The California Court of Appeal has held that evidence of delays in handling a fire claim was sufficient to support a substantial award for emotional distress, attorney’s fees and punitive damages. ( Major v. Western Home Ins. Co. (2009) 2009 WL 26744)
Facts
Patrick and Elsa Major owned a residence and personal property, which they insured through Western Home Insurance Company. After a wildfire destroyed their property, the Majors submitted a claim to Western Home.
At the time of the fire, the policy provided stated limits of $193,000 for the dwelling, $19,300 for other structures, $135,100 for personal property and $38,600 for living expenses. However, the policy also included extended replacement cost coverage up to 25 percent over the stated policy limits, meaning the policy, as written, actually provided coverage up to $241,250 for the dwelling, up to $24,125 for other structures, up to $168,875 for personal property, and up to $48,250 for additional living expense.
As a condition to recovering extended replacement cost coverage, Western Home required that, at the inception of the policy, the dwelling coverage limits be equal to the cost to replace the house. To ensure the limits were adequate, the policy required an inspection of the dwelling and a report specifying the dwelling’s replacement cost. However, Western Home did not send an inspector until after the policy was issued and the coverage limits set. The inspection report identified the replacement cost as $235,578 (i.e., substantially more than the stated $193,000 dwelling coverage limit). Based on this valuation, the extended replacement cost coverage for coverage A should have been $305,216 for the dwelling, $30,522 for other structures, $213,651 for personal property, and $61,043 for additional living expense.
Western Home used an independent adjusting to firm to handle the Majors’ fire claim. The evidence established that Western Home had retained the independent adjusting firm to handle a significant aspect of Western Home’s business. The evidence also established there was no day-to-day oversight of the adjusting firm’s claims supervisor and that the supervisor exercised substantial discretionary authority to pay or not pay claims. In addition, the supervisor managed 35 employees in an office that handled claims across the country.
The independent adjusting firm assigned the claim to an adjuster, and later re-assigned the claim to a second adjuster. At the time of the re-assignment, the second adjuster had not received the training required by California’s Fair Claims Settlement Practices Regulations, and was handling over 200 other claims (which his own manager admitted was “way too many”). Several months after the file was re-assigned to the second adjuster, he told the Majors he had not reviewed their file and told them their claim was “third in his stack.” He also told the Majors on at least three occasions their claim was not his top priority. The adjuster also failed for months to review the Majors’ 77-page personal property claim, which at that time was the most significant unpaid portion of their claim. Eventually, the independent adjusting firm’s supervisor assumed direct handling of the file.
About one year after the fire, the Majors became “exhausted” by their own efforts to resolve the claim and, therefore, they retained an attorney. After the Majors retained counsel, Western Home’s vice president of claims reviewed the underwriting inspection report for the Majors’ dwelling and noted that it showed a replacement cost ($235,578) for the Majors’ house that was significantly higher than the $193,000 stated limit for the dwelling. He thereafter authorized what Western Home characterized as a “courtesy” increase in the policy limits to correspond to the replacement cost set forth in the inspection report. With this adjustment, the extended replacement cost amount for personal property increased from $168,875 to $213,651.
Later, the Majors submitted receipts apparently totaling $31,359.55 for personal property they had replaced. Because the extended replacement cost limit had been increased to $213,651, there were sufficient policy limits remaining to pay the supplemental personal property claim of $31,359.55. However, the independent adjusting firm’s supervisor did not authorize payment of this supplemental amount, claiming that the receipts had been transmitted via facsimile and were illegible, and also asserting that the receipts were not marked so that they could be cross-referenced to the original personal property inventory.
The Majors ultimately sued Western Home. At trial the supervisor admitted that the personal property replacement receipts that allegedly had been faxed and allegedly were illegible actually had been mailed and were legible. The supervisor also admitted that the policy did not specifically require that the replacement receipts be marked so that they could be cross-referenced to the original personal property inventory.
The jury awarded the Majors $1,316,831.08 ($31,359.55 for the personal property the Majors had replaced, $450,000.00 for emotional distress, $189,000.00 for Brandt attorney fees, and $646,471.53 for punitive damages).
On appeal, Western Home contended that the $31,359.55 the jury awarded for personal property was improper. More specifically, Western Home contended that, prior to the trial, Western Home already had paid $168,875 for personal property (the original extended replacement cost limit for personal property). Western Home argued that its “courtesy” decision to adjust the extended replacement cost personal property policy limits from $168,875 to $213,651 was not a binding modification of the policy because it was not supported by consideration. As such, Western Home argued, it was not obligated to pay the $31,359.55 for the personal property replacement cost claim.
Holding
The Court of Appeal rejected Western Home’s argument that the adjustment of the policy limits was a “courtesy” decision instead of a legally binding modification of the policy. The Court noted that the extended replacement cost coverage was available to the Majors only if they allowed Western Home to adjust the Coverage A limit of liability and premium in accordance with property valuations that Western Home itself established. Thus, the Court concluded that the trial court and jury reasonably could have concluded the policy had been modified by Western Home to comply with the original terms of the policy, and thus no new consideration was necessary to support the modification.
The Court of Appeal also found that the evidence was sufficient to support the $450,000.00 award for emotional distress, the $189,000.00 award in Brandt attorney fees and the $646,471.53 in punitive damages. In particular, the Court of Appeal ruled the evidence was sufficient to support a finding that the independent adjusting firm’s supervisor was a “managing agent” such that Western Home was liable for punitive damages stemming from the supervisor’s action in handling the claim.
Comment
Because the Majors were the prevailing parties in the trial court, the Court of Appeal disregarded the evidence favorable to Western Home and instead focused on the evidence favorable to the Majors. Based on the evidence, the jury apparently found that the independent adjusting firm was simply too overwhelmed with other claims to properly handle the Majors’ claim. The Court of Appeal also found that the independent adjuster’s supervisor qualified as a “managing agent” and that Western Home therefore was liable for punitive damages based on the supervisor’s conduct.