OPINION
{1} In this insurаnce-bad-faith case, arising from an insurance company’s failure to settle a third-party lawsuit against its insured, we are asked to clarify whether a culpable mental state in addition to bad faith is required for the imposition of punitive damages. The following question was certified to us by the United States Court of Appeals for the Tenth Circuit, in accordance with Rule 12-607 NMRA 2003:
Is an instruction for punitive damages required in every insurance bad faith case in which the plaintiff has produced evidence supporting compensatory damages as suggested by [UJI 13-1718 NMRA 2003], or is the New Mexico Court of Appeals correct that subsequent New Mexico Supreme Court authority requires a culpable mental state beyond bad faith for imposition of punitive damages in insurance bad faith cases? Teague-Strebeck Motors, Inc. v. Chrysler Ins. Co., [1999-NMCA-109 , ¶¶ 76-90,127 N.M. 603 ,985 P.2d 1183 ].
Sloan v. State Farm Mut. Auto. Ins. Co. (In re Sloan),
{2} Exercising jurisdiction under NMSA 1978, § 39-7-4 (1997), we answer that under New Mexico law, a punitive-damages instruction should be given to the jury in every common-law insurance-bad-faith case where the evidence supports a finding either (1) in failure-to-pay cases (those arising from a breach of the insurer’s duty to timely investigate, evaluate, or pay an insured’s claim in good faith), that the insurer failed or refused to pay a claim for reasons that were frivolous or unfounded, or (2) in failure-to-settle eases (those arising from a breach of the insurer’s duty to settle a third-party claim against the insured in good faith), that the insurer’s failure or refusal to settle was based on a dishonest or unfair balancing of interests. An insurer’s frivolous or unfounded refusal to pay is the equivalent of a reckless disregard for the interests of the insured, and a dishоnest or unfair balancing of interests is no less reprehensible than reckless disregard, which has historically justified an award of punitive damages. To ensure the jury has found a culpable mental state before awarding punitive damages, we modify UJI 13-1718 to reflect that punitive damages may only be awarded when the insurer’s conduct was in reckless disregard for the interests of the plaintiff, or was based on a dishonest judgment, or was otherwise malicious, willful, or wanton.
i.
{3} This matter comes to us in the course of an appeal from a jury trial in federal distriсt court. The trial court granted Defendant State Farm’s motion for judgment as a matter of law on Plaintiffs’ claim for punitive damages against Defendant for bad-faith failure to settle. Sloan,
Jury Instruction No. 6
A liability insurance company has a duty to timely investigate and fairly evaluate the claim against its insured, and to accept reasonable settlement offers within policy limits.
An insurance company’s failure to conduct a competent investigation of the claim and to honestly and fairly balance its own interests and the interests of the insured in rejecting a settlement offer within policy limits is bad faith. If the company gives equal consideration to its own interests and the interests of the insured and based on honest judgment and adequate information does not settle the claim and proceeds to trial, it has acted in good faith.
See UJI 13-1704 NMRA 2003.
Jury Instruction No. 8
An insurance company acts in bad faith when it refuses to pay a claim of the policyholder for reasons which are frivolous or unfounded. An insurance compаny does not act in bad faith by denying a claim for reasons which are reasonable under the terms of the policy.
In deciding whether to pay a claim, the insurance company must act reasonably under the circumstances to conduct a timely and fair investigation and evaluation of the claim. •
A failure to timely investigate, evaluate or pay a claim is a bad faith breach of the duty to act honestly and in good faith in the performance of the insurance contract.
See UJI 13-1702 NMRA 2003.
{4} The jury found that State Farm acted in bad faith in its dealings with Plaintiffs and that its bad faith proximately caused Plaintiffs’ damages. The jury awarded Plaintiffs $600,000 in compensatory damages, later reduced to $540,000 on motion for remittitur. Plaintiffs appealed to the United States Court of Appeals for the Tenth Circuit, arguing that under New Mexico law, where there is sufficient evidence to submit an insuraneebad-faith claim to the jury, the jury must also receive an instruction on punitive damages. The Court of Appeals then certified the above question to us because it was unclear under New Mexico law whether in an insurance-bad-faith action, a finding of bad faith, without an additional finding of a culpable mental state, permitted an award of punitive damages.
{5} This case presents an opportunity to assess the New Mexico Court of Appeals’ holding in Teague-Strebeck that an award of punitive damages in an insurance-bad-faith case requires a culpable mental state in addition to the bad faith required for compensatory damages. See Teague-Strebeck Motors, Inc. v. Chrysler Ins. Co.,
{6} For the reasons that follow, we conclude that under New Mexico law, bad-faith conduct by an insurer typically involves a culpable mental state, and therеfore the determination whether the bad faith evinced by a particular defendant warrants punitive damages is ordinarily a question for the jury to resolve. To the extent Teague-Strebeck would, in every insurance-bad-faith case, require a showing of an additional culpable mental state to permit an instruction on punitive damages, Teague-Strebeck is overruled. In so holding, we reaffirm our statement in Jessen v. National Excess Insurance Co.,
II.
{7} Teague-Strebeck held that in insurance-bad-faith cases, New Mexico requires “the presеnce of aggravated conduct beyond that necessary to establish the basic cause of action in order to impose punitive damages.”
{8} In its original opinion, the Teague-Strebeck court affirmed the trial court’s denial of the plaintiffs’ claim for punitive damages arising from an insurance-bad-faith claim. Id. ¶¶ 70-73. The plaintiffs had argued that they were automatically entitled to punitive damages once compensatory damages were awаrded and that the trial court therefore misapplied the legal standard for the award of punitive damages. Id. ¶¶ 71-72. Teague-Strebeck interpreted Paiz as requiring evidence of “an evil motive or a culpable mental state,” in addition to bad faith, for a plaintiff to be entitled to punitive damages. Accordingly, it held the trial court did not abuse its discretion by refusing punitive damages. Id. ¶¶ 72-73.
{9} In a separate published order on rehearing, appended to the original published opinion, the Teague-Strebeck court reinforced its initial holding, and again relied on Paiz and Allsup’s for the proposition that “there is a real distinction between ‘bad faith’ sufficient to support an award of compensatory damages and ‘bad faith’ meriting exemplary damages.” Id. ¶ 85. The Teague-Strebeck court also noted that UJI 13-1718, as it currently stands, “clearly contemplates the giving of a punitive damages instruction in every bad faith case submitted to a jury.” Id. ¶ 82 n. 1. The court then stated, “Given the holding in Paiz, and the language in Allsup’s, upon which we rely, it would seem appropriate to reconsider this aрproach.” Id.
{10} As we reconsider UJI 13-1718 and the law of punitive damages in insurance-bad-faith claims, we first consider the analyses of Paiz and Allsup’s in Teague-Strebeck.
A.
{11} The Teague-Strebeck court began its analysis of Paiz by characterizing it as “a first party insurance-bad-faith case.” 1999— NMCA-109, ¶ 79,
{12} Importantly, the claim of insurance bad faith was never raised as an issue on appeal. The plaintiffs did not appeal the directed verdict against them and therefore “conceded the correctness of the trial court’s ruling” rejecting the bad-faith claim. Id. at 210,
{13} Teague-Strebeck interprets Paiz as directly applicable to the tort of insurance bad faith. Teague-Strebeck,
B.
{14} The Teague-Strebeck court further advanced certain language from Allsup’s as supporting its conclusion that this Court had raised the standard for punitive damages in insurance-bad-faith cases. Allsup’s involved an insurer’s appeal of a jury award of punitive damages in an insurance-bad-faith claim.
Undеr the “bad faith” claim, what is customarily done by those engaged in the insurance industry is evidence of whether the insurance company acted in good faith. However, the good faith of the insurance company is determined by the reasonableness of its conduct, whether such conduct is customary in the industry or not. Industry customs or standards are evidence of good or bad faith, but they are not conclusive.
Allsup’s,
{15} To resolve the alleged conflict, we examined another jury instruction given at trial that stated in part, “Allsup’s contends and has the burden of proving that any bad faith actions on the part of North River were malicious, reckless or wanton, and, therefore punitive damages should be awarded.”
{16} In our current analysis, we conclude that Allsup’s in fact supports our view that a punitive-damages instruction will ordinarily be given whenever thе plaintiff is entitled to have the jury instructed on his or her insurance-bad-faith claim. In analyzing UJI 13-1705, the Allsup’s court reasoned that “[w]hile bad faith and unreasonableness are not always the same thing, there is a certain point, determined by the jury, where unreasonableness becomes bad faith and punitive damages may be awarded.”
III.
{17} Although we overrule Teague-Strebeck’s holding that an award of punitive damages in such cases always requires evidence of culpable conduct beyond that necessary to establish basic liability, we agree with its statement that “ ‘bad faith’ may include a culpable mental state, but it is not necessarily so.”
{18} Under New Mexico law, an insurer who fails to pay a first-party claim has acted in bad faith where its reasons for denying or delaying payment of the claim are frivolous or unfounded. See State Farm Gen. Ins. Co. v. Clifton,
“Unfounded” in this context does not mean “erroneous” or “incorrect”; it means essentially the same thing as “reckless disregard,” in which the insurer “utterly fail[s] to exercise care for the interests of the insured in denying or delaying payment on an insurance policy.” [Jessen,108 N.M. at 628 ,776 P.2d at 1247 .] It means an utter or total lack of foundation for an assertion of nonliability — an arbitrary or baseless refusal to pay, lacking any arguable support in the wording of the insurance policy or the circumstances surrounding the claim. It is synonymous with the word with which it is coupled: “frivolous.”
Jackson Nat’l Life Ins. Co. v. Receconi,
{19} We acknowledge, however, that the reasonableness of the insurer’s conduct is gеnerally an element of the jury’s inquiry in determining whether compensatory damages should be awarded. For this reason, the bracketed second sentence of our jury instruction reads, “In deciding whether to pay a claim, the insurance company must act reasonably under the circumstances to conduct a timely and fair [investigation or evaluation] of the claim.” UJI 13-1702 NMRA 2003. In failure-to-pay claims, therefore, a plaintiff under these circumstances might make a proper showing that the insurer acted unreasonably in denying or delaying a claim, entitling the plaintiff to compensatory damages, without having made a prima facie showing that the refusal to pay was frivolous or unfounded. In such circumstances, it is proper for the trial court to submit the plaintiffs bad-faith claim to the jury for consideration of an award of compensatory damages but withhold the punitive-damages instruction.
{20} On the other hand, while New Mexico recognizes a common-law cause of action for bad-faith failure to settle within policy limits, we do not recognize a cause of action for negligent failure to settle. Ambassador Ins. Co. v. St. Paul Fire & Marine Ins. Co.,
{21} In such failure-to-settle claims, evidence of an insurer’s negligence in researching a claim does not give rise to its own cause of action, but rather provides one possible means of demonstrating that an insurer acted in bad faith. As we said in Ambassador:
[W]hen failure to, settle the claim stems from a failure to properly investigate the claim or to become familiar with the applicable law, etc., then this is negligence in defending the suit (a duty expressly imposed upon the insurer under the insurance contract) and is strong evidence of bad faith in failing to settle. Here, basic standards of competency can be imposed, and the insurer is charged with knowledge of the duty owed to its insured. In this sense, such negligence becomes an element tending to prove bad faith, but not a cause of action in and of itself.
Id. at 31,
{22} In Ambassador, we predicаted an insurer’s honest judgment on its diligent, competent investigation of the claim:
In order that [the insurer’s decision whether to settle] be honest and intelligent it must be based upon a knowledge of the facts and circumstances upon which liability is predicated, and upon a knowledge of the nature and extent of the injuries so far as they reasonably can be ascertained.
This requires the insurance company to make a diligent effort to ascertain the facts upon which only an intelligent and good-faith judgment may be predicatеd.
Id. (quoted authorities omitted). Our current uniform jury instruction reflects this standard of conduct when it states an insurer “has a duty to timely investigate and fairly evaluate the claim against its insured.” UJI 13-1704 NMRA 2003. Nevertheless, we conclude the competence and timeliness of the insurer’s investigation of the claim, while strong evidence of whether the insurer conducted itself fairly and in good faith, is not the dispositive element in a failure-to-settle claim. Even where the insurer’s investigation was both competent and timely, the insurer is nevertheless liable for bad faith when its refusal to settle within policy limits is based on a dishonest judgment. In many respects, a dishonest judgment in these circumstances may be more reprehensible than where the insurer bases its decision not to settle on a negligent investigation. We conclude, therefore, in failure-to-settle cases, it is the insurer’s failure to treat the insured honestly and in good faith, giving “equal consideration to its own interests and the interests of the insured,” id., that renders the insurer liable for insurance bad faith and also merits an instruction on punitive damages.
IY.
{23} As a result of the foregoing analysis, we conclude that in most cases, the plaintiffs theory of bad faith, if proven, will logically also support punitive damages. To ensure, however, that a jury only awards punitive damages for bad-faith conduct manifesting a culpable mental state, and not for conduct that may fall short of such reprehensibility, we find it necessary to augment the punitive-damages instruction to reflect the requisite standard for a culpable mental state. Accordingly, we modify the first sentence of UJI 13-1718 to read as follows:
If you find that plaintiff should recover сompensatory damages for the bad faith actions of the insurance company, and you find that the conduct of the insurance company was in reckless disregard for the interests of the plaintiff, or was based on a dishonest judgment, or was otherwise malicious, willful, or wanton, then you may award punitive damages.
The trial court should include also the definitions of “dishonest judgment” — “a failure by the insurer to honestly and fairly balance its own interests and the interests of the insured” — along with the definitions of “reckless,” “malicious,” “willful,” and “wanton.” See UJI 13-1827 NMRA 2003. We believe this revised instruction will ensure the jury will award punitive damages only in those eases where the insurer’s conduct is shown to have manifested a culpable mental state.
{24} Finally, in answering as we do that a punitive-damages instruction will ordinarily be given every time the jury is instructed on the plaintiffs insurance-bad-faith claim, we acknowledge the prospect that in certain instances a plaintiffs evidence of bad-faith conduct, though sufficient to entitle the plaintiff to compensatory damages, may be, as a matter of law, insufficient to warrаnt a punitive-damages instruction. Where the trial court determines, based on the evidence marshaled at trial, that no reasonable jury could find the insurer’s conduct to have manifested a culpable mental state, then the trial court may withhold the giving of a punitive-damages instruction. Accordingly, we also modify the Use Note for UJI 13-1718 to reflect that this instruction must ordinarily be given whenever UJI 13-1702, -1703, or - 1704 is given; the instruction will not be given only in those circumstances in which the plaintiff fails to make a prima facie showing that the insurer’s conduct exhibited a culpable mental state.
{25} IT IS SO ORDERED.