California Assesses Punitive Damages for Disability Insurer’s Despicable ConductJuly 13, 2012 | Disability Claim Denials
In our last blog post, we discussed when, under Arizona law, punitive damages may be assessed against a disability insurance company that is guilty of insurance bad faith. In this blog post, we examine how the same issue is analyzed under California law.
Under California law, a disability insurer may be found guilty of insurance bad faith, but still escape an assessment of punitive damages. Punitive damages are only recoverable against a disability insurance company for bad faith conduct when it is demonstrated “by clear and convincing evidence that the [disability insurer] has been guilty of oppression, fraud, or malice” throughout the disability claims process. Cal.Civ.Code § 3294(a). Because the clear and convincing standard is a higher standard of proof than the standard required to prove ordinary insurance bad faith, “[a] marginally sufficient case of bad faith is not likely to prove malice or oppression by clear and convincing evidence.” Shade Foods, Inc. v. Innovative Products Sales & Mktg., Inc., 78 Cal. App. 4th 847, 910 (2000). Therefore, in order to recover punitive damages, a disability insurance lawyer must not only prove that the disability insurer violated its duty of good faith and fair dealing to the insured, but also that either “oppression, fraud, or malice” is clearly manifested by this bad faith conduct. Id.
For disability insurance bad faith cases in California, “punitive damages can be most plausibly justified by a finding of oppression or malice.” Harbison v. Am. Motorists Ins. Co., 636 F. Supp. 2d 1030, 1044 (E.D. Cal. 2009). Malice is defined as either acting with an intent to injure or “despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” § 3294(a)(1); Gaylord v. Nationwide Mut. Ins. Co., 776 F.Supp.2d 1101, 1127 (E.D. Cal. 2011). Oppression, on the other hand, “means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.” § 3294(a)(2). Both malice and oppression, therefore, “involv[e] intentional, willful or conscious wrongdoing of a despicable or injurious nature.” Cal. Prac. Guide Ins. Lit. Ch. 13-C (internal quotations omitted).
When reviewing a punitive damages award, California courts consider a number of factors based on the totality of circumstances to determine whether “the jury’s award of punitive damages was consistent with California law”—that is, whether the disability insurer’s bad faith conduct involved an intentional, willful or conscious wrongdoing of a despicable or injurious nature to such an extent that a trial judge could rationally conclude that an award of punitive damages is appropriate. See Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998, 1013 (9th Cir. 2004).
In Hangarter, for example, a California court upheld a $5 million punitive damages award against a disability insurance company, based upon four important findings of bad faith. This case arose out of a dispute between a disabled chiropractor and Provident Life, her disability insurer, after it wrongfully terminated her disability benefits. At trial, the district court found that Provident Life was guilty of insurance bad faith and punitive damages were assessed. The Ninth Circuit upheld this assessment, reasoning that the district judge did not error in upholding the jury’s conclusion that Provident Life consciously disregarded the insured’s rights because there was evidence (1) that the disability insurer wrongfully supplanted California’s definition of total disability with its own, (2) that the disability insurer’s “independent” medical examination (IME) doctor was biased, (3) that the disability insurance company misinformed the claimant regarding her potential benefits and (4) that the disability insurance company employed practices to achieve net termination ratios. Id. at 1014.
Although the disability insurance attorneys were successful obtaining punitive damages in Hangarter, punitive damages awards for insurance bad faith are the exception, not the rule in California. Even when a disability insurer is obviously guilty of insurance bad faith, “an award of punitive damages is not automatic.” Phelps v. Provident Life & Acc. Ins. Co., 60 F. Supp. 2d 1014, 1026 (C.D. Cal. 1999).
At Comitz | Beethe, our disability insurance lawyers are not afraid of a challenge. We believe punitive damages awards are an effective legal tool to keep disability insurance companies in check by holding them accountable for their egregious misconduct. Punitive damage awards diminish profit-motives behind corporate wrongdoings and may help reshape industry standards. Accordingly, in each insurance bad faith case we strive to demonstrate with clear and convincing evidence the despicable nature of disability insurers’ bad faith conduct.