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The California Court of Appeal, Second Appellate District, upheld a reduction in punitive damages awarded to an insured after her insurer unreasonably refused to defend her in an underlying action. The Court concluded the punitive damages award, as reduced by the trial court, were appropriate given the circumstances of the case.
Farmers Insurance Exchange ("Farmers") insured Village Green Homeowners Association ("HOA") under a "Condominium - Premier" policy, which provided general liability coverage for bodily injury claims. The HOA was the named insured, but the policy also insured "each … unit-owner of the described condominium, but only with respect to that person's liability arising out of the ownership, maintenance or repair of the portion of the premises which is not owned solely by the unit-owner or out of that person's membership in the Association."
Betty Jo Walker and Lind Williams ("Respondents"), two elderly women, shared a condominium and belonged to the HOA. Another tenant, Juanita Wasson, was injured when she was struck by a communal garage door that Ms. Walker opened using a remote control. Wasson sued the HOA and the Respondents for her injuries.
Farmers agreed to defend the HOA but declined to defend the Respondents. The adjuster concluded the Respondents were independently liable because they owned and used the garage door opener. However, in declining the tender Farmers failed to contact the Respondents, consult with coverage counsel, or follow company protocols for denial of defense.
The Respondents had no other insurance and were forced to retain counsel on credit. Respondents settled, using credit cards and a loan to fund the settlement. They then sued Farmers for breach of contract and bad faith. The jury concluded Farmers unreasonably refused to defend and awarded Respondents damages to reimburse their defense costs of $45.431.80 and their settlement payment of $6,500. The jury also awarded Respondents $1,500,000 for emotional distress and $8,338,255.73 in punitive damages, after concluding that Farmers engaged in oppressive but not malicious or fraudulent conduct. In post-trial proceedings, the trial court awarded Respondents attorney fees under Brandt v. Superior Court (1985) 37 Cal.3d 813.
The trial court conditionally granted Farmers' motion for a new trial, unless the Respondents agreed to a reduction of the punitive damage award to $1,500,000. The Respondents agreed to the reduction, and Farmers appealed. Respondent cross-appealed contending the trial court erred reducing the punitive damage award.
In the unpublished portion of the opinion, the Court found substantial evidence supporting the verdict awarding punitive damages. The Court held Farmers showed scant regard for Respondents' rights and used an unsupported "independent" theory of liability tailored to justify a coverage denial. Having been advised by defense counsel of an expected verdict between $250,000 and $350,000, and that Respondents did not have other liability insurance, Farmers was also on notice of a potentially ruinous adverse judgment.
In the published portion of the opinion, the Court affirmed the trial court's order reducing punitive damages to $1,500,000. Relying on State Farm Mutual Automobile Ins. Co. v. Campbell, 538 U.S. 408 (2003) ("State Farm"), the Court stated "the United States Supreme Court has determined that the due process clause of the Fourteenth Amendment…places limits on state courts' awards of punitive damages, limits appellate courts are required to enforce in their review of jury awards." The Court then employed the following State Farm "guideposts:" (1) the degree of reprehensibility; (2) the disparity between the actual or potential harm and the punitive damage award; and (3) the difference between the punitive damages and the civil penalties in comparable cases.
The Court found these "guideposts" had been properly applied when the punitive damages were reduced. The Court agreed with the trial court's determination that the 5.5 to 1 ratio between compensatory and punitive damages awarded by the jury was inappropriately high. Although the California Supreme Court established a "guideline norm" of 3 or 4 to 1 in Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, the Simon court also indicated a lesser ratio would be appropriate where compensatory damages are substantial. Here the compensatory damages were not only substantial but included a punitive element as well, given the high emotional distress damages awarded to each of the Respondents.
Additionally, the Court concluded the reprehensibility of Farmers' conduct did not justify a higher award. Farmer's coverage decision caused economic harm and emotional distress, but no physical harm. Nor did Farmers' conduct evince indifference or reckless disregard for health and safety of others. Plaintiffs also failed to prove Farmers' coverage assessment was other than an isolated incident.
Thus the Court affirmed the trial court's reduction of punitive damages to $1,500,000.
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This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.
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