Punitive Damages

By Alice Wolfson & David Lilienstein


The following are some issues which frequently arise when litigation insurance bad faith cases. This includes claims denials, coverage issues, duty to defend, duty to indemnify, and ERISA preemption law. This primer focuses on insurer conduct that may qualify as bad faith claims handling.

Because statutes change and decisional law on any topic evolves, and because decisions are often subject to multiple interpretations, the reader is cautioned not to rely on the principles set forth without undertaking additional research.

The authors gratefully acknowledge the assistance of Jill Schlichtmann, Esq., and Amy Bach, Esq.

[E] Punitive Damages

  1. Q: What are the applicable standards for recovery of exemplary damages in a bad faith action?
    A: Proof by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice as defined in Civil Code section 3294.

  2. Q: What must the plaintiff establish in order to obtain punitive damages against an insurance company for the actions of an employee adjuster?
    A: That the employee was a “managing agent,” i.e., the employee had the authority to do the things he or she did that formed the basis for the punitive damage claim. (BAJI Nos. 1473, 1473.1, 1474.)

    If the employee was not a managing agent, the under Civil Code section 3294(b), a plaintiff must prove that: (1) the employer knew of the employee’s unfitness yet employed him or her in conscious disregard of the rights or safety of others; or (2) the employer ratified the wrongful conduct for which exemplary damages are recoverable; or (3) the employer was personally guilty of oppression, fraud or malice.

  3. Q: Must a plaintiff introduce evidence of the insured’s financial condition in order to recover punitive damages?
    A: Yes. A punitive damage award can be overturned where no meaningful evidence of a defendant’s net financial condition was submitted by the plaintiff.

    Evidence of the defendant’s income alone, absent a showing of net worth, may not be sufficient. (Lara v. Cadag (1993) 13 Cal.App.4th 1061, 16 Cal.Rptr.2d 811; Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 31 Cal.Rptr.2d 4433 [where $11.25 million punitive damage judgment was reversed for an insured’s failure to prove the insurer’s financial condition, despite the insurer’s failure to object], rev. denied).

  4. Q: Must a plaintiff always prove despicable conduct in order to recover exemplary damages?
    A: Not if the plaintiff proves by clear and convincing evidence that the defendant has been guilty of fraud, as defined in Civil Code section 3294(c)(3).