Tomaselli

Dominick and Denise Tomaselli (Tomasellis) sued Transamerica Insurance Company (appellant), alleging appellant’s refusal to pay a claim on their homeowners policy was both a breach of contract and in bad faith. The jury awarded contract damages of $260,000, emotional distress damages totaling $500,000, and punitive damages of $11,250,000. Appellant’s claims fall into five basic categories: (1) that there is no substantial evidence to support the liability determinations; (2) that a series of evidentiary and instructional errors prejudiced the verdicts; (3) that the compensatory damages are excessive; (4) that the punitive damages award is unsupported by proper evidence and is excessive; and (5) that the attorney fee award is improper.

I

Factual and Procedural Background

A. The Parties and the Policies

Tomasellis purchased a three-year-old house in 1977. Between 1977 and 1982 they had homeowners insurance from Premier Insurance Company, an affiliate of appellant, and from 1982 through 1987 they purchased homeowners insurance from appellant.

The policies originally contained three relevant limitations on coverage: (1) an exclusion for earth movement; (2) a “prompt…