Farmers Insurance Bad Faith Verdict Upheld, But Punitive Damages Reduced
In a decision that will likely weigh strongly on defendants in future personal injury cases, a California Court of Appeal recently concluded a 6-year-old case by upholding a bad-faith judgment against Farmers Insurance Exchange. In the opinion, written by Justice Madeleine Flier, the court upholds the Superior Court’s judgment; a jury verdict awarding damages of $10 million has been reduced to around $3 million, however. http://www.metnews.com/
The case began in June 2001 when 76-year-old Betty Jo Walker of Los Angeles injured her neighbor, Juanita Wasson, by closing her garage door apparently without seeing Wasson standing underneath. Because the condominium where the injury occurred was part of a complex, Wasson then filed a lawsuit against both the homeowner’s association and the homeowners (Walker and co-owner Linda Williams). Upon notification of the suit, Farmers Insurance, who represented the association, refused to defend the homeowners, claiming Walker’s careless use of the garage door was negligent and independent of home ownership. Consequently, Walker and Williams were forced to hire another law firm for their defense, and before eventually settling with Wasson for $6,500, the women racked up over $45,000 in legal fees.
Believing they had been wrongfully denied a defense by Farmers, Walker and Williams sued the insurance company on the grounds that it had acted in bad faith when handling the claim. In the course of this lawsuit, it was discovered that Farmers had previously violated its own procedural rules: only a zone manager was authorized to deny an insured’s request for defense, and in the women’s case, the manager was never even aware of their request. Ultimately, however, Superior Court Judge James Dunn ruled that even if its denial had been procedurally correct, Farmers would still have had a duty to defend Walker and Williams. Otherwise, Dunn reasoned, individual homeowners could potentially be held liable for issues regarding ownership, maintenance and repair of a housing complex’s common areas. Following the court’s ruling, a jury awarded the women over $1.5 million as compensation for their ordeal, as well as $8.34 million levied against Farmers as punitive damages.
Upon Farmers’ appeal, Justice Flier upheld the Superior Court’s decision, concluding that the company was wrong to deny the homeowners a defense because Walker had operated the garage door in a common area, and because Williams was not even present at the accident and therefore could not possibly have been independently liable. In her opinion, Flier further notes that Farmers should have been more diligent in investigating the women’s request for defense, adding that the adjustors did nothing to correct their internal procedural violation, nor did they take any appreciable measures to determine whether or not a defense was warranted, despite knowing the women’s vulnerability. The Court of Appeal did however find the $10 million jury verdict to be excessive for an isolated incident, and reduced the punitive damages to $1.5 million.
While few, if any, insurance companies would be foolish enough to deliberately refuse a legally entitled defense to one of its insured, the interesting point of this case is the extra obligation that it places on insurers in cases in which entitlement may not be so clear. Because Farmers’ denial was not found to be malicious in nature—by all accounts, the adjustors legitimately believed that they were not required to defend Walker and Williams—, the court’s bad faith finding is effectively in response to the company’s failure to go the extra mile to investigate and conclusively determine whether or not the homeowners were legally protected.
