Notrica v. State Compensation Ins. Fund

• Decision Date: 17 March 1999
• Docket Number: No. B097529,B097529
• Citation: 70 Cal.App.4th 911,83 Cal.Rptr.2d 89
• Court: California Court of Appeals Court of Appeals
• Parties: , 64 Cal. Comp. Cases 378, 99 Cal. Daily Op. Serv. 1933, 1999 Daily Journal D.A.R. 2503 Joe NOTRICA, Plaintiff and Respondent, v. STATE COMPENSATION INSURANCE FUND, Defendant and Appellant.

Page 89

83 Cal.Rptr.2d 89

70 Cal.App.4th 911, 64 Cal. Comp. Cases 378,

99 Cal. Daily Op. Serv. 1933,

1999 Daily Journal D.A.R. 2503

Joe NOTRICA, Plaintiff and Respondent, v. STATE COMPENSATION INSURANCE FUND, Defendant and Appellant.

No. B097529.

Court of Appeal, Second District, Division 4, California.

March 17, 1999.

Richard A. Krimen, Charles W. Savage, Berkeley, Barbara J. Gallios, San Francisco, Sheppard, Mullin, Richter & Hampton, Andre J. Cronthall, Los Angeles,; Horvitz & Levy, Christina J. Imre and Julie L. Woods, Encino, for Defendant and Appellant.

Sonnenschein, Nath & Rosenthal, Paul E.B. Glad, Peter A. Smalbach and Sean McEneaney, San Francisco, for California Workers' Compensation Institute as Amicus Curiae on behalf of Defendant and Appellant.

Morrison & Foerster, Raoul Kennedy and Sheryl C. Medeiros, San Francisco, for National Association of Independent Insurers as Amicus Curiae on behalf of Defendant and Appellant.

Shernoff, Bidart & Darras, Michael J. Bidart, Palm Desert, Roxborough, Pomerance & Gallegos, Nicholas P. Roxborough, Drew Pomerance, Esteban G. Gallegos; Bryan Cave, David H. Raizman; Barbara A. Krieg and Sheldon Eisenberg, Los Angeles, for Plaintiff and Respondent.

Joseph V. Capurro, San Jose, for California Applicants' Attorneys Association as Amicus Curiae on behalf of Plaintiff and Respondent.

HASTINGS, J.

INTRODUCTION

Joe Notrica, doing business as Notrica's 32nd Street Market (Notrica), sued his workers' compensation insurer, State Compensation Insurance Fund (SCIF, sometimes State Fund or Fund), to recover in tort and for unfair business practices, based on allegations relating to SCIF's case reserve and claims handling policies and practices. In a bifurcated proceeding, the jury awarded Notrica $478,606 in compensatory damages and $20 million in punitive damages; the trial court enjoined SCIF from various business practices and awarded $333,319.65 in attorneys' fees. SCIF appeals from the judgment. We conclude that the punitive damages award must be reduced to $5 million and otherwise affirm.

PROCEDURAL BACKGROUND

In its complaint against SCIF, Notrica asserted two causes of action here pertinent: tortious breach of the implied covenant of good faith and fair dealing, to be determined by the jury; and unfair, unlawful, or fraudulent business practices (Bus. & Prof.Code, § 17200), to be determined by the trial court.

The implied covenant cause of action alleged the following pertinent facts.

SCIF is the state's largest workers' compensation carrier, created in 1914 as a public enterprise fund and subject to the jurisdiction and control of the state insurance commissioner. SCIF has issued policies to more than 250,000 California employers and has held itself out to the public as the most experienced carrier in California. SCIF, required by Insurance Code section 11775 to be neither more nor less than self-supporting, owns or controls assets exceeding $2.5 billion and "enjoyed a net investment gain on investment income of over $370 Million for the year ending December 31, 1989. Premiums earned for that year exceed[ed] $1.8 Billion." SCIF conducts its business in the same manner as a private carrier, can and does compete with private carriers, and is subject to the same standard of liability. SCIF may be sued in all actions arising out of any act or omission in connection with its business affairs, whether in tort or contract, pursuant to Insurance Code section 11783. ¹

SCIF issued a workers' compensation policy (Policy) to Notrica for the period June 1988 through June 1989 which obligated it to investigate, defend, and settle claims reasonably and to estimate reasonable claim reserve levels. SCIF failed to meet these obligations, resulting in its breach of the implied duty of good faith and fair dealing. SCIF breached this duty for the purposes of either receiving higher premiums or paying less dividends, and increasing its revenues and surpluses while impairing Notrica's financial interests. As a proximate result, Notrica paid higher premiums to workers' compensation carriers, failed to receive sufficient dividends, and was forced to hire professionals to assist it in reviewing SCIF's conduct and to prosecute this action.

SCIF's conduct had been intentional and constituted fraud, oppression, or malice, justifying imposition of punitive damages under Civil Code section 3294.

Under the unfair competition cause of action (Bus. & Prof.Code § 17200, et seq.), which requested restitution, punitive damages, and injunctive relief, Notrica included the following additional allegations. SCIF failed to disclose certain internal policies in order to induce Notrica to enter into the Policy agreement. Notrica reasonably relied upon the inducements and incurred damages as a result. SCIF intentionally, wrongfully and with fraud, oppression, or malice, refused to deal directly with Commercial Benefits, Notrica's authorized representative for workers' compensation insurance concerns, thereby interfering with the contractual relationship between Notrica and Commercial Benefits. SCIF represented that denials of reviews of claims files was to protect the privacy interests of individuals; however, its motives were to perpetrate a fraud upon Notrica and other insureds, to destroy the third-party risk manager industry, to compete unfairly with private insurers, to inhibit or prevent discovery of SCIF's fraudulent and negligent conduct, to gain and maintain an unfair advantage over its insureds and the industry, to enable it to collect exorbitant premium payments, all of which acts constitute dishonest, deceptive, oppressive, fraudulent, unfair, and destructive conduct. SCIF's interference resulted in Notrica over-paying premiums.

The jury rendered several findings by special verdict. It found by a preponderance of the evidence that SCIF had breached the duty of good faith and fair dealing and that such breach had resulted in Notrica suffering damages totaling $478,606. ² The jury found by clear and convincing evidence that SCIF had acted with fraud, awarding $20 million in punitive damages.

The trial court, sitting in equity, found SCIF had engaged in unfair business practices (Bus. & Prof.Code, § 17200). It issued an injunction requiring SCIF to delete the term "maximum probable potential" from its claims estimating manual and to return to a previous standard. It further enjoined SCIF from denying insureds access to claim files as relevant to the employer's premium, from refusing to communicate with an insured's authorized representative, and from refusing to allow such representative to conduct an appropriate claim file review (Lab.Code, § 3762).

The trial court found that Notrica was the prevailing party on its cause of action for breach of the implied covenant of good faith and fair dealing, and on that ground it awarded costs and reserved jurisdiction to determine entitlement to reasonable attorneys fees. At a post-judgment hearing, the trial court awarded some $300,000 in attorney fees.

SCIF asserts the following contentions on appeal:

I. An insured employer should be prohibited from recovering tort damages where the only damage claimed is the impact on future premiums.

II. The bad faith judgment must be reversed because it is not supported by SCIF's reserving practices, claims handling, or claims review policies, including those governing its relationship to the insured's agents.

III. The compensatory damage award must be reversed for new trial.

IV. The injunction is not supported by the law or the facts.

V. The punitive damage award must be reversed and any new trial on this issue requires retrial of all issues.

VI. The award of attorney fees should be reversed or at least limited.

DISCUSSION

I. Basis for Tort Damages

The "particular risk presented by the insured's experience or insurance history" is one of the factors that an insurer is permitted to consider in setting premiums for its insureds. (P.W. Stephens, Inc. v. State Compensation Ins. Fund (1994) 21 Cal.App.4th 1833, 1836, 27 Cal.Rptr.2d 107.) In the instant case, SCIF employed what it termed the "maximum probable potential" standard to workers' compensation claims against Notrica when setting aside amounts as reserves for Notrica cases. "The 'maximum probable potential' standard means that the adjuster reserves for the absolute most SCIF may have to pay without any exercise of discretion or judgment as to the realistic value of each claim.... [T]he greater the claim reserves, the greater the insured's loss history, which in large part determines the insured's experience modification factor--which in turn is used by SCIF to calculate the insured's premium. Claim reserves also impact whether an insured receives a dividend or not." (MacGregor Yacht Corp. v. State Comp. Ins. Fund (1998) 63 Cal.App.4th 448, 457, 74 Cal.Rptr.2d 473, review den. July 29, 1998.) By implication, the jury in the instant case found SCIF had failed to estimate reasonable claim reserve levels, resulting in Notrica paying higher premiums and receiving lower dividends.

SCIF first contends that an impact on future premiums is not a sufficient basis in and of itself to support the tort damage award for breach of the implied covenant of good faith and fair dealing. ³ SCIF notes that the goal of the state workers' compensation system is to maintain sufficient reserves to compensate injured workers under its policy of liberal construction to provide maximum benefits to the injured employee, and that insurers must set reserves in the amount for which, in the language of Insurance Code section 923.5, the insurer "may be liable." ⁴

We first address SCIF's argument that permitting tort recovery based solely on the fact that its practices impacted Notrica's future premiums is error. SCIF claims that such policy creates an irreconcilable conflict of interest for the carrier vis-a-vis its insured employer and the claimant employee. ⁵ SCIF...