In this insurance bad faith case, respondent Amerigraphics, Inc. (Amerigraphics), sued its insurer, appellant Mercury Casualty Company (Mercury), after Amerigraphics’s business premises were flooded, and Mercury denied full coverage under the policy. There are two primary issues on appeal.
First, what is the meaning of the “Business Income” coverage in the policy which states that Mercury will pay an insured during its period of suspended business operation the “(i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred . . . ; and [f] (ii) Continuing normal operating expenses incurred, including payroll”? We agree with the trial court that under the plain meaning of this policy, an insured is entitled to be paid under both subparts without having to offset the two amounts in the event operating expenses exceed net income.
Second, we consider whether an award of punitive damages that is 10 times the amount of compensatory damages and prejudgment interest was correctly calculated and comports with due process. We are satisfied that substantial evidence supports an award of punitive damages, that the amount of compensatory damages should not include prejudgment interest, and that under the circumstances of this case the amount of punitive damages should not exceed compensatory damages by more than a 3.8-to-one ratio.
FACTUAL AND PROCEDURAL BACKGROUND
The Insured, the Loss, and the Policy
Amerigraphics is a printing and graphics design company. It was founded in 1997 as a close corporation by Mark Volper and Boris and Marina Smordinsky. The company leased the first floor of an office building on Ventura Boulevard in Sherman Oaks, California. Before moving in, Volper and the Smordinskys made several tenant improvements, including repairing doors and windows, upgrading the electrical and plumbing systems, and installing modem electrical fixtures, tiles and a new ceiling, at a total cost of about $53,000. After moving in, they made additional tenant improvements between 2001 and 2002 totaling $20,133. The company did well financially
On Monday, April 14, 2003, Volper discovered that the company’s premises were completely flooded. Water was cascading from the ceiling and leaking down the walls, leaving two inches of standing water. Volper and the landlord discovered that the source of the water was a broken water heater in a second-floor restroom. The water damaged all of Amerigraphics’s electrical equipment, including a printer that Amerigraphics had purchased for $11,995, and a scanner that had cost $5,176.
Volper called RM Consulting, the company that had sold and serviced the equipment, to evaluate the damage. RM Consulting spent four hours working on the printer and scanner, and determined that both pieces of equipment had been irreparably water damaged.
Amerigraphics was insured under a “California Special Multi-Peril Policy” issued by Mercury in 1999 that covered damage to business personal property, which includes property used in the business and tenant improvements, and loss of business income due to business suspension. The policy had been renewed for a three-year term from October 9, 2002, to October 9, 2005, and the annual premium was $1,516. The business-interruption coverage, titled “Business Income,” provides in relevant part: “We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’ . . . [][] ...[][] We will only pay for loss of Business Income that you sustain during the ‘period of restoration’ and that occurs within 12 consecutive months after the date of direct physical loss or damage. ...[*]□ Business Income means the: [j[] (i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred . . . ; and [f] (ii) Continuing normal operating expenses incurred, including payroll.”
After learning that his insurance broker had failed to immediately report the loss, Volper telephoned Mercury on Friday, April 18, 2003, and reported the loss himself. Mercury assigned the claim to adjuster Ken Brown, who called Volper the following week. Brown admitted at trial that he never discussed the available coverages under the policy with Volper, nor did he fill out Mercury’s “coverage checklist” that required the adjuster to discuss the various coverages and to check off the coverages discussed and the date of the conversation.
The Investigation Relating to the Printer and Scanner
Because adjuster Brown was located in Mercury’s San Diego office, Mercury hired an independent local adjusting company, Cunningham Lindsey (C-L), to investigate the claim. Volper gave C-L the report from RM Consulting stating that the printer and scanner had been irreparably damaged. C-L recommended an examination by an equipment refurbishing company. Under the policy, Mercury had the option of repairing or replacing damaged equipment. Brown’s supervisor, Chris Boedecker, did not consult RM Consulting and decided that it would be “worthwhile” for Mercury to get a second opinion on the condition of the printer and scanner.
On May 20, 2003, 38 days after the loss, Mercury had a salvage company remove all the damaged equipment from Amerigraphics’s premises, including the printer and scanner. The printer and scanner were then sent to Hi Tech Restoration (Hi Tech), a company which locates vendors to evaluate and repair equipment.
On June 10, 2003, Hi Tech arranged for another company, Advanced Data Products, to evaluate the printer. The report from Advanced Data Products erroneously stated that the printer had been in a fire, that its technician had installed a part provided by “the customer” (though Amerigraphics had not provided any parts), and that the technician tested the unit and found it to be “okay.” Hi Tech itself tested the scanner and reported on June 10, 2003, that an “O.K. Function light test” was performed, and that the unit needed software to be tested. Amerigraphics had no software that could be used to test the scanner. Hi Tech later admitted that it was unable to perform a “complete functional test of the scanner.”
Although the tests were performed in June 2003, Mercury did not advise Volper of the results until September 2003, when it provided him with the reports. At that time, Mercury took the position that the equipment had been restored to its preloss condition, and requested that Volper retake the equipment. Volper found the reports to be unprofessional and inaccurate, and
Ultimately, at Volper’s urging, Mercury had the equipment reexamined in June 2004, more than a year after the loss. The testing report on the scanner stated that “we find the unit unable to calibrate and come to the ready state. An internal inspection and diagnostic test revealed that both the Mainboard and connecting CCD boards are defective.” The report indicated that repairs would cost about $434. The printer was also found not to print properly, and its magenta ink system was not working and had to be replaced, which would cost $156.
The “Business Income ” Claim
In August 2003, frustrated and concerned that he had not heard from Mercury about the status of the machines, Volper called his insurance broker, who advised him that the policy might provide coverage for Amerigraphics’s “normal operating expenses” during the period the business’s operations had been interrupted. Volper called Brown and told him he wanted to make a claim for normal operating expenses. Brown responded that there was no such coverage. Volper then sent Brown a letter enclosing a copy of the relevant policy page with the relevant provision circled. Brown then requested that Volper provide him with a list of the normal operating expenses Amerigraphics had incurred.
On September 17, 2003, Volper sent Brown a list of $59,467.16 in expenses incurred between April 10 and September 12, 2003. Volper’s enclosure letter stated that he could provide copies of checks to document each item he had listed, and ended with the plea: “Please, review this part of the claim as soon as possible, because we need the funds just to stay alive.” Volper got no response for several months.
In January 2004, Mercury hired a forensic accounting firm to investigate the loss of income claim, but did not notify Volper that it had done so until late March or April. At the end of April, Volper spoke with the accountant, who requested certain information about Amerigraphics, including two years of monthly sales records, one year of operating expenses, and an income tax statement for 2002. It took Volper several weeks to gather the information, which he provided to the accountant by late May 2004.
The Tenant-improvements Claim
In June 2004, out of frustration with Mercury’s handling of the claim, Volper once again called his broker. The broker suggested that Amerigraphics might have a claim for damage to the tenant improvements it had made. Although Boedecker, the Mercury claim supervisor, had identified tenant improvements as an issue to be addressed, Brown never pointed out the coverage provision to Volper, and did not instruct C-L to investigate tenant improvements. By this time, Brown had been replaced on the file by adjuster Rome Oliver. Volper called Oliver to make a claim for tenant-improvement losses, and Oliver immediately told Volper there was no such coverage.
Once again, Volper sent Oliver a copy of the relevant policy page, with the tenant-improvements provision circled. In response to Oliver’s subsequent request, Volper sent a letter on June 14, 2004, identifying the $73,000 in tenant improvements Amerigraphics had made. Mercury replied on August 16, 2004, denying the claim for tenant improvements, stating: “Our investigation revealed no damage to the Tenant Improvements as a result of this covered water loss. Since there was not any physical damage to the tenant improvements, your claim for these items is not covered.”
After the denial letter had been sent, Mercury instructed C-L to reopen its file on the case, which had been closed for about eight months, and to inspect the premises to determine whether there had been any damage to Amerigraphics’s tenant improvements. Between September and December 2004, C-L sent Oliver four supplemental reports, explaining that it was trying to find out from the landlord’s insurer, State Farm, whether it had paid the landlord for tenant improvements and that State Farm was not cooperating. C-L’s second supplemental report identified an estimated loss by Amerigraphics of $45,000, which C-L calculated by taking the $73,000 figure submitted by Volper and prorating it over the life of the lease.
In February 2005, Mercury decided to give Amerigraphics the “benefit of the doubt,” and on February 3, 2005 (693 days after the loss), sent Amerigraphics $23,000 as “payment in full” for its tenant-improvements claim.
The Litigation
In April 2005, Amerigraphics sued Mercury for breach of contract and bad faith. Prior to trial, Amerigraphics sought a judicial interpretation of the policy’s “Business Income” provision, known more commonly in the industry as a business-interruption clause. The trial court held multiple hearings on this issue following multiple rounds of briefing. The court ultimately concluded that the plain language of the policy provided coverage for both elements stated in the definition, i.e., an insured was entitled to recover both net income and continuing normal operating expenses without having to offset one against the other.
The case then proceeded to the first phase of trial before the jury on the issue of liability. Volper testified that by September 2003, he and the Smordinskys were borrowing money to keep Amerigraphics afloat. By June 2004, the company was completely out of money. Volper testified that if Mercury had provided a working scanner and printer and had paid the company’s claims by November 2003, he believed he could have kept the business going, and that although Amerigraphics continued to pay the fees necessary to maintain its right to do business, it no longer functions as a going concern.
Boedecker conceded that a company in the printing and scanning business, like Amerigraphics, could not function without a printer and scanner. He also admitted that Mercury made no attempt to provide Amerigraphics with a replacement printer and scanner while Mercury was adjusting the claim. And he conceded that nothing in the claim file, which was approximately 1,000 pages long, reflected any concern that Amerigraphics would go out of business due to the delays in handling the claim. Boedecker also confirmed that he communicated by e-mail with his unit, that e-mail pertaining to a particular claim was required to be kept in the file, and that six to seven
After the presentation of evidence by both sides, including expert witness testimony, Mercury moved for nonsuit on the issue of punitive damages, arguing that there was insufficient evidence of malice, fraud or oppression. The court denied the motion and stated that there was more than enough evidence for the issue to go to the jury. The parties agreed that Amerigraphics’s claim for attorney fees as tort damages under
Brandt v. Superior Court
(1985)
“We, the jury, answer the questions submitted to us as follows:
“1. Did Mercury Casualty Company breach its contract of insurance with Amerigraphics?
“ X Yes No
“If your answer to question 1 is ‘yes,’ then answer question 2. .. .
“2. What damages did Amerigraphics sustain?
“Printer/Scanner/Normal Operating Expenses/Tenant Improvements
“$130,000.[ 1 ]
“If your answer to question 2 is in the affirmative, then answer question 3____
“3. Did Mercury Casualty Company breach the obligation of good faith and fair dealing by unreasonably failing to pay OR unreasonably delaying payment of insurance benefits OR failing to properly investigate the loss?
“ X Yes No
“If your answer to question 3 is ‘yes, ’ then answer question 4. .. .
“ X Yes No.”
For the second phase of trial to determine the amount of punitive damages, the only additional evidence was the parties’ stipulation that Mercury’s net worth was $679 million. The jury awarded Amerigraphics $3 million in punitive damages, plus $40,000 in prejudgment interest at 7 percent from February 1, 2004.
Mercury moved for a partial judgment notwithstanding the verdict (JNOV), asking the trial court to strike the punitive damages and the prejudgment interest awards. Mercury also moved for a new trial on the punitive damages award, arguing, among other things, that the amount of punitive damages was grossly excessive. The trial court denied the JNOV motion, but conditionally granted the new trial motion unless Amerigraphics consented to a remittitur of the punitive damages award from $3 million to $1.7 million. The court concluded that the compensatory damages of $130,000 awarded by the jury were the same damages for both breach of contract and bad faith, and that together with the $40,000 prejudgment interest award, totaled $170,000 in compensatory damages. The court believed that the punitive damages award should be reduced to 10 times the compensatory damages. In concluding that the evidence supported an award of punitive damages of $1.7 million, the court repeatedly stated that the handling of the claim was “really terrible,” “really, really bad,” “a disaster,” “total disaster,” and that this “was a very, very, very solid case for punitive damages, as solid as I have ever seen in my time on the bench.”
Amerigraphics’s motion for an award of Brandt fees was heard after the new trial motion. The court awarded Amerigraphics attorney fees of $346,541.25, plus costs of $31,490.97. Amerigraphics accepted the remittitur of the punitive damages award, and judgment was entered against Mercury based on the reduced award, the compensatory damages, the prejudgment interest, and the court’s award of fees and costs. This appeal followed.
DISCUSSION
I. The “Business Income ” Provision
A. Standard of Review and Contract Interpretation
The interpretation of an insurance contract is an issue of law, which is reviewed de novo under well-settled rules of contract law.
(E.M.M.l. Inc.
v.
A policy provision will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable.
(MacKinnon v. Truck Ins. Exchange
(2003)
B. The Trial Court Properly Interpreted the “Business Income” Provision
Amerigraphics argues that the language used in the business-income provision is clear, based on the meaning of the word “and” used between subparts (i) and (ii) in the definition of “Business Income.” As Amerigraphics points out, the word “and,” used in its ordinary and popular sense, is a conjunction used to indicate “an additional thing, situation, or fact.” (Citing to encarta Diet, of the English Language, www.encarta.com.) Thus, under the plain language of the policy, the business-income provision should be interpreted to mean that Mercury will pay an insured for any lost income and will pay an insured its continuing normal business expenses during the period of business suspension. To the extent there is no lost income (i.e., there is only a net loss), the amount paid under subpart (i) would be zero, but the insured would still be paid under subpart (ii) for its operating expenses.
We are not persuaded by the two out-of-state cases on which Mercury relies to support its position. Mercury cites to
Continental Ins. Co.
v.
DNE Corp.
(Tenn. 1992)
The
Continental
court thus concluded that “the amount of ‘business income’ under the insurance policy provision involved in this case should be determined by adding the amount of ‘net income’ and the amount of ‘continuing normal operating expenses.’ Under this approach, if ‘net income’ is a positive number (which will occur whenever there are net profits), the amount of ‘business income’ will be the sum of two positive numbers, and the insured will be entitled to recover that amount. If, however, ‘net income’ is a negative number (which will occur whenever there is a net loss), the amount of ‘business income’ will be the amount of ‘continuing normal operating expenses’ reduced by the amount of the net loss. If, as under the facts of this case, the amount of the net loss that would have been incurred had there been no business interruption
exceeds
the amount of normal operating expenses actually incurred, the resulting number is a negative number, and there can be no recovery for an ‘actual loss of business income.’ ”
(Continental Insurance Co.
v.
DNE Corp., supra,
834 S.W.2d at
Mercury also argues that the trial court’s interpretation reads the “Net Loss” language out of the policy’s definition of “Business Income” because the insurer would owe no benefits under subpart (i) if the business had been operating at a loss prior to its suspension. Here, again, we disagree. The trial court’s construction of the coverage does not render the term “Net Loss” superfluous. Rather, in the event that there is a net loss, the insured’s entitlement to benefits for loss of “net income” is zero. Construing the two subparts as operating independently is far more consistent with the plain meaning of the policy language than Mercury’s suggested definition.
Even if we assumed Mercury’s interpretation of the policy language is reasonable, we would have to conclude that an ambiguity exists. We resolve an ambiguity by interpreting the ambiguous provision in the sense the insurer believed the insured understood it when the contract was made (i.e., we must determine whether coverage is consistent with the insured’s objectively reasonable expectations).
(Jordan v. Allstate Ins. Co., supra,
As Amerigraphics points out, if a catastrophic event damages an insured’s business premises and prevents the insured from being able to operate, any business in that situation would face two distinct problems: (1) a loss of money coming into the business (loss of income), and (2) payment of ongoing fixed expenses, even though no money is coming in. A reasonable insured would see that the definition of “Business Income” has two distinct components: (i) net income, and (ii) continuing normal expenses. Because the definition provides that “Business Income” includes both items, a reasonable insured relying on the plain language of the clause would reasonably conclude that the policy covers both items. Indeed, we note that the “Business Income” provision appears in the policy under the preceding heading of “Additional Coverages.” Given its placement in the policy and the plain language of the provision, it would be objectively reasonable for an insured purchasing the policy to construe it as protecting both its lost income stream and as defraying the costs of ongoing expenses until operations were restored.
Under both parties’ interpretation, an insured business will be paid if the business was operating at a profit prior to the covered loss. It is only when a business was operating at a net loss greater than its operating costs that it would not be paid at all under Mercury’s interpretation. But there is nothing in the policy language to suggest to an insured that if a business is not
As drafted, the plain meaning of the language in this Mercury policy would lead an ordinary insured to conclude that, in the event of a covered loss that forced the complete suspension of its business operations, the policy would provide coverage for any lost profits, and even if there were no lost profits, for ongoing expenses incurred during the period of suspension. We are satisfied that the trial court correctly construed the policy.
C. Error in Exclusion of Expert Evidence Was Harmless
Mercury next argues that even if the trial court’s policy interpretation was correct, the court erred in excluding evidence from Mercury’s claims handling expert that Mercury’s interpretation was reasonable.
At trial, Mercury asked its expert witness if she was able to figure out why Mercury had not paid Amerigraphics any money under the “Business Income” provision of the policy. After she answered “yes,” Amerigraphics’s attorney objected and a lengthy sidebar ensued. Mercury’s offer of proof was that its expert would testify that Mercury’s interpretation of the provision was a reasonable one that she had used many times and that had been utilized many times in the industry. The trial court ultimately excluded the testimony, finding that “[tjhere was nothing in the papers about custom and practice in the industry,” that Amerigraphics’s expert had already testified based on the court’s interpretation of the policy provision, and that “we’re not going to do sua sponte reconsideration or a motion for reconsideration in the middle of the trial.”
Contrary to the trial court’s recollection, Mercury’s expert witness declaration had stated that Mercury’s expert would testify as to whether Mercury’s actions “were consistent with standards in the insurance industry and as that conduct relates to the bilateral duties of good faith and fair dealing.”
Mercury argues that the testimony should have been admitted because it was relevant to the issue of bad faith. As Mercury points out, “an insurer’s denial of or delay in paying benefits gives rise to tort damages only if the insured shows the denial or delay was unreasonable.”
(Wilson
v.
21st Century Ins. Co.
(2007)
Amerigraphics, on the other hand, argues that custom and usage are admissible only as instruments of interpretation and not to vary the express terms of a contract (C.
J. Wood, Inc. v. Sequoia Union High School Dist.
(1962)
To the extent there was any legitimate concern that the jury might be confused into thinking that Mercury’s expert knew more than the trial judge, that concern could have been remedied with a cautionary instruction that the expert’s testimony was being admitted solely on the issue of the reasonableness of Mercury’s conduct, not on the correct construction of the policy. (See
Higgins v. L. A. Gas & Electric Co.
(1911)
But we conclude that the error was harmless. “[T]rial error is usually deemed harmless in California unless there is a ‘reasonable] probability] ’ that it affected the verdict.”
(College Hospital Inc. v. Superior Court
(1994)
But Mercury’s argument ignores that Amerigraphics’s bad faith claim was not limited to the denial of payment under the business-income provision. The jury was instructed that it could find Mercury liable for bad faith if it found that Mercury unreasonably failed to pay
or
unreasonably delayed payment
or
failed to properly investigate the loss. Here, the evidence supported a finding under all three factors. While Mercury’s expert testified that Mercury did nothing wrong in the way it handled the claim—that its investigation was fair, balanced, and prompt; that there were no regulatory violations; and that Mercury’s adjustment of the claim was, in all respects, reasonable—Amerigraphics’s expert testified to the contrary. He testified that Mercury did violate California’s regulatory standards. He also testified that Mercury’s entire handling of the claim was unreasonable: Mercury never advised Amerigraphics about potential available coverage; Mercury failed to investigate promptly once a claim was made; Mercury twice told Amerigraphics that there was no coverage without even checking the policy provisions; and Mercury failed to provide an explanation or refer to the relevant policy provisions when denying a claim. Amerigraphics’s expert also pointed out that there was no indication in the claim file that Mercury had any concern about the impact on Amerigraphics of being without its printer and scanner, and Mercury’s failure to provide Amerigraphics with a printer and scanner essentially put Amerigraphics out of business. Amerigraphics’s expert was critical of the fact that Mercury delayed payment of the tenant-improvements claim for months while it waited for State Farm to provide information, and then paid only $23,000 on that claim even though
In light of the testimony by Amerigraphics’s expert and the other evidence presented at trial, there was substantial evidence on which the jury could base findings that not only did Mercury engage in bad faith, it did so with malice, fraud or oppression. Indeed, the vote on each question was 12 to zero. It is simply not reasonably probable that had Mercury’s expert been permitted to testify that Mercury’s conduct was reasonable with respect to its interpretation of the business-income provision, which was merely one part of the overall claim for coverage, that the jury would have reached a different verdict on the bad faith, punitive damages, and prejudgment interest claims.
II. Punitive Damages
A. Special Verdict Findings
Mercury contends that the punitive damages should be stricken from the judgment because they were not supported by the findings on the special verdict. It argues that because the jury did not separately award damages for bad faith, there was no predicate for an award of punitive damages.
As an initial matter, we reject Amerigraphics’s claim that Mercury has waived this argument by not objecting below to the special verdict form. It was not Mercury’s responsibility to obtain special verdict findings on Amerigraphics’s tort cause of action. Rather, the party attempting to enforce the judgment based on the special verdict must bear the responsibility for a special verdict submitted to the jury on its own case.
(Myers Building Industries, Ltd.
v.
Interface Technology, Inc.
(1993)
Mercury is correct that the jury made no separate factual finding on the special verdict form as to the amount of compensatory damages for the bad faith cause of action, and that actual damages, even nominal damages, are an absolute predicate for an award of punitive damages.
(Kizer v. County of San Mateo
(1991)
With respect to the amount of damages suffered by Amerigraphics as a result of Mercury’s bad faith, Amerigraphics’s attorney repeatedly argued to the jury that the same evidence that supported a finding of breach of contract also supported a finding of bad faith. He then set forth the testimony given at trial as to the amount of Amerigraphics’s damages, which included the printer, scanner, normal operating expenses, and tenant improvements, which totaled $130,000—the amount ultimately awarded by the jury in response to question No. 2 on the special verdict form. Mercury’s attorney, in his own closing argument, never disputed that the amount of damages caused by any bad faith conduct was the same as those caused by the breach of contract. Nor did he argue that the bad faith damages could be more or less than the contract damages or any other amount. Indeed, his minimal discussion on bad faith was limited to asking the jury to weigh each expert’s testimony.
In sum, on the basis of the evidence offered at trial, the jury instructions, and counsel’s closing argument, it is clear that the jury intended to find that Amerigraphics had been harmed by Mercury’s bad faith in the same amount that it had been harmed by Mercury’s breach of contract. In other words, Amerigraphics suffered damage in the amount of $130,000, which could have been awarded for either breach of contract or bad faith. As such, we find Mercury’s argument to be without merit.
B. Substantial Evidence
Mercury next argues that the punitive damages should still be stricken from the judgment because they are not supported by substantial evidence of malice, oppression or fraud.
Civil Code section 3294, subdivision (a) provides: “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.” The clear and convincing standard “require[s] that the evidence be ‘ “so clear as to leave no substantial doubt”; “sufficiently strong to command the unhesitating assent of every reasonable mind.” ’ ”
(In re Angelia P.
(1981)
We have little trouble in this case concluding that there was more than substantial evidence to support an award of punitive damages. The evidence showed that Mercury was intentionally dishonest and showed a conscious disregard of Amerigraphics’s rights. Not only did Mercury never advise Amerigraphics about the available coverages, on at least two occasions Mercury immediately told Amerigraphics that there was no coverage (for “business income” and tenant improvements), and only looked into the matter when Volper pressed the issue and pointed out the applicable policy provisions. Mercury expressly denied coverage for the tenant-improvements claim, stating that its investigation showed that none of the tenant improvements made by Amerigraphics had been damaged. In reality no such investigation had been undertaken, and no such investigation even occurred until after the denial letter had been sent.
Having denied the tenant-improvements claim based on an investigation that never took place, once it reopened its file on this claim, Mercury allowed the claim to languish for months while it attempted to get information from State Farm as to whether it had paid the landlord for Amerigraphics’s tenant improvements. Mercury finally paid on the claim, and then only a fraction of the amount Amerigraphics was seeking, when Volper “out of absolute desperation” wrote multiple letters to Mercury’s president “begging” for help.
Mercury’s handling of the printer and scanner was similarly despicable. It is undisputed that the printer and scanner were the key pieces of equipment Amerigraphics needed to run its business. By the time Mercury began its investigation of the damage to the printer and scanner, RM Consulting had already evaluated the equipment and found both pieces were beyond repair. Yet, no one at Mercury ever contacted RM Consulting to discuss its findings. Mercury did not have the equipment tested by Hi Tech until nearly 60 days after the loss. Then, Mercury did nothing for another three months, until it falsely informed Volper that the equipment was in preloss condition or better, despite the fact that none of the reports from Hi Tech or
Mercury’s investigation of the business-income claim also proceeded at a snail’s pace. Although Volper sent Mercury the information it requested to process the claim in September 2003, Mercury never informed Volper until late March or April 2004 that it had hired a forensic accountant to examine his claim. Volper quickly sent a substantial packet of financial information as requested by the accountant. Mercury denied the claim on September 15, 2004, 552 days after the loss.
Although Mercury tries to spin the facts as evidencing nothing more than negligence or incompetence, an insurance company can always make that argument when charged with mishandling a claim. As the court explained in
George F. Hillenbrand, Inc. v. Insurance Co. of North America
(2002)
We note that Mercury does not claim that the jury was improperly instructed, and the jury unanimously found that Mercury acted with malice, oppression, or fraud. We are satisfied that the evidence in the record amply supports this finding. 3
Mercury argues that the punitive damages should be reversed or reduced as constitutionally excessive. The jury awarded $3 million in punitive damages, which the trial court later reduced to $1.7 million. This amounted to 10 times the total of $130,000 in compensatory damages, plus $40,000 in prejudgment interest.
“The due process clause of the Fourteenth Amendment to the United States Constitution places constraints on state court awards of punitive damages.”
(Roby v. McKesson Corp.
(2009)
In
State Farm,
the high court articulated “three guideposts” for courts reviewing punitive damages: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.”
(State Farm, supra,
“Of the three guideposts that the high court outlined in
State Farm, supra,
Applying these factors here, there is no dispute as to the first two reprehensibility factors articulated by State Farm. The harm caused by Mercury was economic and not physical, and there was no showing of a disregard for the health or safety of others.
Mercury disputes the third factor of Amerigraphics’s financial vulnerability, but we find this factor to weigh in favor of a finding of reprehensibility. The evidence showed that Amerigraphics was losing money even before its premises were flooded, that Mercury removed the equipment Amerigraphics needed to keep its business going and never replaced it, and that Volper’s letters to Mercury clearly explained that Amerigraphics needed the money to survive. Moreover, the relationship between an insurer and its insured is unique, in that an insured like Amerigraphics purchases insurance precisely to buy peace of mind and security. (See
Egan
v.
Mutual of Omaha Ins. Co.
(1979)
As to the fifth reprehensibility factor, whether Mercury acted with intentional malice, trickery or deceit, “the jury here necessarily determined that [the defendant] acted with ‘conscious disregard’ of the rights of others (Civ. Code, § 3294, subd. (c)(1), (2)); therefore, the conduct at issue was certainly not ‘mere accident’
{State Farm, supra,
We therefore conclude that of the five reprehensibility factors, only financial vulnerability weighs in favor of Amerigraphics.
2. Ratio of Punitive Damages to Actual Harm
In
State Farm,
the court stated that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.”
(State Farm, supra,
The Supreme Court in
Exxon Shipping Co. v. Baker
(2008)
The trial court here relied on
Simon
in reducing the award of punitive damages to a 10-to-one ratio, the same ratio found by the
Simon
court to comport with due process. The plaintiff’s claim in
Simon
arose from a failed attempt to purchase an office building from the defendant. Although the jury found the parties never reached a binding contract, the jury did find that the defendant had committed promissory fraud, and awarded compensatory damages of $5,000 and punitive damages of $1.7 million (a 340-to-one ratio).
(Simon, supra,
Roby, supra,
Mercury cites to other California appellate cases indicating that a one-to-one limit is appropriate in most cases, especially those involving purely economic loss. In
Jet Source Charter, Inc. v. Doherty, supra,
Amerigraphics attempts to alter the ratio by arguing that its total compensatory damages was $516,541 (jury verdict plus
Brandt
fees), and therefore as remitted, the punitive damages award is only 3.2 times the compensatory damages award. But contrary to Amerigraphics’s argument, the trial court properly excluded the amount of
Brandt
fees in determining the compensatory damages award, since the
Brandt
fees were awarded by the court after the jury had already returned its verdict on the punitive damages. Amerigraphics also claims that prejudgment interest should be included in the ratio calculation. But we are aware of no authority supporting this contention. To the contrary, the court in
Bardis
v.
Oates
(2004)
3. Comparable Civil Penalties
We briefly address the third guidepost courts consider when evaluating a punitive damages award, which is the disparity between the punitive damages award and the civil penalties authorized or imposed in comparable cases.
(Jet Source Charter, Inc. v. Doherty, supra,
4. Maximum Constitutional Award
Based on the authorities and the facts of this case, we are convinced that the trial court’s remittitur of punitive damages to $1.7 million is constitutionally excessive. “To state a particular level beyond which punitive damages in a given case would be grossly excessive, and hence unconstitutionally arbitrary, ‘ “is not an enviable task. ... In the last analysis, an appellate panel, convinced it must reduce an award of punitive damages, must rely on its combined experience and judgment.” ’ [Citation.]”
(Simon, supra,
The $130,000 awarded by the jury in compensatory damages is the precise amount of damages that Amerigraphics sought. In light of the amount, there does not appear to be a punitive element to the compensatory damages award. In response to Amerigraphics’s request for punitive damages in the amount of $3.4 million, Mercury’s attorney argued in closing that a ratio of two-to-one, or even $500,000, might be appropriate as punitive damages, and would bear a reasonable relationship to the harm caused by Mercury. It is our task to determine independently whether an award is constitutionally excessive, and a party’s consent is therefore irrelevant. (Simon, supra, 35 Cal.4th at pp. 1187-1188.) Still, we agree that $500,000 is an appropriate amount of punitive damages in this case, and is not constitutionally excessive. Amerigraphics, which thought it had insured itself against catastrophic loss, and faithfully paid its premium to Mercury, ultimately became a particularly vulnerable victim. Put simply, Mercury’s egregious conduct put Amerigraphics out of business.
We therefore conclude that based upon the circumstances of this case, the maximum award of punitive damages consistent with due process is $500,000, an award based on a 3.8-to-one ratio of compensatory damages.
The judgment is reversed insofar as it awards punitive damages of $1.7 million. The matter is remanded to the trial court with directions to modify the judgment by reducing the award of punitive damages to $500,000. In all other respects, the judgment is affirmed. Each party to bear its own costs on appeal.
Boren, P. J., and Chavez, J., concurred.
Notes
The parties presume that the damage amount of $130,000 found by the jury was based on Volper’s testimony that Amerigraphics was still owed $17,000 for the printer and scanner, $22,000 in tenant improvements, and $91,000 in normal operating expenses.
Mercury never cited these cases to the trial court, despite the court’s continuance of a hearing on the matter so that Mercury could conduct more thorough research on the interpretation of the policy language.
Mercury argues that if we find insufficient evidence to support an award of punitive damages or that the trial court erred in construing the “Business Income” provision, then we must reverse the jury’s award of prejudgment interest. Because we find no error and that punitive damages are supported by the evidence, there is no basis for reversing the award of prejudgment interest.