Friday, August 6, 2004
S.C. Rejects Tort Liability for Bad Faith in Insurance Billing
By DAVID WATSON, Staff Writer
Tort damages for breach of the duty of good faith and fair dealing are not available when an insurance company charges a premium it knows is not owed, the state Supreme Court ruled yesterday.
The justices declined to reinstate a $6.4 million award won by the owners of a trucking firm in Fresno Superior Court after Judge Franklin P. Jones ruled tort damages were available. Jones cut the award to that amount in the wake of a jury verdict of more than $13 million, which included over $11 million in punitive damages.
The high court also ruled that the trial judge should have stayed the litigation and referred the premium billing dispute to the state Department of Insurance. On both issues, the court’s ruling closely tracked a 45-page opinion authored by Justice Steven M. Vartabedian for the Fifth District Court of Appeal in May of 2002.
Freddie and Mildred Jones, who won the trial court award, began as defendants in the case when they were sued for insurance premiums they had refused to pay to Cal-Eagle Insurance. Their trucking firm purchased insurance from Cal-Eagle under the state’s assigned risk insurance program.
Retroactive Premium Hike
When the case was argued before the high court in Los Angeles in June, the Jones’ lawyer told the justices that six months after the policy for which they paid $19,700 expired, Cal-Eagle billed them 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.
The Joneses counterclaimed against Cal-Eagle after they were sued by a collection agency.
Writing for a unanimous high court, Justice Carlos Moreno rejected the Joneses’ argument that the rationale under which tort damages for bad faith denial of coverage are permitted applies to bad faith billing practices.
“[T]he Joneses were not in the same vulnerable position as those who suffer from the insurer’s bad faith claims and settlement practices—they were not denied the benefits of the insurance policy, were not required to prosecute the insurer to vindicate their contractual rights, and had available various administrative, contractual, and tort remedies,” Moreno explained. “Accordingly, we conclude that tort remedies for breach of the implied covenant of good faith and fair dealing in this circumstance are unnecessary to protect the insured’s interests and hold that no such damages are available for the Joneses’ bad faith claim.”
Moreno pointed out that the existence of a billing dispute “does not, by itself, deny the insured the benefits of the insurance policy—the security against losses and third party liability.”
Nor, he observed, were the Joneses required to initiate litigation to vindicate their position. Instead, they simply refused to pay the premium, forcing the insurer to sue them.
Other tort remedies available to the Joneses, Moreno said, included a malicious prosecution suit following a successful defense against the insurer’s premium claim; a defamation action, if the alleged debt was reported to third parties; or an action for intention interference with prospective economic advantage.
Noting that the Joneses contended the premium bill created so much financial uncertainty that they had to close their trucking business, Moreno said any lost profits would be recoverable even under a contract theory as long as they were proven to be a “natural and direct” consequence of breach.
The justice said the Joneses were not required to exhaust administrative remedies before countersuing, but he said that because the premium dispute arose in the context of the highly regulated market for assigned risk insurance, the trial judge should have stayed the litigation and referred it to the Department of Insurance under the doctrine of primary jurisdiction. Had such a referral been made, the lengthy portion of the trial spent in taking testimony about the department’s rules governing such insurance and the methods of calculating premiums that those rules allow might have been rendered unnecessary, Moreno explained.
“The fact that a lengthy trial has already been held, which may well have been unnecessary, highlights the need for trial and appellate courts to timely apply the primary jurisdiction doctrine when appropriate,” he declared.
Justice Marvin Baxter did not participate in the case. Justice Kathryn Doi Todd of Div. Two of this district’s Court of Appeal, sitting on assignment, joined in the opinion authored by Moreno.
The case is Jonathan Neil & Associates, Inc. v. Jones, 04 S.O.S. 4224.
Copyright 2004, Metropolitan News Company