A trial judge’s prejudicial errors during trial mandated reversal of an $8.2 million bad faith award and a $46 million punitive damage award against liability insurers who allegedly mishandled the defense of an insured in underlying litigation. (Victaulic Co. v. American Home Assurance Co. (2018) 20 Cal.App.5th 948)
Facts
Victaulic Company (Victaulic) is a Pennsylvania corporation that produces mechanical pipe joining systems. Victaulic purchased commercial general liability, umbrella and excess policies through American Home Assurance Company, Insurance Company of the State of Pennsylvania, and National Union Fire Insurance Company of Pittsburgh, PA (collectively AIG).
Plaintiffs filed nine different lawsuits against Victaulic in several different jurisdictions, seeking damages from Victaulic because of property damage caused by alleged defects in Victaulic’s products. Victaulic tendered the lawsuits to AIG. AIG’s director of complex claims, Nancy Finberg, concluded that there was a “potential” for coverage. AIG thus agreed to defend Victaulic in the lawsuits subject to a reservation of rights, and subject to the self-insured retention provisions of the policies.
AIG later filed a declaratory relief action against Victaulic in Pennsylvania (Victaulic’s home state), seeking a declaration that AIG did not have any duty to defend or indemnify Victaulic in the underlying lawsuits. Ultimately, the Pennsylvania court dismissed that case on the ground that the third-party claimants were indispensable parties and were not amenable to jurisdiction in Pennsylvania.
Meanwhile, Victaulic sued AIG in California for breach of contract and bad faith, alleging that AIG had failed to pay amounts due under the policies and that AIG had thus failed to meaningfully defend and indemnify Victaulic in the underlying lawsuits. AIG cross-complained, seeking a declaration that AIG did not have any duty to defend or indemnify Victaulic in the underlying lawsuits. During the California coverage litigation, Ms. Finberg verified AIG’s responses to request for admissions (RFAs) in which AIG denied that it had any duty to defend Victaulic in the underlying lawsuits. Eventually, the trial judge summarily adjudicated that AIG did have a duty to defend Victaulic in three of the underlying lawsuits.
The trial judge then bifurcated the coverage case, with Phase 1 consisting of a bench trial on the issues of whether AIG had a duty to defend and indemnify Victaulic in the underlying lawsuits. The trial judge ultimately ruled that AIG did have a duty to defend and indemnify Victaulic in the underlying lawsuits.
Phase 2 consisted of a three-and-a half week jury trial on the issue of breach of contract and bad faith. The bulk of Phase 2 was devoted to Victaulic’s claim that AIG acted unreasonably by filing the declaratory relief actions against Victaulic. During Phase 2, the trial judge allowed Victaulic’s counsel to interrogate AIG’s claim director, Ms. Finberg, about AIG’s responses to RFAs in which AIG denied that it had any duty to defend Victaulic. During Victaulic’s interrogation of Ms. Finberg regarding the RFA responses, the trial judge himself twice aggressively interrogated Ms. Finberg, and ultimately the judge abruptly halted the questioning for an in-chambers conference in which the judge concluded that Ms. Finberg had “made an admission that she perjured herself” in connection with the RFAs. When Ms. Finberg resumed the stand the next day, represented by personal counsel, the trial judge ruled that Ms. Finberg could, on a blanket basis, claim the Fifth Amendment privilege against self-incrimination and would do so in front of the jury. AIG moved for a mistrial, which the trial judge denied. During closing arguments in Phase 2, Victaulic’s counsel focused on “Ms. Finberg,” “RFAs,” “lies,” and “penalty of perjury.” After brief deliberations, the jury awarded Victaulic breach of contract damages of over $1 million and Brandt bad faith attorney fee damages of over $8.2 million. The jury also found that AIG acted with fraud, oppression, or malice committed by a managing agent.
Phase 3 was the punitive damages trial. It consisted of one hour of argument by counsel for each side. Following brief deliberation, the jury awarded $46 million in punitive damages against AIG.
The trial judge denied AIG’s motion for new trial, and AIG appealed the judgment.
Holding
The California Court of Appeal found that the trial judge had committed multiple prejudicial errors during trial, and thus reversed the judgment.
Specifically, the trial judge erred in allowing Victaulic’s counsel to question Ms. Finberg about AIG’s denials of the RFAs on the “duty to defend” issue. The appellate court reasoned that if a party improperly denies RFAs, that party can be held liable for the cost the propounding party incurs in proving the denied matter. However, the California discovery statutes do not authorize a party’s denial of RFAs to be used as evidence at trial.
Further, the trial judge improperly assumed the role of advocate and impugned Ms. Finberg’s integrity before the jury. While a trial judge has the power to examine a witness, the trial judge “cannot become an advocate for either party or cast aspersions upon a witness.” Here, the trial judge had openly attacked Ms. Finberg on the witness stand and had acted as an advocate for Victaulic.
Last, the trial judge erred in handling Ms. Finberg’s invocation of the privilege against self-incrimination. Specifically, the trial judge erred in: (1) allowing Ms. Finberg to invoke the privilege after she had already testified under Victaulic’s questioning for nearly two days; (2) allowing Ms. Finberg to unilaterally invoke the privilege on a blanket basis; (3) failing to either strike Ms. Finberg’s testimony or declare a mistrial; and (4) requiring Ms. Finberg to invoke the privilege in front of the jury.
The appellate court concluded that the trial judge’s multiple errors in handling Ms. Finberg’s testimony, coupled with Victaulic’s exploitation of those errors in closing argument, “surely” influenced the jury’s bad faith verdict. The appellate court thus reversed the judgment that had been entered in favor of Victaulic and against AIG.
Comment
The appellate court agreed with AIG that there were serious errors during the trial, beginning with the trial judge’s allowance of the use of the RFA responses, compounded by the judge’s intensive questioning of Ms. Finberg, and compounded further by the judge’s handling of Ms. Finberg’s invocation of the Fifth Amendment privilege. According to the appellate court, the “cumulative effect” of the errors left no doubt that AIG was prejudiced at trial. As such, reversal was warranted.