Thursday, June 3, 2004
Insurer’s Bad Faith Billing Practices Support Tort Liability, Justices Told
By a MetNews Staff Writer
An insurer’s breach of the duty of good faith and fair dealing can give rise to tort liability in the context of billing practices, a lawyer for the former owners of a trucking firm told the state Supreme Court yesterday.
Fresno attorney James P. Wagoner asked the justices to reinstate a $6.4 million verdict against Cal-Eagle Insurance. Wagoner’s clients, Freddie and Mildred Jones, owned a trucking firm which purchased insurance from Cal-Eagle under the state’s assigned risk insurance program.
Six months after the policy for which they paid $19,700 expired, Wagoner said, Cal-Eagle billed the Joneses for an additional $112,000. The company contended the larger premium was warranted because the Joneses failed to disclose that, in addition to their own trucks, they subcontracted work to other trucking companies which could assert claims against the policy.
When the Joneses refused to pay the bill, Cal-Eagle assigned its rights to a collection agency which sued them. The Joneses countersued, alleging the insurer sought the larger premium in bad faith.
A Fresno Superior Court jury awarded them $2 million in compensatory damages and over $11 million in punitive damages.
The trial judge granted a remittitur reducing the punitive damages to $4.3 million, but the Fifth District Court of Appeal reversed, ruling that bad faith suits against insurers can give rise to tort damages only where there has been breach of the duty to defend or indemnify, not where only the “general administration” of an insurance policy is involved. In a 45-page opinion authored by Justice Steven M. Vartabedian, the court also concluded that the entire matter should first have been referred to the insurance commissioner, since the dispute involved the application of regulations governing assigned risk insurance.
At yesterday’s argument in Los Angeles, Wagoner called Cal-Eagle a “rogue insurer” that sought to “glutton itself at the smorgasbord of servicing carrier fees.” The insurer never really believed the additional premiums were warranted, he asserted, since it knew the subcontracting truckers had their own coverage.
But Peter O. Israel of Greines, Martin, Stein & Richland in Los Angeles argued that the insurer believed at the time it was entitled to the money. Though he conceded that later changes in state regulations undercut that belief, the company still deserved some compensation for the undisclosed risk that it might have to contribute towards indemnifying one of the Joneses subcontractors, he said.
“These were not cut and dried issues at the time and I don’t think they are now,” Israel declared.
He noted that the dispute arose over a decade ago in a regulatory climate that “no longer exists.” The post-coverage audit that the company conducted, which led to the premium increase, was required under state regulations and the Joneses knew the regulations made the premium subject to revision, he said.
Only when an insurer “unreasonably withholds its promise of protection from a covered occurrence” should tort damages be available to the insured, Israel contended, adding:
“That’s the promise that this court has given special protection.”
In response to a question from Justice Kathryn Doi Todd of this district’s Court of Appeal, Israel conceded a different result might be required if a premium dispute arose during, instead of after, the policy period. But the outcome would still depend on “whether the right to a promise of immediate protection is threatened or impaired,” he said.
Doi Todd, of Div. Two, was sitting in on assignment in place of Justice Marvin Baxter.
Justice Joyce Kennard suggested that most attorneys would choose to bring a tort action in a premium dispute if the high court makes that option available, and she and Chief Justice Ronald M. George noted that other tort remedies may be available in cases of egregious insurer misconduct.
“There are very nasty contract disputes, but we don’t make them torts just because they’re nasty,” he observed. “We didn’t promise him that he would be free from commercial disputes over premiums.”
But Wagoner said the same factors that support tort liability in coverage cases were present in the Joneses’ case. They suffered economic damage—they were forced to sell their trucking business—and had the “same lack of ability to turn to the marketplace” for a remedy, since the premiums were for coverage that had already expired, he said.
Copyright 2004, Metropolitan News Company