Calif. Appellate Court Affirms $1 Million Bad Faith Judgment Against Geico

GEICO General Insurance Co. refused an offer to settle Michael Mazik’s underinsured motorist claim for $50,000.

Instead, the claim will cost the insurer more than $1.3 million.

On Friday, a panel of the California 2nd District Court of Appeal affirmed a decision by the Los Angeles County Superior Court to award Mazik $1 million in punitive damages for the bad faith breach of its insurance contract, plus compensatory damages and his legal costs on appeal.

The appellate court said GEICO had disregarded information that showed Mazik had suffered a permanent, painful injury after his vehicle collided head-on with another vehicle that had crossed into his lane.

“An insurer is not permitted to rely selectively on facts that support its position and ignore those facts that support a claim,” the court said in an opinion written by Presiding Justice Elwood Lui. “Doing so may constitute bad faith.”

Mazik was injured on Aug. 11, 2008 in Riverside County when another vehicle crossed over double yellow lines while attempting to pass slower traffic. The cars collided while both were traveling at about 45 to 50 mph, according to the opinion. The other driver was killed.

The accident shattered the bones in Mazik’s left ankle. His physician said he may require surgery in the future to fuse the bones together. He testified that Mazik will suffer chronic pain from the injury throughout his life.

It was a life-changing injury. Mazik was a young man, no more than 24 years old at the time of the accident, who was active in martial arts and employed as a teacher for children enrolled in a recreational “space camp,” his attorneys said.

Mazik was represented on appeal by the Pine Tillett Pine law firm in Los Angeles. Appellate attorney Scott Tillett said the decision reaffirms an important principle of California insurance law: Insurers are not supposed to negotiate claim as if they were haggling to get a low price on a used car.

“Here we have a fiduciary relationship,” Tillett said. “There is a legal duty on the part of the company to treat its policyholder’s interests at least the same as its own.”

Mercury Insurance, which insured the other driver, paid Mazik $50,000, the full value of the policy. On Dec. 31, 2009, Mazik’s attorney submitted a claim to GEICO asking for $50,000.

GEICO’s regional liability administrator, Lon Grothen, authorized a settlement offer of only $1,000, an amount that Tillett called “insulting.” The insurer increased that offer to $13,800 nine months later, then to $18,000, and then to $18,887. That was its final and highest offer.

After that offer was refused, Grothen instructed the claims adjuster to move the case to arbitration. The arbitrator issued an award of $50,000. GEICO issued a check in that amount in June 2013.

Mazik filed a lawsuit accusing GEICO of acting in bad faith. A jury returned a verdict in his favor and awarded $313,508 in compensatory damages and $4 million in punitive damages.

Los Angeles County Superior Court Judge Richard Rico reduced the punitive damages award to $1 million.

Geico appealed the trial court’s award of punitive damages, but did not challenge the compensatory damages.

The appellate court said punitive damages may be awarded only if there is clear and convincing evidence that a defendant has been “guilty of oppression, fraud or malice” and the if the conduct was approved by a “managing agent,” meaning an officer who exercises substantial independent authority.

Geico argued on appeal that its conduct was not so egregious that it would warrant a bad faith claim, and that Grothen was not a “managing agent.” The appellate court disagreed on both counts.

The court said Grothen had authority to authorize settlements of up to $100,000 and used that brand discretion to enforce his “negotiation regime.” The court rejected Geico’s contention that a managing editor must have responsibility over “formal policies,” rather than ad hoc decisions. The court said Geico did not request a jury instruction contains such a jury description, so it need not consider that argument. The decision says in footnote that the evidence would support Grothen’s status as a managing agent even using the strict definition that Geico urged the court to adopt.

The evidence also showed that the carrier’s conduct was sufficiently oppressive to warrant a punitive damage award, the appellate court said.

The carrier’s claims adjusters prepared summaries that were misleading and omitted significant information. For example, one summary stated that Mazik had not submitted any information supporting his request for reimbursement of expenses that his mother and a friend had incurred in assisting him after the accident. In fact, Mazik had submitted documentation.

Another summary stated that Mazik had not had any medical treatment in three years, but then visited a doctor five times “for fitting of shoes.” That description trivialized the treating physician’s diagnosis and treatment. Mazik needed specially fitted shoes because of ongoing problems with walking and working due to his pain.

The court said Grothen had sufficient contact with Mazik’s file to know that the adjuster’s summaries were misleading.

“GEICO downplayed the nature of the injury and in the court’s own words, ‘cherry-picked medical information and disregarded unfavorable findings’ to lowball the claim and save the company money,” Tillett said.