Article

Factual Summary:

To assure payment of retrospective premiums for workman's compensation insurance and general liability insurance in excess of estimated premiums actually paid, the insured caused a standby to be issued payable to the insurer. When the beneficiary drew down US$ 310,000 and claimed additional premiums, the applicant sued claiming that the insurer had failed to supervise the administrator of the insurance plan and had wrongfully drawn the standby. On the LC issue, the trial court awarded summary judgment on the issue of wrongful drawing and the jury found that the action of the beneficiary was in bad faith and awarded punitive damages of $500,000. The net compensatory damages awarded on the LC was $4,792 due to set-off for unpaid premiums. On post trial motions of the beneficiary, the trial judge gave the applicant a choice between accepting remission of $400,000 on the LC-related punitive damages or undergoing a new trial. The applicant appealed and the beneficiary cross-appealed the award of summary judgment and punitive damages. The Supreme Court of New Mexico affirmed the summary judgment and the award of punitive damages but reversed the trial court's order granting remission or a new trial.


Legal Analysis:

1. Wrongful Drawing: The applicant claimed that the standby related only to certain policies that involved paid loss agreements. The beneficiary, however, claimed that the standby related to all premiums owed regardless of the policy. In rejecting the beneficiary's argument, the court noted a letter from the insurer's counsel in which it was recognized that the standby was issued to cover unpaid premiums under the paid loss agreement. Since the insurer did not even argue that the drawing was to cover paid loss agreement premiums, the court ruled that the summary judgment was warranted.

2. Bad Faith/Punitive Damages: The court also affirmed the jury finding of bad faith, concluding that it was supported by the same facts as the award of summary judgment.

3. Punitive Damages: Excessive: In concluding that the award of punitive damages was not excessive, the court noted that:

There was also substantial evidence that the drawdown on the letter of credit occurred willfully and in bad faith without reference to whether the policy premiums to which the letter applied were overdue, to wit the letter from [the defendant's] attorney acknowledging that Letter of Credit No. 1478 applied to paid loss, not incurred loss, policies. The acts of [the defendant] can be considered to be reprehensible and affirmatively in bad faith, in contrast to the minor, relatively harmless and innocuous concealment ...

Although the ratio between the compensatory and punitive damages was extreme, the court ruled that "even though the net figure on the drawdown on the letter of credit was only $4,792, a punitive damages award of $500,000 was not constitutionally disproportionate."

The court noted that where an act was particularly egregious, relatively small awards of compensatory damages could result in high punitive damage awards.

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