California: Cutting Back On Punitive Damages Against Insurers?

With a recent employment decision, the California Supreme Court has handed insurance companies a compelling new argument, potentially limiting their exposure to punitive damages in bad faith cases. The question is: when is an insurance company subject to punitive damages for the acts of an employee/ adjuster in connection with the handling of a single insured’s claim for benefits? The answer is, in all probability: not as often as it was before.

In California, a corporate defendant can only be subject to punitive damages if a corporate officer, director or managing agent committed, authorized, or ratified the wrongful conduct. Cal. Civil Code, § 3294(b). Everyone knows who the officers and directors are, but the meaning of "managing agent" has been open to debate.

In 1999, the State Supreme Court, in White v. Ultramar, Inc. (1999) 21 Cal.4th 563, held a managing agent is someone who makes "corporate policy."

But White was an employment case. For the next decade, insureds continued to argue that the managing agent test was different for corporate insurer defendants. They relied on a 1972 State Supreme Court opinion – a holdover from the Bird Court – in an insurance bad faith case: Egan v. Mututal of Omaha Ins. Co. (1979) 24 Cal.3d 809. Egan, decided before the punitive damages statute was amended, had said that the corporate insurer could be liable for punitives for the adjuster’s malicious, fraudulent or oppressive acts because the insurer vested the adjuster with discretion over the handling of the claim.

Egan’s test for managing agent (discretion over a single claim) appears at odds with White’s narrower test (one who makes "corporate policy.") Which rule applies in bad faith cases? The White court clearly intended to narrow Egan’s definition of managing agent, but was Egan still good law in insurance lawsuits? White did not overrule Egan and in fact sometimes cited with it with seeming approval.

The tension between the two tests went unresolved, and indeed largely unnoticed until 2009. Then, one California intermediate court of appeal came down on the Egan side in an insurance case. (Major v. Western Mut. Ins. Co. (2009) 169 Cal.App.4th 1197.) Major held that it is the vesting of discretion in the adjuster that matters, not so much whether that adjuster is thereby making corporate policy.

But Major was on the books for barely half a year when it turned out to be not so "major" after all. In Roby v. McKesson Corp. (2009) 47 Cal.4th 686, the California Supreme Court explained what it meant by the making of "corporate policy," in the bargain further narrowing the test:

"we were referring to formal policies that affect a substantial part of the company and that are the type likely to come to the attention of corporate leadership. It is this sort of broad authority that justifies punishing an entire company for an otherwise isolated act of oppression, fraud or malice." (Emphasis added.)

Note the critical language:

• The policy must be "formal;" it must affect a "substantial part of the company;" it should be of the type "likely" to come to the attention of the corporation’s leadership; indeed, the very rationale for imposing punitive damages is to punish the corporation for something it did, in its own right, not for a renegade or isolated act.
• Roby thereby rejects the notion that a corporation can be subject to punitive damages for what might be characterized as the making of ad hoc "policy." Yet that is precisely what a rogue or unsupervised insurance adjuster does when "maliciously" handling a single claim.

Defense lawyers take note:Roby offers a potent new weapon in the arsenal for defending against punitive damage claims in bad faith cases. It is far from clear that an insurer can be subject to any punitive damages for merely vesting discretion in an adjuster in connection with a single claim for benefits.