Calif. Supreme Court Issues Major Ruling on Insurer Bad-Faith Claims

August 9, 2004

The California Supreme Court threw out a lower court ruling that had resulted in a multimillion-dollar damage award against an insurance company.

The Association of California Insurance Companies (ACIC) had filed an amicus brief in the case Jonathan Neil & Associates Inc. v. Jones asking the court to overturn the verdict and throw out the damages.

“The Court has issued a major decision dealing with the primary jurisdiction of the Department of Insurance and the scope of bad-faith actions against insurance companies,” said Sam Sorich, president of ACIC. “The ruling is consistent with the arguments ACIC made in its brief to the Court.”

The legal dispute centered around premium payments owed by a trucking company owned by Fred and Mildred Jones. They had obtained insurance coverage for their company through the California Automobile Assigned Risk Plan (CAARP). After the expiration of the policy, CAARP’s servicing carrier audited the Joneses and, based on CAARP’s rules for charging for subhaulers, determined that the Joneses owed an additional $51,000 in premiums. The Joneses refused to pay. The servicing carrier sued and the Joneses responded by suing the servicing carrier for bad-faith.

The trial court ruled in favor of the Joneses and the jury awarded them more than $11 million in punitive damages. The judge reduced that amount to $4 million. The Fifth District Court of Appeal ruled that the trial judge should have stayed the legal action and sent the dispute to the state Department of Insurance.

The Supreme Court decided that the trial court should not have taken the case. The trial court should have stayed the proceeding and referred the premium dispute to the Department of Insurance so that the Department could make a timely ruling on the CAARP appeal process. The Court concluded that the doctrine of “primary jurisdiction” of administrative agencies required the trial court to allow the CAARP process to be completed before taking the case.

The Court also concluded that the facts of this case did not justify a
bad-faith action against the servicing carrier. The legal analysis in the
Court’s opinion supports the argument that bad-faith actions against
insurers should be limited to cases where there are allegations of claims mishandling and should not be extended to disputes over premiums.

The Association of California Insurance Companies (ACIC) is an affiliate of the Property Casualty Insurers Association of America (PCI) and represents more than 300 property/casualty insurance companies doing business in California. ACIC member companies write 39.2 percent of the property/casualty insurance in California, including 53 percent of personal auto insurance, 43 percent of commercial automobile insurance, 35 percent of homeowners insurance, 31 percent of business insurance and 43 percent of the private workers’ compensation insurance. PCI is composed of more than 1,000 member companies, representing the broadest cross-section of insurers of any national trade association.

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