Metropolitan News-Enterprise


Monday, June 16, 2003


Page 1


C.A. Cuts Punitive Award Against Insurer in Worker-Leasing Dispute


By Kenneth Ofgang, Staff Writer/Appellate Courts


The Fourth District Court of Appeal Friday upheld a jury’s conclusion that a workers’ compensation insurer is liable for fraud based on an employee leasing company’s insistence that an injured worker was not its employee.

But while the Div. Three panel said there was sufficient evidence to hold Argonaut Insurance Company responsible as the agent of the now-bankrupt leasing company, it also concluded that a jury award of $5.5 million in punitive damages was excessive. It ordered the case retried unless the plaintiff, Diamond Woodworks, Inc., accepts a reduction in the punitive damages to $1 million.

The justices, in an opinion by Justice Raymond Ikola, also reduced the compensatory damages from $404,000 to $258,000.

The suit by Diamond arose from its relationship with Builders Staff Corporation, which became Diamond’s employee leasing company in 1995 and went bankrupt later that decade. The two companies had a typical employee leaseback arrangement, in which Diamond transferred its workforce to BSC and BSC leased the employees back to Diamond.

BSC was considered the workers’ employer for various purposes, including workers’ compensation insurance, which it obtained from Argonaut at favorable rates because of the large number of employees covered.

 Difficulty arose, however, when a woodworker at Diamond suffered a major injury his first day on the job, before his employment paperwork had been sent by Diamond to BSC. When he made a workers’ compensation claim, Argonaut rejected it on the ground he was not an employee of Argonaut’s insured, BSC.

The employee, who said he had never heard of BSC, sued Diamond under a state law that permits an employer to be held strictly liable for tort damages, as well as workers’ compensation benefits, if it fails to comply with the workers’ compensation insurance requirement.

Diamond tendered its defense to Argonaut, which initially refused to defend either the tort claim or the workers’ compensation claim, but eventually settled with the employee without admitting that he was covered by the policy.

Diamond sued Argonaut and BSC for breach of contract, insurance bad faith, and fraud. The complaint alleged, among other things, that the failure to defend and provide coverage for the on-the-job injury was a breach both of Diamond’s contract with BSC and of BSC’s contract with Argonaut—of which Diamond claimed to be a third-party beneficiary.

Diamond also alleged that the defendants committed fraud by promising to cover all of its workers for on-the-job injury, then denying an obligation to do so.

The jury found for Diamond on all counts and assessed compensatory damages of $658,000 and punitive damages of $14 million. Orange Superior Court Judge Richard Aronson, later elevated to the Court of Appeal, granted a remittitur to $404,000 and $5.5 million, which Diamond elected to accept.

The appellate panel Friday rejected Argonaut’s contention that it had no duty to defend or provide coverage because the contract between Diamond and the leasing company clearly provided that no Diamond worker would be considered a BSC employee until paperwork was submitted and the hiring approved

There was sufficient evidence, Ikola said, for the jury to find that the written contract had been modified by the parties’ conduct. There had, the justice said, been a consistent pattern in which BSC had paid and provided benefits to workers from their first day of employment at Diamond, even though the paperwork was filled out and submitted after the employee started work.

The evidence also supported the jury’s finding that Argonaut was responsible for bad faith and fraud, the justice said.

Ikola acknowledged that the implied covenant of good faith and fair dealing in an insurance policy normally can be enforced only by the insured. But a different rule is called for in an employee leasing situation, the justice said, where the covenant is entered into specifically for the benefit of the lessor.

As for fraud, he said, there was clear and convincing evidence that Diamond was the victim of “false promise.” The proof was, the jurist said, “unequivocal and uncontradicted that BSC and Diamond dispensed with the contract requirements regarding hiring procedures, pre-hiring paperwork and employment approval: BSC paid leased employees from the first day on the job, without regard to whether paperwork had been completed and approval given.”

Ikola elaborated:

“In this routine practice modifying the terms of the written contract, BSC impliedly promised Diamond and caused it to reasonably believe to its clear detriment that all of its new hires were BSC employees from day one and thus covered under the workers’ compensation policy. A false promise can as easily, perhaps more easily, be implied from conduct as from language.”

Argonaut, he went on to say, was liable as BSC’s agent.

But the verdict, even as reduced by the trial judge, had to be cut, Ikola reasoned.

The compensatory damage award was excessive, he said, because it included Diamond’s fees to BSC for workers’ compensation premiums, which were not recoverable. The balance of the award, for lost profits and prejudgment interest, stands, the panel concluded.

The punitive damage award, even as reduced by Aaronson, was disproportionate under a recent U.S. Supreme Court decision, Ikola said, hence the further remittitur. An award equal to 3.8 times the compensatory damages would be reasonable, the justices ruled.

The case is Diamond Woodworks, Inc. v. Argonaut Insurance Company, 03 S.O.S. 3078.


Copyright 2003, Metropolitan News Company