Duty to Settle Archives - McKennon Law Group

Court Finds Regional Claims Administrator Qualifies as a “Managing Agent” of an Insurance Company, Justifying an Award of Punitive Damages

When insurance companies, including those offering disability, life, health or accidental death policies, engage in conduct that is sufficiently egregious, a court may award punitive damages against the insurance company. California Civil Code Section 3294 (“Section 3294”) provides that where the defendant is guilty of oppression, fraud or malice, the plaintiff may recover punitive damages for the sake of example and by way of punishing the defendant. If the defendant is a corporation, such as an insurance company, the defendant is liable for punitive damages if the act of oppression, fraud or malice was authorized or ratified by an officer, director or managing agent of the corporation or if the officer, director or managing agent was personally guilty of such conduct. While it may be relatively simple to determine who would qualify as an officer or director of a corporation, the question of who qualifies as a managing agent is notably less clear.

In a recent decision by the California Court of Appeal, Mazik v. GEICO General Insurance Company, No. B281372, (May 17, 2019), the Court concluded that a regional liability administrator who had broad authority over the settlement of a large number of claims qualified as a “managing agent” to support an award of punitive damages against GEICO General Insurance Company (“GEICO”). The Court affirmed the trial court’s decision approving punitive damages of $1 million to the plaintiff for GEICO’S bad faith conduct in handling an underinsured motorist claim. The Court also found that the award of $1 million was within the constitutionally permitted range in view of the degree of reprehensibility of GEICO’s actions.

On August 11, 2008, Michael Mazik was involved in a serious automobile accident in which he sustained a comminuted fracture of his left heel bone which ultimately resulted in a left foot deformity, chronic pain, difficulty walking and a severely restricted range of motion in his left foot. At trial, Mazik’s medical expert testified that the injury to his heel was “devastating” and that the severe nature of Mazik’s injury was apparent from the doctors’ diagnoses “right from the beginning” as a comminuted fracture refers to a fracture producing many pieces of bone. Mazik submitted a claim to GEICO under his own underinsured motorist policy for $50,000 which represented the full policy limits of $100,000 offset by a $50,000 settlement he had already received from the driver of the other vehicle involved in the accident.

After receiving Mazik’s demand, a GEICO claims adjuster obtained approval from GEICO’s regional liability administrator, Lon Grothen (“Grothen”), to reject the demand and offer Mazik $1,000 to settle his claim. Approximately eight months later a new claims adjuster was assigned to the file and increased GEICO’s settlement offer to $13,800. Four months later, GEICO increased its offer to $18,000. On May 23, 2011, GEICO conducted an independent medical evaluation (“IME”) of Mazik. GEICO’s medical examiner determined that Mazik’s injury did not restrict his occupation as a teacher, that no further medical care was indicated and that Mazik’s prognosis was good. The claim went to arbitration in April 2013 and Mazik was awarded the full policy limits.

Mazik later filed a bad faith action against GEICO. In July 2016, a jury returned a verdict in favor of Mazik and awarded him $313,508 in compensatory damages and $4 million in punitive damages. The trial court reduced the amount of punitive damages to $1 million. GEICO appealed the award of punitive damages.

In upholding the award of punitive damages, the appellate court in Mazik determined that there was sufficient evidence in the record to show that GEICO’s managing agent ratified conduct warranting punitive damages. The plaintiff had argued that Grothen, who was a regional liability administrator for Orange County, Los Angeles, San Bernardino and Alaska, was a managing agent based upon his broad regional authority over adjusters and managers in cases up to $100,000. In analyzing the issue, the Court first turned to Section 3294 which establishes the legal standard for punitive damages in California. Section 3294 provides, among other things, that a corporate employer can be liable for punitive damages based on the acts of an employee if an officer, director or managing agent of the corporation authorized or ratified the wrongful conduct. The Court cited to White v. Ultramar, Inc., 21 Cal.4th 563 (1999) for the definition of managing agents. In White, the California Supreme Court explained that managing agents are employees who exercise substantial independent authority and judgment in their corporate decision-making so that their decisions ultimately determine corporate policy. White, 21 Cal.4th at 566-567. The Mazik court concluded that there was ample evidence that Grothen met this definition of managing agent.

The Court noted that Grothen had wide regional authority over claims settlements, over 100 claims adjusters were “funneled up” to him for approval of settlements and he typically had 18 to 20 meetings per day with claims adjusters seeking his approval or direction for handling claims. Grothen even testified that an extremely important part of his role was to maintain consistency in settlement valuations within his region. The Court found that a jury could have reasonably concluded that this type of broad decision-making responsibility for establishing GEICO’s settlement standards ultimately determined corporate policy.

Having determined that Grothen was a managing agent of GEICO, the Court next turned to the issue of whether Grothen ratified conduct warranting punitive damages. The Court pointed to evidence provided by Mazik that showed that GEICO deliberately “cherry-picked” medical information and disregarded unfavorable findings. For instance, the evidence showed that GEICO’s claims adjusters prepared an initial claim evaluation summary and summaries in advance of the arbitration that were misleading and omitted important information that appeared in Mazik’s medical records. GEICO argued that the claims adjusters’ conduct cannot support punitive damages because Grothen himself was not personally involved in investigating Mazik’s claim. The Court rejected this argument finding that there was sufficient evidence for the jury to conclude that Grothen engaged in oppressive conduct by ignoring information concerning the serious and permanent nature of Mazik’s injuries for the purpose of saving the company money.

The Court looked at the numerous instances as documented in the record where Grothen provided direction and/or approval for decisions affecting Mazik’s case such as his approval to reject Mazik’s initial policy demand, his instruction to the claims adjuster to obtain an IME and his approval to move the case toward arbitration. Grothen also testified that he has access to the entire claims file and that he “spot checks” the information the adjusters provide. The Court thus concluded that he had more than a “passing familiarity” with Mazik’s claim and that a jury reasonably could have found that not only he knew the claims adjusters’ summaries were misleading, but that he himself was fully aware of the severe nature of Mazik’s injuries. Importantly, the Court recognized that, when sufficiently egregious, an insurer’s bad faith conduct can also satisfy the standard for punitive damages. See Egan v. Mutual Omaha Ins. Co., 24 Cal.3d 809, 821-822 (1979). Based on the evidence, the Court determined that the jury had a sufficient basis to conclude that Grothen ratified such egregious conduct by approving unreasonably low offers to Mazik that ignored medical records showing the serious and permanent nature of his injuries.

Finally, the Court addressed the amount of the punitive damages award. In analyzing the degree of reprehensibility of GEICO’s conduct, the Court found that GEICO’s oppressive conduct was repeated based on the numerous instances that Grothen either authorized unreasonably low settlement offers or approved decisions not to increase offers. It also found that Mazik was financially vulnerable and that there was evidence that GEICO intentionally manipulated the facts by “cherry-picking” medical information and disregarding unfavorable findings. Each of these factors supported the conclusion that the $1 million punitive damages award was constitutionally permissible. The Court also found that the three-to-one ratio of punitive to compensatory damages did not exceed constitutional restraints.

The Mazik case is significant because it broadens the scope of who can be considered a managing agent for purposes of obtaining a punitive damages award. This decision establishes that a claims supervisor who has wide regional authority over claim settlements can qualify as a managing agent of an insurance company such that his conduct will be imputed to the insurance company for purposes of punitive damages. It should be noted that according to earlier cases, in-house claims managers and adjusters who handled claims with little if any supervision could be treated as “managing agents:” “When employees dispose of insureds’ claims with little if any supervision, they possess sufficient discretion for the law to impute their actions concerning those claims to the corporation.” Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 822-823 (1979); see also Major v. Western Home Ins. Co., 169 Cal. App.4th 1197, 1220-1221 (2009) (outside claim representative vested with discretionary authority to pay or deny claims). In light of this decision and earlier decisions, claimants should look closely at the conduct of any managers or supervisors involved in the claims-handling process.

Insureds May Still Have a Claim for Insurance Bad Faith Even If Their Insurer Offered to Pay the Policy Limits

Under California law, an insurer has an obligation to, among other things, make reasonable efforts to settle a third party’s lawsuit against an insured. As a recent decision rendered by the California Court of Appeals illustrates, “reasonable efforts” entail more than timely offering the policy limit to settle a claim from a third party. The insurer’s conduct must be reasonable given the circumstances and they must do everything reasonably within their power to effect a settlement. An insurer’s responsibilities are not necessarily complete when they offer to pay their policy limits or other amounts agreed-upon by the parties.

Barickman v. Mercury Casualty Company, 2 Cal. App. 5th 508 (2016), arose from a personal injury claim where an individual insured of Mercury struck two pedestrians with her automobile while intoxicated and then fled the scene. The individual then reported the claim to Mercury the following day as an accident. The insured was subsequently arrested, sentenced to prison, and ordered to pay restitution to the injured pedestrians. Mercury offered the policy limits of $15,000 to each of the injured pedestrians to settle their claims against Mercury. The injured pedestrians accepted the settlement, but insisted upon additional language in the release agreement assuring that the $15,000 payments did not cover court-ordered restitution.

Mercury failed to respond to the injured pedestrian’s demand to include the additional language in the settlement agreement by the deadline provided to them. Mercury was later informed by criminal counsel that the language requested by the injured individuals should not be accepted because it could be interpreted as waiving the insured’s right to offset the restitution she is required to pay with the $15,000 insurance payments from Mercury. However, the injured parties’ attorney had conversations with the Mercury agent assuring them that he was simply trying to preserve his client’s basic rights to restitution, and not attempting to eliminate the insured’s right to an offset. Mercury never attempted to revise the language requested by the injured pedestrian’s attorney to clarify that the right to offset the restitution owed was preserved. After the insured assigned her rights to sue Mercury, the injured pedestrians filed suit against Mercury for breach of contract and insurance bad faith which resulted in a $3 million judgment against Mercury.

Mercury appealed claiming that it acted in good faith by offering the policy limits to the injured pedestrians and the only reason the case did not settle was because the injured pedestrians’ attorney insisted upon unacceptable additional language in the settlement agreement. The Appellate Court disagreed with Mercury’s argument, reasoning that Mercury’s position would mean that just because an insurer acted in good faith at one point in a settlement negotiation, it discharged its obligations to act in good faith and had no further responsibility to make reasonable efforts to settle a third-party lawsuit. The Appellate Court upheld the $3 million judgment, determining that Mercury’s policy limits offer was not enough to defeat the insurance bad faith claim. The Court determined that Mercury unreasonably rejected the modified settlement instead of at least attempting to amend the release to clarify the parties’ mutual intent. The Court also noted that the language requested by the injured pedestrians should not have affected the settlement, because a release in a civil case would not release a defendant from the criminal court’s restitution order and did not disturb the insured’s right to offset under California law. Therefore, Mercury did not make reasonable efforts to settle the injured parties’ claim.

Our take: This decision is important because it correctly demonstrates that insurers must make reasonable efforts to settle third-party lawsuits beyond simply offering to pay for a claim based on a settlement offer at or within policy limits, and they cannot fail to engage in reasonable negotiations related to the terms of settlement or release agreements. All of an insurer’s conduct surrounding settlement of a claim must be reasonable given the circumstances. If a conflict arises regarding the terms of a settlement or release, an insurer must pursue all reasonable avenues to resolve a dispute in order to satisfy their obligation to act in good faith.

Ninth Circuit Severely Limits Known-Loss Doctrine in Insurance Cases

Have you ever wondered whether the liability policy you purchased covers losses you already knew about before you bought the policy? How much do you have to know? What if you knew about certain property damage at a construction project you caused but not about other related damage your policy would otherwise cover? A recent case from the Ninth Circuit sheds light on these issues, and it is good news for policyholders.

In Kaady v. Mid-Continent Casualty Co., 2015 WL 3894394 (9th Cir. June 25, 2015), the Ninth Circuit, applying Oregon law, strictly construed the known-loss provision in a commercial general liability policy in favor of the insured. Despite that the insured subcontractor knew about property damage to his work before he purchased a policy to cover it, the Court held the provision did not preclude coverage. Namely, it did not preclude coverage for different property damage to the work of others the insured did not know about, though the damage resulted from the insured’s work.

In Kaady, the insured, a masonry subcontractor, was sued in a construction defect action because the wall sheathing and deck posts behind the manufactured stone he installed over them had deteriorated. He did not install the underlying wall sheathing and posts, which were installed by other subcontractors. He was sued in the construction defect case for wall and post deterioration caused by his defective masonry work.

The insured settled the construction defect case and then tendered to his commercial general liability insurer seeking coverage for the settlement. He claimed the wall and post deterioration of which he settled was “property damage” covered under his policy, defined as “physical injury to tangible property . . . .” The insurer denied his claim and the insured sued for breach of the policy.

The insurer argued the insured’s claim was barred because he purchased the policy after he already knew about the “property damage.” More specifically, the insurer contended the insured’s settlement of the construction defect case was not covered based on the policy’s known-loss provision. That provision states the policy “applies to ․.. ‘property damage’ only if ․.. no insured ․.. knew that the ․.. ‘property damage’ had occurred, in whole or in part.” The insurer argued that the manufactured stone and underlying structural components are the same “property” and part of the same structure, and, “so long as the insured knew about any damage to a structure, the known-loss provision bars coverage of any other damage to the same structure.”

There was undisputed evidence that the insured knew about some cracks in the manufactured stone he had installed. But he did not know about any of the property damage for which he sought coverage: the damage to the wall sheathing and deck posts behind the stone facade.

The insurer prevailed on summary judgment but the Ninth Circuit reversed. It rejected the insurer’s argument that it should treat components the insured provided and components provided by others as the same “property.” The Court reasoned that a commercial general liability policy, in the construction defect context, necessarily distinguishes between the two in every other policy provision and therefore should also in the known-loss provision.

Mid–Continent has offered no reason to treat the insured’s work and the work of others as different property in every provision of the policy except the known-loss provision. Thus, we conclude that the known-loss provision also distinguishes between them. The insured’s knowledge of damage to his own work doesn’t automatically constitute knowledge of damage to the components of the structure furnished by others.

The Ninth Circuit then soundly rejected the insurer’s next argument. Even if the insured’s masonry stone and the underlying walls and deck posts (furnished by others) were considered the same “property,” the Court concluded the known-loss provision still did not preclude coverage. It reasoned the provision does not preclude coverage for a different type of “property damage” than the type the insured knew about when he bought the policy, even if both types of damage were to the same “property.” In other words, the insured only knew about the cracks in the stone, not about the deteriorated walls and posts, which is a completely different type of “property damage.” Since the policy’s known-loss provision bars coverage for “property damage” if the insured “knew that the . . . ‘property damage’ had occurred,” the Court reasoned use of the definite article “the” particularizes the subject which it precedes and indicates “that the claimed damage must be the same as the known damage.”

The Court went on to explain that the insurer’s interpretation of the policy would eviscerate the known-loss provision’s “continuing property damage” language, which states that if the insured “knew, prior to the policy period, that the ․.. ‘property damage’ occurred, then any continuation, change or resumption of such ․.. ‘property damage’ during or after the policy period will be deemed to have been known prior to the policy period.” The Court correctly reasoned that “if the insured’s knowledge of any damage to any part of the structure automatically barred coverage of all damage to that structure, it wouldn’t matter whether the claimed damage was a ‘continuation, change or resumption’ of the known damage,” rendering that policy provision meaningless.

The Court summarized its holding as follows:

Applying our interpretation of the policy to [the insured’s] claim, we conclude that [the insured’s] knowledge of the cracks in the masonry before he bought the policy doesn’t constitute knowledge of the claimed “property damage” to the structural components. Not only are the wooden deck posts and wall sheathing different “property” than the manufactured stone . . ., the claimed damage is of a different type. We don’t think that the ordinary purchaser of the policy would interpret the known-loss provision as broadly as [the insurer] advocates.

Lastly, the Court concluded the insured’s knowledge of one type of “property damage” when purchasing the policy would only preclude coverage for different, unknown “property damage” under the known-loss provision if the latter was a continuation of the former. It stated,

the correct inquiry is whether the claimed damage to the structural components was a ‘continuation, change or resumption’ of the cracks. If it was, [the insured’s] knowledge of the cracks would bar coverage of the claimed damage; if not, his knowledge of the cracks wouldn’t bar coverage.

Courts regularly interpret policy provisions in favor of coverage, particularly where they are ambiguous or involve an exclusion. This case is no different. The Court looked at the policy and interpreted it as written, rejecting the insurer’s extremely broad reading of a provision limiting coverage. Just because an insured knows some facts about a potential loss when he buys a policy does not necessarily mean there is no coverage.

Policyholder Wins Handed Down in Insurance Decisions. Daily Journal Publishes McKennon Law Group PC Article.

The February 10, 2014 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Policyholder Wins Handed Down in Insurance Decisions.” In it, Mr. McKennon discusses six insurance decisions handed down in California and federal courts in 2013 that were favorable to policyholders.

The article includes a discussion of Zhang v. California Insurance Co., 57 Cal. 4th 364 (2013), which empowered policyholders to pursue Unfair Competition Law claims against insurers, as well as Rochow v. Life Insurance Company of North America, 737 F.3d 415 (6th Cir. 2013), in which the 6th U.S. Circuit Court of Appeals affirmed a large disgorgement of profits award in long-term disability case governed by the Employee Retirement Income Security Act of 1974 (ERISA). Also discussed are Barnes v. Western Heritage Insurance Co., 217 Cal. App. 4th 249 (2013), Nickerson v. Stonebridge Life Insurance Co., 219 Cal. App. 4th 188 (2013), Aguilar v. Gostischef, 220 Cal. App. 4th 475 (2013) and American Safety Indemnity Co. v. Admiral Insurance Co., 220 Cal. App. 4th 1 (2013). The article is posted here with the permission of the Daily Journal.

Clearing Up Murky Waters: Insurer’s Duty to Settle. Daily Journal Publishes McKennon Law Group PC Article.

The October 29, 2013 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Clearing Up Murky Waters: Insurer’s Duty to Settle.” In it, Mr. McKennon discusses the California Court of Appeal’s decision in Reid v. Mercury Insurance Company, 2013 DJDAR 13436 (Cal. App. 2nd Dist. Oct. 7, 2013). The Reid case followed the uncertainty left by the Ninth Circuit Court of Appeals’ decision in Du v. Allstate Ins. Co., 697 F.3d 753 (9th Cir. 2012). The Reid case resolved some legal issues relating to whether, in the absence of a settlement demand within policy limits, an insurer owes its insured a duty to settle a claim. The article is posted below with the permission of the Daily Journal.

Want to Open Up the Policy Limits on a Policy? Try Making a Section 998 Offer Above Policy Limits and You Just May Be Able to Do It

Can a pretrial California Code of Civil Procedure section 998 offer to settle above an insurer’s policy limits result in opening up a policy’s liability limits? Interestingly, a California Court of Appeal has said “yes” to this question under certain limited circumstances if the offer is reasonable and made in good faith. In Aguilar v. Gostischef, ___ Cal. App. 4th ___, 2013 Cal. App. LEXIS 816, 2013 WL 5592976 (Oct. 11, 2013) (“Aguilar”), the California Court of Appeal held that where an injured party rationally believed an insurer may be liable for excess judgment, and the insurer refuses to provide this third-party with the amount of policy limits when requested prior to litigation, a section 998 offer above policy limits may open up the policy to an excess judgment.

The Aguilar case arose out a personal injury suit following an automobile accident involving Aguilar and Gostischef. Aguilar suffered extensive injuries, including $507,718 in medical expenses, and sought to recover against Farmers Insurance Exchange, Gostischef’s insurer. Farmers issued Gostischef a policy containing a $100,000 limit for each person injured. Aguilar’s attorney contacted Farmers three times requesting discovery of the policy limit so as to negotiate a policy demand, but Farmers did not respond. Subsequently, Aguilar brought a personal injury action against Gostischef. A few months later, Farmers offered to pay Aguilar its $100,000 limit, and advised Aguilar that Gostischef had no real property assets and lived on Social Security. Gostischef presented Aguilar a section 998 offer to compromise for $100,000. Aguilar argued that because Farmers ignored three attempts to settle within policy limits, it would be responsible for an excess judgment. Aguilar then made a section 998 offer for $700,000, and Farmers countered by renewing its $100,000 offer.

The case went to trial, and a jury ultimately awarded Aguilar $2,339,657 after a reduction for contributory negligence. Farmers obtained a judgment notwithstanding the verdict, which the Court of Appeals reversed on appeal. The trial court reinstated the judgment for Aguilar. Aguilar also sought $1,639,451.14 in costs, which included prejudgment interest beginning from the date of his section 998 offer. The trial court held that Aguilar’s section 998 offer was “realistically reasonable under the circumstances” and in good faith, explaining that:

The purpose of section 998 is to encourage the settlement of litigation without trial. To effectuate the purpose of the statute, a section 998 offer must be made in good faith to be valid. Good faith requires that the pretrial offer of settlement be “realistically reasonable under the circumstances of the particular case. . . .

The trial court awarded costs, and Farmers appealed the award. On appeal, the Court of Appeals determined Aguilar’s section 988 offer was made in good faith and awarded costs. Farmers argued Aguilar’s section 988 offer of $700,000 was not made in good faith because there was no reasonable anticipation of acceptance of the offer by Gostischef who lacked the financial means to pay and no reasonable expectation Farmers could be liable for the amount of the section 998 offer in light of the $100,000 policy limit.

The Court of Appeals explained that a good faith 998 offer must have had a “reasonable prospect of acceptance” in light of the information available to the parties at the time of the offer. Reasonableness depends on a two-prong determination. First, an offer is reasonable if it represents a reasonable prediction of what the defendant would have to pay the plaintiff following a trial, discounted by money received by the plaintiff before trial, and premised on the information known to the defendant at the time. Secondly, the offeree must have reason to know the offer is a reasonable.

Under this analysis, the Court of Appeals found that the trial court did not abuse its discretion in holding the section 998 offer was made in good faith. First, by refusing the disclose its policy limits, Farmers exposed itself to liability in excess of policy limits. Next, the court found that Aguilar’s expectation that Farmers may be liable for damages in excess of policy limits was reasonable. Aguilar suffered demonstrable injuries beyond $100,000 and sought several times to discover Farmer’s policy limits prior to litigation so he could attempt to negotiate a settlement.

The court relied on Boicourt v. Amex Assurance Company, 78 Cal. App. 4th 1380 (2000), which authorized an excess judgment against an insurer where the insurer refused to disclose policy limits, which closed the door on reasonable settlement negotiations. In Boicourt, the court held that an insurer’s blanket policy of refusing to disclose policy limits in advance of litigation may give rise to a bad faith claim. Id. at 1392. As relevant here, the Boicourt court reasoned that “a liability insurer ‘”is playing with fire”‘ when it refuses to disclose policy limits. Such a refusal ‘”cuts off the possibility of receiving an offer within the policy limits”‘ by the company’s ‘”refusal to open the door to reasonable negotiations.”‘ Id.

The Aguilar court explained:

Here, no evidence indicated Farmers had a blanket policy of refusing to disclose a policy limit, but there was evidence Farmers delayed, perhaps unreasonably in disclosing Gostischef’s policy limit, and that delay may support bad faith liability. (See Boicourt v. Amex Assurance Co., supra, 78 Cal.App.4th at p. 1394.) Aguilar’s letter stating that he would settle for policy limits reasonably can be understood as a settlement opportunity (regardless of whether it is ultimately determined to be such). In the current appeal, Farmers has not shown Aguilar could have no reasonable expectation of acceptance of his $700,000 offer such that the trial court abused its discretion in finding Aguilar acted in good faith.

Finally, the Court of Appeals affirmed the trial court decision that Aguilar’s offer to settle in excess of policy limits was reasonable, and awarded costs.

This is a very good case for policyholders and affirms that the practice by some insurers of not disclosing policy limits upon the request by injured third-parties can give rise to liability in excess of policy limits (i.e., opening up the policy, rendering an insurer liable for an excess judgment).

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