This past June the California Supreme Court issued its decision in Nickerson v. Stonebridge Life Insurance Company, 63 Cal.4th 363 (2016), holding that post-trial Brandt fees could be included in the damage calculus for purposes of evaluating the ratio of punitive damages to compensatory damages. We wrote about this decision in an earlier blog. The Supreme Court remanded the $19 million punitive verdict to the Court of Appeals to amend the judgment to correct the maximum allowable amount of punitive damages of 10:1, or $475,000. In doing so, the Court of Appeals reissued its original decision. This decision has a number of issues that may guide insurance counsel in handling bad faith cases with a punitive exposure.

The policy involved was a hospital stay policy that paid $350 per day for each day of confinement in a hospital for a covered injury. The definition of “Hospital Confinement” required that the confinement be for a “Necessary Treatment”, as considered by a peer review, and that it not take place in a convalescent facility. Stonebridge determined that 109 days of confinement to a hospital for a broken leg was not necessary, and allowed only 14 days of payment. The payment could be used for any purpose whatsoever, and because Mr. Nickerson was a veteran staying at a VA Hospital, he did not need to use it to pay for his free hospital care.

Issue One: The trial court directed a verdict on the limitation of coverage to “Necessary Treatment”, finding as a matter of law that the limitation was not “conspicuous, plain or clear” in the policy, and therefore was unenforceable. There are few clues as to why the trial court found this definition was unclear since Stonebridge did not appeal from the decision on the contract. The lack of appeal led the Court of Appeals to conclude that Stonebridge conceded its “hidden” definition was not enforceable. Lesson: Unless the insurer’s coverage position is indefensible, counsel should consider asserting an issue on appeal for any coverage denial by a trial court.

Issue Two: Stonebridge admitted in response to discovery that there were 224 other claims in California where lack of “Necessary Treatment” was the basis of a coverage denial. Its counsel did not object to the admission of this discovery response into evidence at trial. There is no indication in the Court of Appeals decision of factual differences between the various other cases. The Court of Appeals rejected out of hand Stonebridge’s argument that it was being punished for other cases in which no bad faith claims were made. Instead, it concluded Stonebridge was guilty of “recidivism” in using an unenforceable term in its policy, rather than being punished for other dissimilar matters. Lesson: Counsel should object to discovery of other claims involving the same or similar policy language, and if that is not successful, object at trial to its use. Counsel should also be prepared to present evidence of the dissimilarity of those claims.

Issue Three: After receiving the records from the VA, Stonebridge informed Mr. Nickerson that it was seeking a peer review. The case review form had a box that could be checked indicating that the peer reviewer was required to consult by phone with the treating physician. The claims person testified that she never checked this box. After the peer reviewer concluded that more than 14 days’ hospital confinement was not medically necessary, Mr. Nickerson had his treating physician write to the insurer to advocate that he needed to remain in the hospital. The insurer did not forward the letter to the peer reviewer but instead responded by citing grounds not in the insurance policy. Lesson: Trial counsel should consider having an expert witness testify that the basis for denial was valid, such as a medical expert in this case. In preparing a claims handler for deposition or trial, counsel might caution the witness not to go beyond what he or she does in handling a claim.

Issue Four: Both the claims handler and the vice president of claims testified that they would have handled the matter in the same way. The court found this to be evidence of bad faith, which was not contested on appeal. Lesson: Trial counsel should consider using a claims-handling expert to counter the inevitable argument that the insurer committed bad faith regardless of whether or not it would act the same way again. A jury consultant can assist in preparing witnesses to deflect this type of cross-examination. Bad faith is the predicate to the punitive damages, and should almost always be appealed. See Lesson One.

Issue Five: The ground for punitive damages was that the insurer engaged in fraud by concealing the policy limitation in the definition of “Necessary Treatment”, and by not requiring peer reviewers to communicate with treating physicians. The Court of Appeals held that “fraud” for punitive damages in insurance cases equates to the conduct that gives rise to liability, namely bad faith. Additionally, the court held that the fact that the insurer ignored the post-treatment letter by the treating physician violated its obligation to inquire into all grounds that could support Mr. Nickerson’s claim. Lesson: An award of punitive damages generally requires conduct that goes beyond the conduct that supports a mistake in claims handling. Expert witnesses on claims handling and the validity of the grounds for the coverage decision and manner in which the claim was handled should be considered to limit the claim of bad faith at trial. Then the appeal of any bad faith verdict may further limit punitive damages based solely on the same grounds as the defense against the bad faith claims.