Insurance Law

• Publication year: 2016
• Author: By Stephen Raucher and Michael Sohigian

Insurance Law

By Stephen Raucher and Michael Sohigian

2016: A Year of Key Developments

2016 was an active year in insurance law in California. With respect to bad faith, the California Supreme Court decided that Brandt fees are included when calculating punitive damages, and the Second District Court of Appeal (the "Second District") upheld the imposition of bad faith liability against an insurer that had offered policy limits, but failed to act reasonably after the settlement offer was made. The results of other bad faith cases decided in California were less friendly to policyholders.

In other developments, the Fifth District Court of Appeal (the "Fifth District") expanded the application of the efficient proximate cause doctrine to benefit policyholders. The Fifth District also allowed an insurer to pursue a claim assigned to it by the defendant in a subrogation matter against the defendants' allegedly negligent insurance broker.

The Second District applied the genuine dispute doctrine to benefit insurers. The Third District Court of Appeal (the "Third District") strictly applied statutes and regulations to protect an insurer's right to cancel a policy and leave its insureds without coverage for a multimillion-dollar injury claim. The Third District also applied exclusions in an auto policy to deny coverage to the policyholder. Additionally, the Second and Third District published opinions in matters of insurers suing each other.

Meanwhile, the Ninth Circuit Court of Appeals (the "Ninth Circuit") established a newly skeptical approach in ERISA cases involving claims administrators who also insure the plan, benefitting claimants but seemingly putting the court at odds with all other federal Circuits.

Bad Faith The California Supreme Court Allows for Inclusion of Brandt Fees in Punitive Damages Calculation

In its only foray into insurance law in 2016, the California Supreme Court clarified in Nickerson v. Stonebridge Life Insurance Co.¹ that Brandt fees may be included in the calculation of punitive damages in a bad faith case — even if the fees are assessed by the trial court following the jury's verdict.

In Brandtv. SuperiorCourt,² the California Supreme Court held that an insurer who has acted in bad faith may be held liable for attorney fees incurred by the policyholder to compel the payment of policy benefits. The Brandt court made clear that such fees constitute an element of the plaintiff's compensatory damages. Accordingly, the determination of Brandt fees must be made by the trier of fact, unless the parties stipulate to a post-trial assessment by the trial court. However, the California Supreme Court suggested that such a stipulation would normally be preferable, and practitioners have generally followed this approach. But where the fees have been deferred for post-trial determination by the trial judge, by which time the jury has already assessed punitive damages, how do those fees factor into the punitive damages equation, if at all? The Nickerson case supplied the answer to this question.

In the Nickerson case, Mr. Nickerson ("Nickerson"), a paraplegic, broke his leg when he fell from the wheelchair lift on his van, suffering multiple fractures and leading to various complications. Nickerson was ultimately hospitalized for 109 days. Following his discharge, Nickerson sought benefits under a policy issued by Stonebridge Life Insurance Company. However, Stonebridge determined that hospitaliza-tion had only been "medically necessary" for 18 days, paying him only $6,450. Nickerson then sued for breach of the insurance contract and bad faith.

Before trial, the parties stipulated that any determination of Brandt fees would be made by the trial court after the jury's verdict. Nickerson was awarded $31,500 in unpaid policy benefits, and the jury found that Stonebridge had acted in bad faith, awarding an additional $35,000 in damages for emotional distress, plus $19 million in punitive damages. The parties then stipulated to Brandt fees in the amount of $12,500.

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The trial court granted Stonebridge's post-trial motion, reducing the punitive damages award to $350,000, or 10 times the emotional distress damages, refusing to include the $12,500 in Brandt fees in its calculation. The California Court of Appeal affirmed, but the California Supreme Court reversed. Reviewing recent case law setting due process limitations on punitive damages awards, the Nickerson court noted that the U.S. Supreme Court has established "the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award" as one of the guideposts (and the most relevant one here) that reviewing courts must consider in evaluating punitive damages awards.³ The California Supreme Court had previously provided its own gloss on this guidepost in Simon v. San Paolo U.S. Holding Co. Inc.,⁴ explaining that "ratios between the punitive damages award and the plaintiff's actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect and, absent special justification ... , cannot survive appellate scrutiny under the due process clause."

The Nickerson court rejected Stonebridge's assertion that only evidence that was presented to the jury may have a role in a reviewing court's evaluation of the punitive-compensatory ratio. The court reasoned that the Gore guideposts are not framed as rules of trial procedure, but rather as "a set of rules for reviewing courts to apply in order to ensure that the state ultimately does not impose an award whose size exceeds constitutional limits."⁵ Moreover, the court noted that the other guideposts established in Gore touch on matters of which the jury could not have been aware — for example, the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

Thus, the Nickerson court found that "there is no apparent reason why a court applying the second guidepost may not consider a post-verdict compensatory damages award in its constitutional calculus."⁶ It remanded the case for further proceedings — presumably to add another $125,000 (10 times the stipulated Brandt fees) to Nickerson's judgment, which is in fact what happened. The Nickerson case not only represented a win for policyholders, but also assured the continued use of stipulations allowing for post-trial assessment of Brandt fees.

The Second District Holds an Insurer Who Tendered Policy Limits Subject to Unnecessary Restriction Acted in Bad Faith

In Barickman v Mercury Casualty Co.,⁷ two pedestrians, Barickman and Mclnteer, were struck and seriously injured by a drunk driver insured by Mercury Casualty Company ("Mercury"). Mercury's insured had minimum coverage of $15,000/$30,000, and Mercury tendered policy limits less than 30 days after the injured parties' counsel contacted the insurer, along with pre-printed releases. Mercury's insured was sentenced to three years in state prison and ordered to pay about $165,000 in restitution. After reviewing a statement of assets from the insured, Barickman and McInteer accepted Mercury's policy limits offer and returned signed releases, with an interlineated notation: "This does not include court-ordered restitution." Counsel later explained to Mercury's adjustor that he didn't want the settlement to stop his clients from receiving restitution. Meanwhile, criminal counsel for Mercury's insured was concerned that the insured not lose her right to offset policy benefits paid on her behalf against the court-ordered restitution. It is a matter of settled law that "[a] civil settlement does not eliminate a victim's right to restitution ordered by the criminal court, but the defendant is entitled to an offset for any payments to the victim by the defendant's insurance carrier for items included within the restitution order."⁸ Both Barickman's counsel and criminal counsel for Mercury's insured pointed this out to Mercury. Nevertheless, Mercury refused to agree to the added language.

Barickman and McInteer sued Mercury's insured, and Mercury continued its attempts to persuade them to sign the unedited release. Barickman and McInteer settled their personal injury action against Mercury's insured with a stipulated judgment totaling $3 million ($800,000 for Barickman and $2.2 million for McInteer) and an assignment of the insured's bad faith rights against Mercury in exchange for a covenant not to execute. Mercury paid each injured party $15,000.

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Barickman and McInteer then filed their bad faith action against Mercury. They alleged the liability of Mercury's insured for their injuries - and the likelihood of a recovery well in excess of policy limits -were virtually certain. They further alleged Mercury's failure to make an offer without unacceptable terms and conditions, its refusal to settle the case at policy limits when it had the opportunity, and its unwillingness to make efforts to reach a reasonable settlement constituted a breach of its duties of good faith and fair dealing.

The case was tried by reference before a retired judge, who found that Mercury had breached the covenant of good faith and fair dealing by refusing to accept the releases with the added language. The referee concluded that the language did not constitute a non-acceptance of the policy limits offer and was essentially superfluous; there was no merit to Mercury's contention that the language added to the release did not protect the insured against a waiver of her right to restitution offset; and the law did not give an insured a right to object to a settlement within policy limits.

On appeal, Mercury argued it had performed its duties under the covenant of good faith and fair dealing by timely offering a policy limits settlement, relying on Graciano v. Mercury General Corp.⁹ The Court of Appeal was not willing, however, to accept a "position . . . that would mean an insurer that at one point acted in good faith during...