel's distress b fected an intimate and pcrsoi heavy dnnking. and his man had found no "extreme harm resistant Transportation Insui full masculinity.'1"6 Prior to Moriel. justice Dog tive ``objective" and "subject] majority "deliberately miscon ciousiy reversed its holding.1*1 Justice Doggett noted that Texas had experienced liede d courts had consistently uphel stances, the defendant should of risk.16' Thus, although th negligence may be proved by rence Moriel insulates an insur holder it victimized can prov< also that the insurer knew or remonstrated that this holdin others from any obligation t< possessed by a reasonable per 133 Id 134 u 133. Id 136. Id 157 Id 158 699 S W 2d 70 (Tex 1983) I 59 The (987 Ton Reform Act \ T Momford & Will G Barber. 198 Texas Civil /user Svitrm. 25 Hous. endorsed finding gross negligence base 160 879 SVV.2d at 42 (Doggett. 161 Id at 42-41 (citing Clibon v. Denham v Gnued States. 8 34 F 2d 3! Inc 652 F Supp 219. 225-26 (N D a jury finding that the L S Arms- Co. concrete anchor to remain in a swim 521-22 The Totmn coun emploved was grossly negligent in providing an < esen though the compam explicitly in materials 652 F Supp at 22 5-27 162 Set 879 S W 2d at 22 ( It is determined by an obteem-e extreme r 16 3 Id at 44 (Doggett J . concur 164 Id jusuce Doggett accused the gence contained in the record Id A. insurer not to pay submitted medical bi Accident Board Transportation had t settlement Id Furthermore. Iransports Castrate: Texas Supreme Court Sea Controls on Pvmtrx Damages Awards 245 severity of Morid's distress had been well established.*155 Model's injury had "af fected an intimate and personal part of his life."154 He was sued. He resorted to heavy drinking, and his marriage was jeopardized.''155 Nonetheless, the majority had found no "extreme harm." ignoring Monel's "trauma of struggling with the resistant Transportation Insurance Company to obtain the means to recover his full masculinity."1'6 Prior to Monel, Justice Doggett related, the test for gross negligence had alterna tive "objective" and "subjective" components.15' Justice Doggett argued that the majority "deliberately misconstrued" Willurms v. Steves Industries1 !S and surrepti tiously reversed its holding. Justice Doggett noted that the Texas state courts and federal courts sitting in Texas had experienced little difficulty interpreting the Williams standard.160 These courts had consistendy upheld Williams to allow proof that, under the circum stances, the defendant should have known his conduct created an extreme degree of risk.161 1T6h2u*s, although the Monel holding does appear to accept that gross negligence may be proved by circumstantial evidence,14'' according to the concur rence Mcrnel insulates an insurance company from punishment "unless the policy holder it victimized can prove not only unusual harm from the misconduct, but also that the insurer knew or expected the unusual to happen.''145 Justice Doggett remonstrated that this holding would insulate those causing grievous injury to others from any obligation to "summon up even the most minimal awareness possessed by a reasonable person."164 m. Id. 154 Id 155. Id 156. Id 157. Id. 158 699 S W.2d 70 (Tex. 1985). 159. The 1987 Tors Reform Act was intended to "modify" the objective test of Williams, see John T. Montford & Will G. Barber, 1987 Texas Tort Reform: Tbe Quest for a Fatter and More Pndsttable Texas Cml fusaa System, 25 Hous. L. Rev 245, 520 <1988). at least to the extent that Williams endorsed finding gross negligence based on what a "reasonable person" probably would have known 160. 879 S W 2d at 42 (Doggett, J.. concurring) 161. Id. at 42-45 (citing Gifton v. Southern Pac Transp Co. 709 S W.2d 656. 640 (Tex 1986). Denham v. United States. 854 F.2d 518. 522 (5th Cir. 1987); and Toomer v. United Resin Adhesives. Inc.. 652 F Supp 219, 225-26 (N.D 111 1986)) In Denham the court applied Williams in affirming a jury finding that the U S. Army Corps of Engineers was grossly negligent in allowing an abandoned concrete anchor to remain in a swimming area, where it caused injury to a trespasser 854 F 2d at 521-22. The Toomer court employed Williams in upholding a |ury finding thai a trucking company was grossly negligent in providing an economic incentive for truckers to dean truck tanks themselves even though the company explicitly instructed the drivers not to dean any tank containing hazardous materials. 652 F. Supp. at 225-27 162. See 879 S W 2d at 22 ("It is true that the relative riskiness of the defendant s action can be determined by an objective extreme risk' test."). 165. Id at 44 (Doggett, j.. concurring). 164. itf. justice Doggett accused the majority of "deliberately disregarding] evidence of gross negli gence contained in the record." Id. A Transportation adjuster had acknowledged it was wrong for an insurer not to pay submitted medical bids unless the insurer had filed a controversion with the Industrial Accident Board. Transportation had failed to controvert anv of the four bills it refused to pay until settlement. Id Furthermore, Transportation's adjuster testified that she sometimes (although not necessar- 246 Tort & Insurance Law Journal, Volume XXX, Number 1, Fall 1994 The concurring opinion closes with an empirical argument that punitive damages are assessed far less frequently than critics suggest and that the amounts assessed are also far less than punitive damages opponents' statistics indicate.14' The concurrence concludes: "In the long run, the American emphasis on safety, backed by the social control of punitive damages, will produce the top quality products needed to compete in the international marketplace "160 * * * * 165 166 Justices Doggect and Gammage granted that they would have joined the majority in implementing certain reforms--such as requiring specific enumeration offindings by the trial court in punitive damages cases--but concluded that they could not join in "abandoning" the punitive damages system.167 Ill CONCLUSION Moriel has clarified the distinction between insurer bad faith and gross negligence and, as part of the process, announced practical guidelines to govern imposition of punitive damages. Regarding insurer bad faith, the court reiterated that bad faith requires proof contradicting the insurer's "reasonable basis" for denying the insured's claim. If the insurer is guilty of bad faith insurance practices, the plaintiff ordinarily will recover compensatory damages, but not the exceptional remedy of punitive dam ages. Punitive damages require a finding of gross negligence, and the court held that gross negligence cannot exist unless the defendant's acts or omissions generated a likelihood of "serious harm" to the plaintiff. This holding applies to all tort cases. The jury must consider and weigh the risk of "serious harm" from the defendant's perspective as it stood prior to the injury In insurance bad faith disputes "serious harm" presupposes that the insurer's conduct created alikelihood of death, grievous physical injury, financial catastrophe, or other harm that is both different from and worse than the harm ordinarily resulting from mere bad faith. Further, the insured must offer proof that the insurer knew that its conduct created such a risk. Except in the cases involving disability insurance, juries mav no longer assume that an insurer who denied coverage in bad faith knew or was consciously indifferent that its behavior would cause the insured extreme harm. As a procedural matter, trial courts must bifurcate proceedings in all punitive damage cases and try the issue of the amount of punitive damages separately from ily in Monel's case) consciously declined to nocifv an injured worker of the insurer's decision to deny payment. The adjuster admitted that such delavs could cause harm bevond that resulting from the work-related injury. Id The majority had held that such additional harm would justify emotional distress damages in some cases, but would not necessarily justify punitive damages. Id. at 24 (opinion of the court) 165. Id. at 45 (Doggen. J.. concurring). 166. Id. at 46. 167. Id. at 47. Catenate.- Texas Supreme Co the issue of the defendant s liab this ruling is that the jury will dec. as to the defendant s net worth At the appellate level, the rev supporting the award or denial court must take particular care to of "serious harm" to the plainti The early indications are that/ ers, particularly if the plaintiffs ha was decided, a Texas jury hand after a bifurcated trial held pur the first in which a major corr implants Monel's influence undoubtedl State. Moriel was decided by a by moderates, such as Justice H The decision has been praised b Judicial opinions do not beet Moriel's innovation, how ever, proper absent a substantial thn designed quite simplv to rule oi bad faith disputes 1 ' Monel's ' that knowledge or reason to 1 example, cause an insured to lo: damages. On the other hand, 1 an unpaid insurance claim, are e The common law will swiftly punitive damages, which pro isting regime, under which vim recipients ' J I 6R Evidence til d deten.unt - net.* has been lound u> preiuduc lurn- unfairly Entfrprim. Rksponmbm i n h m Pers< are Told the net wnnh oi companies n liable regardless ol the nature ut their a and the plaintiffs iniurio Id ]<sy Dos, v McGhan Medial Carp I `0 Elliot, supra non j: i I'l iavlcir. supra non- 4 ji t 1*2 Set Monel 8*u s \\ 2d at 24 mav lustily an award ol consequential d damages aione does not ordinariJv wart I 7 J See id {"[ W]e must relv on the distinction over time "> 174 See Wtllusms. 69V S W 2d at 5T neglieence > CasenoU: Texas Supreme Court Sets Controls on Pumttoe Damages Awards 247 the issue of rhe defendanr's liability for punitive damages. The practical effect of this ruling is that the jury will decide the defendant's liability before hearing evidence as to the defendant's net worth.164 At the appellate level, the reviewing court must state in its opinion the factors supporting the award or denial of punitive damages. Presumably, the appellate court must take particular care to state the facts establishing or disproving the threat of "serious harm" to the plaintiff. The early indications are that Morielwill not insulate the most egregious wrongdo ers, particularly ifthe plaintiffs have suffered physical harm. One month after Monel was decided, a Texas jury handed down a SI5 million punitive damages verdict after a bifurcated trial held pursuant to Moriel'69 Notably, this jury award was the first in which a major company has been found liable for leaking silicone implants Morsel's influence undoubtedly will extend beyond the borders of the Lone Star Stare. Moriel was decided by a 7-2 margin, and the majority opinion was joined by moderates, such as Justice Hightower, as well as the liberal Justice Spector."0 The decision has been praised by the United States Chamber of Commerce.*171169 * Judicial opinions do not become influential merely by breaking new ground. Morsel's innovation, however, is its plain dictate that punitive damages are not proper absent a substantial threat of serious harm. This is a practical standard, designed quite simply to rule out punitive damages in the majority of insurance bad faith disputes."2 Mo-riel's "serious harm" standard gives notice to insurers that knowledge or reason to know that wrongful denial of a claim will, for example, cause an insured to lose her business may result in liability for punitive damages. On the other hand, large, corporate insureds, who easily can absorb an unpaid insurance claim, are effectively barred from securing punitive damages. The common law will swiftly establish the classes of insureds who qualify for punitive damages,1 5 which promises to be a clear improvement over the preex isting regime, under which virtually all insureds were potential punitive damages recipients " 16B. Evidence of a defendant s net worth, f admitted prior to the jury's determination of liability. has been found to prejudice juries unfairly against wealthy defendants. Set 2 AMERICAN Law Institute. Enterprise Responsibility for Personal Injury --Reporters' Study 265-69 <1991 > Junes who are told the net worth of companies making substantial profits have tended to find such companies liable regardless of the nature of (heir actual conduct or die causal connection between their conduct and the plaintiffs injuries Id. 169 Doss v McGhan Medical Corp.. No 92-14155 (Tex. Dist, Ct.. 189th Disc Mar 3. 1994) . 170. Elliot, mpra note 5. at 1 17[. Taylor, supra note 4, at 3. 172. Set Monti. 879 S W.2d at 24 ("Although the bad faith breach of an insurance contract may jusufv an award of consequential damages (or mental anguish . the existence ot mental anguish damages alone does not ordinarily warrant legal punishment."). 173. Set id ("(W]e must rely on the evolution of the common law to increase the precision of rhu distinction over tune."I 174. See WiUutms, 699 S.W.2d at 574 ("No exact line can be drawn between negligence and gross negligence.'') 24B Ton & Insurance Law Journal, Volume XXX, Number i. Fall 1994 Monel thus presents a practical cool for courts, regardless of whether one views theMonel standard as just or unjust-1 ,f In Morielthe Texas Supreme Court fashioned a workable standard chat will return certainty and predictability to an area of the law that may have lost its bearings. Other jurisdictions that value certainty and predictability in the law soon may be looking to Texas as the source of practical solutions to knotty legal issues. 175. judicial decisions become influential when they are perceived to be "logical and jusdy pragmati cal.'' State v. Fontano, 97 A.2d 498. 500 (N.J. Super. Ct. App. Div. 195)). Of particular value and influence are decisions that set forth useful tests, stt. e.g., In n Femsuom Storage 8c Van Co.. 9)8 F.2d 7)1, 7)5 (7th Ctr. 1991). or author pragmatic definitions, m. t.g.. Commonwealth v. Kean. 55 6 A.2d J74. )77 (Pa. Super. Ct. 1989).