January 6, 2009

Major v. Western Home: California Court of Appeal Affirms $646,000 Punitive Damages Award

The California Court of Appeal issued this published opinion today, affirming a punitive damages award of $646,471.53, roughly equal to the compensatory damages.

The case required the court to interpret a provision of California’s punitive damages statute, Civil Code section 3294. That statute provides that punitive damages cannot be awarded against a corporation based on the wrongful acts of a corporate employee unless an officer, director, or managing agent of the corporation either participated in, authorized, or ratified those acts.

The defendant was an insurance company that hired a third-party claims administrator to process the plaintiffs’ claim for the destruction of their home by fire. The insurer paid benefits representing the full limits of the policy at the time of the fire, but a jury nevertheless found that the company acted in bad faith by delaying the payment of benefits to the plaintiffs, and by withholding about $30,000 in additional benefits above the policy limits (which the plaintiffs claimed they were entitled to because the insurer raised the policy limits after the loss).

On appeal, the primary punitive damages issue was whether the person who committed the wrongful conduct, an employee of a third-party claims administrator, qualified as an “managing agent” of the insurer, such that her conduct could subject the company to punitive damages. The Court of Appeal relied heavily on the California Supreme Court’s 1979 decision in Egan v. Mutual of Omaha, which concluded that punitive damages can be awarded against an insurance company based on the acts of a claims representative if the claims rep has the effective authority to set corporate policy. The Court of Appeal extended Egan a step further. It held that the employee of the third-party administrator had the effective authority to set policy for the insurer, and therefore subject the insurer to punitive damages. The court did not explain how the conduct as issue could effectively set corporate policy when the actual corporate policies of the insurer prohibited that conduct.

After concluding that the plaintiff had satisfied the managing agent requirement of section 3294, the court went on to discuss the amount of the punitive damages award. The court concluded that a relatively low punitive damages award was appropriate because the harm to the plaintiff was purely economic, the case did not involve a disregard of health or safety, and there was no evidence that the defendant had ever engaged in similar misconduct towards other insureds. The court also concluded that the analogous civil penalty for insurer misconduct, a fine of $10,000, also weighed in favor of a relatively low punitive damages award. Accordingly, the court concluded that a one-to-one ratio of punitive damages to compensatory damages was appropriate and did not raise due process concerns.

Finally, the court examined whether the jury’s verdict was inconsistent because the jury found the defendant acted with “oppression” (one of the grounds for imposing punitive damages under section 3294), but also found the defendant did not act with “malice.” The court found no inconsistency, because the statutory definition of malice requires that the defendant acted with a “willful and conscious disregard” of the rights and safety of others, whereas oppression requires only a finding of “conscious disregard.” The court did not explain exactly how the defendant’s conduct could have exhibited a conscious disregard for the plaintiffs’ rights without also being willful.

Full disclosure: Horvitz & Levy represents the defendant, Western Home Insurance Company.