California Recent Developments in Bad Faith
by Jordan Stanzler and Deborah Mongan
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
1. 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.
2. 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.
3. 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.
4. 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.
5. 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 is on appeal to the California First District Court of Appeal.
6. 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 US Supreme Court was denied.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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
A. AEROJET — Investigative Costs Are Covered.
In Aerojet-General Corporation v. Transport
Indemnity Company, 97 C.D.O.S. 9737 (December 29, 1997) the Supreme Court of California decided two issues of major importance to policyholders seeking insurance for the defense of environmental claims. The Court held that, as a general rule, site investigation expenses constitute defense costs that must be paid by an insurance company that owes a duty to defend. The Court held, in addition, that an insurance company that has a duty to defend must defend in full, immediately, without seeking to “allocate” the costs of defense to the policyholder or to other insurance companies. The Court rejected the arguments of insurance companies that site investigation costs should be considered as indemnity costs, and rejected the argument that such costs should be shared pro-rata between policyholders and insurance companies. The decision is certain to have far-reaching impact on virtually every type of claim that involves expenditures for defense costs. Without question, the decision will reshape the way insurance companies defend “continuing injury” claims — such as asbestosis or construction defect claims.
From the 1950’s into the 1980’s Aerojet discharged hazardous substances in an ongoing fashion, allegedly causing continuous and progressively deteriorating bodily injury and property damage. Substances such as trichloroethylene spread onto the ground and into the groundwater. Aerojet faced some thirty-five lawsuits brought by private parties and three actions brought by the United States or the State of California. One action brought by the State of California sought cleanup and remediation under California’s Porter-Cologne Water Quality Control Act. The United States and the State of California also filed cleanup actions under CERCLA (“Comprehensive Environmental Response, Compensation, and Liability Act of 1980”). Aerojet spent over $26,000,000 in site investigation expenses in connection with the private actions and the suits brought by the United States and the State of California. Aerojet sought to recover the investigation costs from a number of insurance companies that provided comprehensive general liability insurance from 1956 to 1984.
The Supreme Court held that site investigation costs constitute defense costs that an insurance company must pay if three requirements are satisfied:
First, the site investigation must be conducted within the temporal limits of the insurer’s duty to defend, i.e., between tender of the defense and conclusion of the action. Second, the site investigation must amount to a reasonable and necessary effort to avoid or at least minimize liability. Third and final, the site investigation expenses must be reasonable and necessary for that purpose. (Slip Op. at 24, 97 C.D.O.S. at 9742.)
The Court explained that the policyholder must bear the burden of proof on establishing the “existence, amount, and reasonableness and necessity” of site investigation costs — which are to be judged on an “objective” standard. If, however, the insurance company has breached the duty to defend, then the insurance company must carry the burden of proof that the expenses are unreasonable and unnecessary.
Most policyholders should be able to meet these standards. Site investigations are rarely done for foolish, extravagant or frivolous purposes. These investigations are a necessary part of reducing or minimizing the policyholder’s potential liability — as the Court recognized throughout the opinion. Many insurance companies have either flatly refused to reimburse policyholders for these costs, or have tried to pay a pro-rata share of these costs. These practices will be put to rest, once and for all.
The rejection of pro-rata schemes for payment of defense costs is perhaps the most far-reaching aspect of the decision. The Court gave a number of examples to illustrate this point. First, the Court stated that if an insurance company has a duty to defend, it must defend the entire action:
Insurer has a duty to defend Insured as to a claim for damages for property damage caused by its discharge of hazardous substances brought by Neighbor. Insured may possibly have discharged such a substance. It thereby may possibly have caused property damage to Neighbor’s land within the policy period of year 1. It may possibly have caused further damage as the substance may possibly have spread under the surface in year 2 through year 30. Insurer must defend Insured as to the claim in its entirety. (Slip Op. at 21, 97 C.D.O.S. At 9741.)
The Court used this very example in reversing the Court of Appeal. The Court of Appeal had reasoned that one insurance company, issuing one policy over a thirty year period in which contamination had taken place, should pay only 1/30 of defense costs. The Supreme Court rejected this analysis as erroneous:
[The] duty to defend was triggered when specified harm was possibly caused by an included occurrence, because at least some such harm may possibly have resulted within the policy period in the first year. It extended to all specified harm that was possibly caused by an included occurrence, even if some such harm may possibly have resulted beyond the policy period in the succeeding 29 years. In a word, although the
trigger of the duty to defend is limited to the policy period, the extent of the duty to defend is not. (Slip Op. at 45, 97 C.D.O.S. At 9746).
The Supreme Court also rejected cases from other jurisdictions which purported to allocate defense costs between a policyholder and its insurance company on notions of “fairness” and “justice”, such as the Supreme Court of New Jersey in Owens-Illinois,
Inc. v. United Ins. Co., 138 N.J. 437, 479 (1994). The Court reasoned that the “policies provide what they provide” and that Aerojet was not receiving a “windfall”. (Slip Op. at 45, 97 C.D.O.S. At 9746).
It is clear, therefore, that a policyholder may turn to any one of its insurance companies that provided defense coverage during a thirty year period of alleged contamination. That one insurance company must defend immediately and fully. That insurance company may not seek to pay less than 100% of defense costs of a potentially covered claim when dealing with the policyholder. The insurance company may seek contribution from other insurance companies, but may not offer to pay the policyholder a pro-rata share of defense costs.
B. Obtaining Information From Insurance Companies
- 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.
- 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.
- Lipton v. Superior Court, 48 Cal. App. 4th 1599 (1996). Reserves and reinsurance are subject to discovery.
- 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.
C. 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 US 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.
D. Is a “PRP Letter” a Suit?</span class=”italic”>
The issue of whether government environmental cleanup and enforcement
action instigated by a PRP (“potentially responsible party”)
letter triggers an insurance company’s duty to defend a lawsuit under
CGL policy language is presently before the California Supreme Court in
Foster-Gardner, Inc. v. National Union Ins. Co., 56 Cal. App. 4th 204 (1997), rev. granted October 15, 1997 (PRP letter is a “suit”) and Fireman’s Fund Ins.
Co. v. Superior Court, 57 Cal. App. 4th 1252 (1997) petition for review filed November 3, 1997, (PRP letter is not a “suit”).
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, 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., ____ F. ___ (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.
