On May 5th, I blogged about an important case pending before the California Supreme Court—Nickerson v. Stonebridge Life Insurance Company—that was set to address an important issue for policyholders forced to sue their insurers for bad faith and punitive damages. You can check out my prior blog addressing the issues in the case here.
Unlike some other states, in California, proving that an insurer breached the insurance policy does not automatically trigger the insured’s right to recover the attorneys’ fees (“Brandt fees” in California) incurred to establish that the claim is covered under the insurance policy. Instead, California requires that the insured also establish that insurer’s conduct, in withholding the policy benefits owed, was done in bad faith.1
Because punitive damages—which are awarded when a defendant’s actions are reprehensible (i.e., when they arise from fraud, malice, or oppressive conduct)—are constitutionally limited to a ratio where they cannot be more than ten times the compensatory damages awarded, when deciding whether an award of punitive damages is constitutional, the courts are forced to key in on and evaluate the amount of compensatory damages.
The important issue for insurance policyholders in Nickerson was whether (after establishing that the insurer’s conduct constituted bad faith) the award of attorneys’ fees incurred should be included as “compensatory damages” for purposes of the punitive damage calculation.
My gut feeling that I shared with you in my prior blog post on this topic was that if due process requires that punitive damages be limited to no more than ten times the compensatory damages awarded to an insured, public policy and the concept of fundamental fairness should also require that the attorney’s fees incurred by the insured to prove that they were entitled to policy benefits should also be included in that calculation.
Well, the California Supreme Court agreed with me! On June 9, 2016, the California Supreme Court issued its decision2 in which it held that:
In determining whether a punitive damages award is unconstitutionally excessive, Brandt fees may be included in the calculation of the ratio of punitive to compensatory damages… [T]o exclude the fees from consideration would mean overlooking a substantial and mutually acknowledged component of the insured‘s harm. The effect would be to skew the proper calculation of the punitive-compensatory ratio….
Not every decision by an insurance company to deny coverage is done in bad faith. Sometimes, there is a genuine dispute over whether the loss is covered or not. Other times, insurers mistakenly deny coverage. Insurance adjusters are people too and like all of us, they sometimes make mistakes. In those situations the denial of coverage wouldn’t be considered to have been done in bad faith, and would not entitle the insured to an award of punitive damages. As you all know, the goal of most insurance lawsuits is to obtain full and fair compensation—compensation that the insured is legally entitled to under the terms of the insurance policy.
The California Supreme Court’s decision in Nickerson not only righted the wrong decision made by the Court of Appeal (which decided attorneys’ fees should not be included in the punitive damage calculation), but it reiterated the fundamental notion that when insurance companies step over the line and wrongfully and egregiously deny coverage, “full and fair compensation” includes those amounts necessary to send a message to the insurance industry that underhanded and wrongful conduct should not and will not be tolerated.