                         IN THE SUPREME COURT OF MISSISSIPPI
                                  NO. 95-CT-00034-SCT
AMERICAN FUNERAL ASSURANCE COMPANY
v.
DAISY HUBBS, ADMINISTRATRIX OF THE ESTATE
OF LUCILLE KITCHENS, DECEASED
                         ON PETITION FOR WRIT OF CERTIORARI
DATE OF JUDGMENT:                               12/19/94
TRIAL JUDGE:                                    HON. W. O. DILLARD
COURT FROM WHICH APPEALED:                      HINDS COUNTY CHANCERY COURT
FOR APPELLANT:                                  JAMES HUGH RAY
                                                THOMAS WICKER
FOR APPELLEE:                                   PAUL SNOW
NATURE OF THE CASE:                             CIVIL - INSURANCE
DISPOSITION:                                    AFFIRMED IN PART; REVERSED AND
                                                RENDERED IN PART - 6/19/97
MOTION FOR REHEARING FILED:                     6/27/97
MANDATE ISSUED:                                 8/29/97




     EN BANC.


     SULLIVAN, PRESIDING JUSTICE, FOR THE COURT:




                              FACTS AND PROCEDURAL HISTORY

¶1. On April 4, 1990, Lucille Kitchens went to Lakeover Memorial Funeral Home to apply for a
policy of insurance. Kitchens spoke with Arthur Willis, a principal in Lakeover and a licensed
insurance agent for American Funeral Assurance Company. Kitchens had been referred to Willis by
her sisters who had already purchased insurance through Lakeover and Willis.

¶2. Lucille Kitchens took out a $4,000 monthly debit ordinary life insurance policy with a monthly
premium of $21.88. Kitchens designated her mother, Iola Etheridge, as the beneficiary of her policy.

¶3. In taking the application, Willis allegedly asked Kitchens a number of health questions, including
whether she had been in a hospital during the preceding three years and whether she had been told
that she had diabetes, cancer, tumor, high blood pressure, heart disease or disorder of the brain or
nervous system. The questions were all marked "no" on the application. Willis marked the answers
and Kitchens signed the application. The policy was issued on April 15, 1990. Kitchens died less than
three months later on June 27, 1990, of pancreatic carcinoma.

¶4. Willis testified that he marked Kitchens's answers to the questions exactly as she stated them. He
also stated that other family members were present when he took Kitchens's application. Daisy
Hubbs, Lucille Kitchens's sister, testified that she told Willis that she had seen a doctor within the last
three years and had been diagnosed and treated for cancer of the cervix. No such information was
noted by Willis on Hubbs's application. Willis denied that Hubbs had given him this information when
he filled out her application. Hubbs, on the otherhand denied any knowledge that her sister had
diabetes.

¶5. After Kitchens's death a claim was submitted to American Funeral. During the course of
investigation, American Funeral discovered in a hospital discharge summary that Kitchens had a
history of alcohol abuse and had been diagnosed as an insulin-dependent diabetic. It was also
discovered that Kitchens had been hospitalized on a number of occasions in the three years before the
policy application. American Funeral denied the claim for failure to disclose a material health
condition, the diabetes.

¶6. On January 26, 1993, Daisy Hubbs brought suit as the administratrix of the Estate of Lucille
Kitchens against American Funeral and Lakeover, asking for specific performance of the insurance
contract and alleging tortious breach of contract, breach of fiduciary duties and fraud. The complaint
asked for the policy benefits, $4,000, damages for mental and emotional distress and punitive
damages.

¶7. The case was tried on May 26 and 27, 1994, and was continued for final judgment on November
3, 1994. The chancery court made the following findings: (1) that Arthur Willis, agent for Lakeover
and American Funeral "actually checked the answers to the questions asked of Ms. Kitchens . . . ;"
(2) the policy was written to provide funeral benefits to Lakeover upon the death of the insured; and
(3) the policy was in full force and effect at the time of Kitchens's death. The chancery court awarded
$4,000 to the plaintiffs and determined that a hearing would be held on the question of punitive
damages pursuant to Miss. Code Ann. § 11-1-65. As to punitive damages, the chancery court found:
"Pursuant to [§ 11-1-65], the Court finds from the evidence discussed above that the defendants
acted with bad faith and their acts constituted gross negligence which evidences a willful, wanton, or
reckless disregard for the rights of others and is tantamount to actual fraud."

¶8. The chancery court awarded $200,000 in punitive damages. American Funeral appealed. The case
was assigned to the Court of Appeals. TheCourt of Appeals first found that "the chancellor
determined that AFA was not entitled to void the policy because the misrepresentations were made
by the agent, not the insured. . . . [T]he chancellor could reasonably infer that Kitchens did indeed
disclose the diabetes, but economic and financial stimuli motivated Willis not to report the condition
on the application." As to the propriety of punitive damages, the Court of Appeals stated that
"punitive damages were assessed because the court determined that agent Willis'[s] conduct was
tantamount to fraud. Because the record contains substantial credible evidence indicating that
economic incentives motivated Willis not to disclose the diabetes, we must defer to the chancellor's
determination that punitive damages were appropriate." Finally the Court of Appeals found that there
was no error in the procedure followed by the chancery court in deciding the issue of punitive
damages.

¶9. American Funeral petitioned this Court for certiorari. We granted the petition, and after due
consideration we affirm the award of compensatory damages, but reverse and render the punitive
damages award.

                                                  I.

¶10. American Funeral raises two issues on certiorari dealing with the affirmation Court of Appeals
by the affirmation of the chancery court's award of punitive damages. One deals with the relation
between the cause of the insured's death and the alleged material misrepresentation made by the
insured. We do not reach that issue in our disposition of this appeal. The other issue is whether the
Court of Appeals correctly affirmed the ultimate finding of the chancery court.

¶11. "This Court will not disturb the findings of a chancellor when supported by substantial evidence
unless the chancellor abused his discretion, was manifestly wrong, clearly erroneous or an erroneous
legal standard was applied." Herring Gas Co. v. Whiddon, 616 So. 2d 892, 894 (Miss. 1993). The
Court of Appeals found that substantial evidence supported the finding that Arthur Willis failed to
correctly report Lucille Kitchens's medical history on her application. "Regarding issues of fact as to
which a chancellor did not make specific findings, this Court is required to assume that the chancellor
resolved all such fact issues in the appellee's favor." Sunburst Bank v. Keith, 648 So. 2d 1147, 1149
(Miss. 1995). After careful review of the record we decline to disturb the decision of the Court of
Appeals on this issue. The award of compensatory damages is affirmed.

                                                  II.

¶12. The chancery court found that in addition to compensatory damages Daisy Hubbs had met the
requisite burden of proof under Miss. Code Ann. § 11-1-65(1)(a) (Supp. 1996) to be awarded
punitive damages. Both parties, and the chancery court, assumed that § 11-1-65 would apply in this
case. However, § 11-1-65(2) states:

     The provisions of Section 11-1-65 shall not apply to:

     (a) Contracts;

     (b) Libel and slander; or

     (c) Causes of action for persons and property arising out of asbestos.

¶13. Because we find that this case is exempted from the provisions of § 11-1-65(1), the question of
punitive damages must instead be governed by the common law standards set by this Court. Those
standards are as follows:

     Although punitive damages are not ordinarily recoverable in cases involving breach of contract,
     they are recoverable where the breach results from an intentional wrong, insult, or abuse as well
     as from such gross negligence as constitutes an independent tort. In these instances, they act to
     punish, and are to set an example, thereby discouraging others from similar behavior. As such,
     punitive damages are allowed only with caution and within narrow limits.

Blue Cross & Blue Shield v. Maas, 516 So. 2d 495, 497 (Miss. 1987) (citations omitted). "[B]efore
punitive damages may be recovered from an insurer, the insured must prove by a preponderance of
evidence that the insurer acted with (1) malice, or (2) gross negligence or reckless disregard for the
rights of others." Universal Life Ins. Co. v. Veasley, 610 So. 2d 290, 293 (Miss. 1992).

¶14. A review of this record fails to show, by a preponderance of the evidence, that Arthur Willis was
guilty of anything more than ordinary or simple negligence in his handling of Lucille Kitchens's
insurance application. The heightened circumstances required for an imposition of punitive damages
are not present. The Court therefore finds that the award of punitive damages in favor of Daisy
Hubbs, administratrix of the Estate of Lucille Kitchens, must be reversed and rendered.

¶15. AFFIRMED IN PART; REVERSED AND RENDERED IN PART.

LEE, C.J., PRATHER, P.J., PITTMAN, BANKS, ROBERTS, SMITH AND MILLS, JJ.,
CONCUR. McRAE, J., CONCURS IN RESULT ONLY.
