Insurance Firms Begin to Feel Punitive Damage Pangs

Trinidad Perez was working as a janitor at a General Dynamics plant in California when an accident on the job left him totally and permanently disabled. His company was covered under a disability policy issued by Aetna Life Insurance.

Despite a statement by his physician and a verification by Aetna’s claims adjuster that Perez was physically disabled, the insurance company concluded the opposite and denied the claim.

After a lawsuit was, filed against Aetna by Perez, it was learned that Aetna did not obtain all his medical reports and that the company’s medical department never reviewed the case. The injured worker charged Aetna with a “bad faith” handling of his claim and asked the court for punitive damages.

Although the disability benefits under the policy came to about $15,000, Aetna chose to settle the case just before it reached trial for $150,000.

This is but one example of many cases won, settled or pending in the California courts charging insurance companies with deceptive or bad faith refusals to indemnify insured people. Whether under health, accident, fire, property or life policies, the pattern is similar in these cases: blatant disregard of the insured’s rights are leading to punitive damage awards that are sending shock waves throughout the insurance industry.

Lawyers such as William Shernoff of San Diego, who specialize in these insurance fraud cases, believe that only the punitive damage spectre will lead to reforms within insurance companies to improve their claims handling practices. Certainly, Shernoff says, most of the state insurance commissioners are not going to do the job nor have they in the past.

By the force of their reasoning, the California cases are prodding other state courts to act. Insurance company executives are beginning to get the message and are responding into two disparate ways.

First, as is typical, the insurance lobby is trying to persuade state legislatures to prohibit the punitive damage award in personal injury and bad faith cases. Punitive damages, in contrast to compensatory damages, are not a proper function of civil litigation, the lobby says over and over again.

Decades of legal commentary and court decisions provide a deep refutation of this assertion. For out of the anguished crucibles of thousands of cases has come the admonition from jury or judge to those seriously culpable corporations: “You must pay punitive damages to make more likely that you not do to others what you did to this unfortunate plaintiff.” Having failed to persuade the courts, the insurance lobby is prepared to continue spending millions of the policyholders’ dollars next year to get the politicians to stop the courts.

Second, insurance companies are proving every day what a salutary effect punitive damage awards are having on their internal operations. One company dismissed the managers who were responsible for fraudulent activities that cost the firm $750,000 instead of the $90,000 that a good faith settlement would have incurred.

The chairman of the board of Occidental Life Insurance Company, Earl Clark, indirectly gave the best tribute to the punitive damage award when he told his industry colleagues:

“Every judgment on a suit of this type impairs the industry’s character in the eyes of the public. The best defense against punitive damages suits is to avoid them by thoughtful, careful, equitable administration of our contracts–from the first contact with a prospective purchaser to the handling of every claim under the contract.

“These lawsuits are not based solely on claims action, they also involve advertising, sales literature, the conduct of the agent, group policyholders and administrative conduct, underwriting and preservation of confidential personnel information.”

Mr. Clark went on to propose an upgrading of claims standards in the form of an industry-written code for enactment as state regulations.

There are 50 state legislatures and thousands of courts. Our country achieves some of its finest hours when it keeps the doors to the courtroom open and flexible. Where else is the legal safeguard to come from after legislatures and agencies are found in industry’s back pockets?

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