Court Finds Regional Claims Administrator Qualifies as a “Managing Agent” of an Insurance Company, Justifying an Award of Punitive Damages

When insurance companies, including those offering disability, life, health or accidental death policies, engage in conduct that is sufficiently egregious, a court may award punitive damages against the insurance company.  California Civil Code Section 3294 (“Section 3294”) provides that where the defendant is guilty of oppression, fraud or malice, the plaintiff may recover punitive damages for the sake of example and by way of punishing the defendant.  If the defendant is a corporation, such as an insurance company, the defendant is liable for punitive damages if the act of oppression, fraud or malice was authorized or ratified by an officer, director or managing agent of the corporation or if the officer, director or managing agent was personally guilty of such conduct.  While it may be relatively simple to determine who would qualify as an officer or director of a corporation, the question of who qualifies as a managing agent is notably less clear.

In a recent decision by the California Court of Appeal, Mazik v. GEICO General Insurance Company, No. B281372, (May 17, 2019), the Court concluded that a regional liability administrator who had broad authority over the settlement of a large number of claims qualified as a “managing agent” to support an award of punitive damages against GEICO General Insurance Company (“GEICO”).  The Court affirmed the trial court’s decision approving punitive damages of $1 million to the plaintiff for GEICO’S bad faith conduct in handling an underinsured motorist claim.  The Court also found that the award of $1 million was within the constitutionally permitted range in view of the degree of reprehensibility of GEICO’s actions.

On August 11, 2008, Michael Mazik was involved in a serious automobile accident in which he sustained a comminuted fracture of his left heel bone which ultimately resulted in a left foot deformity, chronic pain, difficulty walking and a severely restricted range of motion in his left foot.  At trial, Mazik’s medical expert testified that the injury to his heel was “devastating” and that the severe nature of Mazik’s injury was apparent from the doctors’ diagnoses “right from the beginning” as a comminuted fracture refers to a fracture producing many pieces of bone.  Mazik submitted a claim to GEICO under his own underinsured motorist policy for $50,000 which represented the full policy limits of $100,000 offset by a $50,000 settlement he had already received from the driver of the other vehicle involved in the accident.

After receiving Mazik’s demand, a GEICO claims adjuster obtained approval from GEICO’s regional liability administrator, Lon Grothen (“Grothen”), to reject the demand and offer Mazik $1,000 to settle his claim.  Approximately eight months later a new claims adjuster was assigned to the file and increased GEICO’s settlement offer to $13,800.  Four months later, GEICO increased its offer to $18,000.  On May 23, 2011, GEICO conducted an independent medical evaluation (“IME”) of Mazik.  GEICO’s medical examiner determined that Mazik’s injury did not restrict his occupation as a teacher, that no further medical care was indicated and that Mazik’s prognosis was good. The claim went to arbitration in April 2013 and Mazik was awarded the full policy limits.

Mazik later filed a bad faith action against GEICO.  In July 2016, a jury returned a verdict in favor of Mazik and awarded him $313,508 in compensatory damages and $4 million in punitive damages.  The trial court reduced the amount of punitive damages to $1 million.  GEICO appealed the award of punitive damages.

In upholding the award of punitive damages, the appellate court in Mazik determined that there was sufficient evidence in the record to show that GEICO’s managing agent ratified conduct warranting punitive damages.  The plaintiff had argued that Grothen, who was a regional liability administrator for Orange County, Los Angeles, San Bernardino and Alaska, was a managing agent based upon his broad regional authority over adjusters and managers in cases up to $100,000.  In analyzing the issue, the Court first turned to Section 3294 which establishes the legal standard for punitive damages in California.  Section 3294 provides, among other things, that a corporate employer can be liable for punitive damages based on the acts of an employee if an officer, director or managing agent of the corporation authorized or ratified the wrongful conduct.  The Court cited to White v. Ultramar, Inc., 21 Cal.4th 563 (1999) for the definition of managing agents.  In White, the California Supreme Court explained that managing agents are employees who exercise substantial independent authority and judgment in their corporate decision-making so that their decisions ultimately determine corporate policy.  White, 21 Cal.4th at 566-567.  The Mazik court concluded that there was ample evidence that Grothen met this definition of managing agent.

The Court noted that Grothen had wide regional authority over claims settlements, over 100 claims adjusters were “funneled up” to him for approval of settlements and he typically had 18 to 20 meetings per day with claims adjusters seeking his approval or direction for handling claims.  Grothen even testified that an extremely important part of his role was to maintain consistency in settlement valuations within his region.  The Court found that a jury could have reasonably concluded that this type of broad decision-making responsibility for establishing GEICO’s settlement standards ultimately determined corporate policy.

Having determined that Grothen was a managing agent of GEICO, the Court next turned to the issue of whether Grothen ratified conduct warranting punitive damages.  The Court pointed to evidence provided by Mazik that showed that GEICO deliberately “cherry-picked” medical information and disregarded unfavorable findings.  For instance, the evidence showed that GEICO’s claims adjusters prepared an initial claim evaluation summary and summaries in advance of the arbitration that were misleading and omitted important information that appeared in Mazik’s medical records.  GEICO argued that the claims adjusters’ conduct cannot support punitive damages because Grothen himself was not personally involved in investigating Mazik’s claim.  The Court rejected this argument finding that there was sufficient evidence for the jury to conclude that Grothen engaged in oppressive conduct by ignoring information concerning the serious and permanent nature of Mazik’s injuries for the purpose of saving the company money.

The Court looked at the numerous instances as documented in the record where Grothen provided direction and/or approval for decisions affecting Mazik’s case such as his approval to reject Mazik’s initial policy demand, his instruction to the claims adjuster to obtain an IME and his approval to move the case toward arbitration.  Grothen also testified that he has access to the entire claims file and that he “spot checks” the information the adjusters provide.  The Court thus concluded that he had more than a “passing familiarity” with Mazik’s claim and that a jury reasonably could have found that not only he knew the claims adjusters’ summaries were misleading, but that he himself was fully aware of the severe nature of Mazik’s injuries.  Importantly, the Court recognized that, when sufficiently egregious, an insurer’s bad faith conduct can also satisfy the standard for punitive damages.  See Egan v. Mutual Omaha Ins. Co., 24 Cal.3d 809, 821-822 (1979).  Based on the evidence, the Court determined that the jury had a sufficient basis to conclude that Grothen ratified such egregious conduct by approving unreasonably low offers to Mazik that ignored medical records showing the serious and permanent nature of his injuries.

Finally, the Court addressed the amount of the punitive damages award.  In analyzing the degree of reprehensibility of GEICO’s conduct, the Court found that GEICO’s oppressive conduct was repeated based on the numerous instances that Grothen either authorized unreasonably low settlement offers or approved decisions not to increase offers.  It also found that Mazik was financially vulnerable and that there was evidence that GEICO intentionally manipulated the facts by “cherry-picking” medical information and disregarding unfavorable findings.  Each of these factors supported the conclusion that the $1 million punitive damages award was constitutionally permissible.  The Court also found that the three-to-one ratio of punitive to compensatory damages did not exceed constitutional restraints.

The Mazik case is significant because it broadens the scope of who can be considered a managing agent for purposes of obtaining a punitive damages award.  This decision establishes that a claims supervisor who has wide regional authority over claim settlements can qualify as a managing agent of an insurance company such that his conduct will be imputed to the insurance company for purposes of punitive damages.  It should be noted that according to earlier cases, in-house claims managers and adjusters who handled claims with little if any supervision could be treated as “managing agents:” “When employees dispose of insureds’ claims with little if any supervision, they possess sufficient discretion for the law to impute their actions concerning those claims to the corporation.”  Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 822-823 (1979); see also Major v. Western Home Ins. Co., 169 Cal. App.4th 1197, 1220-1221 (2009) (outside claim representative vested with discretionary authority to pay or deny claims).  In light of this decision and earlier decisions, claimants should look closely at the conduct of any managers or supervisors involved in the claims-handling process.

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