By Mike Abourezk, Alicia Garcia and Marialee Neighbours

Evidence of First-Party Bad Faith and Wrongful Intent

The South Dakota Supreme Court has adopted a two prong test to prove bad faith. That test requires: (1) the absence of a reasonable basis for denial of policy benefits, and (2) the knowledge or reckless disregard of a reasonable basis for denial. Champion v. United States Fidelity&Guarantee Co., 399 N.W.2d 320, 323-24 (S.D. 1987), quoting Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1275 (Colo. 1985).

Since bad faith is an intentional tort, evidence of similar conduct establishes elements of first-party bad faith and wrongful intent. Under S.D.C.L. § 19-12-5, a legitimate purpose of the use of other acts evidence is intent. Novak v. McEldowney, 655 N.W.2d 909, 914 (S.D. 2002). Other acts evidence is also admissible for any of the other purposes outlined in the statute. Id. at 913.

In various cases requiring proof of intent, the South Dakota Supreme Court has held that evidence of similar conduct is admissible. For instance, in Novak, the Court held that similar conduct evidence was admissible to show intent and common plan in a sexual harassment case. In that case, the Court explained that while evidence of other acts may not be used to prove a defendant's character, "[i]t may, however, be admissible for other purposes, such as proof of motive, intent, preparation, plan, knowledge, identity, or absence of mistake or accident." Id. at 913. "Moreover, admission of the evidence is favored under S.D.C.L. § 19-12-5, and the judicial power to exclude such evidence should be used sparingly." Id. at 913, citing State v. Wright, 593 N.W. 2d 792, 799 15 (S.D. 1999).

In an earlier decision, reiterated in Novak, the Court approved the admission of evidence that a defendant in an alienation of affections case had previously engaged in an affair with yet another married woman:

[Plaintiff] claims that the evidence was relevant in proving intent. We agree. Alienation of affections is an intentional tort and it was necessary for [plaintiff] to prove intent to proceed with his case. SDCL 19-12-5 specifically recognizes "intent" may be proved by "evidence of other wrongs or acts " As the defendant rarely admits the crucial element of intentional wrongful conduct, it must be established by the plaintiff and proved by circumstantial evidence to avoid being non-suited.

Veeder v. Kennedy, 589 N.W. 2d 610, 620 43 (S.D. 1999)(emphasis added).

In State v. Wright, the Court held that even in the absence of express testimony from the defendant to the effect that his actions in harming his son were the result of "mistake," evidence of other incidents of excessive discipline were admissible to show lack of mistake, because these other incidents provided the only method by which the jury could get a sense of his state of mind. 593 N.W.2d 792, 802 (S.D. 1999).

Other jurisdictions have ruled that evidence of similar conduct is admissible to establish elements of bad faith and wrongful intent. For instance, in Hawkins v. Allstate Insurance Co., a bad faith case, the Arizona Supreme Court allowed testimony of similar conduct in order to establish intent and punitive damages. 152 Ariz. 490, 498, 733 P.2d 1073, 1081 (Ariz. 1987). In Hawkins, the Arizona Court noted that a witness' testimony of other acts was relevant to show that Allstate's bad faith conduct was not unintentional, a mistake or inadvertently made:

Regarding Allstate's liability for bad faith, Boettcher's testimony is relevant to whether Allstate acted intentionally. Evidence of previous, similar acts alters the probability that the conduct in question was unintentional; the more frequently an act occurs, the more probable it is intentional. Thus, Boettcher's testimony made it more probable that the invalid $35 cleaning fee deduction used in estimating the actual cash value of Hawkins' loss was not mistakenly nor inadvertently made.

Id. (emphasis added).

Evidence of Pattern of Practice of Wrongful Claims Handling

Typically, insurers claim that their bad faith conduct was simply an isolated event or mistake. To counter this defense, a plaintiff must show that the insurer's conduct reflected company policies and practices-that a pattern of practice existed. While this issue has not been discussed in a reported South Dakota Supreme Court decision, other jurisdictions, with the same bad faith law as South Dakota, have decided this issue favorably for plaintiffs.

For instance, in Grange Mut. Ins. Co. v.Trude, 151 S.W.3d 803 (Ky. 2004), the Kentucky Supreme Court held that information related to other similar claims was relevant and discoverable. Noting that discovery of similar claims could reveal a pattern of bad faith, the court said:

It is enough for us to note that discovery of information and documents related to similar claims involving other adjusters could reveal a pattern of bad faith conduct on the part of Grange. This would certainly be relevant to Wilder's bad faith claim, regardless of whether such information was admissible at trial.

Id. at 812.

Another case involving a plaintiff's discovery of other claims is Colonial Life&Accident Ins. Co. v. Superior Court, 647 P.2d. 86 (Cal.1982). In that case, the California Supreme Court allowed discovery of other claims handling incidents by the same adjustor that handled the plaintiff's claim. The court summarily discarded the defendant insurer's relevancy objection as follows:

Colonial's suggestion that the discovery of other insureds whose claims were negotiated by Sharkey will not yield relevant, admissible evidence, is patently meritless.

Id. at 89. Elaborating, the California Supreme Court said:

While proof of a knowing violation will make plaintiff's job that much easier, in cases where a knowing violation is difficult to establish, knowledge can be proved circumstantially. Discovery aimed at determining the frequency of alleged unfair settlement practices is therefore likely to produce evidence directly relevant to the action.

Id. at 90. Finally, the Court noted:

Without doubt, the discovery of the names, addresses and files of other Colonial claimants with whom Sharkey attempted settlements is relevant to the subject matter of this action and may lead to admissible evidence.

Id. See also Vining on Behalf of Vining v. Enterprise Financial Group. Inc., 148 F. 3d. 1206, 1218-19 (10th Cir. 1998)(Tenth Circuit upheld admission of other claim evidence holding that it was clearly relevant to the question of how defendant acted in that case and that FRE 406 (habit) clearly provided for its admission); Moore v. American United Life Ins. Co., 197 Cal. Rptr. 878 (Cal. App. 1984) (court held that claim handling of a non-party was admissible to show a pattern of practice of unreasonable actions by insurer).

Evidence That Helps Establish Plaintiff's Entitlement To Punitive Damages And Assists Jury In Calculating Punitive Damages

In South Dakota, punitive damages are awarded to punish and deter wrongful conduct. Schaffer v. Edward D. Jones&Co.(SchafferII), 552 N.W.2d. 801, 813 (S.D.1996); Veeder v. Kennedy, 589 N.W.2d 610, 622 34, citing Schaefer II, 1996 SD 94 at 35, 552 NW 2d at 813 (citing BMW v. Gore, 517 U.S. 559, 568, 116 S. Ct.1589, 1595, 134 L. Ed. 2d. 809, 882; Grynberg v. Citation Oil&Gas Corp., 573 N.W.2d 493 (S.D. 1997). See also BMW, 517 U.S. at 568 (a state has a legitimate interest in punishing unlawful conduct and deterring its repetition.)

Evidence of similar conduct helps prove a plaintiff's entitlement to punitive damages and assists the jury or court assess appropriate punitive damages. In Pacific Mut. Life Ins. Co. v. Haslip, the United States Supreme Court recognized that it was appropriate for state courts to take into consideration "the existence and frequency of similar past conduct" in calculating punitive damages. 499 U.S. 1, 21, 111 S.Ct. 1032, 1045 (1991) (emphasis added). Other courts have interpreted BMW v. Gore, 517 U.S. 599 (1996), as increasing the necessity for a plaintiff seeking punitive damages for an intentional tort to request discovery of similar conduct by a defendant. See, e.g., Ex parte National Security Ins. Co., Inc., 773 So.2d 461, 465 (Ala. 2000).

Recidivism And Reprehensibility

In order for a jury or court to assess punitive damages properly, evidence of similar misconduct is highly relevant in establishing recidivism and reprehensibility. The United States Supreme Court has said: "Our holdings that a recidivist may be punished more severely than a first offender recognize that repeated misconduct is more reprehensible than an individual instance of malfeasance." BMW, 517 U.S. at 576-577. "Certainly, evidence that a defendant has repeatedly engaged in prohibited conduct while knowing or suspecting that it was unlawful would provide relevant support for an argument that strong medicine is required to cure the defendant's disrespect for the law. [Citation]." Id.

In State Farm Mut. Auto Ins. Co. v. Campbell, the Supreme Court emphasized that "[t]he most important indicum of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct." 538 U.S. at 419. "In elaborating on BMW's reprehensibility guidepost, the Court noted that conduct involving 'repeated actions' was worse than, and could be punished more severely than, conduct limited to 'an isolated incident.'" Johnson v. Ford Motor Co., 35 Cal.4th 1191, 1206, 29 Cal.Rptr.3d 401, 413 (Cal. 2005), citing State Farm at 419, 123 S.Ct.1513.

Like the United States Supreme Court, the South Dakota Supreme Court has held that in it is relevant to show that a defendant has a proclivity to repeat wrongful conduct. For instance, in Schaffer v. Edward D. Jones&Co.(SchafferII), 552 N.W.2d. 801, 813 (S.D.1996), the Court held that a major purpose of punitive damages is to deter future misconduct of a similar nature. In Schaffer II, the Court recognized that where a defendant sees nothing wrong with its conduct, and thereby implies his willingness to repeat that conduct, a higher award is needed to deter future misconduct.

In Schaffer II, the Court outlined such an instance. In that case, Jones, the defendant attempted to argue to the jury that "we sold at low risk and WE WOULD DO IT AGAIN based on those factors."...Not surprisingly, in response, Schaffer argued to the jury:

Why are punitive damages necessary? You heard the testimony of the people at Edward D. Jones and every witness they brought here that said they would do it all over again....And they will, unless somebody tells them...no you're not going to do this to anybody down the road.

Id. at 812-13.

Recognizing that substantial punitive damages were necessary to deter future misconduct, the Court said:

This trial strategy by Jones allowed the jury to conclude Jones showed no remorse for its acts which had already been found to be fraudulent and that Jones intended to repeat the same conduct in the future. In Hulstein, we upheld a very substantial punitive award under the rationale that "this award should be a clear signal that companies caught practicing deliberate fraud will be severely punished. This is the nature of punitive damages." Punitive damages may properly be imposed to further a State's legitimate interests in not only punishing unlawful conduct but also to deter its repetition.

Schaffer II at 813 (internal citations omitted)(emphasis added).

Again, in Veeder v. Kennedy, the South Dakota Supreme Court addressed recidivism in its analysis of punitive damages:

As in Schaefer II, here the defendant showed no remorse for his acts and so told the jury. "Punitive damages may properly be imposed to further a State's legitimate interests in not only punishing unlawful conduct but also to deter its repetition."

589 N.W. 2d at 622 34, citing Schaefer II, 1996 SD 94 at 35, 552 N.W. 2d. at 813 (citing BMW v. Gore, 517 U.S. at 116, S.Ct. at 1595, 134 L. Ed. 2d. at 882)(emphasis added).

In Grynberg v. Citation Oil&Gas Corp., 573 N.W.2d 493 (S.D. 1997), the Court reasoned that a proper punitive damage award must take into account not only the harm that has occurred to the plaintiff, but also the harm that might result to other victims if similar misconduct is not deterred. In that case, the court said:

"Punitive damages should bear a reasonable relationship to the harm that is likely to occur from the defendant's conduct as well as the harm that actually has occurred .It is appropriate to consider the magnitude of the potential harm as well as the possible harm to other victims that might have resulted if similar future behavior were not deterred."

Grynberg at 508 n.14, quoting Schaefer II (italics in original) .

In a 2003 case, Roth v. Farner-Bocken Co., 667 N.W.2d 651 (SD 2003), the South Dakota Supreme Court discussed the United States Supreme Court's guideposts for reviewing punitive damages awards. The Court noted that in applying the reprehensibility guidepost, a consideration is whether "the conduct involved repeated actions or was an isolated incident." Id. at 665, 48, quoting State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. at -, 123 S.Ct. at 1521 (emphasis added).

In Roth, the Court found that the there was no evidence that defendant's conduct reflected a company policy or practice. Id. at 52 (emphasis added). The Court concluded that defendant's misconduct was not sufficiently reprehensible to merit the punitive damages award. The case was remanded for a new trial on punitive damages. Thus, in order to justify punitive damages in South Dakota, it is important for a plaintiff to discover other similar misconduct that reflects a company policy or practice. See also Friztmeier v. Krause Gentle Corp., 669 N.W.2d 699, 710 (S.D. 2003).

Numerous other courts hold that recidivism is relevant to assessment of a defendant's culpability. For instance, the California Supreme Court recently explained the relevance of repeated misconduct to a punitive damage analysis: "To consider the defendant's entire course of conduct in setting or reviewing a punitive damages award, even in an individual plaintiff's lawsuit, is not to punish the defendant for its conduct toward others. An enhanced punishment for recidivism does not directly punish the earlier offense; it is, rather, 'a stiffened penalty for the last crime, which is considered to be an aggravated offense because a repetitive one.'" Johnson v. Ford Motor Co., 35 Cal.4th 1191, 1206, 29 Cal.Rptr.3d 401, 413 n. 6 (Cal. 2005) (citing Ewing v. California (2003) 538 U.S. 11, 25-26, 123 S.Ct. 1179, 155 L.Ed.2d 108).

In addition, the California court noted that the Supreme Court's rulings in both BMW and Campbell "make clear that due process does not prohibit state courts, in awarding or reviewing punitive damages, from considering the defendant's illegal or wrongful conduct toward others that was similar to the tortious conduct injured the plaintiff or plaintiffs." Johnson, 35 Cal.4th at 1204, 29 Cal.Rptr.3d at 411(emphasis added). The California Supreme Court joined "numerous courts holding that a civil defendant's recidivism remains pertinent to an assessment of culpability." Id.

Total Picture of Events

Moreover, in order to assess punitive damages properly, evidence of other similar conduct is necessary to permit a jury or court to have a total picture of events. South Dakota places particular importance on the total picture of the events, including relationships between the parties and the motives of the wrongdoer, which gave rise to the wrongful conduct. Schaffer v. Edward D. Jones&Co., 521 N.W.2d 921, 926 (S.D. 1994)("Schaffer I") ("[B]linders should not be placed on a jury when it is called upon to assess punishment, i.e., punitive damages.")

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