Obtaining Punitive Damages Against An Insurance Company Under California Law

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In California, because of the “special relationship” between an insured and an insurer, where an insurance company acts in bad faith and the misconduct is egregious, punitive damages are available.  (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 922-23.)   Awards for punitive damages often garner media attention because they can substantially increase the verdict amount.  The movie The Rainmakerwith Matt Damon climaxed in  a large punitive damage award against an insurance company for denying life saving medical treatment.

In order to obtain punitive damages under California law, the insured must prove the insurance company acted in bad faith, and that its conduct was alsomalicious, fraudulent, or oppressive.  (Civil Code §3294.)  The same actswhich are bad faith can also be the basis for punitive damages, if they rise to the level of malice, fraud and/or oppression.  (Fleming v. Safeco Ins. Co. of America(1984) 160 Cal.App.3d 31, 44.)

Punitive damages against an insurance company have been approved by California Courts in a variety of circumstances.  Punitive damages may be appropriate where there is a violation of an insurer’s “obligation to investigate” a claim.  (Hughes v. Blue Cross of Northern California (1990) 215 Cal.App.3d 832, 846, 847.)  The failure to advise an insured about “available coverages” can also lead to punitive damages.  (Amerigraphics v. Mercury Cas. Co. (2010) 182 Cal.App.4th 1538, 1559.)  Inordinatedelays in handling or investigating a claim may also justify punitive damages.  (Campbell v. Cal-Guard Sur. Services, Inc.(1998) 62 Cal.App.4th 563, 571.)

Many cases have held that punitive damages are particularly appropriate where an insurance company has an institutionalized practice that is unreasonable and in bad faith.  (Neal, supra, 21 Cal.3d at 923.)  For example, a “broad fraudulent scheme” or an “unlawful profit scheme” are significant factors that justify punitive damages. (State Farm Mut. Auto Ins. v. Campbell (2003) 538 U.S. 408, 435–436.)  Similarly, there is a greater chance for an award of punitive damages where there are “establishedpolicies or practices in claims handling which are harmful to insureds.”  (Mock v. Michigan Miller’s Mutual Ins. Co. (1992) 4. Cal.App.4th 306, 329.)  In addition, “the existence and frequency of similar past conduct” is evidence that raises the likelihood of a punitive damage award.  (Pacific Mut. Life Ins. Co. v. Hasip (1991) 499 U.S.1, 21.)

In California, insureds are allowed to conduct pattern and practice discovery to seek evidence of similar bad faith practices or conduct by the insurance company. (Colonial Life & Accident Ins. Co. v. Superior Court (Perry) (1982) 31 Cal.3d 785, 792.)  If an insured is elderly of disabled, he or she may be able to recover treble punitive damages under a California statute designed to protect the disabled and elderly.  (California Civil Code §3345.)

Punitive damages are difficult to recover against an insurance company.  Insurers fight such claims vigorously, and cases seeking punitive damages will likely face multiple motions to dismiss the claim before it reaches a jury.  Even when a jury awards punitive damages, the award is often issues susceptible to appeal andlarge punitive damage awards can be hard to keep.

Nevertheless, if an insured can get a punitive damage claim before a jury, it becomes a potentially powerful weapon.  Punitive damage claims greatly raise the insurance company’s damage exposure and the stakes of the litigation.  The threat of punitive damages is a great deterrent to insurance company abuse, and is an important protection California law provides to its policyholders.