Monday, July 30, 2007
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C.A. Cuts $10 Million Bad-Faith Award Against Farmers Insurance
By KENNETH OFGANG, Staff Writer
A $10 million bad-faith judgment against Farmers Insurance Exchange, including $8.34 million in punitive damages, has been reduced to a little over $3 million by this district’s Court of Appeal.
In a June 27 opinion by Justice Madeleine Flier, writing for Div. Eight, the court rejected Farmers’ arguments that it did not act in bad faith by refusing to defend a pair of limited-income homeowners from a negligence claim, forcing them to retain counsel, and later to settle the case, at their own expense.
But the justices also concluded that the misconduct was not sufficiently reprehensible to justify a punitive damage award of more than the approximately $1.5 million awarded as compensatory damages.
Neighbor Injured
The dispute arose when Betty Jo Walker, a 76-year-old retiree living primarily on Social Security benefits, drove into her garage at a condominium on Village Green Court in Los Angeles in June 2001. Apparently not seeing a neighbor, Juanita Wasson, standing by the garage door, Walker activated the remote garage door opener, causing the door to hit Wasson and knock her to the ground.
Wasson, who broke her hip, notified the homeowners’ association that she was making a claim against it. The association reported the claim to its carrier, Farmers.
Farmers assigned the claim to general adjustor John Hughes, who reporte to commercial team leader Steve Hedglin. Evidence later presented at the bad-faith trial showed that Hughes and Hedglin concluded that a finding of liability was unlikely.
In January 2002, Wasson demanded a settlement of a little more than $70,000. Hughes responded that he had not yet obtained a statement from the homeowners’ association’s representative, and that it was unlikely Farmers would settle for the amount demanded.
Wasson subsequently sued the association, as well as Walker and her co-owner, Linda Williams, a $2,000-a-month office worker who was not home at the time of the accident. Farmers assumed the defense of the association, but not of the homeowners, who retained the law firm of Halverson & Associates.
That firm assigned the case to attorney Theresa Powell. The women paid the firm’s bills by charging them to a credit cared.
Defense Refused
Powell tried to get Farmers to assume the defense of Walker and Williams, based on the fact that the garages were in a common area and were under the control of the association and not the individual owners. Farmers declined, as Hodges and Hedglin concluded that there was no possibility of coverage for Walker and Williams, who did not have an insurance policy of their own, since Walker’s careless use of the remote was an act of negligence independent of home ownership.
Farmers commercial claims office manager Thomas Weindorf subsequently oncluded that the case should be taken to trial rather than settled on the terms proposed by Wasson’s counsel.
Walker and Williams then agreed to settle for $6,500, which they borrowed. At the time, they owed the Halverson firm over $45,000 in legal fees.
A jury concluded that the association was 80 percent responsible for the accident, Walker 10 percent, and the plaintiff 10 percent. A verdict was returned for damages in excess of $300,000.
After the women sued Farmers, the company conceded that it own procedures had been violated because only the zone manager, who was Weindorf’s superior, had authority to deny an insured’s request for a defense, and in this case the zone manager was never notified.
The parties agreed to have Los Angeles Superior Court Judge James R. Dunn determine, on the basis of stipulated facts, whether Farmers had a duty to defend the individual unit owners, with a jury trial to follow if the judge found such a duty. Dunn ruled that such a duty existed because of the potential that individual homeowners could be held negligent with regard to the ownership, maintenance or repair of the common area.
The jury found by special verdict that the refusal to defend was unreasonable and oppressive, but not malicious or fraudulent; that an officer, director, or managing agent of Farmers ratified the unreasonable refusal to defend; and that punitive damages should be set in the amount of one percent of the insurer’s net worth, or $8.34 million.
The plaintiffs were also awarded $750,000 each for emotional distress, plus their legal fees in the underlying litigation and the amount they paid to settle with Wasson. Dunn subsequently awarded them more than $140,000 in attorney fees for the bad faith case, but granted Farmers a remittitur of the punitive damages to $1.5 million.
Flier, writing for the Court of Appeal, said there was substantial evidence supporting an award of punitive damages. The adjustors, she wrote, were “patently wrong” in refusing a defense based on Hughes’ conclusion that the women were “independently” liable, even though Walker’s potential liability arose from the operation of the remote in the common areas, and Williams wasn’t even present and could only be held liable in the capacity of a unit owner.
Farmers, she added, stood by the original decision, without even consulting coverage counsel. Rejecting the company’s claim that the coverage question was “intricate” and the denial of a defense a mere “misunderstanding,” she described the denial as stemming from a “theory made of whole cloth for the occasion,” and said the company did nothing to correct the alleged misunderstanding, even though it knew the women were particularly vulnerable and that its own procedures for denying a defense were not followed.
But in determining that the company’s oppressive conduct did not justify more than a 1 to 1 ratio of punitive to compensatory damages, the justice noted that the women were made whole by the compensatory damage award, which included a “handsome” award of emotional distress damages as well as their attorney fees.
She also concluded that the conduct was not overly reprehensible, as defined by the Supreme Court in State Farm Mutual Automobile Insurance Company v. Campbell (2003), 538 U.S. 408. While the victims were unusually vulnerable, Flier explained, they suffered no physical injury and the misconduct was not “persistent.”
The justice explained:
“There was one denial of the tender of a defense; ‘persistent’ is not the same as a repetition of the decision in other instances. For all that the record shows, Farmers’ denial of respondents’ tender of a defense was an isolated incident.”
Attorneys on appeal were John N. Quisenberry and Heather M. McKeon of The Quisenberry Law Firm and Andrew N. Chang, Stuart B. Esner and Gregory R. Ellis of Esner, Chang & Ellis for the plaintiffs and Barry R. Levy and Mitchell C. Tilner of Horvitz & Levy for Farmers.
The case is Walker v. Farmers Insurance Exchange, 07 S.O.S. 4700.
Copyright 2007, Metropolitan News Company