Delos v. Farmers Group, Inc.

• Citation: 155 Cal.Rptr. 843,93 Cal.App.3d 642
• Court: California Court of Appeals
• Decision Date: 30 May 1979
• Parties: Cynthia Marie DELOS et al., Plaintiffs and Appellants, v. FARMERS INSURANCE GROUP, INC., et al., Defendants and Appellants. Civ. 14968.

Page 843

155 Cal.Rptr. 843

93 Cal.App.3d 642

Cynthia Marie DELOS et al., Plaintiffs and Appellants, v. FARMERS INSURANCE GROUP, INC., et al., Defendants and Appellants.

Civ. 14968.

Court of Appeal, Fourth District, Division 1, California.

May 30, 1979.

Hearing Denied Aug. 29, 1979.

Tyson & Churchill and Gordon S. Churchill, San Diego, William Shernoff, Claremont, Popko & Cornblum and Bruce I. Cornblum, San Diego, for plaintiffs and appellants.

McInnis, Fitzgerald, Rees & Sharkey and James A. McIntyre, San Diego, Ellis J. Horvitz, Encino, Arthur E. Schwimmer, Los Angeles, and John L. Klein, San Diego, for defendants and appellants.

WIENER, Associate Justice.

We face in this appeal a variation on a popular and recurring theme punitive damages in a "bad faith" case relating to uninsured motorist coverage. We decide plaintiffs are entitled to compensatory and punitive damages, rejecting defendants' several arguments and conclude further it was not an abuse of discretion for the trial court to grant a new trial unless plaintiffs consented to $350,000, a reduction from the $4,000,000 jury award.

Procedural Background

Cynthia Marie and Timothy Delos (the Deloses) sued Farmers Insurance Exchange (the Exchange) and Farmers Group, Inc. (the Group) for compensatory and punitive damages for the failure of defendants to recognize and pay the uninsured motorist (UM) claim of Mrs. Delos in accordance with the terms of her automobile insurance policy issued by the Exchange. The pleadings of plaintiffs' second amended complaint filed February 21, 1975 were based on breach of the implied duty of good faith and fair dealing, constructive and actual fraud, and violation of the statutory duties defined in Insurance Code section 790.03. ¹

The jury rendered a verdict in favor of plaintiffs against the Exchange for $2,500 and against the Group for $8,000 compensatory damages and $4,000,000 punitive damages. The Exchange moved for a new trial; the Group moved for judgment notwithstanding the verdict and/or for a new trial. All motions were denied except the Group's motion for a new trial on the issue of punitive damages only unless the Deloses consented to a reduction of punitive damages to $350,000. The Exchange and the Group appeal from the judgment entered pursuant to the jury verdict (Code Civ.Proc., § 904.1, subd. (a)). The Group also appeals from the denial of its motion for judgment notwithstanding the verdict (Code Civ.Proc., § 904.1, subd. (d)). The Deloses cross-appeal from the order granting the Group a new trial (Code Civ.Proc., § 904.1, subd. (d)).

Factual Background

We believe it helpful to set out the facts under three separate headings. The relationship between the insurance known as guaranteed benefits (GB) and the bad faith aspect of this litigation, although superficially appearing to be distinct events, have a nexus which we will fully discuss.

Guaranteed Benefits

In the early part of 1972, the Group considered developing for the Exchange an insurance coverage to be known as GB, a combination of high limits ($15,000 for one person/$30,000 for one accident), medical payments and disability income coverage designed to induce policyholders of the Exchange to give up their UM coverage. Management of the Group, aware of the substantial loss associated with UM coverage, desired some remedial action, for it knew UM coverage could not legally be dropped or rates sufficiently raised to make the line profitable. The marketing program for the coverage, as approved and implemented, required any policyholder desiring to buy GB to sign a form deleting UM, medical payments and auto disability coverage with no further explanation of the rights being relinquished.

The first written notice announcing the availability of the new coverage (stuffer no. 1) was sent out in July 1972, but was stopped within a few months after the California Insurance Commissioner and some of the Exchange's agents criticized the notice for not adequately advising prospective purchasers they were giving up UM coverage. Starting in October 1972, a revised notice (stuffer no. 2) was sent to policyholders whose policies came up for renewal during the six-month period starting October 1, 1972. Stuffer no. 2 contained a comparison of GB and UM coverage. A third revised notice (stuffer no. 3) was mailed for a limited time after March 1973 following an injunction restraining the mailing of the first two stuffers.

The Purchase of GB by the Deloses

Mrs. Delos handled insurance matters for her family. When she read stuffer no. 2, she concluded GB was an additional coverage. She then checked a box on the renewal payment card "Change coverage to Guaranteed Benefits" and returned it to the Exchange with her check for the renewal premium. Neither she nor her husband had any desire to give up UM coverage; neither one signed the waiver attached to the stuffer.

When the renewal policy was received, Mr. Delos discovered the declarations page said something other than "not covered" with respect to UM coverage. It contained the word "See" in the UM box, ostensibly to draw his attention to the GB endorsement (E-387). The endorsement, however, although expressly providing for the deletion of the medical expense provision of the Delos policy and describing the benefits under the added coverage, made no reference to UM coverage.

The UM Claim of Mrs. Delos

Mrs. Delos was injured on May 25, 1973 when she was involved in an automobile accident caused by an uninsured motorist. Her automobile insurance policy with the Exchange included UM and GB coverage.

Plaintiffs reported the accident by telephone on May 30, 1973 to the San Diego branch claims office. Kenneth P. Flaherty, a claims supervisor in that office, reviewed the insurance information pertaining to the Deloses and concluded that since they had bought GB coverage during the period it was necessary to waive UM coverage, they did not have the latter coverage and so advised the claims adjuster assigned to the file. Consequently, on June 7, 8, and 14, 1973, Mr. and Mrs. Delos and their counsel were advised by the Exchange that her lost wages and medical expenses were covered by GB, but there was no UM coverage.

On December 5, 1973, plaintiffs' counsel sent a written request to the Exchange for arbitration of the UM claim. Plaintiffs' written requests to the Exchange for arbitration and for a copy of the written waiver of UM coverage made on February 5, March 7, April 1 and 17, were unanswered. On April 11, 1974, the regional office of the Exchange wrote to the San Diego branch claims office explaining that plaintiffs' UM waiver could not be located. The waiver forms were kept at the Santa Ana regional office. During 1972-1973, the procedure at the regional office was that, after the information from the waiver forms was put into a computer, the programmers would drop each waiver into a large, polyethylene bag next to the computer terminal. Some of the waivers missed the bags, dropped on the floor, and were swept away by the janitorial staff. Those waivers which fell into the bags were stored without being sorted as to policy number or name of insured. A claims examiner told Mrs. Delos' counsel on or about April 18 that if the waiver could not be located, the Exchange would settle her UM claim and on April 23, 1974, Mr. Flaherty wrote to Mrs. Delos' counsel to the same effect. Plaintiffs' counsel responded by offering to drop their lawsuit if the Exchange unequivocally extended UM coverage and paid plaintiffs' attorney fees. The Exchange failed to respond.

On May 9, 1974, the regional office advised the San Diego claims office it was unable to locate the UM waiver. A few days later, the supervisor of liability claims and the branch claims office manager jointly sent a memo to the regional claims manager, who agreed the Exchange had no choice but to extend UM coverage. Nevertheless, the Exchange decided to defer its decision on UM coverage until Mrs. Delos' deposition was taken. When her deposition was eventually taken on October 24, 1974, the Exchange agreed to recognize her UM claim.

THE GROUP'S APPEAL ²

The Trial Court Properly Denied the Group's Motion for Judgment Notwithstanding the Verdict

The Group attacks the denial of its motion for judgment notwithstanding the verdict on the ground that the law and the evidence compelled a finding in its favor on each of plaintiffs' five causes of action. We address only two of plaintiffs' theories of relief, for where there are several causes of action a general verdict will be upheld if the evidence supports it on any one count. (Henderson v. Harnischfeger Corp. (1974) 12 Cal.3d 663, 673, 117 Cal.Rptr. 1, 527 P.2d 353.)

The Group is Liable on the Theory of Breach of the Implied Covenant of Good Faith and Fair Dealing on the Insurance Contract

It is now well settled that an insurer has the law-imposed duty to act fairly and in good faith in discharging its contractual responsibilities to its insured. (See Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 328 P.2d 198; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173.) The source of that duty is the implied covenant that neither party will do anything that will injure the right of the other to receive the benefits of the agreement. (Brown v. Superior Court (1949) 34 Cal.2d 559, 564, 212 P.2d 878.) As part of its obligation, an insurer must act fairly and in good faith in handling claims submitted by its insured "a duty not to withhold unreasonably payments due under a policy." (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573, 108 Cal.Rptr. 480, 485, 510 P.2d 1032, 1037.) The Exchange admittedly had the duty to handle the UM claim of Mrs. Delos in the manner required by law. (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 921, 148 Cal.Rptr. 389, 582 P.2d 980.) It acknowledges in this appeal that there was sufficient evidence in reference to its denial of pla...