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Advising
Individual and Commercial Policyholders Concerning Insurance Coverage and Bad
Faith
By Ray Bourhis INTRODUCTION
The following are some of the most common issues that
arise in advising clients in insurance coverage and bad faith matters. Because
decisional and statutory law on any topic evolve, and because decisions are often
subject to multiple interpretations, the reader is cautioned not to rely on the
principles set forth without undertaking additional research. Although most of
these principles apply in all major states, the case citations listed are to California
law. The Contract Bad
Faith Duty to Defend Damages Punitive
Damages ERISA Statute
of Limitations  A.
The Contract
Q. What general rules of construction apply to the interpretation of insurance
policies? A. 1. The language of an insurance policy
is to govern its interpretation if the language is clear and explicit. (Civil
Code § 1638; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 10
Cal.Rptr.2d 538.) 2. Any ambiguity or uncertainty in a policy
will be resolved against the insurer and in favor of the policyholder. (Gray v.
Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104; Delgado v.
Heritage Life Ins. Co. (1984) 157 Cal.App.3d 262, 203 Cal.Rptr. 672.) 3.
Insurance contracts are to be interpreted to effectuate the "objectively
reasonable expectations of the insured." (AIU Ins. Co. v. Superior Court
(1990) 51 Cal.3d 807, 822, 274 Cal.Rptr. 820.) 4. Insurance
industry publications are particularly persuasive as interpretive aids in determining
coverage on behalf of the insured. (Prudential-LMI Commercial Ins. Co. v. Reliance
Ins. Co. (1994) 22 Cal.App.4th 1508, 27 Cal.Rptr.2d 841.) 5.
Indemnity in case of loss should be effectuated rather than defeated. (Insurance
Company of North America v. Electronic Purification Co. (1967) 67 Cal.2d
679, 63 Cal.Rptr. 382.) 6. Words used in an insurance policy
are to be interpreted according to the plain meaning which a layperson would ordinarily
attach to them, not as they might be analyzed by an attorney or an insurance expert.
(Delgado v. Heritage Life Ins. Co., supra, 157 Cal.App.3d 262, 272; Jones v. Crown
Life Ins. Co. (1978) 86 Cal.App.3d 630, 638, 150 Cal.Rptr. 375; Crane v. State
Farm Fire & Cas. Co. (1971) 5 Cal.3d 112, 115, 95 Cal.Rptr. 513, 514.) 7.
Exclusions must be in clear and unambiguous language and will be narrowly construed.
(Ins. Code § 11580.1(c); California State Auto Association Inter-Insurance
Bureau v. Warwick (1976) 17 Cal.3d 190, 130 Cal.Rptr. 520; State Farm
Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 110 Cal.Rptr. 1; Reserve
Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 180 Cal.Rptr. 628.) An exclusionary
clause that is not conspicuous will be strictly construed against the insurer.
(Merrill & Seeley, Inc. v. Admiral Ins. Co. (1990) 225 Cal.App.3d 624, 630,
275 Cal.Rptr. 280. 8. Policies are read as a whole with each
clause lending meaning to others. (Titan Corp. v. Aetna Casualty & Surety
Co. (1994) 22 Cal.App. 4th 457, 27 Cal.Rptr. 2d 476.) Q.
Is an insurer required to advise claimants of contractual rights under their policy?
A. In many situations, yes. Where an insured's lack of
knowledge may potentially result in the loss of benefits or forfeiture of rights,
an insurer is required to bring to the insured's attention any relevant information
to enable the insured to take action to secure rights afforded by the policy.
(Sarchett v. Blue Shield of California (1987) 43 Cal.3d 1, 233 Cal.Rptr.
76.) Q. Does an insurance agent have
a duty to advise a policyholder on the sufficiency of his/her coverage limit A.
The agent's general duty of care usually does not include the duty to advise a
policyholder on the adequacy of his/her limits. (Jones v. Grewe (1987) 189 Cal.App.3d
950, 234 Cal.Rptr. 717.) However, where agents assume additional duties by agreement,
or hold themselves out as having specific expertise, a special duty may arise.
(Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing Corp.
(1993) 12 Cal.App.4th 1249, 16 Cal.Rptr.2d 259.) The addition of a course of action
for negligent misrepresentation may lie against an agent whose assurances of proper
coverage turn out to be false. (Clement v. Smith (1993) 16 Cal.App.4th 39, 19
Cal.Rptr.2d 676.) Q. Can an insured reasonably
rely upon an insurance agent's representations regarding coverage? A.
An insured cannot intentionally remain ignorant as to the terms of his/her policy,
but need not independently verify the accuracy of representations made by the
agent regarding relevant policy provisions. (Clement v. Smith, supra, 16 Cal.App.4th
39.) If the insured can prove justifiable reliance, an agent may be liable for
intentional or negligent misrepresentation. (Eddy v. Sharp (1988) 199 Cal.App.3d
858, 245 Cal.Rptr. 211; Hadland v. NN Inventors Life Ins. Co. (1994) 24 Cal.App.4th
1578, 30 Cal.Rptr.2d 88, rev. denied.) Q.
Notwithstanding provisions of the policy itself, what are some of the common restrictions
on an insurer's right to cancel? A. In California, a cancellation
must meet the requirements of Insurance Code section 677 which provides that
all notices of cancellation must be in writing, and must specify the reason for
the cancellation. Insurance Code section 675 et seq. contains additional cancellation
requirements applicable to certain types of policies. A cancellation that does
not comply with statutory requirements is ineffective. (Lee v. Industrial
Indemnity Co. (1986) 177 Cal.App.3d 921, 223 Cal.Rptr 254.) Q.
Beyond the possible effect of specific policy provisions, what are the principal
restrictions on an insurer's right to non-renew or effect a reduction in coverage
in a policy? A. The non-renewal of a property and/or
liability policy, (excluding auto and worker's compensation policies) is governed
by Insurance Code section 678. A notice of non-renewal or reduction in coverage
must be sent to the policyholder at least 45 days before expiration of the policy.
If an insurer fails to provide such notice, the prior policy, with no changes
in coverage, will remain in effect. If the insurer later complies with the notice
provision, the prior policy will remain in effect for 45 days from delivery or
mailing of the notice. Q. If an insurance
policy contains provisions that are extremely one-sided or unfair, what remedies
are available? A. If the court, as a matter of law, finds
the contract or any clause of the contract to have been unconscionable at the
time it was made, the court may refuse to enforce the contract; enforce the remainder
of the contract without the unconscionable clause; or limit the application of
any unconscionable clause to avoid an unconscionable result. The basic test is
whether or not the clauses involved are so one-sided as to be unconscionable under
the circumstances existing at the time of the making of the contract, given the
general background and needs of insured in the particular case. (Civil Code § 1670.5;
Truta v. Avis Rent-A-Car System, Inc. (1987) 193 Cal.App.3d 802, 238 Cal.Rptr.
806.) Q. If two or more policies cover
a loss, what remedies are available to the respective insurers? A.
Generally, each can seek contribution from the other. This is true even if the
two carriers are not co-insurers and the insured risks are not identical (e.g.,
an errors and omissions policy and a comprehensive general liability ("CGL")
policy). (State Farm Fire & Casualty Co. v. Cooperative of American
Physicians, Inc. (1984) 163 Cal.App.3d 199, 209 Cal.Rptr. 251; Troost v.
Estate of DeBoer (1984) 155 Cal.App.3d 289, 202 Cal.Rptr. 47.) For primary
and excess carrier obligations, see Hartford Accident & Indemnity Co. v. Superior
Court (1994) 23 Cal.App.4th 1774, 29 Cal.Rptr.2d 32 and Iolab Corp. v. Seaboard
Surety Co. (9th Cir. 1994) 15 F.3d 1500. Q.
In a dispute between two property insurers regarding continuous, progressive and
deteriorating damage to covered property which began during policy period #1 but
continued until policy #2 was in effect, who is liable? A.
In the absence of enforceable policy language to the contrary, the insurer providing
coverage when the damage is first manifest may be liable for all continuing damage
even if it "occurs" after the policy period expires. (Snapp v. State
Farm Fire & Cas. Co. (1962) 206 Cal.App.2d 827, 24 Cal.Rptr. 44.) Where two
insurers' policies cover successive periods, each insurer can be held jointly
and severally liable for the loss. (California Union Ins. Co. v. Landmark
Ins. Co. (1983) 145 Cal.App.3d 462, 193 Cal.Rptr 461.) Note: substantial analytical
differences exist between first and third party cases in this area. (Garvey v.
State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 257 Cal.Rptr. 292; Prudential-LMI
Commercial v. Superior Court (1990) 51 Cal.3d 674, 274 Cal.Rptr. 387.) Q.
Can coverage "evaporate" in the presence of "other insurance"
clauses? A. Public policy disfavors "escape"
clauses in insurance policies, whereby coverage purports to "evaporate"
in the presence of other insurance. This may also apply to "excess-only"
clauses, by which carriers seek exculpation whenever the loss falls within another
carrier's policy limit. When two "excess-only" other-insurance clauses
collide, courts will force both carriers to pro-rate, in derogation of the policy
language; this rule is based on the fact that if both of the other-insurance clauses
were given effect according to their terms, the insured would have no coverage.
(CSE Ins. Group v. Northbrook Property & Casualty Co. (1994) 23 Cal.App.4th
1839, 29 Cal.Rptr.2d 120.) Q. What are
an insured's remedies where an insurer has used advertising and solicitation materials
that are unfair or deceptive as to the coverage that was actually provided? A.
Insurance Code section 790.03(a) and (b) prevent insurers from engaging in such
conduct. Although there may be no direct cause of action created
by the statute itself, these code sections establish standards of conduct for
the insurance industry. Violation of these code sections may constitute evidence
of bad faith. Q. Who bears the burden
of proving an excluded risk or condition subsequent which negates an insurer's
liability . . . the insured or the insurer? A. The insurer.
(State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94, 109 Cal.Rptr.
811; Maffei v. Northern Ins. Co. of New York (9th Cir. 1993) 12 F.3d 892.) Q.
What happens when property loss under a homeowner's policy is caused by a combination
of a covered and an excluded risk? A. In most cases, coverage
will probably be a question of fact. (Howell v. State Farm Fire and Casualty Co.
(1990) 218 Cal.App.3d 1446, 267 Cal.Rptr. 708.) The loss should be covered if
the covered risk was the triggering or "efficient proximate cause" of
the loss. (Garvey v. State Farm Fire & Casualty Co., supra, 48 Cal.3d 395,
402.) The loss is not covered if the covered risk was only a remote cause of the
loss, or if the excluded risk was the efficient proximate cause of the loss. 
B.
Bad Faith Q. How does the insurer-insured
relationship differ from a traditional contractual relationship? A.
Every insurance contract contains an implied covenant of good faith and fair dealing.
This covenant imposes a duty on the insurer to act in good faith and fairly toward
its insureds in handling their claims. It further imposes a responsibility on
the carrier to meet the reasonable expectations of the policyholder. (Gruenberg
v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 108 Cal.Rptr. 480.) In handling claims,
an insurer must give at least as much consideration to the financial interests
of its insureds as it does to its own. (McCormick v. Sentinel Life Ins. Co. (1984)
153 Cal.App.3d 1030, 200 Cal.Rptr. 732.) Q.
What is the basic standard or test of liability in an action for breach of the
covenant of good faith and fair dealing? A. "Unreasonable
conduct" by the carrier. (California Shoppers v. Royal Globe Ins. Co. (1985)
175 Cal.App.3d 1, 221 Cal.Rptr. 171.) Examples of unreasonable behavior include
unreasonable denial of benefits (McLaughlin v. Connecticut General Life Ins. Co.
(N.D.Cal. 1983) 565 F.Supp. 434), paying less than what is owed (Egan v. Mutual
of Omaha Ins. Co. (1979) 24 Cal.3d 809, 157 Cal.Rptr. 482), and delaying payments
(Beck v. State Farm Mut. Auto Ins. Co. (1976) 54 Cal.App.3d 347, 126 Cal.Rptr.
602). However, there is no exhaustive list of acts constituting bad faith. Any
act breaching the implied covenant of good faith and fair dealing will give rise
to a bad faith cause of action. Q. Will
unreasonable delay in the investigation of a claim alone provide sufficient grounds
to support a general and punitive damage award? A. Yes.
(Kanne v. Connecticut General Life Insurance Co. (9th Cir. 1988) 867 F.2d
489.) An insurer has a duty to fully investigate claims, and must inquire into
all possible bases that might support an insured's claim. It cannot deny a claim
without thoroughly investigating the basis for its denial. (Egan v. Mutual of
Omaha Ins. Co., supra, 24 Cal.3d 809, 820.) Q.
Does the filing of a lawsuit by an insured terminate the carrier's duty of good
faith and fair dealing for that particular claim in controversy? A.
No. (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 221 Cal.Rptr. 509.)
Q. May an insurer rescind a policy and
refuse to honor a claim where the policyholder supplied incomplete or inaccurate
information on the original form? A. Yes, if, (1) the
language of the application is clear and unambiguous; (2) no modifications in
the application were made by an agent of the carrier; (3) the applicant had present
knowledge of the facts sought, and appreciated their significance; (4) the insured
intentionally misrepresented or concealed the facts; and (5) the misrepresentation
was a material one. The burden of proving misrepresentation lies with the insurer
and according to some cases must be proven by clear and convincing evidence. (Thompson
v. Occidental Life Ins. Co. (1973) 9 Cal.3d 904, 109 Cal.Rptr. 473.) Q.
Does payment of bills by the insurance company in a first party case, or eventual
acceptance of plaintiff's demand preclude recovering for bad faith? A.
No. (Sprague v. Equifax, Inc. (1985) 166 Cal.App.3d 1012, 213 Cal.Rptr.
69; Pistorius v. Prudential Life Insurance Co. (1981) 123 Cal.App.3d
541, 176 Cal.Rptr. 660; Fletcher v. Western National Life Insurance
Co. (1970) 10 Cal.App.3d 376, 89 Cal.Rptr. 78;.) Q.
If the victim of bad faith dies, are there circumstances under which his or her
estate may maintain an action for compensatory, general and punitive damages?
A. Yes. (Carr v. Progressive Casualty Ins. Co. (1984)
152 Cal.App.3d 881, 199 Cal.Rptr. 835.) Q.
Is evidence of an insurer's business practices admissible in a bad faith action?
A. Yes, if admitted to "show motive, opportunity,
intent, preparation, plan, knowledge, identity or absence of mistake or accident."
(Evid. Code § 1101(b); Sprague v. Equifax, Inc., supra, 166 Cal.App.3d
1012.) Q. Must the plaintiff prove that
the insurer intended to cause harm in order to prove breach of the covenant of
good faith and fair dealing? A. No. Intent to harm is
not a prerequisite to establishing a breach of the insurer's duty of good faith
and fair dealing. (Johansen v. California State Auto. Assn. (1975) 15 Cal.3d
9, 123 Cal.Rptr. 288; Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d
910, 921, 148 Cal.Rptr. 389.) Q.
In an action for breach of the covenant of good faith and fair dealing, can the
insurer rely on subsequently obtained evidence to show its good faith? A.
The general rule is that the reasonableness of an insurer's actions must be measured
at the time the carrier was confronted with a factual situation to which it was
called upon to respond. (Austero v. National Casualty Co. (1978) 84 Cal.App.3d
1, 146 Cal.Rptr. 653; Wetherbee v. United Insurance Co. of America (1971)
18 Cal.App.3d 266, 95 Cal.Rptr. 678; McLaughlin v. Connecticut General Life
Insurance Co., supra, 565 F.Supp. 434.) Q.
In a bad faith action, is the insurer presumed to have knowledge of the insured's
emotional distress? A. Yes. When a person buys an insurance
policy, the very risks insured against presuppose that if a claim is made the
insured will be under financial and/or emotional pressure. S/he would therefore
be particularly vulnerable to oppressive tactics on the part of the insurance
company. An insurance company is presumed to know that a denial of benefits may
result in emotional distress to the insured. (Delgado v. Heritage Life Insurance
Co., supra, 157 Cal.App.3d 262; Fletcher v. Western National Life Ins. Co., supra,
10 Cal.App.3d 376.) Q. Can an insured's
conduct which contributes to an insurer's delay in investigating or processing
a claim constitute grounds for a "comparative bad faith" defense? A.
In California, it sometimes can. (California Casualty General Insurance v.
Superior Court (1985) 173 Cal.App.3d 274, 218 Cal.Rptr. 817.) However, comparative
bad faith does not apply to punitive damages. (Fleming v. Safeco Ins. Co. (1984)
160 Cal.App.3d 31, 206 Cal.Rptr. 313.) |
Q.
Can statutes such as California's Unfair Claims Practices Act (Ins. Code §
790.03(h)) be used as a basis for establishing liability in either a first or
third party case? A. Yes.
Even though California no longer allows a "direct" cause of action by
a consumer for violation of the statute (Moradi-Shalal v. Fireman's Fund Ins.
Cos. (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116), the statute still sets a "standard
of care" for insurers. It is also arguable that a "negligence per se"
cause of action can be pled in California. It applies whenever there is a violation
of a statute intended to protect a class of persons (which includes the plaintiff)
and where the damage suffered is of the type which the statute is designed to
prevent. (Evid. Code § 669; Vesely v. Sager (1971) 5 Cal.3d 153, 95 Cal.Rptr.
623.)
C.
Duty to Defend Q. Do
the same legal standards apply to an insurer's duty to defend as to its duty to
indemnify an insured? A. No.
The duty to defend is much broader than the duty to indemnify. (CNA Casualty Co.
of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 222 Cal.Rptr.
276.) Insurers have a duty to defend all suits which potentially seek covered
damages. They have a duty to indemnify only where judgment has been entered on
a theory which is actually, not just potentially, covered by the policy. (Collin
v. American Empire Ins. Co. (1994) 21 Cal.App. 4th 787, 26 Cal.Rptr.2d 391.) Q.
What are some examples of fact patterns triggering a duty to defend? A.
At least in the following situations: The suit potentially
seeks damages within the scope of coverage. (Horace Mann v. Barbara B. (1993)
4 Cal.4th 1076, 17 Cal.Rptr.2d 210; Gray v. Zurich, supra, 65 Cal.2d at 276 &
278, 54 Cal.Rptr. at p. 112.)
The complaint is capable of being amended
to include covered damages. (Ibid.)
The insurer learns of facts, from
any source, which would trigger coverage. (Gray v. Zurich, supra, 65 Cal.App.2d
at p. 277.)
The insured reasonably expects coverage. (Gray v. Zurich,
supra, 65 Cal.App.2d at p. 281.)
If an insurer is required to defend
at least one cause of action, they must then defend all causes of action. (Horace
Mann, supra, 17 Cal.Rptr.2d at p. 214; City of South El Monte v. Southern California
Joint Power Ins. Authority, supra, 28 Cal.App.4th 701.) Q.
Can an insurer wait until litigation progresses before deciding whether it is
obligated to defend its insured? A.
No. An insurer's duty to defend must be assessed promptly at the outset of a case.
(CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d 598.)
This does not mean, however, that the insurer must continue to defend even after
it becomes certain there is no potential for coverage. (Montrose Chemical Corporation
of California v. American Motorists Insurance Company, supra, 6 Cal.4th 287.)
Q. Can an
insurer, defending under a "reservation of rights," be held liable for
breach of the covenant of good faith and fair dealing even if it is ultimately
determined that the insurer had no duty to defend or indemnify? A.
Yes, an insurer may be held liable for improperly handling the defense. (Travelers
Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 231 Cal.Rptr. 791.) Q.
When the insurer provides a defense under a "reservation of rights,"
does the insured have the right to independent counsel? A.
Often. The carrier's reservation of rights to assert non-coverage at a later date
can give rise to the insured's right to an independent "Cumis" attorney.
(San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d
358, 208 Cal.Rptr. 494.) Civil Code section 2860 requires that Cumis counsel
be qualified and willing to charge reasonable fees. (Center Foundation v. Chicago
Ins. Co. (1991) 227 Cal.App.3d 547, 278 Cal.Rptr. 13.) Q.
Does an insured's willful wrongdoing in the underlying case necessarily relieve
the carrier of its duty to defend or indemnify in a civil damages action? A.
In California, Insurance Code section 533 prohibits a carrier from indemnifying
the insured for injury caused by the insured's "willful act." (Aetna
Casualty & Surety Co. v. Sheft (9th Cir. 1993) 989 F.2d 1105.) However, some
umbrella policies, including some State Farm policies and promotional materials,
actually represent that intentional torts are covered. Generally coverage depends
on the nature of the claim and the allegations being made against the insured.
Intentional action by an insured may not automatically relieve an insurer of its
duties. (Studley v. Benicia Unified School Dist. (1991) 230 Cal.App.3d 454, 281
Cal.Rptr. 631.) The same is true if the claim against the insured arises out of
vicarious liability for the acts of others. (Arenson v. National Auto & Cas.
Ins. Co., (1955) 45 Cal.2d 81, 286 P.2d 816; Fireman's Fund Ins. Co. v. City of
Turlock (1985) 170 Cal.App.3d 988, 216 Cal.Rptr. 796; Allstate Ins. v. Gilbert
(9th Cir. 1988) 852 F.2d 449 [acts of co-insureds].) Q.
Must a liability insurer defend an insured against a claim for punitive damages?
A. Often yes, in the absence
of a clear and express policy provision to the contrary and/or if it is reasonable
for the insured to expect the insurer to do so. (Ohio Casualty Insurance Co. v.
Hubbard (1984) 162 Cal.App.3d 939, 208 Cal.Rptr. 806.) Q.
In a liability case, can an insured settle with a third party when his/her insurer
wrongfully denies coverage and/or improperly refuses to defend against a covered
claim? A. The insured is entitled
to make a reasonable settlement and may then maintain an action against the insurer
to recover the amount of the settlement as well as appropriate damages for bad
faith. (Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 244
Cal.Rptr. 655; Villicana v. Evanston Ins. Co. (1994) 28 Cal.App.4th 631, 33 Cal.Rptr.
2d 690.) Q.
May a third party who has entered into a stipulated judgment with the insured
in exchange for an assignment of a cause of action against the carrier with a
covenant not to execute, bind the insurer to the agreement? A.
Certainly not if the arrangement is collusive or fraudulent. Even in the absence
of collusion, courts question the validity of such agreements. Issues such as
the basis for the stipulation, liability, the amount of the settlement and the
effect of a covenant not to execute are all potential problems, and attorneys
should be very cautious in this area. (Smith v. State Farm Mutual Auto. Ins. Co.
(1992) 5 Cal.App.4th 1104, 7 Cal.Rptr.2d 131; Xebec Development Partners, Ltd.
v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501, 15 Cal.Rptr.2d 726;
Roman v. Uniguard Ins. Group (1994) 26 Cal.App.4th 177, 31 Cal.Rptr.2d 501; Wright
v. Fireman's Fund Ins. Companies (1992) 11 Cal.App.4th 998, 14 Cal.Rptr.2d 588;
Glenbrook Homeowners Assoc. v. Scottsdale Ins. Co., supra, (N.D. Cal. 1994) 858
F.Supp. 986.) Q.
Can the third party victim of an insurer's bad faith refusal to defend take an
assignment of the insureds' claim for general and punitive damages? A.
Probably not. Most general and punitive damage claims cannot be assigned in California
and must be reserved and prosecuted by the insured. (Murphy v. Allstate Insurance
Co. (1976) 17 Cal.3d 937, 132 Cal.Rptr. 424.)
D. Damages Q.
What is the scope of damages recoverable for breach of the covenant of good faith
and fair dealing? A. The
insured may recover all damages proximately caused by the breach. This includes
consequential loss, loss of use of the insurance proceeds, general damages, attorneys
fees, and in appropriate cases, exemplary damages. (Crisci v. Security Ins. Co.
(1967) 66 Cal.2d 425, 432-434, 58 Cal.Rptr. 13; Brandt v. Superior Court (1985)
37 Cal.3d 813, 210 Cal.Rptr. 211; Egan v. Mutual of Omaha Ins. Co., supra, 24
Cal.3d 809.) Q.
What is the standard for recovering emotional distress damages in a bad faith
case? A. The damage must have
naturally ensued from the insurer's conduct. (Gruenberg v. Aetna Insurance
Co., supra, 9 Cal.3d 566; Sprague v. Equifax, Inc., supra, 166 Cal.App.3d 1012.) Q.
Can an insurer limit its exposure for damages by terminating coverage while the
peril insured against is still active? A.
Not usually. This would defeat the very purpose of the protection for which the
premiums were paid. (Ibid.) Q.
Under what circumstances can an insured recover prejudgment interest in an insurance
bad faith case? A. Rarely.
Prejudgment interest under Civil Code section 3291 is generally recoverable in
personal injury cases where the defendant fails to accept a C.C.P. section 998
offer and the judgment exceeds that rejected offer. It is not recoverable in bad
faith actions. (Gourley v. State Farm Mutual Auto Ins. Co. (1991) 53 Cal.3d 121,
279 Cal.Rptr. 307.) Q.
Are plaintiffs' attorney's fees recoverable in successful bad faith actions? A.
Yes, fees incurred in obtaining wrongfully denied policy benefits are recoverable.
(Brandt v. Superior Court, supra, 37 Cal.3d 813.)
E.
Punitive Damages Q. What
are the applicable standards for recovery of exemplary damages in a bad faith
action? A. Proof by clear and convincing evidence
that the defendant has been guilty of oppression, fraud, or malice as defined
in Civil Code section 3294. Q. What must
the plaintiff establish in order to obtain punitive damages against an insurance
company for the actions of an employee adjuster? A. That
the employee was a "managing agent," i.e., the employee had the authority
to do the things he or she did that formed the basis for the punitive damage claim.
(BAJI Nos. 1473, 1473.1, 1474.) If the employee was not a
managing agent, then under Civil Code section 3294(b), a plaintiff must prove
that: (1) the employer knew of the employee's unfitness yet employed him or her
in conscious disregard of the rights or safety of others; or (2) the employer
ratified the wrongful conduct for which exemplary damages are recoverable; or
(3) the employer was personally guilty of oppression, fraud or malice. Q.
Must a plaintiff introduce evidence of the insured's financial condition in order
to recover punitive damages? A. Yes. A punitive damage
award can be overturned where no meaningful evidence of a defendant's net financial
condition was submitted by the plaintiff. Evidence of the
defendant's income alone, absent a showing of net worth, may not be sufficient.
(Lara v. Cadag (1993) 13 Cal.App.4th 1061, 16 Cal.Rptr.2d 811; Tomaselli v. Transamerica
Ins. Co. (1994) 25 Cal.App.4th 1269, 31 Cal.Rptr.2d 433 [where $11.25 million
punitive damage judgment was reversed for an insured's failure to prove the insurer's
financial condition, despite the insurer's failure to object], rev. denied). Q.
Must a plaintiff always prove despicable conduct in order to recover exemplary
damages? A. Not if the plaintiff proves by clear and
convincing evidence either that the defendant has been guilty of fraud, as defined
in Civil Code section 3294 (c)(3), or that the insurer is guilty of holding one
of the two statutory definitions of malice.
F.
ERISA Q. What is
ERISA preemption? A. ERISA is an acronym for the
Employee Retirement Security Act of 1974 (29 U.S.C. 1001-1461). ERISA severely
limits policyholder benefits as to group insurance offered through an employer.
Remedies are limited to those administrative remedies found in the statute if
the group insurance is offered as part of a "plan" within the meaning
of ERISA. The issue of whether a group insurance policy is governed by ERISA has
become a vital question in light of decisions extending ERISA's preemptive reach
and forcing claimants to bring an ERISA enforcement action in federal court, rather
than a common law bad faith action in state court. (Kanne v. Connecticut General
Ins. Co. (9th Cir. 1988) 867 F.2d 489; Pilot Life v. Dedeaux (1987) 481 U.S. 41,
107 S.Ct 1549.) Q. What constitutes an
ERISA plan? A. Whether an ERISA plan exists is a factual
question. The courts have generally found a "plan" to exist where the
employer pays the premiums, even though the employer does not intend to create
an ERISA plan and has little involvement in the administration of the benefit
program. (Marshall v. Bankers Life & Casualty Co. (1992) 2 Cal.4th 1045, 10
Cal.Rptr.2d 72.) Q. When is an employee
plan excluded from ERISA? A. The Ninth Circuit in Kanne
v. Connecticut General Ins. Co., supra, held that all the criteria set forth in
the Department of Labor regulations must be satisfied before a plan is excluded
from ERISA. These are: - the employer does not endorse
the program;
- employee participation is voluntary;
- premiums are paid entirely by the employee;
- the employers sole function is to collect
premiums and remit the same to the insurer; and,
- the
employer must receive no consideration other than reasonable compensation for
collecting and remitting premiums.
Note:
State, federal and municipal employees are not governed by ERISA preemption. (29
U.S.C. §§ 1309(b), 1321(b)(2).) Q.
Who is a "participant" in an ERISA plan? A.
ERISA defines a "participant" as an "employee or former employee".
Plaintiffs who own their businesses or who are independent contractors arguably
are not "employees". The key consideration is whether the hiring party
has the right to control the manner and means by which work is done. (Nationwide
Mut. Ins. Co. v. Darden (1992) 503 US 318, 112 S.Ct. 1344.)
G.
Statute of Limitations Q.
What is the statute of limitations in a bad faith case? A.
In most cases, a one-year statute for personal injuries (emotional distress) is
applied. (C.C.P. § 340.) A two-year statute governing actions "upon
a[n] . . . obligation or liability not founded upon an instrument of writing"
(C.C.P. § 339(1)) may also apply. (Smyth v. USAA Property and Casualty Ins.
Co. (1992) 5 Cal.App.4th 1470, 7 Cal.Rptr.2d 694.) **CAUTION** If the insurance
policy contains a contractual statute of limitations clause see below. Q.
Is an insurance policy clause limiting the time "within which the insured
must bring an action to recover on the policy" (e.g., one year), enforceable,
and if so, how is the time period computed? A. In California
this issue is complex. The wording of the policy and the facts of the case are
important factors. Some insurance policies attempt to require insureds to file
actions on the policy within a specified period from the occurrence, rather than
from the time the claim is denied. (Lawrence v. Western Mutual Ins. Co. (1988)
204 Cal.App.3d 565, 251 Cal.Rptr. 319; Abari v. State Farm Fire & Casualty
Co. (1988) 205 Cal.App.3d 530, 252 Cal.Rptr. 565, 567.) In
Prudential - LMI Commercial Insurance v. Superior Court, supra, 51 Cal.3d 674,
the California Supreme Court held that the time limitation in the policy was enforceable,
but tolled between the period of time that the insured gives notice of the loss
and the time the claim was denied. For example: a loss occurs on January 1, 1991
and is reported to the insurer on February 1, 1991; it is denied by the insurer
on March 1, 1992. The insured must file suit prior to February 1, 1993. The one
month that elapsed between the loss and the notice to the insurer counts toward
the limitations period. Based on the length of the delay in reporting the loss,
the insured will have only an additional eleven months after denial to file the
lawsuit. (Prieto v. State Farm Fire & Casualty Co. (1990) 225 Cal.App.3d 1188,
275 Cal.Rptr. 362.) Q. When does the statute
of limitations begin to run on an action to compel an insurer to abide by an arbitration
clause? A. In California, (Civil Code Section
3294) provides that the limitations period begins to run when the insurer refuses
to arbitrate. (Spear v. California State Auto. Assn. (1992) 2 Cal.4th 1035, 9
Cal.Rptr.2d 381.)
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