Publications
California Appellate Courts Interpret Law on Punitive Damages
Insurance Law Update
Punitive Damages
Two districts of the California Court of Appeal recently interpreted California law on punitive damages following the U.S. Supreme Court’s decision in State Farm v. Campbell . Their conclusions, while not legally inconsistent, are quite distinct and are likely to cause the California Supreme Court to consider the issue.
In Romo v. Ford Motor Co., 2003 WL 22784959 (Cal.App. 2003), the trial resulted in an award of compensatory damages of approximately $5.0 million and punitive damages of $290 million. Upon reconsideration of the punitive damages in light of State Farm v. Campbell , the Fifth District Court of Appeal reduced the punitive damage award to just under $24 million.
The Romo decision — if upheld by the California Supreme Court — is a landmark, watershed decision. It completely reshapes the law of punitive damages in order to comply with U.S. Supreme Court precedent. While punitive damages are still meant to punish the defendant, the punishment must be for conduct directed toward the plaintiff, not in response to the defendant’s alleged bad conduct generally. The Romo court also reiterated the U.S. Supreme Court’s conclusion that most punitive damages awards must be limited to a single-digit multiplier, finding that the particularities of each circumstance would dictate the appropriate amount of the multiplier.
The Romo court also reiterated that, under the U.S. Supreme Court decision in Cooper Industries v. Leatherman Industries , for constitutional purposes, the appellate court must conduct an independent review of the issue of the excessiveness of a punitive damages award.
In Simon v. San Paolo U.S. Holding Co., Inc ., 03 C.D.O.S. 10376 (Cal.App. 2003), the Second District Court of Appeal considered a punitive damages award of $1.7 million in a case in which the award for compensatory damages was only $5,000. The defendant had been found liable for fraud in the sale of commercial real estate. Under California law, a defrauded purchaser of real property who does not succeed in acquiring the property may only recover his or her out-of-pocket losses, not benefit-of-the-bargain damages. While the out-of-pocket expenses were only $5,000, the court found that there was evidence that the benefit-of-the-bargain damages would have been approximately $400,000. A punitive damage award of $1.7 million represented a ratio of slightly more than 4-to-1, had the jury been permitted to award benefit-of-the-bargain damages of $400,000.
The court found that the ratio could be determined by the harm or damage caused, not limited to the damages actually awarded. Thus, the court found that the $1.7 million punitive damage award was not a violation of due process.
The Simon court did not cite Romo, which was decided just a few days earlier. Nor did the Simon court conclude that the State Farm v. Campbell decision fundamentally changed California law in the manner described by the Romo court. Indeed, the Simon court cited many traditional California punitive damages decisions supporting its conclusion.
[Submitted by Bruce D. Celebrezze — Sedgwick San Francisco]
In-House Defense Counsel
In American Home Assur. Co., Inc. v. Unauthorized Practice of Law Committee , 2003 WL 22532817 (Tex.App. 2003), the Texas Court of Appeals determined that the use of in-house staff counsel by insurers does not constitute the unauthorized practice of law. The court held that, although staff counsel may face conflicts due to their perceived service to two clients, such conflicts are no different from those faced by outside counsel, are not irreconcilable, and can be resolved by resort to the Texas Grievance System. The court indicated that the insured is the defense counsel’s primary client and all ethical quandaries are to be resolved in favor of the insured. The court also found that insurers are not technically practicing law through the use of staff counsel since the defense of an insured is collateral to the carriers’ main duty to pay under the policy and that carriers are rightfully seeking to protect their own financial interests in the course of defending their insureds.
[Submitted by L. Kimberly Steele and Lisa M. Henderson — Sedgwick Dallas]
Notice of Impending Policy Changes
In Pastoria v. Nationwide Ins. Co. , 112 Cal.App.4th 1490, 6 Cal.Rptr.3d 148 (Cal.App. 2003), plaintiffs alleged that, prior to purchasing health insurance policies, they were not told of impending material premium increases and benefits reductions under the policies. These changes went into effect two months after plaintiffs received their policies. They asserted that they gave up better insurance from another insurer and that they would not have done so had they been made aware of the impending changes. The court allowed an unfair competition claim under Cal. Bus. & Prof. Code §17200 to proceed beyond the initial pleading stage.
The court found that, under various California Insurance Code sections, insurers have a duty to disclose information to prospective policyholders at the time of policy application just as prospective policyholders have a duty to disclose to the insurers. The court found that a violation of a legislatively-declared policy to disclose could meet the test for unfairness under California’s unfair competition law.
[Submitted by Bruce D. Celebrezze — Sedgwick San Francisco]
No Duty to Defend Sexual Assault Case
In State Farm Fire & Cas. Co. v. Tippett , 2003 WL 22717616 (Fla.App. 2003), the Florida Court of Appeals found that, while a duty to defend is determined by the allegations in the complaint, a plaintiff cannot necessarily plead around policy exclusions. A civil action was brought against defendant for sexual assault. Defendant claimed that his insurer owed him a duty to defend under a homeowners’ policy. The policy explicitly excluded coverage for bodily injury that is expected or intended, or malicious or willful. In an effort to plead around this exclusion, the victim/plaintiff amended her complaint to say that, despite drugging and sexually assaulting her, the defendant did not expect or intend the resulting harm. The court held that the victim’s novel pleading could not circumvent an insurance policy exclusion.
[Submitted by Robert M. Brava-Partain — Sedgwick Los Angeles]
Law of the Case
In Pekin Ins. Co. v. Pulte Home Corp ., 2003 WL 22493636 (Ill.App. 2003), an injured construction worker brought a personal injury complaint against a general contractor, which was listed as an additional insured under a subcontractor’s insurance policy. A coverage dispute followed over whether the subcontractor’s insurer’s reservation of rights letter was defective, thus effectively waiving the insurer’s right to contest the duty to defend. The injured construction worker then voluntarily dismissed the underlying case. The insurer, however, pursued the coverage dispute through an appeal. The appellate court affirmed that the insurer had waived its right to deny a defense.
After the worker filed an identical complaint, the subcontractor’s insurer filed a second coverage action seeking a declaration that it was not obligated to provide a defense or indemnification for the second underlying action. The Illinois appellate court reversed the trial court and held that the prior coverage action was binding on the identical parties in the second coverage action (what is commonly referred to as the “law of the case” doctrine). The insurer was thus precluded from relitigating the defense obligation. In its holding, the court specifically rejected the insurer’s assertion that the injured worker’s voluntary dismissal of the underlying personal injury suit against the general contractor extinguished the insurer’s duty to defend, and the subsequent filing of an identical action by the worker gave the insurer another opportunity to contest its duty to defend without regard to the earlier defective reservation of rights
[Submitted by Alex B. Mahler – Sedgwick Chicago]
Policy Garnishment
In Garamendi v. Golden Eagle Ins. Co ., 2003 WL 22801295 (Cal.App. 2003), a California appellate court found that, even when an insurer is in liquidation, a judgment creditor is entitled to recover the full amount of a covered judgment under Cal. Ins. Code §11580 so long as the judgment was obtained through an “independent adjudicatory action.” In the case before the court, the defendant had answered the complaint and defended itself all the way up until the week before trial. At that point, it was discovered that the defendant had not paid its franchise taxes and, as a matter of California law, was no longer permitted to appear in the case. The insurer (prior to liquidation), rather than intervening as permitted to provide the defense, elected not to do so. A large judgment was then entered following a five-day trial.
In the garnishment action brought by the judgment creditor, the insurer in liquidation argued that the trial actually resulted in a default judgment. The Court of Appeal disagreed, finding that there was a distinction between a default judgment and an uncontested trial. When the insurer has breached its duty to defend, it will be bound by the judgment so long as there was “significant independent adjudicatory action by the court” in a process that does not create the potential for abuse, fraud, or collusion.
[Submitted by Bruce D. Celebrezze — Sedgwick San Francisco]
Workers' Compensation
In Vella v. Hartford Vermont Acquisitions, Inc ., 2003 WL 22744206 (Vt. 2003), the defendant was a garage owner who leased premises to a bus company that used the garage as a bus wash. An employee of the bus company slipped and fell on snow and ice in the garage and collected workers’ compensation benefits. The employee then brought a suit in tort against the garage owner on a theory that garage owner failed to keep the premises safe. The trial court granted the garage owner’s summary judgment motion on basis of employer exclusive remedy doctrine. The Vermont Supreme Court overturned the lower court’s opinion, reasoning that the garage owner was not the “statutory employer” and thus cannot enjoy the protection of exclusivity doctrine.
[Submitted by Robert M. Brava-Partain – Sedgwick Los Angeles]
|