A California appellate court has held that there was sufficient evidence to support a punitive damage award against an insurer for bad faith delay in paying its insured’s claim for underinsured motorist benefits. (Mazik v. GEICO General Ins. Co. (2019) — Cal.App.5th —)
Facts
In August 2008, Michael Mazik’s car was struck head-on by another car which had crossed over the center line of the highway. Both cars were traveling about 50 miles per hour. The driver of the other car was killed in the collision.
As a result of the collision, Mazik suffered abrasions, lacerations, and a badly-fractured left heel bone. Due to the nature of the fracture, doctors could not operate on it. The fractured heel bone left Mazik with severely restricted range of motion, arthritis, a deformity, and chronic pain in his ankle.
The responsible driver’s auto insurer, Mercury Insurance Company, paid its $50,000 policy limit in settlement of the responsible driver’s liability to Mazik. In December 2009, Mazik submitted a claim to his own insurer, GEICO General Insurance Company, under a policy with uninsured / underinsured motorist limits of $100,000. Mazik requested $50,000 from GEICO, representing the full policy amount offset by the $50,000 payment Mazik had already received.
A GEICO adjuster reviewed the demand and prepared a “Claim Evaluation Summary,” but the summary omitted information from the medical records that Mazik had provided. The summary calculated a “negotiation range” for the full value of Mazik’s claim (including the $50,000 that Mercury had already paid) at between approximately $47,000 and approximately $52,600. The adjuster obtained approval from GEICO’s regional liability administrator, Lon Grothen, to reject Mazik’s $50,000 claim. In January 2010, GEICO offered Mazik a settlement of $1,000. In September 2010, GEICO increased its settlement offer to $13,800, and in January 2011, GEICO increased its settlement offer to $18,000.
At GEICO’s request, in May 2011, Mazik submitted to an independent medical examination. The doctor who examined Mazik concluded that Mazik was “doing well” and that there was no indication he needed surgery.
In February 2012, GEICO increased its settlement offer to $18,877. Mazik rejected that offer and reasserted his demand for the policy limits. However, GEICO did not make any further settlement offers because, according to GEICO’S regional liability administrator, Grothen, Mazik would not negotiate and GEICO did not want to “bid against itself.” Grothen thus instructed the claim adjuster to move the case into arbitration.
In April 2013, Mazik and GEICO arbitrated Mazik’s underinsured motorist claim. The arbitrator issued an award in favor of Mazik for the full policy limits. In June 2013, GEICO paid Mazik $50,000 under the policy.
Mazik subsequently sued GEICO for bad faith delay in paying Mazik’s claim for underinsured motorist benefits. The jury in the bad faith case awarded Mazik compensatory damages of $313,508 (consisting of $300,000 for emotional distress and $13,508 for attorney’s fees and costs to recover policy benefits). The jury also awarded Mazik punitive damages of $4 million, which the trial judge later reduced to $1 million. GEICO appealed the punitive damages award.
Holding
The Court of Appeal affirmed the award of punitive damages against GEICO.
The appellate court rejected GEICO’s claim that there was insufficient evidence that any “officer, director, or managing agent” of GEICO was involved in bad faith. Under Civil Code section 3294, an award of punitive damages against a corporation requires conscious disregard, authorization, ratification or an act of oppression, fraud, or malice “on the part of an officer, director, or managing agent of the corporation.” Here, GEICO’s regional liability administrator, Grothen, was involved in handling Mazik’s claim. Further, Grothen had wide authority over the settlement of claims because he supervised over 100 adjusters in three large California counties, and part of his job was to establish “settlement standards” within his region. Thus, there was sufficient evidence that Grothen was a “managing agent” of GEICO.
The appellate court also rejected GEICO’s claim that, even if Grothen was a managing agent, there was insufficient evidence that Grothen personally engaged in “oppression, fraud, or malice” or authorized or ratified such conduct by other employees. According to the court, there was sufficient evidence for the jury to conclude that Grothen personally engaged in oppressive conduct. Specifically, there was evidence that Grothen was aware that the claims adjusters reported only selected information; that Grothen was fully aware of the serious nature of Mazik’s injuries; and that Grothen adopted an improper adversarial approach to resolving Mazik’s claim. Thus, the record supported the jury’s conclusion that GEICO’s conduct amounted to oppression or malice warranting punitive damages.
Last, the appellate court rejected GEICO’s claim that, even after the trial court reduced the punitive damages award to $1 million, the award was still excessive. In considering whether the amount of punitive damages is constitutionally permissible, courts consider three factors: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. Of these three factors, the most important is the degree of reprehensibility of the defendant’s conduct. Here, given GEICO’s “significant reprehensible conduct,” and given the roughly three-to-one ratio of punitive to compensatory damages, the trial court’s decision approving punitive damages of $1 million was within constitutional boundaries.
Comment
Pursuant to California Civil Code section 3294(a), punitive damages may be awarded only on proof by “clear and convincing evidence” that the defendant “has been guilty of oppression, fraud, or malice.” Section 3294(b) then describes the proof necessary when the defendant is an employer whose employee allegedly engaged in such conduct. An employer may not be liable for punitive damages based upon the acts of an employee unless the employer (1) “had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others”; or (2) “authorized or ratified the wrongful conduct for which the damages are awarded”; or (3) “was personally guilty of oppression, fraud, or malice.” (Cal. Civ. Code § 3294(b).) Further, with respect to a corporate employer, “the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation.” (Ibid.)