Source: https://scocal.stanford.edu/opinion/egan-v-mutual-omaha-ins-co-28054
Timestamp: 2019-04-21 18:59:26+00:00

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Home > Opinions > Egan v. Mutual of Omaha Ins. Co.
Defendants appeal from a judgment awarding compensatory and punitive damages for breach of an insurance contract. We conclude [24 Cal.3d 815] the judgment should be affirmed insofar as it awards compensatory damages against defendant Mutual of Omaha Insurance Company (Mutual) but reversed in all other respects.
 In addition to the duties imposed on contracting parties by the express terms of their agreement, the law implies in every contract a covenant of good faith and fair dealing. (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658 [328 P.2d 198, 68 A.L.R.2d 883]; see also Comment, Extending the Insurer's Duty of Good Faith and Fair Dealing to Third Parties Under Liability Insurance Policies (1978) 25 UCLA L.Rev. 1413, 1418-1424.) The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the benefits of the agreement. (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 940 [132 Cal.Rptr. 424, 553 P.2d 584]; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429 [58 Cal.Rptr. 13, 426 P.2d 173]; Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 658.) The precise nature and extent of the duty imposed by such an implied promise will depend on the contractual purposes.
This court has previously addressed the extent of the duties imposed by the implied covenant in liability insurance policies. (Johansen v. California State Auto Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9 [123 Cal.Rptr. 288, 538 P.2d 744]; Crisci v. Security Ins. Co., supra, 66 Cal.2d 425; Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d 654.) We there held that the insurer, when determining whether to settle a claim, must give at least as much consideration to the welfare of its insured as it gives to its own interests. The governing standard is whether a prudent insurer would have accepted the settlement offer if it alone were to be liable for the entire judgment. (Johansen, at p. 16 of 15 Cal.3d; Crisci, at p. 429 of 66 Cal.2d.) The standard is premised on the insurer's obligation to protect the insured's interests in defending the latter against claims by an injured third party.
On this appeal, of course, we are governed by the familiar substantial evidence test of Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429 [45 P.2d 183]. Determinations related to assessment of punitive damages have traditionally been left to the discretion of the jury; Davis v. Hearst (1911) 160 Cal. 143, 173 [116 P. 530], declares them to be "wholly within the control of the jury." (See also Ferraro v. Pacific Fin. Corp., supra, 8 Cal.App.3d at p. 351; Sullivan v. Matt (1955) 130 Cal.App.2d 134, 143-144 [278 P.2d 499].) fn. 2 Here the propriety of punitive damages was also reviewed by the trial court when it rejected both defendants' motion for new trial and their motion for judgment notwithstanding the verdict.  A brief analysis of the record convinces us that substantial evidence supports the jury's decision to assess punitive damages.
Mutual argues that neither McEachen nor Segal can be considered "managerial employees" because neither was involved in "high-level policy making."  The determination whether employees act in a managerial capacity, however, does not necessarily hinge on their "level" in the corporate hierarchy. Rather, the critical inquiry is the degree of [24 Cal.3d 823] discretion the employees possess in making decisions that will ultimately determine corporate policy. When employees dispose of insureds' claims with little if any supervision, they possess sufficient discretion for the law to impute their actions concerning those claims to the corporation.
 We turn to the question whether the amount of the punitive damage award herein -- $5 million -- is excessive as a matter of law. We have recently reviewed the considerations governing appellate determination [24 Cal.3d 824] of such questions, and need not reiterate them at this time. (Neal v. Farmers Ins. Exchange (1978) supra, 21 Cal.3d 910, 927-928, and cases cited.) Applying those considerations to the case at bar, we observe first that the award of punitive damages is more than 40 times larger than the not-insubstantial assessment of $123,600 in compensatory damages against Mutual. In addition, the punitive damage figure herein represents two and one-half months of Mutual's entire net income in 1973, and more than seven months of such income in 1974. Viewing the record as a whole and in the light most favorable to the judgments, we conclude that in these circumstances the punitive damage award against Mutual must be deemed the result of passion and prejudice on the part of the jurors and excessive as a matter of law.
I concur in the majority opinion insofar as it holds that included within the implied covenant of [24 Cal.3d 825] good faith and fair dealing is a duty to properly investigate claims and that the evidence establishes as a matter of law that the insurer was negligent in investigating. I also concur in reversal of the judgment against Segal and McEachen. However, I dissent on two grounds from the majority's determination that a punitive damage award is permissible in this action.
Our courts have recognized that the law does not favor punitive damages, granting them only in the most outrageous cases. (Beck v. State Farm Mut. Auto Ins. Co. (1976) 54 Cal.App.3d 347, 355 [126 Cal.Rptr. 602]; Ferraro v. Pacific Fin. Corp. (1970) 8 Cal.App.3d 339, 351 [87 Cal.Rptr. 226].) In Gombos v. Ashe (1958) 158 Cal.App.2d 517, 526-527 [322 P.2d 933], Justice Peters enunciated the limited basis for punitive damages award: "Punitive damages are allowed in certain cases as a punishment of the defendant. They are not a favorite of the law and the granting of them should be done with the greatest caution. They are only allowed in the clearest of cases. In order to warrant the allowance of such damages the act complained of must not only be willful, in the sense of intentional, but it must be accompanied by some aggravating circumstance amounting to malice. Malice implies an act conceived in a spirit of mischief or with criminal indifference towards the obligations owed to others. There must be an intent to vex, annoy or injure. Mere spite or ill will is not sufficient. Mere negligence, even gross negligence, is not sufficient to justify such an award."
Although malice may be proven by circumstantial evidence, the evidence must establish malice in fact rather than malice implied by law. (Bertero v. National General Corp. (1974) 13 Cal.3d 43, 66 [118 Cal.Rptr. 184, 529 P.2d 608, 65 A.L.R.3d 878].) Mere breach of the covenant of good faith and fair dealing is in itself insufficient to support a finding of intent necessary to justify an award of punitive damages. (Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, at p. 463 [113 Cal.Rptr. 711, 521 P.2d 1103]; Beck v. State Farm Mut. Auto Ins. (1976) 54 Cal.App.3d 347, 355-356 [126 Cal.Rptr. 602].) Negligent investigation of a claim, while constituting a breach of the covenant of good faith and fair dealing, does not establish malice in fact.
Plaintiff filed a supplemental claim in October 1970, stating he was unable to return to work. However, his physician, who signed the claim form on 19 October, stated on the form that plaintiff had been disabled [24 Cal.3d 830] only through 29 September. fn. 6 Because of this contradiction, defendant McEachen, an agency claims manager, investigated the claim. McEachen reviewed workers' compensation and State Compensation Insurance Fund medical records. These records indicated plaintiff and the examining physician had earlier agreed on a 1 July 1970 return to work date.
Following his surgery on 26 February 1971, plaintiff submitted a new proof-of-loss form on 5 April 1971. This claim was assigned to defendant Segal, an agency claims adjuster. Segal was aided in his field investigations by claims analyst Romano from Mutual's home office. Although not entirely clear, it appears Romano was assigned to the agency to assist in a [24 Cal.3d 831] backlog of field investigations. Romano was not Segal's superior; rather, he occupied a position equivalent to Segal's position with the agency.
What practices are the majority attempting to deter by allowing punitive damages? Is it an improper insurance practice warranting [24 Cal.3d 832] punitive damages to deny claims when the medical reports of the plaintiff's treating physicians show that no benefits are due?
A managerial employee for purposes of imposing punitive damage must occupy a high level policy-making -- as opposed to a policy-implementing -- position. (E.g., Lowe v. Yolo County etc. Water Co. (1910) 157 Cal. 503, 510-511 [108 P.2d 297] [corporate president]; Davis v. Local Union No. 11, Internat. etc. of Elec. Workers (1971) 16 Cal.App.3d 686, 698 [94 Cal.Rptr. 562] ["No. 2 man"]; Toole v. Richardson-Merrell, Inc. (1967) 251 Cal.App.2d 689, 712 [60 Cal.Rptr. 398, 29 A.L.R.3d 988] [high level management].) When those who control the corporation, and who are in essence the corporation itself, seek to further its interest through adoption of malicious, oppressive, or fraudulent policies, imposition of punitive damages may achieve its deterrent purpose because such award is directed at the corporation itself. However, to impose punitive damages because one of the corporate employees improperly applied an otherwise lawful and reasonable corporate policy, simply serves to enlarge judgments. In such case, the corporation itself may not properly be considered the actual wrongdoer. It has formulated policies and directed its employees in a manner consistent with the law. The deterrence, if any, is ineffective.
In Hale v. Farmers Ins. Exch., supra, 42 Cal.App.3d 681, 697, a claims supervisor -- a position analogous to McEachen's -- with authority to deny claims, was held not a managerial employee for purposes of punitive damages. The fact McEachen possessed authority to accept or reject claims does not warrant finding him a managerial employee. As noted, the claims supervisor in Hale possessed such authority. Further, acceptance of such a rule would equate punitive damage liability with respondeat superior liability. Under such an approach virtually any employee having the capacity to effect a decision would be a managerial employee for purposes of assessing punitive damages. This would extend the concept to a vast majority of corporate employees.
The rule that punitive damages may be awarded against a corporation only for the conduct of its managerial employees does not permit a corporation to absolve itself of all responsibility merely by formulating a proper policy without supervising its execution. The corporation remains liable for all compensatory damages resulting from an incorrect decision by its employees. In addition corporate policy forming a basis for [24 Cal.3d 834] imposition of punitive damages does not require a showing of a formal adoption of the policy by resolution or formal direction by a managing official, but may be established as a de facto policy upon a showing of uniform course of conduct by lower level employees. A single act by one employee in an isolated instance does not, of course, establish a de facto policy. Thirdly, the corporation may incur liability for punitive damages if it ratifies employee conduct.
Unlike Justice Clark, however, I would not absolutely preclude an award of punitive damages in every case involving a breach by an insurer of the implied covenant of good faith and fair dealing. We have previously held that such a breach sounds in both contract and tort (e.g., Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573-575 [108 Cal.Rptr. 480, 510 P.2d 1032]), and that punitive damages are recoverable for an [24 Cal.3d 835] aggravated breach of the implied covenant, so long as the insurer has acted "'with the intent to vex, injure, or annoy, or with a conscious disregard of the plaintiff's rights.'" (Neal v. Farmers Insurance Exchange (1978) 21 Cal.3d 910, 922 [148 Cal.Rptr. 389, 582 P.2d 980], quoting from Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 462 [113 Cal.Rptr. 711, 521 P.2d 1103].) My dissent from the majority opinion in Neal was directed at entirely different issues from that relating to the above principle.
­FN 1. See, e.g., Long, Punitive Damages: An Unsettled Doctrine (1976) 25 Drake L.Rev. 870; Carsey, The Case Against Punitive Damages (1975) 11 The Forum 57; Ghiardi, The Case Against Punitive Damages (1972) 8 The Forum 411; Note, The Imposition of Punishment by Civil Courts: A Reappraisal of Punitive Damages (1966) 41 N.Y.U.L.Rev. 1158.
­FN 2. Restatement Second of Torts, section 908, comment (d), includes the statement, "Whether to award punitive damages and the determination of the amount are within the sound discretion of the trier of fact, whether judge or jury."
­FN 3. McEachen substantiated this assertion by claiming to have contacted plaintiff's treating physician, a claim not supported by the record.
­FN 4. Of course, if there had been a reasonable and carefully investigated foundation for believing that plaintiff's injury did not fall within the scope of the policy coverage, the proposed settlement could not have been considered inappropriate and, accordingly, could not have entered into the jury's decision to award punitive damages.
­FN 5. Kuchta v. Allied Builders Corp. (1971) 21 Cal.App.3d 541, 549-550 [98 Cal.Rptr. 588], and Davis v. Local Union No. 11, Internat. etc. of Elec. Workers (1971) 16 Cal.App.3d 686 [94 Cal.Rptr. 562], support the conclusion that McEachen was a "managerial employee" in a "policy-making position." In Kuchta, the actions of a franchisee with managerial authority comparable to that of McEachen were imputed to the principal for the purpose of fixing liability for punitive damages. The court in Davis similarly rejected defendant labor union's contention that the actions of its agent, merely an assistant business manager, could not be imputed to the union. These cases focus on the responsibilities of the agent, rather than merely his title, in assessing whether punitive damages are appropriate. To the extent that Hale v. Ins. Exch. (1974) 42 Cal.App.3d 681 [117 Cal.Rptr. 146], conflicts with the views expressed herein, we disapprove it.
­FN 6. The majority in Merlo did not decide the question of the managerial status of the defendant insurer's claims representative.
­FN 7. Mutual also contends that the compensatory damage award should be reversed because the trial court permitted the jury to award future policy benefits. It is true that in Erreca v. Western States Life Ins. Co. (1942) 19 Cal.2d 388, 402 [121 P.2d 689, 141 A.L.R. 68], this court allowed the recovery of only accrued benefits in an action for breach of a contract for disability insurance. We have never held, however, that future policy benefits may not be recovered in a valid tort cause of action for breach of the implied covenant of good faith and fair dealing, nor does defendant offer any compelling reason for extending Erreca to such actions. Thus, in applying to these facts the general rule for fixing tort damages (Civ. Code, § 3333), the jury may include in the compensatory damage award future policy benefits that they reasonably conclude, after examination of the policy's provisions and other evidence, the policy holder would have been entitled to receive had the contract been honored by the insurer. To the extent it is inconsistent herewith, Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, 24-25 [148 Cal.Rptr. 653], is disapproved.
­FN 1. Because restitution requires the wrongdoer only to disgorge his ill-gotten gains, compensatory damage will not always constitute a deterrent, and punitive damage may be necessary to deter. (Ward v. Taggert (1959) 51 Cal.2d 736, 743 [336 P.2d 534].) However, when, as in the instant case, potential compensatory damages are not limited to restitution but extend to consequential damages as well, including mental suffering, the risk of potential compensatory damages constitutes a substantial deterrent against wrongdoing.
­FN 2. It has also been pointed out that in mass disaster situations, the award of punitive damages to early litigants may well preclude recovery of even compensatory damages to litigants who subsequently recover judgments. (See, Long, Punitive Damages: An Unsettled Doctrine, supra, 25 Drake L.Rev. 870, 877.) The same possibility of bankrupting the defendant to the prejudice of bona fide claims for compensatory damages exists whenever the conduct held to warrant punitive award is a widespread or common corporate practice.
­FN 5. The defense elicited testimony from plaintiff's doctors that plaintiff's disability was in large part, perhaps 50 percent, due to "discogenic disease," changes that occur over the years rather than traumatic injury. Medical reports also reflected the presence of the disease. The policy limited accidental benefits to injuries "independent of sickness and other causes."
­FN 6. The physician testified at trial that when he examined plaintiff on 22 September, he stated he was going back to work on 29 September. When the physician examined plaintiff on 9 October, plaintiff stated his former employer did not have any vacant jobs. This information was not available to McEachen on 20 November.
­FN 9. The majority also suggests that Segal's offer to settle was improper, warranting punitive damages. However, the majority concede that the offer was proper had Segal made a proper investigation. (Ante, p. 822, fn. 4.) Accordingly, the basis of impropriety is the improper investigation.
­FN 10. There is also evidence of wrongdoing by the insurer in that plaintiff's file was lost in the home office and that the ordinary procedures of review of adjuster's decision to terminate benefits were not followed. The majority do not rely on the breakdown in the insurer's ordinary procedures for review. In any event, the insurer's negligent failure to follow its own procedures may not warrant punitive damages.
SCOCAL, Egan v. Mutual of Omaha Ins. Co. , 24 Cal.3d 809 available at: (https://scocal.stanford.edu/opinion/egan-v-mutual-omaha-ins-co-28054) (last visited Sunday April 21, 2019).

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