Insurance Company Act in Bad Faith? Can It Be Punished? What Policyholders Need To Know About California Bad Faith Law

Daniel Veroff | Property Insurance Coverage Law Blog | June 10, 2019

Insurance policyholders who are considering suing their insurance companies for bad faith need to consider many pros and cons, including the potential for financial compensation. California juries can allocate the money they award policyholders to several categories, such as unpaid policy benefits, attorney fees, and punitive damages. This post addresses punitive damages and looks at three key issues that came up in a recent decision from California’s Second Appellate District.1 Keep in mind, there are many other factors to consider, and there is no substitute for a consultation with an experienced insurance law attorney.

What is the standard for awarding punitive damages?

California law states that punitive damages can only be awarded if “clear and convincing evidence” shows the insurance company engaged in “oppression, fraud or malice.”2 “Malice” is an intentional injury or “despicable conduct which is carried on the defendant with a willful and conscious disregard of the rights or safety of others.”3 “Oppression” is “despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.”4And “fraud” is “an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant” with the intent to deprive the insured of their legal rights or to cause injury.5

In the recent appellate decision, the court stated that punitive damages were justified because the insurance company, there GEICO, egregiously relied “selectively on facts that support its position and ignore[d] those facts that support[ed the] claim.”6 This is an all-too-common scenario in the claims we see.

When is the insurance company responsible for the malice, fraud and oppression of its adjusters?

In many cases we see, there are bad acts by the adjusters. Insurance companies need to right the wrongs of their adjusters. But should an insurance company be responsible for additional, punitive damages for the acts of one bad apple? The law does not think so, unless there is proof that at least one of two scenarios exists.

First, a jury can award punitive damages against an insurance company for the fraud, malice or oppression of its adjusters if an “officer, director or managing agent” of the company knew in advance that the adjuster was unfit for the job.7

Second, a jury can award punitive damages against an insurance company if an “officer, director or managing agent” of the company authorized or ratified the wrongful conduct” of the adjuster.8

An officer or director is easy to identify, but a “managing agent” can take many forms. In general, the definition of “managing agent” for purposes of punitive damages is an employee who exercises “substantial discretionary authority over significant aspects” of the insurance company’s business.9 For example, in the recent California case, the court held that a regional claims manager was a “managing agent” because he set the standards for claim settlement in his region, viewed the claims process as an adversarial negotiation, and reviewed and approved the adjuster’s course of conduct based on biased summaries.10 Even though the manager never read the claim file, the fact he had access to it was sufficient to support the award for punitive damages.11

Is there a limit or range for the amount of punitive damages that can be awarded?

After the plaintiff and defendant rest their cases in trial, the jury decides whether there is clear and convincing evidence that the insurance company engaged in malice, fraud or oppression. If it finds that such evidence exists, then it determines the amount of punitive damages to award.

The jury’s award is not free from scrutiny however. Courts have the power to reduce punitive damages awarded if the amount is “grossly excessive” compared to the compensatory damages, or “arbitrary.”12 Where the amount of compensatory damages are high, punitive damages in a 1:1 ratio are typically accepted as the ceiling.13 Where the compensatory damages are middle of the road, the generally accepted ceiling for punitive damages is a 3:1 ratio.14 Where the compensatory damages are small but the fraud, malice or oppression was severe, awards have greatly exceeded 3:1.15

In deciding whether the amount chosen by the jury is “grossly excessive” or “arbitrary,” courts consider several “guideposts.”16

First, courts consider “the degree of reprehensibility of the defendant’s misconduct.”17 For this, the court looks at whether (1) the harm was physical as opposed to economic; (2) the insurance company was reckless or engaged in malice, trickery or deceit, as opposed to an accident; (3) the insured was financially vulnerable; and (4) the extent and duration of bad acts to the insured in the single claim, or to a large group of insureds.”18

Second, courts consider “the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award.”19 In other words, the jury cannot make a mountain out of a molehill.

Third, courts consider “the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.” Many courts find this factor unhelpful given the penalty laws in California.20

In the recent California appellate decision, the court held that the punitive damages award of less than 3:1 was justified based on the reprehensibility of the insurer’s conduct.21 Importantly, the court explained that evidence of several wrongful acts towards one insured is just as good as evidence of the same wrongful act towards many insureds.22

Bonus question: should I consult with an attorney?

The rules discussed in this post are just the beginning of the analysis. The body of law about punitive damages in California is complex and cases must be analyzed based on their own unique facts. You can contact our attorneys for a free case consultation and ask us how these questions apply to your case.
1 Mazik v. GEICO General Ins. Co., Case No. B281372 (Cal. 2nd. Dist. App. May 17, 2019).
2 Civil Code § 3294(a).
3 Civil Code § 3294(c)(1).
4 Civil Code § 3294(c)(2).
5 Civil Code § 3294(c)(2).
6 See footnote 1; see also Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 721; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 821–822.
7 See Civil Code § 3294(b).
8 See footnote 1 and cases cited.
9 Id.
10 Id.
11 Id.
12 Id.
13 Id.
14 Id.
15 Id.
16 Id.
17 Id.
18 Id.
19 Id.
20 Id.
21 Id.
22 Id.

New Sustainability Ordinances for Construction Enacted in Florida and Colorado Cities

Joshua Atlas | Construction Industry Counselor | June 6, 2019

The City of St. Petersburg, Florida is one of the latest municipalities to incorporate the concepts of sustainable construction, sometimes referred to as “green building”, into the requirements of their municipal code.  On April 26, 2019, the City adopted Ordinance No. 359-H; which requires City-owned buildings over 5,000 square feet, which are either existing and being substantially modified or are being newly constructed, to achieve a rating of LEED Gold from the U.S. Green Building Council.  

The new ordinance makes clear that the purpose of adopting the sustainability requirement is to uphold the City’s responsibility to lead by example. The City is focusing on its goals of becoming a more sustainable community by pressing the conservation of resources, a reduction of waste, and increased energy and water efficiency for its own facilities.

The new ordinance also applies to City-funded municipal infrastructure projects exceeding $2,000,000.  For these projects, the work must achieve a Gold rating under the Envision program, a sustainable construction framework developed by the Institute of Sustainable Infrastructure.  While compliance with the sustainability requirements is not mandatory for non-qualifying municipal projects (or private projects), the ordinance furthers the City’s overall goals by also requiring that all City construction projects implement LEED or Envision principles even if certification is not required. 

The City of Denver also recently enacted a revised, stricter sustainability ordinance.  It requires property owners to use a “green roof” design to incorporate either reflective roof surfaces, solar panels or green space/vegetative roofs.  Subject to a few exemptions, the Denver ordinance applies to all new construction and renovations of buildings larger than 25,000 square feet.  The stated purpose of the Denver ordinance is to reduce the “heat island” effect associated with urban environments, which are prone to capturing and retaining solar heat.  In a suburban or rural environment this heat gain is reduced by the presence of larger areas of plant life and vegetation.  If not feasible for a certain project, the Denver ordinance also gives property owners the alternative of either obtaining a LEED Gold certification for the entire project, purchasing off-site renewable energy credits or paying an additional per-square-foot development fee.  The fee revenue would be invested in other municipal projects to advance the City’s sustainability goals.  Denver became the second U.S. city to enact a green roof requirement after San Francisco passed a similar ordinance in 2016.

That’s Common Knowledge! Failure to Designate an Expert Witness in a Professional Negligence Case is Not Fatal Where “Common Knowledge” Exception Applies

Lyndsey Torp | Snell & Wilmer | May 16, 2019

In reversing summary judgment for defendants, the California Fourth District Court of Appeal recently held that homeowners suing their real estate broker for negligence did not need an expert witness to establish the elements of their causes of action. Ryan v. Real Estate of the Pacific, Inc. (2019) 32 Cal. App. 5th 637. Typically, expert witnesses are required to establish the standard of care in professional negligence cases. But in Ryan, the court of appeal held that the “common knowledge” exception applied despite this general rule, because the conduct required by the particular circumstance of the case was within the common knowledge of a layman. The conduct in question here? The broker’s failure to disclose to his client that the client’s neighbor told him that she planned extensive renovations that would obstruct the client’s property’s ocean views.

Ryan and Patricia Ryan (the Ryans) hired defendant Real Estate of the Pacific, Inc., doing business as Pacific Sotheby’s International Realty (Sotheby’s) and defendant real estate broker to sell their residence in La Jolla, California. During an open house at the residence, a neighbor informed the Ryan’s real estate broker that she planned extensive renovations at her home that would, among other things, permanently obstruct the Ryan’s westerly ocean views and take several years to complete. The real estate broker never informed the Ryans of this, nor the subsequent buyer. The subsequent buyer purchased the property for $3.86 million, and defendants received $96,500 as commission for the sale. The day after escrow closed, the buyers learned of the renovations, and sought to rescind the purchase. Based on advice of defendants, the Ryans refused, and the dispute proceeded to arbitration. The buyer obtained a rescission of the purchase, with the Ryans order to pay damages, interest, and attorneys’ fees and costs in excess of $1 million. The Ryans then sued Sotheby’s and the real estate broker to recover these amounts and damages caused by defendants’ alleged negligence.

Sotheby’s and the defendant real estate broker moved for summary judgment against the Ryans, arguing that the Ryans could not establish the existence of any cause of action without an expert witness. Because the Ryans did not designate an expert witness, defendants argued summary judgment was warranted. The trial court agreed and granted the motion. The court of appeal reversed.

The court of appeal first analyzed whether the Ryans had forfeited certain arguments by failing to raise them with the trial court. At the trial court level, the Ryans opposed summary judgment on the grounds that they did not need expert testimony because the findings of fact and conclusions of law regarding the standard of care in the arbitration with the buyers, and the arbitration award collaterally estopped defendants from relitigating the issue. The trial court rejected this argument, given that defendants were not a party to the arbitration. In their appeal, the Ryans instead advanced the “common knowledge” theory, which states that an expert witness is not needed to establish the standard of care in a professional negligence cause of action when the conduct required by the particular circumstances is within the common knowledge of a layman. The court of appeal found that the common knowledge theory presented a new question of law based upon undisputed facts, and the Ryans could make such an argument for the first time on appeal.

The court of appeal then analyzed the Ryans’ claims, noting that they were contingent on defendants having a duty to share the subject information. At the summary judgment stage, to satisfy their initial burden and shift the burden to the Ryans to prove the existence of a triable issue of material fact, defendants had to show that an expert witness was essential for the Ryans’ claims. To carry that burden, they needed to explain why the lack of an expert witness was fatal to the Ryans’ claims. The court of appeal found that defendants did not meet this burden.

California law does not require an expert witness to prove professional malpractice in all circumstances. One such exception is where the negligence is obvious to a layman. Defendants argued that this was not one of those cases, and instead attempted to limit to their duties to those set forth in California Civil Code section 2079(a), and that their duties of investigation and disclosure, as real estate brokers, were limited to the property being sold. The court of appeal disagreed that these were the real estate broker’s only source of duties. Rather, real estate brokers are subject to duties imposed by regulatory statutes, such as section 2079(a), but also those arising from the general law of agency. The court of appeal explained:

Here, the Ryans’ claims are not contingent on an expansion of the statutorily defined duties of a real estate broker. Instead, their claim is more elementary. If a real estate broker has information that will adversely affect the value of a property he or she is selling, does that broker have a duty to share that information with his or her client? The clear and uncontroversial answer to that question is yes.

The court of appeal concluded that because the Ryans alleged a cause of action for breach of fiduciary duty against defendants, the lack of an expert witness would not be an impediment to proving such a cause of action based upon the allegations in the complaint. In addition, defendants had not shown, for purposes of summary judgment, that an expert witness was necessary to establish the scope of a broker’s duty or a breach of that duty for professional negligence. Defendants possessed material information that impacted the value of the property. They did not need to engage in investigation to discover the information, but rather, they “simply chose to remain silent, collect their commission, and allow the Ryans to deal with the consequences.” The conduct required here was within the common knowledge of a layman. “Put differently, anyone who hired a real estate broker to sell her home, would expect that broker to share information that would adversely impact the value of the home.”

This case is interesting for a few reasons. First, the court of appeal rejected defendants’ forfeiture argument, and considered a new legal argument on appeal. Second, the case navigates an exception to the general rule requiring the designation of an expert to establish the standard of care in professional negligence cases. The conduct at issue here strikes a chord for anyone that has purchased or sold a home. Even so, assessing whether to designate an expert in a particular case requires close scrutiny, given that the wrong call could be fatal to the case.

Trial Court’s Award of Contractual Fees to Public Adjuster Overturned

Tred R. Eyerly | Insurance Law Hawaii | April 29, 2019

    A judgment awarding the public adjuster his compensation for work performed under contract was remanded for further proceedings by the Hawaii Intermediate Court of Appeals. Joslin v Ota Camp-Makibaka Ass’n, 2019 Haw. App. LEXIS 155 (Haw. Ct. App. April 5, 2019). 

    A fire destroyed the homeowners’ residence on September 19, 2013. The property was subject to the bylaws of the Association of Apartment Owners of Ota Camp. The Association had a policy with Alterra Excess & Surplus Insurance Company and submitted a claim for all units damaged in the fire. The Association’s adjuster came the following day to inspect the site.

   Separately, Robert Joslin, public adjuster, entered a contract with the homeowners to adjust their claim in exchange for twelve-percent of any insurance proceeds obtained. Over the next several months Joslin pursued insurance proceeds from Alterra on behalf of the homeowners. On December 18, 2013, Joslin filed a complaint with the Insurance Division arguing that Alterra had failed to timely make payments on the claim. 

    On February 10, 2014, Alterra’s third party administrator, Engle Martin & Associates, sent a check to Joslin for $231,940 made out to the Association, the homeowners and Joslin. 

    On February 10, 2014, Joslin sent a letter to the homeowners with the check for their signature. The letter stated that the check would be deposited into a client trust account, the fees would be removed, and a new check issued from Joslin. The letter included an invoice for services totaling $28,992.31. 

    The Association’s legal counsel sent an email to the property manager on February 14, 2014, stating that under the bylaws, the Association was responsible for the repair of the unit. Thus, if the Association signed the check over to the homeowners and they did not repair the unit, the Association would breach its duty and be liable to the new owners of the unit. The lawyer also wrote to Engle Martin, asking that the check be cancelled and reissued as payable to the Association as the sole payee. 

    Joslin then sued the homeowners and the Association, seeking a declaratory judgment that as a public adjuster, he had an equitable lien against the insurance proceeds, a finding that the Association was unjustly enriched, and that the homeowners breached their contract with Joslin. The circuit court granted Joslin’s motion for summary judgment in so far as he was entitled to have his commission paid from the insurance proceeds as a public adjuster under Haw. Rev. Stat. 431:9-230. Further, the homeowners breached their contract with Joslin and he conferred a benefit on the Association, but there was a genuine issue of material fact as to the amount of value actually conferred. Joslin was also awarded fees.

    The Court of Appeals found that Haw. Rev. State. 431:9-230 did not provide authority for Joslin to be paid commissions out of the insurance proceeds paid under the Association’s policy. Instead, the statute addressed an adjuster’s responsibilities as trustee “for all premium and return premium funds received or collected under this article. The plain meaning of “premium” meant the amount paid at designated intervals for insurance. Therefore the appellate court disagreed with the circuit court that Joslin was entitled to commissions based on Haw. Rev. Stat. 431:9-230.  

    Instead, the applicable statute was Haw. Rev. Stat. 514B-143 (f), which provided that “any loss covered by the property Policy . . . shall be adjusted by and with the association. The insurance proceeds for that loss shall be payable to the association . . .” Accordingly, the circuit court erred in granting Joslin summary judgment on the declaratory judgment claim. 

    The appellate court also found that genuine issues of material fact existed as to whether the Association was unjustly enriched by the actions of Joslin, including whether he conferred a benefit upon the Association by causing Alterra to issued a payment for $231,940 and whether the Association’s retention of the money resulting from Joslin’s labor and expertise without compensating him was unjust. There also remained genuine issues of material fact as to whether the Association was unjustly enriched by the activities of Joslin. 

    The court determined Joslin was not entitled to an equitable lien against the proceeds paid by Alterra because the funds had been interpleaded. The funds would be distributed by the Clerk of Court in accordance with the final judgment in the case.

    Finally, the award of attorneys fees to Joslin was reversed. Because he did not have a statutory right to receive his commissions from the insurance proceeds under the Association’s policy and the circuit erred in granting Joslin summary judgment on the declaratory judgment claim, the court also erred in awarding him fees.

    The case was remanded to the circuit court for further proceedings. 

Liability Insurer’s Duty to Defend Insured is Broader than its Duty to Indemnify

David Adelstein | Florida Construction Legal Updates | May 3, 2019

When it comes to liability insurance, an insurer’s duty to defend its insured from a third-party claim is much broader than its duty to indemnify.   This broad duty to defend an insured is very important and, as an insured, you need to know this.   “A liability insurer’s obligation, with respect to its duty to defend, is not determined by the insured’s actual liability but rather by whether the alleged basis of the action against the insurer falls within the policy’s coverage.”  Advanced Systems, Inc. v. Gotham Ins. Co., 44 Fla. L. Weekly D996b (Fla. 3d DCA 2019) (internal quotation omitted).  This means:

Even where the complaint alleges facts partially within and partially outside the coverage of a policy, the insurer is nonetheless obligated to defend the entire suit, even if the facts later demonstrate that no coverage actually exists.  And, the insurer must defend even if the allegations in the complaint are factually incorrect or meritless.  As such, an insurer is obligated to defend a claim even if it is uncertain whether coverage exists under the policy.  Furthermore, once a court finds that there is a duty to defend, the duty will continue even though it is ultimately determined that the alleged cause of action is groundless and no liability is found within the policy provisions defining coverage.

Advanced Systems, supra(internal citations and quotations omitted).

In Advanced Systems, an insurer refused to defend its insured, a fire protection subcontractor.   The subcontractor had been third-partied into a construction defect lawsuit because the foam fire suppression system it installed had a failure resulting in the premature discharge of foam.  The owner sued the general contractor and the general contractor third-partied in the subcontractor.  However, the subcontractor’s CGL carrier refused its duty to defend the subcontractor from the third-party complaint because of the pollution exclusion in the CGL policy.  In other words, the insurer claimed that the foam the subcontractor installed constituted a pollutant within the meaning of the exclusion and, therefore, resulted in no coverage and, thus, no duty to defend the insured in the action.  

To determine the foam was a “pollutant”–which the policy defined as any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste”—the insurer relied on extrinsic evidence, specifically the Material Safety Data Sheet (MSDS Sheet) for the foam.   The insured objected to the insurer’s reliance on extrinsic evidence since it was beyond the scope of the insurer’s duty to defend which should be based on the allegations in the underlying complaint.  (The insurer tried to support its reliance on extrinsic evidence under a very limited exception that supports the reliance on extrinsic facts to form the refusal to defend when the extrinsic facts are uncontroverted and manifestly obvious, not normally alleged in the complaint, and that place the claim outside of coverage.  However, this is a very narrow exception that the court was not going to apply here.) 

It is important to consult with counsel if you have an issue with your insurer refusing to defend you in an underlying action and/or your insurer denies coverage.