CALIFORNIA RECENT DEVELOPMENTS IN BAD FAITH

Bad Faith Law in California -- A Thumbnail Sketch

CALIFORNIA RECENT DEVELOPMENTS IN BAD FAITH

Insurance is different. An insurance company's product is not something tangible like a car or a house -- but rather something very intangible -- a promise to pay in the future on the happening of some event. The typical insurance policy is a pre-printed boilerplate form that is unintelligible to most people. Even learned judges and lawyers who specialize in insurance have difficulty parsing through the fine print and making sense of it. Consequently, the purchasers of insurance, whether individuals or large corporations, depend upon the insurance company to interpret the policy and to perform in good faith. All too often, however, the coverage promised at the time of purchase disappears down the road when the policyholder submits a claim.

The policyholder is usually at a disadvantage. Insurance companies are paid to handle claims and are thus in the litigation business. They are not afraid to engage in battles over insurance coverage. As the American Insurance Association explained in a brief filed in 1993, "insurers spend (conservatively) a billion dollars a year in so-called 'coverage litigation'".

In fact, insurance companies make money by saying "no", because of the time value of money. The longer they hold on to premium dollars, the more money they stand to make on investments. From an institutional point of view, a delay of just one day in paying thousands of claims may save enough money to pay for lawyers, court costs, and litigation.

Policyholders often have no choice but to litigate. They need all the help they can get. This web page will keep track of recent developments in California, especially in the area of bad faith, an area of law that has unique application to insurance companies.

I. RECENT BAD FAITH DECISIONS

Argonaut - Workers Compensation Insurance

In Diamond Woodworkers, Inc. v. Argonaut Ins. Co., 109 Cal. App. 4th 1020 (2003) the appellate court upheld a jury verdict for bad faith and fraud in failing to provide coverage for "leased employees". The court reduced a $14 million award for punitive damages to $1 million (four times compensatory damages), following the Supreme Court's decision in State Farm v. Campbell.

Paul Revere /Unum Provident - Disability Insurance

The federal court decision in Handgarter v. Paul Revere (Nov. 2002) upholds a $5 million punitive damage award and details a company-wide scheme to deny disability benefits to save money for the insurance company.

A California jury in state court awarded $30 million in punitive damages against Unum Provident for terminating the long-term disability benefits of an eye surgeon. The trial judge reduced the damage award to $5 million. Chapman v. UnumProvident (Jan. 2003).

Truck Insurance Exchange - Pollution Coverage

Truck misrepresented policy provisions by stating that a pollution exclusion barred coverage for contamination at a car dealership. A $30 million award by a California jury was reduced to $3 million in an unpublished decision in Earnest v. Truck Insurance Exchange. (Nov. 2002)

Truck Insurance Exchange - Failure to Defend Advertising Injury Claims

Truck Insurance failed to defend the maker of a surgical device against allegations of advertising injury and unfair competition. A jury award pf lost profits in the sum of $4.5 million was upheld in an unpublished decision. (June 2002).

New Hampshire Ins. Co. - Additional Insured Coverage

New Hampshire Insurance Co. denied a defense to a gasoline refinery on Grounds that the additional insured endorsement did not provide coverage. In an unpublished decision, a $4.5 million punitive damage award was upheld. Tosco v. New Hampshire Ins. Co. (Oct. 2002)

National Union - Certificate of Insurance

National Union denied coverage for a school bus, claiming it had been deleted from an insurance policy. A $10 million punitive damage award was re3duced to $1.7 by the Court of Appeal in an unpublished decision (June 2002).

PERSHING PARK VILLAS v. UNITED PACIFIC INSURANCE COMPANY, No. 95-1918-S, S.D. California

$27 Million in Compensatory Damages

Summary: A $27 million verdict was delivered March 2, 1998, in U. S. District Court for the Southern District of California against defendant United Pacific Insurance Company and Reliance Insurance Company. The jury awarded damages to three San Diego developers and a homeowners' association who sued their insurance companies for failing to help them rehabilitate a condominium complex. A homeowners' association claimed that the developers had constructed a condominium complex with construction defects. Insurance companies originally agreed to defend the lawsuit but withdrew from defense of the lawsuit prior to trial. The plaintiffs alleged that they had been forced into bankruptcy and financial ruin as a result of a default judgment that was entered against them.

SHADE FOODS, INC. v. ROYAL INSURANCE COMPANY OF AMERICA AND NORTHBROOK NATIONAL INSURANCE COMPANY

$17.5 Million Verdict

Summary: A San Francisco Superior Court jury award approximately $20 million in damages against two insurance companies for failure to pay for claims involving a defective product. Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., No. 970035 in San Francisco Superior Court. Shade Foods, Inc. supplied ingredients to a variety of brand name food manufacturers, including a major breakfast cereal maker. The cereal maker reported that it found wood slivers in the product that was being supplied. The insurance companies denied coverage on the grounds that all damages were as a result of a breach of contract. $3,750,000 was awarded for denial of disability payments. The plaintiff was an emergency room doctor who claimed that he was disabled under four "own occupation" disability policies issued by Mass Mutual. The insurance company contended that the plaintiff was not psychiatrically disabled.

PARTNERSHIP PLACEMENTS INC. v. LANDMARK INSURANCE CO.

Summary: A Los Angeles jury found that the insurance company improperly refused to defend its policyholders against a breach of warranty of habitability and negligent management of property suit filed by tenants. The jury awarded $2.4 million in compensatory damages and $10,000,000 in punitive damages. The jury found Landmark concealed the fact that it had been found to have a duty to defend in a related case (against another policyholder of Landmark, arising out of the same lawsuit by tenants), intentionally concealed or suppressed the fact with the intent to defraud, and acted with fraud or malice. The trial judge denied post-trial motions. Landmark has filed a notice of appeal.

PAINEWEBBER REAL ESTATE SECURITIES, INC. V. FIREMAN'S FUND INS. CO., 1997 Cal. LEXIS 1711 (March 26, 1997) pet. review denied, request for publication denied.

Summary: A $21 million bad faith punitive damage award will stand against Fireman's Fund Insurance Co., after the U.S. Supreme Court on October 6, 1997 refused the insurance company's petition for certiorari (Fireman's Fund Insurance Co. v. PaineWebber Real Estate Securities, et al., No. 97-4, U.S.Sup. __________.

The insurance company failed to contribute $3 million to the settlement action of a defamation case against PaineWebber Real Estate Securities.

GORDON VANN v. TRAVELERS COS.

Summary: An Alameda County jury found Travelers improperly denied an auto shop owner a defense in a pollution suit, and awarded $25,000,000 in punitive damages. The case was upheld in an unpublished decision.

WEST AMERICAN INSURANCE CO. v. MARK R. FREEMAN, 46 Cal. App. 4th 1476

Summary: A San Mateo County jury awarded $12,000,000 in punitive damages, finding an insurer coerced its insured, a general contractor, into a settlement and then sued the insured to recover the amount paid. An appeals panel affirmed the verdict, and the California Supreme Court dismissed the review after initial briefing. The insurance company's petition to the U.S. Supreme Court was denied.

MATSON TERMINALS v. HOME INSURANCE CO.

Summary: The insurance company denied coverage for a $10 million earthquake claim, and a California jury concluded the denial, based on a Manuscript DIC Form policy exclusion, was in bad faith, awarding $11,000,000 in punitive damages. The appeals court, in affirming the award that included $23.5 million in compensatory damages, held that the insurer led the policyholder to believe coverage was forthcoming and encouraged it to initiate repairs. The case settled for $33.65 million.

JAMES AND LORRAINE MEYER v. 20TH CENTURY INSURANCE CO.

Summary: The insurance company failed to pay a California earthquake claim because the damage did not meet the deductible. The trial judge found the punitive award grossly excessive given that 20th Century was faced with 45,000 claims from the Northridge quake. He reduced the punitive award from $6.75 million to $500,000.

GARY FREEMAN v. FIREMAN'S FUND INSURANCE CO.

Summary: A California jury awarded a couple $5 million in punitive damages for the insurance company's failure to settle a claim for fine art that was damaged during an earthquake. The trial judge vacated the punitive award, finding Fireman's Fund's conduct was not despicable, despite separate holdings by the jury that its actions constituted fraud, malice and oppression.

The case is on appeal to the Second District Court of Appeals, where Fireman's Fund is attempting to overturn the compensatory award and Freedman seeks reinstatement of the punitives.

DAVID CLAYTON v. UNITED SERVICES AUTOMOBILE ASSOCIATION, 54 Cal. App. 4th 1158

Summary: An Alameda County jury found the insurance company's offer of $10,000 on policy limits of $300,000 to parents whose only child was killed in an auto accident was unreasonable and in bad faith. An appellate panel affirmed the award of $3.9 million in punitive damages. On July 30, the California Supreme Court denied review of the case.

CATES CONSTRUCTION v. TALBOT PARTNERS

Summary: Transamerica refused to perform on its surety bonds. A jury found the failure to investigate and perform constituted bad faith. The appellate court reduced the punitive damage award from $28,000,000 to $15,000,000. The case has been accepted for review by the California Supreme Court, but was apparently settled.

ROBBINS v. FARMERS HOME GROUP, No. BC151210

$7.7 million

Summary: A Los Angeles jury found that an insurance company "low-balled" an earthquake damage estimate to keep the claim below the deductible. Damage was estimated by plaintiffs at $22,300; the insurance company estimated $400 below the $7,600 deductible.

AMOCO CHEMICAL CO. v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON

$381 million, reversed and settled

Summary: A California jury awarded the policyholder $381 million in punitive damages after the carrier failed to indemnify for underlying product liability claims related to substandard municipal water pipes. The trial judge reduced the award to $70 million. An appeals panel reversed, finding the jury was given an improper jury instruction on the definition of "accident." The case then settled for a confidential amount.

CALHAR, INC. v. STATE FARM FIRE & CASUALTY CO., BC 150257

Summary: A Los Angeles jury awarded approximately $4.4M in punitive damages for failure to provide coverage in a case of alleged arson. The insurer denied coverage on belief that the policyholder had set the fire and had made material misrepresentations on his application for insurance.

II. RECENT SIGNIFICANT RULINGS IN CALIFORNIA INSURANCE LAW

Obtaining Information From Insurance Companies.

1. Glenfed Development Corp. v. Superior Court, 53 Cal. App. 4th 1113 (1997) requires insurance companies to provide copies of their claims manuals in the course of pre-trial discovery.

2. Pfizer, Inc. v. Superior Court of Orange County, 59 Cal. App. 4th 480 (1997) holds that insurance companies can be compelled to disclose how they treated other policyholders with similar claims.

3. Lipton v. Superior Court, 48 Cal. App. 4th 1599 (1996). Reserves and reinsurance are subject to discovery.

4. Crime/Fraud Exception To Attorney-Client Privilege -- State Farm Fire & Casualty Co. v. Superior Court (Taylor), 54 Cal. App. 4th 625 (1997) (order published 12/1/97).

This case discusses fraudulent practices engaged in by State Farm to deny valid earthquake claims. The practices included forgery and intentional spoliation of evidence.

Insurance Company Must Provide A Defense When There Is A Potential For Coverage -- That Potential Exists In Environmental Cases.

In Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287 (1993) the California Supreme Court ruled in an environmental case that the insurance company has a duty to defend if there is any potential for coverage. The duty arises as soon as the insurance company is placed on notice. Id., at 295. These general principles were reaffirmed in subsequent decisions by the court, including Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995), Buss v. Superior Court, 16 Cal. 4th 35 (1997) and Aerojet.

Consequently, California courts continue to hold that insurance companies must defend environmental cases, even cases in which it is asserted that an exclusion bars coverage. Vann v. The Travelers Co., 46 Cal. Rptr. 2d 614 (1995); Haskel, Inc. v. Superior Court, 33 Cal. App. 4th 963 (1995); A-H Plating, Inc. v. American Nat'l Fire Ins. Co., 67 Cal. Rptr. 2d 113 (1997).

Most recently, the Ninth Circuit Court of Appeals ruled that Travelers had a duty to defend claims alleging off-site contamination. Reese v. The Travelers Ins. Co., 1997 U.S. App. LEXIS 31787, 97 C.D.O.S. 8590; 97 Daily Journal DAR 13923 (Nov. 12, 1997). Travelers argued that the contamination was confined to land owned by the policyholder and hence that coverage was precluded by the "owned property exclusion". The Ninth Circuit ruled, however, that because the complaint alleged off-site contamination, the potential for coverage existed. Travelers could not avoid its duty to defend by arguing that the policyholder was not liable for off-site contamination. Such proof would merely establish that the complaint was lacking in merit -- in which case Travelers would still have a duty to defend.

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last modified Jan 29, 2007 / 09:44 AM, GMT