Sobieski v. American Standard (CA1 9/29/16)

This is about the extent to which the nature of an insurer’s business practices can make it liable for punitive damages in a bad-faith case.

Plaintiff, riding a motorcycle, was seriously injured when he hit an uninsured car that slowed suddenly in front of him. He made a UM claim to Defendant. Its claims rep talked to the car’s driver, who claimed that she signaled a turn and had to slow for a pedestrian. The representative didn’t talk to the three motorcyclists with Plaintiff, who would have cast doubt on the driver’s story, on the theory that they would be “biased” – in other words, that they would have cast doubt on the driver’s story. (Plaintiff himself didn’t remember what happened.) The representative assigned 100% of the fault to Plaintiff and closed the claim. A year later, Plaintiff’s lawyer sent a policy-limits demand; a new claims rep reviewed the file, didn’t interview any of the witnesses, and denied the claim again. Plaintiff sued for breach of contract; the car driver was found 40% at fault. That was enough to exceed Defendant’s limits, which it paid. Plaintiff then sued for bad faith; a jury awarded compensatory damages and $1 million in punitives. Defendant appealed.

The Court of Appeals affirms the compensatory damages. Plaintiff had “presented sufficient evidence from which the  jury could conclude that [Defendant’s] investigation of the claim was not reasonable.”

The real issue was punitive damages. Plaintiff’s theory on punitives was that the claims reps denied it because of “undue pressure . . . to promote company profits at the expense of insureds.” Plaintiff relied on Nardelli, which allowed punitives when the company made the income and even the job of each claims rep contingent on strictly limiting each claim. Plaintiff contended that various aspects of Defendant’s practices were as bad; examining them at length (“each case will depend on its own distinct facts”), the court disagrees.  “An insured seeking punitive damages must show clear and convincing evidence that the insurer’s concern for profits drove the company to breach its duty . . . .” There was no evidence that, as in Nardelli, adjusters were pressured to reduce claims for reasons of profit. Their manger was given goals and strategies for monitoring claims but “keeping statistics on resolution of claims and looking to their ‘bottom line’ are reasonable internal procedures.” That defendant had a profit-sharing plan for all its employees was not the same as basing adjusters’ pay on their claims payouts.  

Plaintiff also argued that Defendant knew he was in particular need because had been out of work for a year because of the accident. “But knowledge of the harm that denial of a claim will cause an insured, without evidence without evidence the insurer deliberately ignored the insured’s ‘rights and needs,’ is not sufficient to establish . . . ‘evil mind’. . .”  It would be more accurate to point out that the justifiable denial of a claim does not cause harm in any legal sense but the opinion is paraphrasing Linthicum, the author of which paid rare attention to such minutiae.

The court affirms the trial court’s award of Rule 68 sanctions but in light of the reversal of punitive damages remands its award of attorney’s fees for reconsideration.

(Opinion: Sobieski v. American Standard)