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.
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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.

Jury to Decide If Carrier Risked Trial Because It Had Nothing Left to Lose

Claims Journal | May 23, 2019

A federal judge in Rhode Island has cleared the way for a trial to decide whether Columbia Casualty Insurance, in bad faith, put its own interest over its policyholder’s by gambling on a trial instead of settling a claim that resulted in a $25 million jury verdict.

Boston-based Ironshore Specialty Insurance Co. sued Columbia, accusing the Chicago-based carrier of pulling a fast one. Ironshore says Columbia risked a jury trial in a malpractice claim only because it knew it would have to shell out the full $9 million in coverage provided to settle the case.

By not settling, Columbia exposed Ironshore and its policyholder to even greater losses. A jury in August 2015 awarded claimant Carl Beauchamp $25.6 million in damages — which came to $35 million with prejudgment interest — forcing Ironshore to pay all of the $11 million in coverage that it provided as a third-tier insurer. That was the largest negligence verdict in Rhode Island history at the time, the court said.

Columbia filed a motion with the U.S. District Court in Rhode Island to dismiss Ironshore’s suit on the grounds that a carrier cannot be liable for bad faith unless it has been accused of breaching an insurance contract. Columbia said its insurance contract was with Rhode Island Hospital’s parent organization, Lifespan, not Ironshore.

On Monday, U.S. District District Judge William E. Smith ruled that Ironshore did not have to be a party to a contract with Columbia to bring a bad faith claim.

“The crux of the dispute here is whether Columbia’s settlement tactics in the Beauchamp action were reasonable and legitimate efforts to reduce Lifespan’s exposure to damages, or were executed in bad faith and in reckless disregard of Lifespan’s best interests,” the judge explained in his opinion.

Ironshore also scored a victory against Columbia by persuading Smith to bar one of Columbia’s expert witnesses, a retired judge who wrote a report finding that Columbia’s actions were consistent with industry standards.

Both litigants are heavyweights in the liability market. Columbia Casualty Co., based in Chicago, had $572 million in direct written premiums in 2018, all but $5 million of that in liability lines, according to National Association of Insurance Commissioners’ data. Ironshore Specialty Insurance Co. had $990 million in direct written premiums last year, all but $77 million of it in liability lines.

Columbia provided the second tier in malpractice insurance coverage through an umbrella policy covering Rhode Island Hospital. The hospital was self-insured for up to $6 million in losses. Columbia covered amounts beyond that retention up to $15 million. Ironshore covered the excess: anything more than $15 million up to $32 million.

The dispute between the carriers stems from Beauchamp’s claim. The hospital had admitted that Beauchamp had suffered permanent brain damage because of its negligence. The only issue left to settle was the amount of damages.

Columbia said Beauchamp’s attorney demanded $32 million to settle the case and refused to come down from that number. The carrier says it earnestly negotiated a pre-trial “high-low” agreement that guaranteed Beauchamp at least $15 million in damages and no more than $31.5 million.

The jury verdict triggered the high-end of that agreement, effectively exhausting all of Rhode Island Hospital’s insurance coverage.

Smith said now it’s up to a jury to decide if Columbia ignored its policyholder’s “reputational risk and used Ironshore’s money to roll the dice in hopes of getting snake eyes.”

A Good-Faith Attempt to Limit Unwarranted Bad-Faith Liability in Georgia

Bryan Lutz, Tiffany Powers, and Kyle Wallace | Alston & Bird | March 21, 2019

A victory for insurers in Georgia’s Supreme Court clarifies state law on liability for failing to settle a claim. Our Insurance Litigation & Regulatory Team offers three key holdings that will limit an insurer’s potential exposure.

  • The injured party must present a valid offer
  • Whether a claimant has made a valid offer to settle is a legal question
  • Insurers may exhaust the policy limits by settling one of multiple claims

In a recent victory for insurers by Alston & Bird’s insurance team before the Georgia Supreme Court, the court issued an opinion in First Acceptance Insurance Co. of Georgia v. Hughes clarifying longstanding (and much debated) Georgia law governing an insurer’s liability for failing to settle a claim within the policy limits. The court held that a claimant’s ambiguous demand letter did not create a duty for the insurer to settle a claim, shedding light on three key aspects of Georgia law:

  • Insurers have no duty to settle a claim until they receive a valid offer to settle.
  • Demand letters are construed by the court with the principles of general contract construction, with ambiguous terms to be construed against the drafter.
  • Insurers have no duty to settle one of multiple claims when there is no time-limited demand and the claimant has expressed a willingness to engage in a joint settlement conference.

Georgia Law on Liability for Bad-Faith Failure to Settle Claims Against an Insured

The Georgia Supreme Court recently stepped in to clarify Georgia’s law governing an insurer’s liability for failing to settle a claim within the policy limits. Decades ago, the Georgia Supreme Court announced a rule in Southern General Insurance Co. v. Holtthat if an insurer acts in bad faith by refusing to settle a claim for an amount within the policy limits, it may be liable for the full amount of any judgment against the insured. The reason for the rule was simple: to encourage insurers to settle to avoid liability to their insured for judgment amounts exceeding the insurance coverage rather than take a chance at a trial where the insurer will face the same policy-limits maximum exposure but will possibly save money if the insured is found not liable.

In the 27 years following Holt, however, the rule has been weaponized. Plaintiffs’ attorneys have recognized that when the person at fault in a catastrophic accident may be rendered insolvent by a massive judgment, the insurer is often the only possible source to collect from. In these instances, plaintiffs’ attorneys have every incentive to break through the contractual limits of the insurance policy and to seek collection of the entire judgment from the insurer. Holt provided an inlet with its bright-line rule. As a result, rather than promoting settlement, the Holt rule has often been used as a trap to ensnare unwary insurers through the use of strategic “set-up” demands to create bad-faith liability even when the claimant never truly intends to settle their claim for an amount within the policy limits. Set-up tactics have included demand letters that require hand delivery of settlement payments within an unrealistic timeframe and vague and confusing demands that may not fully release all claims. These tactics have become so widespread that plaintiffs’ attorneys have actually created continuing legal education seminars to instruct on their use.

The Georgia Supreme Court’s Opinion in Hughes

Although the Georgia legislature took action to curb the abusive tactic of sending time-limited demands,[1] the Georgia Supreme Court recognized in Hughes that the law governing bad-faith liability needed further reform. In Hughes, the insured caused a car accident that seriously injured multiple parties and resulted in the insured’s death. The insurer, recognizing the $50,000 policy limit would quickly be exhausted, attempted to schedule a joint settlement conference with all injured parties. One of the injured parties (on her own behalf and her minor child’s) sent two letters to the insurer on the same day: (1) a letter expressing interest in a joint settlement conference and alternatively offering a limited release that would carve out claims for uninsured motorist coverage upon payment of the policy limits and receipt of coverage information; and (2) a letter requesting coverage information within 30 days.

After 41 days, the attorney “withdrew” the offer, filed suit, and the claimants at issue were awarded a judgment of $5.3 million against the insured’s estate. The estate then filed suit against the insurer for the full amount of the judgment. The trial court granted the insurer’s motion for summary judgment, finding that the insurer could not have reasonably known that all of the injured parties’ claims could have been settled within the policy limits. The Georgia Court of Appeals reversed, relying on a rigid application of Holt, finding that a jury could find that a demand had been made with a “purported 30-day time limit” and that the insurer failed to settle the two claims at issue within that timeframe. The Georgia Supreme Court reversed the court of appeals, finding that there was no “time-limited” demand for settlement and that the insurer could not be liable for bad-faith failure to settle when the claimant unilaterally withdrew a pending offer that had no express time limit. 

Georgia’s highest court in Hughes made three key holdings that work to further limit an insurer’s potential exposure from the use of set-up demands:

An insurer’s duty to settle does not arise until the injured party presents a valid offer.

The court in Hughes held that insurers cannot be liable for excess judgments if the claimant never presented a valid offer to settle a claim within the insured’s policy limits. Before Hughes, courts had openly questioned whether under Georgia law an insurer could be liable for bad-faith failure to settle even without an express offer to settle for the policy limits. Many plaintiffs argued that an insurer had an obligation to initiate settlement discussions or make an offer even if the claimant had not. However, the court in Hughes recognized that such a rule would encourage after-the-fact testimony that a claimant would have settled every time a judgment is entered that exceeds the policy limit. 

By holding that a claimant must first present a valid offer to settle within the policy limits, the court has provided insurers with a powerful defense to set-up demands that are vague, contradictory, or fail to settle the entire claim. In those instances, insurers can argue that there was no valid offer to “accept” that would avoid future liability for the insured.

Whether a claimant has made a valid offer to settle is a legal question decided by the court according to the general rules of contract construction.

The court also struck at the heart of set-up demands that provide vague, confusing, or contradictory terms by holding that courts must construe the validity of an offer as a matter of law, resorting to a jury only if ambiguity remains after applying the rules of contract construction. Ambiguous demand letters are construed against the drafter—in this instance, the claimant. Before Hughes, plaintiffs often sought to avoid summary judgment (and to appeal to sympathetic jurors) by arguing that the interpretation or intent of a demand letter was a fact question that was appropriately resolved at trial and by arguing that agreements are generally construed in favor of the insured or claimant.

The court in Hughes clarified that demand letters are to be construed against the injured party, and that if its terms are “too indefinite for a court to [ ] determine, there can be no assent thereto” and the offer is not valid. Applying this basic rule of contract interpretation, the court held as a matter of law that there was no time-limited demand when a claimant mailed two separate letters—one expressing a willingness to attend a joint settlement conference or, in the alternative, to settle the claims if insurance information was provided, and the other requesting insurance information within 30 days. In light of Hughes, insurers will have a powerful defense when faced with vague, confusing, or contradictory demand letters.

Insurers may exhaust the policy limits by settling one of multiple claims, but need not do so absent a time-limited demand.

Finally, the court addressed the situation insurers face when there are multiple claimants involved. It has long been the rule that an insurer may settle one claim that exhausts the policy limits without incurring liability for excess judgments resulting from litigation by the non-settling claimants. However, Hughes clarifies that an insurer has no obligation to settle one of multiple claims for the full policy limits, absent a time-limited demand.

However, Hughes should not be seen as limiting an insurer’s potential liability in the face of a valid time-limited demand—even in the context of multiple claimants. The court noted that in Hughes, the two claimants at issue “expressed their interest in attending a settlement conference with the other claimants.” Consequently, the insurer’s failure to settle with the two individual claimants was “reasonable as an ordinarily prudent insurer could not be expected to anticipate that, having specified no deadline for the acceptance of their offer, [the claimants] would abruptly withdraw their offer and refuse to participate in the settlement conference.”


[1]  Effective July 1, 2013, Georgia enacted a law that provided insurers with a minimum of 30 days to respond to a time-limited demand and clarified that an insurer’s request for clarification of an offer letter will not be deemed a rejection and counteroffer. O.C.G.A. § 9-11-67.1(a)(1), (d).

Insurance Policy’s Promise to Advance Claims Expense for Covered Claims Does Not Create a Duty to Defend

Christopher Kendrick and Valerie Moore | Haight Brown & Bonesteel | May 7, 2019

In United Farm Workers of America v. Hudson Insurance Company, (E.D. Cal.) 2019 WL 1517568, the United Farm Workers of America union (UFW) sued Hudson Insurance Company for breach of contract and bad faith arising out of a former employee’s wrongful termination and wage and hour lawsuit.

Hudson provided UFW with Labor Professional Liability Insurance that included employment practices liability coverage. Hudson reserved its rights and agreed to pay an allocated share of the defense costs, citing the terms of its policy. UFW and Hudson agreed to a 50-50 allocation and, defending itself, UFW moved to compel arbitration of the employee lawsuit pursuant to its collective bargaining agreement. However, the trial court found that the only claim subject to arbitration was the employee’s wrongful termination claim, which Hudson contended eliminated the sole covered cause of action.

The employee’s complaint was amended to include class action allegations for the statutory wage and hour claims and the case proceeded to trial, resulting in an adverse judgment of $1.2 million. Hudson paid UFW for the allocated share of the defense costs incurred through the dismissal of the sole covered claim, and disclaimed any obligation for the wage and hour award.

Hudson retained Haight, Brown & Bonesteel to defend the company against the subsequent bad faith lawsuit brought by the UFW, which alleged that Hudson wrongfully failed to defend or indemnify the union for the employees’ lawsuit. Besides the $1.2 million wage and hour award, UFW claimed in excess of $800,000 incurred defending itself as damages.

UFW and Hudson brought cross-motions for summary judgment, with UFW seeking summary adjudication on the duty to defend. UFW argued that Hudson had a duty to defend the entirety of the employee lawsuit based on the mere potential for coverage, which was not extinguished by the partial grant of UFW’s motion to compel arbitration. (Citing Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263; Montrose Chem. Corp. v. Super. Ct. (1993) 6 Cal. 4th 287; and Buss v. Super. Ct. (1997) 16 Cal.4th 35.) UFW argued that Hudson’s failure to do so amounted to a bad faith breach of contract, exposing Hudson to the full amount of the defense costs, the resulting judgment, UFW’s own attorney’s fees for suing Hudson under Brandt v. Super. Ct. (1985) 37 Cal.3d 813, and other damages.

Hudson’s cross-motion for summary judgment asserted that there was no duty to defend under the terms of its policy, which expressly stated that UFW had the duty to defend. Under the policy, Hudson was only obligated to advance defense expenses for covered claims, subject to an allocation based on the respective liabilities and further subject to reimbursement in the event of an uncovered result, none of which translated into a duty to defend. (Citing Jeff Tracy, Inc. v. United States Spec. Ins. Co. (C.D. Cal. 2009) 636 F.Supp.2d. 995; and Petersen v. Columbia Casualty Company (C.D. Cal.) 2012 WL 5316352.) Further, although the employee’s original claim for wrongful termination was a covered claim under the Hudson policy’s definition of Wrongful Employment Practices, Hudson argued that none of the statutory wage and hour claims that remained after wrongful termination was ordered to arbitration came within the policy’s Wrongful Acts, Wrongful Offenses or Wrongful Employment Practices coverages. (Citing California Dairies v. RSUI Indem. Co. (E.D. Cal. 2009) 617 F.Supp.2d 1023.)

Consequently, Hudson contended that its payment after the entry of judgment, limited to an allocated share of the defense expense, and its disclaimer of coverage for the wage and hour award, were entirely proper and not in breach of the contract. In addition, Hudson uncovered the existence of misrepresentations in UFW’s application for the insurance during discovery, which Hudson argued voided the policy. (Citing Imperial Cas. Co. v. Sogomonian (1988) 198 Cal.App.3d 169; and Thompson v. Occidental Life (1973) 9 Cal.3d 904.) Without coverage or a breach of contract, Hudson argued that there could be no bad faith.

The district court agreed with Hudson, denying UFW’s motion for summary adjudication on the duty to defend and granting Hudson’s cross-motion for summary judgment. The court found that there was no duty to defend under the terms of the policy, which imposed the duty to defend on the insured and not the insurer. The court agreed that Hudson’s obligation was limited to payment for the cost of defending claims actually covered by the policy, and the award for wage and hour violations did not come within any of the policy’s coverages. Additionally, the court found that UFW made material misrepresentations in its application for insurance, holding that the contract was void. Because there was no coverage there was no breach of contract, and the cause of action for breach of the implied covenant of good faith and fair dealing had to fail as well, entitling Hudson to summary judgment.

This document is intended to provide you with information about insurance law related developments.The contents of this document are not intended to provide specific legal advice. If you have questions about the contents of this alert, please contact the authors. This communication may be considered advertising in some jurisdictions.

Federal and State Court Split on Procedure for Alleging Bad Faith

Christina Phillips | Property Insurance Coverage Law Blog | March 29, 2019

Minnesota Statute section 604.18, commonly known as Minnesota’s Bad Faith Law, permits an insured to add a claim to recover taxable costs based on an insurance company’s bad faith denial of policy benefits. The procedure for bringing a claim under section 604.18 differs from most states. Generally, an insured is strictly prohibited from including a claim for bad faith in its initial pleading. Rather, the insured must seek leave to amend the complaint, supported with affidavits, showing the factual basis for the motion. The insurer may then submit evidence to show there is no factual basis for the motion. Section 604.18 requires that the moving party (the insured) establish, by prima facie evidence, that the nonmoving party (the insurer) is liable under the statute. If the court finds such prima facie evidence, it may grant the insured leave to amend their pleading.

However, the question was recently raised in Minnesota Federal District Court as to whether the procedure in section 604.18 conflicted with the Federal Rules of Civil Procedure for amendments to pleadings.1 The court in Selective Insurance Company of South Carolina v. Sela,2 concluded that subdivision 4(a) of section 604.18 conflicted with Fed. R. Civ. P. 8. Rule 8(a) authorizes a plaintiff to “request any and all of the relief sought…in all pleadings that state a claim.”3 The court concluded that the restriction in subdivision 4(a) of section 604.18 which prohibits an insured from including a bad-faith claim in its initial complaint was in direct conflict with Rule 8, which permits a plaintiff to include a state law request for relief.

The court also concluded that section 604.18 conflicted with Rule 15, which permits a plaintiff to amend its complaint within 21 days after service, or within 21 days after service of the answer, or upon motion where leave is to be “freely given.” In that regard, the standard under Rule 15(a)(2), is that the proposed amendment plead “enough facts to state a claim to relief that is plausible on its face.”4 In other words, under Rule 15, the insured would not have to submit any affidavits or evidence in support of an amendment, because the four corners of the proposed pleading would govern the amendment.

Based on Sela, there is a split between state and federal trial courts in Minnesota on when an insured can allege a claim for bad faith. In that regard, Sela seems to suggest that an insured can initially allege a claim under section 604.18 in federal court if the requirements of Rule 8 are met. And if leave to amend is sought, the insured must comply with Rule 15, and not the requirements of section 604.18. Note, however, that the Sela decision does not alter or amend the objective and subjective standards an insured is required to establish under section 604.18.
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1 Fed. R. Civ. P. 8 and 15.
2 Selective Ins. Co. of South Carolina v. Sela, 353 F.Supp.3d 847 (D. Minn. 2018).
3 Id. at 857.
4 Id. at 866.