Insurance Law

Lessons Worth Learning, Again and Again

By George Wallace

On occasion,appellate courts will publish a decision not because it breaks new legal ground but because it offers an opportunity to "remind" practitioners of rules that are well-settled but too often "forgotten" or "overlooked."  To wrap up 2008, Curt Cutting at the California Punitive Damages Blog points to just such a case.

In Food Pro International v. Farmers Insurance Exchange (H031178, Dec. 30. 2008),the Sixth District California Court of Appeal takes up two recurrent issues:

1. How certain must the facts of a case be before a liability insurer can refuse to defend its insured, and
2. What proof is required to support a claim for punitive damages. 

The Punitive Damages Blog, unsurprisingly, is most interested in the second issue, as to which the Court reiterates the need for "clear and convincing" evidence establishing the equivalent of "evil, criminal, recklessly indifferent [conduct, or other strong indications of] a vexatious intention to injure" before punitive damages are appropriate.  As Curt Cutting writes:

This opinion doesn't really add much to the body of California law regarding the standards for imposition of punitive damages. Nevertheless, my sense is that trial courts sometimes lose sight of how stringent those standards are, so it's nice to see the Court of Appeal issue this published opinion as a reminder.

Here at Decs& Excs, unsurprisingly, it is the first issue that holds our interest.  The particular details of the insurance coverage question in Food Pro will be of most interest to coverage specialists -- the case turns on the application of a "professional services" exclusion, and specifically on when an injury does or does not "arise out of" the provision of professional services -- but the major "reminders" that the court intends to provide are of broad application:

1. A liability insurer must defend whenever there is a "potential," no matter how slim, that the case may result in an award of covered damages;
2. There is a "potential" for a covered award whenever there is any evidence available that would support such an award; and
3. Insurers cannot avoid the duty to defend -- and trial courts cannot ratify the insurer's denial of a defense by granting judgment in the insurer's favor -- by the expedient of simply ignoring evidence that supports a differing conclusion.

Too often, insurers and the attorneys who advise them get in to trouble because they reach a conclusion -- "Nope, nope: there's no potential for covered damages here." -- and thereafter only acknowledge the existence of information that reinforces that conclusion, turning a blind eye to any conflicting information.  That is the mistake that Farmers and its coverage counsel made in this case, at least to hear the Court of Appeal tell it. 

The price of that error is a remand to the trial court for a further trial.  The good news for Farmers is that it does not face the risk of a judgment for punitive damages.  The less good news is that if definitely faces liability to pay its insured's defense costs and maybe, just maybe, faces liability for compensatory damages for "bad faith."  And therein lies the danger of seeing only what you want or expect to see.

Full post as published by Declarations and Exclusions on January 05, 2009 (boomark / email).