O.C. Case Spurs Examiners to Probe Farmers : Regulators: Insurance officials will look through unit’s files seeking to determine if it is illegally denying liability claims.

Citing an Orange County case that resulted in a $58-million bad-faith judgment against a Farmers Insurance Group unit, Insurance Commissioner John Garamendi on Monday announced a special regulatory examination of Farmers.

In the “market-conduct examination,” insurance examiners will visit Farmers offices and look through files to determine how certain types of claims are handled.

A spokesman for the state Department of Insurance said the examination will be limited to cases where Farmers denied customers’ large liability claims--cases similar to that involving Surgin Surgical Instrumentation Inc. of Tustin, which an Orange County Superior Court judge last month awarded damages of $58 million.

The department is trying to determine whether there is a pattern of Farmers illegally denying liability claims.

“If this abuse is widespread . . . we may have the authority to revoke their license,” Garamendi said Monday.

Judge C. Robert Jameson cited Truck Insurance Exchange, a Farmers subsidiary, for failing to provide Surgin with a legal defense in a patent fraud case.

Attorney Daniel J. Callahan of the law firm Callahan & Gauntlett, which represented Surgin Surgical in its case, said Garamendi’s action Monday came in response to an Oct. 21 letter that Jameson ordered him to send to the insurance commissioner.

“This is a message to the insurance industry to stop putting its economic interests before those of the insured,” Callahan said. “The state of California is taking a stand that this practice will not be allowed here even if it’s the biggest insurer in California.”

Callahan said the case is the largest won by his Irvine firm and the largest punitive damage award against an insurance company in Orange County.

Farmers, which says it will appeal the judgment as soon as Jameson issues his order, contends that it had no duty to protect Surgin because patent infringement is not covered by the commercial general liability policy that Truck sold to Surgin.

Farmers said in a statement that, “out of respect for due process and for the constitutional separation of powers,” the examination should be put off until the appeal is decided.

Formed in 1981, Surgin Surgical is a privately held company that makes medical devices. The company now has about 40 employees in Tustin, where it recently moved from Placentia.