Suits Against ‘Bad-Faith’ Insurers Barred by Justices

In a multimillion-dollar victory for the insurance industry, the state Supreme Court on Thursday overturned a milestone 1979 ruling that had allowed accident victims to sue the wrongdoer’s insurer if claims were improperly delayed or denied.

The 5-2 decision marked the first time the newly aligned court, now led by appointees of Gov. George Deukmejian, has reversed a major civil law ruling by the court under former Chief Justice Rose Elizabeth Bird.

The controversial, 9-year-old ruling, issued in the case of Royal Globe Insurance Co. v. Superior Court, permitted injured persons to sue for a “bad-faith” refusal to fairly settle a claim under a state statute barring unfair insurance practices. Under the decision, victims could win punitive damages far exceeding the limits of the policy involved.

But in Thursday’s ruling, the court noted that the 1979 ruling, the first of its kind in the nation, had been widely criticized by legal commentators and rejected by 17 of 19 courts in other states that had considered the issue. And in California, the justices said, the decision had proved unsound and largely unworkable.

The 1979 ruling “has generated and will continue to produce inequitable results, costly multiple litigation and unnecessary confusion unless we overrule it,” Chief Justice Malcolm M. Lucas wrote for the court.

“Reconsideration of that decision seems a far better alternative than allowing ourselves to be swept deeper into the developing interpretive whirlpool it has created.”

Justice Stanley Mosk, author of the 1979 ruling, issued an unusually sharp dissent, joined by Justice Allen E. Broussard, the only other member of the court not appointed by Deukmejian.

Mosk said the majority had replaced “Royal Globe with a ‘Royal Bonanza’ ” for insurance companies, giving them “total immunity” for unfair and deceptive practices. He ridiculed the court’s suggestion that the state Insurance Commission could adequately enforce laws against unscrupulous actions.

“Regrettably, the insurance industry has succeeded in persuading justices of this court that it is entitled to immunity from the same type of responsibility required of every other business and individual that commit deceptive practices,” Mosk wrote.

Becomes Final in 30 Days

Thursday’s ruling prohibits such suits after the decision becomes final in 30 days. Meanwhile, pending suits will be permitted to proceed under the 1979 ruling, but, in a severe limitation, a judicial finding of liability by the wrongdoer will be required before an insurer can be sued. In most cases, such liability has not been established.

The decision was warmly received by lawyers for the insurance industry, which had claimed in briefs to the court that reversing the 1979 decision could result in “hundreds of millions of dollars” in reduced premiums by decreasing the high cost of defending against such actions.

Ellis J. Horvitz of Encino, attorney for the Assn. of California Insurance Cos., said that while it was difficult to estimate the amount of savings, the ruling “is certain to have some impact in reducing insurances rates.”

Horvitz noted the frequency in which plaintiffs have won multimillion-dollar awards under the 1979 ruling. “Anyone could hit the jackpot,” he said. “It was the true California Lottery.”

However, Harvey R. Levine of San Diego, attorney for the California Trial Lawyers Assn., said Thursday’s decision will only “fuel the greed for added profits” for an industry that already has reaped “a financial bonanza” from high rates.

Included in Prop. 100

Levine urged the adoption of new laws regulating insurers by the Legislature or through the initiative process. “Otherwise, insurance companies can keep millions of dollars by not handling claims fairly, and people who have been crippled by injuries, like widows and orphans, will have the tools of protection taken away from them,” he said.

Levine noted that Proposition 100, the insurance initiative on the fall ballot backed by the California Trial Lawyers Assn., provides for “bad-faith” lawsuits for improper handling of claims. However, it was not immediately clear how Thursday’s decision will affect the initiative.

The case before the court arose from a suit Parvaneh Moradi-Shalal brought in Los Angeles Superior Court against Firemen’s Fund Insurance Cos. She sued over injuries she said she received in a 1983 auto accident caused by one of the firm’s policyholders.

Moradi-Shalal sought $750,000 in general and punitive damages, charging that Fireman’s Fund had improperly delayed settling her claim for more than a year. A state Court of Appeal agreed she could sue under the 1979 ruling, even though no judge or jury had yet found the other driver was at fault.

In Thursday’s ruling, the court upheld the insurance firm’s appeal, finding that there must be a judicial determination of liability before any pending suits could proceed under the 1979 ruling.

Disagreed With 1979 Findings

The majority, disagreeing with the findings of the court in 1979, said the Legislature did not intend to allow “bad-faith” lawsuits by victims against a wrongdoer’s insurer when it enacted the statute barring unfair practices. That finding, the majority said, does not leave people without recourse against insurance companies. Insurers are subject to punitive damages in other civil actions--such as for fraud--and policyholders still may sue their own companies for breach of contract.

In other action Thursday, the court:

- Unanimously held that while a jury must acquit a defendant of a more serious offense before returning a verdict on a lesser-included offense, jurors still may freely consider the lesser offense during deliberations.

The court, in an opinion by Justice John A. Arguelles, upheld the second-degree murder conviction of David Kenneth Kurtzman, a preparatory school student, in the slaying of a transient he mistakenly identified as a local gang member in Santa Barbara in 1985.

The court said the jury had been improperly instructed by the trial judge that it must first unanimously agree on whether Kurtzman was guilty of second-degree murder before considering a verdict of voluntary manslaughter. But under the circumstances of the case, the erroneous instruction did not affect the outcome, the justices said.

Defense lawyers had contended the judge’s instruction had prevented the jury from exploring the lesser offense, which carries a maximum sentence of 11 years in prison, rather than the term of 15 years to life imposed for murder.