Egan v. Mutual of Omaha Ins. Co.

• Citation: 157 Cal.Rptr. 482,598 P.2d 452,24 Cal.3d 809
• Parties: Michael EGAN, Plaintiff and Respondent, v. MUTUAL OF OMAHA INSURANCE COMPANY et al., Defendants and Appellants. L.A. 30747.
• Decision Date: 14 August 1979
• Court: United States State Supreme Court (California)

Page 482

157 Cal.Rptr. 482

598 P.2d 452

24 Cal.3d 809

Michael EGAN, Plaintiff and Respondent, v. MUTUAL OF OMAHA INSURANCE COMPANY et al., Defendants and Appellants.

L.A. 30747.

Supreme Court of California.

Aug. 14, 1979.

As Modified on Denial of Rehearing Oct. 11, 1979.

Pettit, Evers & Martin, Joseph W. Rogers, Jr., Robert J. Heil, Ferguson, Hoffman, Henn & Mandel, San Francisco, Kaplan, Livingston, Goodwin, Berkowitz & Selvin, Herman F. Selvin, Sheldon W. Presser, Peter C. Bronson, Beverly Hills, Poindexter & Doutre, Alfred B. Doutre, Los Angeles, and Robert A. Seligson, San Francisco, for defendants and appellants.

Beardsley, Hufstedler & Kemble, Seth M. Hufstedler, Peter O. Israel, Los Angeles, Charles A. O'Brien, San Francisco, Don B. Kates, Jr., Redwood City, O'Brien & Hallisey, San Francisco, Ropers, Majeski, Kohn, Bentley & Wagner, Michael J. Brady, Redwood City, Adams, Duque & Hazeltine, James S. Cline and Kimler G. Casteel, Los Angeles, as amici curiae on behalf of defendants and appellants.

Hafif & Shernoff, Herbert Hafif, William M. Shernoff and Stephen L. Odgers, Claremont, for plaintiff and respondent.

William P. Camusi, Los Angeles, Wylie A. Aitken, Santa Ana, Leonard Sacks, Encino, Robert E. Cartwright, San Francisco, Robert G. Beloud, Upland, LeRoy Hersh, David B. Baum, San Francisco, Stephen I. Zetterberg, Claremont, Ned Good, Los Angeles, Arne Werchick, San Francisco, Sanford M. Gage, Beverly Hills, Roger H. Hedrick, Daly City, as amici curiae on behalf of plaintiff and respondent.

MOSK, Justice.

Defendants appeal from a judgment awarding compensatory and punitive damages for breach of an insurance contract. We conclude the judgment should be affirmed insofar as it awards compensatory damages against defendant Mutual of Omaha Insurance Company (Mutual) but reversed in all other respects.

In 1962, plaintiff purchased a health and disability insurance policy from defendant Mutual through its Los Angeles representative, the Hall-Worthing Agency (agency). The policy provided for lifetime benefits of $200 per month in event the insured became totally disabled as a result of either an accidental injury "independent of sickness and other causes" or sickness sufficiently severe to cause confinement of the insured to his residence. Benefits for a nonconfining illness were payable for a period not to exceed three months.

Between 1963 and 1970 plaintiff claimed and received payments for three separate back-related disabling injuries. In May 1970, he made a fourth claim for accidental back injury suffered during the course of his employment. Portions of the claim form were completed by both plaintiff and his physician. The physician estimated plaintiff would be able to return to work in August 1970. In September plaintiff visited the agency and discussed his claim. This discussion resulted in payment under the policy's accident provisions for a three-month period following date of injury.

Plaintiff filed a supplemental claim in October 1970, stating he was unable to return to work. Because his physician indicated on the claim form that plaintiff could have returned to work on September 29, defendant McEachen, an agency claims manager, reviewed workers' compensation and State Compensation Insurance Fund medical records. These records disclosed that plaintiff and the examining physician had agreed he would return to work on July 1, 1970.

On November 20, McEachen visted plaintiff at home. McEachen testified he merely discussed contradictions in the claim form and agreed to discuss the matter later after further investigation. Plaintiff testified that McEachen informed him no further benefits were due because he was not actually disabled but simply unable to find work, that he told McEachen employment was available through his labor union but because he still suffered from his injury he was unable to accept such employment, and that he was willing to be examined by any doctor of Mutual's choice.

In February 1971, as a result of inquiry from Mutual's home office, McEachen addressed a letter to plaintiff enclosing payment of benefits through September 29, 1970. The letter stated the check represented full payment of benefits due under the policy.

On February 26, 1971, surgery was performed on plaintiff's back, and he submitted another claim to the agency. The physician's portion of this claim form included an estimate by the surgeon that plaintiff could return to work "Possibly 3-6 months from date of surgery." This claim was assigned to defendant Segal, an agency claims adjuster, who was aided in his field investigations by claims analyst Romano from Mutual's home office. Although not entirely clear, it appears Romano was assigned to the agency to assist in a backlog of field investigations. Romano was not Segal's superior; rather, he occupied a position equivalent to that of Segal in the agency.

Segal and Romano, in the course of their field investigations, reviewed records of Workers' Compensation Appeals Board, State Compensation Insurance Fund, and the hospital where plaintiff's surgery was performed. State Compensation Insurance Fund records contained letters from Dr. Carpenter, plaintiff's surgeon, and Dr. Singelyn. Dr. Carpenter wrote in his letter: "[Plaintiff's medical] history appears consistent with a man with probable discogenic disease with multiple aggravations over the last several years, finally culminating in a specific incident a little over seven months ago ...." Dr. Singelyn declared in his letter: "I would apportion 50% of his current subjective complaints to his industrial injury, and 50% to the natural progression of his preexisting pathology of degenerative wear and tear osteoarthritis of the spine." Neither Segal nor Romano made any effort to contact plaintiff's physicians. Trial testimony established that efforts to discuss the case with attending physicians would ordinarily have been made by a claims adjuster. Based on Segal's review of medical records, plaintiff's condition was reclassified from injury to nonconfining illness.

In May 1971 Segal visited plaintiff at home, telling him he suffered from an illness, not an injury. Segal handed plaintiff a check for medical costs and three months' maximum disability payments. Plaintiff did not cash the check. He testified he refused Segal's offer for a larger check if plaintiff would surrender his policy. He further testified that after discussing the matter with Dr. Carpenter, he wrote to Segal concerning his reclassification but received no answer.

Segal testified he was certain he acted at the direction of some higher authority during the May 1971 meeting, although he could not recall who directed him. Mutual's files contained no written directive to Segal. Gustin, head of Mutual's continuing disability claims division, attempted to explain the absence of any identifiable person in authority at Mutual's home office to receive and review Segal's reports. He testified plaintiff's file had not been in his department after December 1970, and that it may have "fallen ... into a crack."

Subsequently, plaintiff received a 73 percent disability rating on his workers' compensation claim. Not returning to work, he remained under medical care. In July 1972, at plaintiff's request, the Department of Insurance asked Mutual to review plaintiff's file and report to the department within 15 days. The nature of Mutual's response, if any, is unclear; it was not produced at trial.

In 1973, plaintiff commenced the present action for compensatory and punitive damages against Mutual, Segal and McEachen. The trial court, in directing a verdict against defendants, ruled as a matter of law that defendants' failure to have plaintiff examined by a doctor of their choice or to consult with plaintiff's treating physicians and surgeon violated the covenant of good faith and fair dealing. The court submitted to the jury the issues of causation, compensatory and punitive damages. The jury returned verdicts against all defendants. General damages of $500 and punitive damages of $400 were assessed against Segal. General damages of $1,000 and punitive damages of $500 were assessed against McEachen. Mutual was held liable for $45,600 in general damages, $78,000 for emotional distress, and $5 million in punitive damages.

I

The directed verdict on the issue of breach of covenant of good faith and fair dealing rests on Mutual's inadequate investigation of plaintiff's claim. Mutual argues that an insurer violates this covenant in a disability insurance contract only if it wrongfully denies a claim knowing it has no reasonable basis for doing so, and that the ruling herein improperly subjects it to strict liability in tort for breach of contract. We disagree. For the reasons discussed below, we conclude that an insurer may breach the covenant of good faith and fair dealing when it fails to properly investigate its insured's claim.

In addition to the duties imposed on contracting parties by the express terms of their agreement, the law implies in every contract a covenant of good faith and fair dealing. (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658, 328 P.2d 198; see also Comment, Extending the Insurer's Duty of Good Faith and Fair Dealing to Third Parties Under Liability Insurance Policies (1978) 25 UCLA L.Rev. 1413, 1418-1424.) The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the benefits of the agreement. (Murphy v. Allstate Ins. Co. (1976),17 Cal.3d 937, 132 Cal.Rptr. 424, 553 P.2d 1584; Crisci v. Security Ins. Co. (1967),66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173; Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 658, 328 P.2d 198.) The precise nature and extent of the duty imposed by such an implied promise will depend on the contractual purposes.

This court has previously addressed the extent of the duties imposed by the implied...