Down To Cases

Continuing, the appeals court said, "The Supreme Court chided us for basing our reinstatement of the jury's $145 million punitive damages award on (the insurer's) "nationwide policies rather than for the conduct direct(ed) toward the (insureds)." The appeals court also noted the Supreme Court's comment that "a more modest punishment for this reprehensible conduct could have satisfied the State's legitimate objectives, and the Utah courts should have gone no further." Turning to the case, the appeals court said, "Insureds buy financial protection and peace of mind against fortuitous losses. They pay the requisite premiums and put their faith and trust in their insurers to pay policy benefits promptly and fairly when the insured event occurs. Good faith and fair dealing is their expectation. It is the very essence of the insurer-insured relationship. In some instances, however, insurance companies refuse to pay the promised benefits when the underwritten harm occurs. When an insurer decides to delay or to deny paying benefits, the policyholder can suffer injury not only to his economic well-being but to his emotional and physical health as well. Moreover, the holder of a policy with low monetary limits may see his whole claim virtually wiped out by expenses if the insurance company compels him to resort to court action.

"(The insurer) expressly assured the (insureds) that their assets would not be placed at risk by the negligence and wrongful death lawsuit brought against them. The company then unnecessarily subjected the (insureds) to the risks and rigors of a trial. (The insurer) disregarded facts from which it should have concluded that the (insureds) faced a near-certain probability of having a judgment entered against them in excess of policy limits. When this probability came to pass, (the insurer) withdrew its expressions of assurance and told the (insureds) to place a "for sale" sign on their house. These acts, all of which the Supreme Court conceded that (the insurer caused)…and for which (the insurer) has not voiced so much as a whisper of apology or remorse, caused the (insureds) profound non-economic injury.

"Lastly, we consider whether the substantial emotional damages sustained by the (insureds) were the result of (the insurer's) intentional malice, trickery and deceit. We conclude that the damages sustained by the (insureds) were no mere accident. At trial, the adjuster…testified that (the insurer) resorted to various tactics to create prejudice in the event the case ever went before a jury."

In conclusion, the appeals court held that the carrier's behavior toward its insureds "was so egregious" as to warrant a punitive damages award of $9,018,780.75, which was nine times the amount of compensatory and special damages.

Campbell vs. State Farm Mutual Automobile Insurance Co., 2004 UT 34 (Utah 04/23/2004) 2004 UT 34, 2004.UT.0000161 (www.versuslaw.com).

Single limit for employee dishonesty applies to all three years of policy

A Georgia business bought a commercial insurance policy that, among other things, provided employee dishonesty coverage. The policy had a three-year term, from Sept. 1, 1997, to Sept. 1, 2000. It was renewed for an additional three years.

The policies provided that the most the insurer would pay under the employee dishonesty coverage in any one occurrence was the applicable limit shown on the declarations, which was $50,000. The policies defined an "occurrence" as "all loss caused by, or involving, one or more employees whether the result of a single act or a series of acts." The policies also included the following non-cumulation clause: "Regardless of the number of years this insurance remains in force or the number of premiums paid, no Limit of Insurance cumulates from year to year or period to period."

Four years after the original policy took effect, the insured discovered that, due to the ongoing embezzlement of a single employee, it had sustained losses in each of the three years covered by the original policy and during the first year of the renewal policy. It submitted a claim to the insurer, seeking $50,000 for each year of the original three-year policy and $10,670 for the first year of the renewal policy. The insurer paid $50,000, explaining that was the extent of the insured's coverage for employee dishonesty. The insured sued for the additional $110,670. A trial court granted the insured's motion for summary judgment. A state Court of Appeals affirmed in part and reversed in part, concluding the policies' terms were ambiguous concerning whether the renewal policy provided a new $50,000 limit independent of the original policy's limit. Because of that ambiguity, the Court of Appeals affirmed the trial court's ruling that the insured could recover $10,670 under the renewal policy. In regard to the original three-year policy, the Court of Appeals ruled that the policy unambiguously limited coverage to $50,000 for the entire three-year period. Therefore, it reversed the trial court's ruling that the insured was entitled to recover an additional $100,000 under the original policy.

The insured appealed the second part of the ruling to the state Supreme Court, where it argued that the original policy was not a single contract with a three-year term but rather a series of separate, independent contracts, each for a one-year term. Thus, the insured felt entitled to recover up to the policy's $50,000 limit for each of the three years in which a loss occurred. However, both the insured and the carrier had stipulated before the trial court that the original policy had a single, three-year term. Thus, the insured was estopped from arguing otherwise on the appeal.

The Supreme Court noted that the insured's recovery was limited to $50,000 by both the policy's definition of "occurrence" and the non-cumulation clause. The insured, however, claimed that the non-cumulation clause was intended only to prevent the insured from carrying forward unused portions of insurance from one year to the next. For example, the insured said, if he lost $150,000 in the policy's third year due to employee dishonesty, the non-cumulation clause would prevent him from seeking recovery for the entire loss by carrying forward $50,000 in unused coverage from the policy's first and second years.

That argument, the Supreme Court said, was based on the erroneous assumption that there was a separate $50,000 coverage limit for each year the policy was in force. The non-cumulation clause aside, the rest of the policy unambiguously allowed recovery of only one limit of insurance, the court said.

The insured argued that it paid an annual premium, so it should not be denied annual coverage. The court, however, noted that where the policy intended for insurance limits to apply on an annual basis, it said so explicitly. The court held that if the parties had intended the $50,000 limit to apply separately to each year the policy was in place, they would have expressly provided for it, as they did with regard to coverage for general commercial liability and real estate agent errors and omissions coverage.

The appellate court ruling was affirmed. There was a dissent.

Sherman & Hemstreet Inc. vs. Cincinnati Insurance Co., No. S03G1190 (Ga. 03/29/2004) 2004.GA. 0000499 (www.versuslaw.com)

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Carrier, wholesaler not bound by action of retail broker

A woman contacted her broker to procure a commercial package policy for her jewelry store. The broker solicited a wholesaler broker for quotes. As a part of process, the broker requested a quote for "special" business and personal property coverage.

The underwriter for the wholesaler declined to quote special form coverage unless the client's building had upgraded wiring, plumbing, heating and roofing. When the broker told the underwriter no such upgrades had been made, the underwriter refused to offer special-form coverage. Rather, the underwriter returned the app to the broker after striking out the word "special" and writing over it the word "basic." (One of the differences between the special form coverage and the basic broad form coverage is that the latter does not insure against theft.) The underwriter then provided a quote reflecting the counter offer.

The broker asked the underwriter to bind and issue the coverage "per your quote." On Feb. 12, 2001, the broker prepared and presented a policy binder to his client. The binder mistakenly represented that the policy included "special form" coverage. The client believed the policy she obtained was the type she had requested. By March 28, the broker received a copy of the insurance policy from the issuing carrier, and it did not include special form coverage.

On June 19, the client suffered a theft loss and promptly reported it to her broker, who submitted it. The carrier rejected the claim because the policy did not cover loss from theft. On Aug. 2., the broker finally delivered a copy of the policy to the client, who subsequently sued the insurance company, the wholesale brokerage and the owner of the brokerage.

A trial-court judge ruled against the woman, observing, in part, that the woman's broker was primarily responsible for failing to obtain the type of policy requested. She then appealed. (No cause of action against the retail broker was mentioned in this appeal, although one was in the original trial-court action. A case footnote said briefly that the insured settled with her retail broker, who had been dismissed from this case. Perhaps she was seeking "deeper pockets.") The woman alleged that the carrier breached its policy by failing to indemnify her for her loss. The appeals court, however, found that the plain language of the policy issued did not include coverage for loss due to theft.

The court also said: "It is well settled that it is the burden of the insured to show that a loss falls within the basic scope of coverage of a policy. (Waller vs. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 16.) When an occurrence is clearly not included within the coverage afforded by the insuring clause, it need not also be specifically excluded. (Glavinich vs. Commonwealth Land Title Ins. Co. (1984) 163 Cal.App.3d 263, 270.)

The court said applicable statutes declare that a binder may be deemed a policy only for the purpose of proving that the insured has the coverage specified in the binder. Further, a binder merely assists the insured in proving the existence of coverage until the actual policy is issued. Therefore, the court said, "Even if the binder prepared by (the broker) could be deemed the actual policy for a limited time, the binder expired on Feb. 21, 2001, the date the actual policy was issued, and long before (the woman) incurred her theft loss on June 9, 2001."

The court held that the broker's mistaken representation within the binder that the policy provided "special form" coverage could not be imputed to the insurer or the wholesaler broker. It said that the broker was an agent for the insured and not an agent of the insurer for the purpose in question. The court noted that "the producer brokerage agreement between the broker and the wholesale broker stated that '(the retail broker) is not the agent of and has no authority to bind (the wholesaler broker) or any of (the wholesale broker's) insurance companies…and the broker had no authority to make any changes in terms and conditions of any policy issued through (the wholesaler broker).'"

The appeals court said that there was no triable issue of fact as to whether the insurer violated the policy in declining the claim for theft coverage. It said summary judgment was properly granted concerning the breach-of-contract claim.

The woman also alleged a cause of action against the insurer for breach of the implied covenant of good faith and fair dealing. The appeals court said that "since the policy did not provide coverage for her loss, as discussed above, there can be no bad faith."

The woman also claimed that the loss was not properly investigated, but the court said that allegation didn't support her bad-faith claim, either. She also argued that the carrier and wholesaler misrepresented the scope of coverage of her policy and therefore were liable for negligent misrepresentation and fraud. She claimed three "misrepresentations": the wholesaler's change of the application by crossing out "special" and writing "basic" on an internal document, the broker's erroneous representation to her that the policy included theft coverage, and a misrepresentation by the wholesaler broker's owner to the carrier in allowing the application to be changed.

The court held that the underwriting documents showed that the insured, through the retail broker as her chosen broker, was properly advised that the wholesaler and carrier rejected her request for "special" form coverage, that she was only offered a quote for "basic" coverage, which she accepted and paid. Even if there were any misrepresentations, the carrier and wholesaler were blameless. Neither communicated directly with the insured. Rather, all communications went through her retail broker.

The court didn't accept the insured's allegation that the wholesaler's alteration of her application was a fraudulent act. The court quoted a relevant case, stating: "An application for insurance is a proposal….The proposal is not a completed contract until it is accepted by the insurer in the same terms in which the offer was made. If the acceptance modifies or alters any of the terms of the proposal, it must then in turn be accepted by the applicant to be effective as a contract." (Linnastruth vs. Mut. Benefit etc. Assn. (1943) 22 Cal.2d 216, 219.)

In this case, the appeals court said, "The application was altered, by interlineations, to reflect in an honest and accurate manner a counteroffer, which was the only coverage (the woman) was offered and the coverage she then accepted through her agent (the retail broker). Thus, in modifying the insured's application, no insurer made any misrepresentations."

The trial court was upheld in its summary judgment.

Rios vs. Scottsdale Insurance Co., No. B163709 (Cal.App. Dist.2 06/01/ 2004) 2004.CA.0004873 )www.versuslaw.com.

Readers may fax Don Renau at (502) 897-1533. His e-mail address is drenau@thepoint.net.