Insurance Bad Faith

Walter J. Lack
Engstrom, Lipscomb & Lack
Specialty: Civil Litigation
Law School: Loyola, 1973

INSURANCE BAD FAITH: EXPERT WITNESSES AND EVIDENCE

(Walter J. Lack and Jill P. McDonell)

While expert witnesses in bad faith litigation should educate the jury in insurance, their testimony should also be used to present a comprehensive picture of the evidence and to argue the case to the jury. Insurance bad faith is still a rather novel concept to the average juror. If the jury is not fully educated regarding insurance concepts and bad faith conduct, insidious conduct by an insurer will appear as little more than a few mistakes by people doing their jobs or a company policy that is a little lacking.

A. CHOOSING AN EXPERT

Theories of bad faith include everything from an improper denial of a first party claim to an insurer's breach of a duty to defend, to investigate, or to settle. The choice of an expert will depend upon the theory of recovery. In addition to insurance industry and legal experts, health care experts may be needed to testify as to what constitutes reasonable and necessary medical treatment; civil engineers or contractors may be needed regarding coverage in construction defect cases; psychologists may be needed regarding emotional distress due to the bad faith, and so on. Each of their roles should be well defined by the attorney, not the expert, from the outset of the case. The testimony of insurance industry experts, such as claims handlers or underwriters, should dovetail with the testimony of legal experts.

The role of a legal expert should take into account California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal.App.3d 1 (1985). Although the attorney testifying as an expert witness was "a highly qualified trial attorney," the California Shoppers court found that this did not mean that he "had any special knowledge, skill, experience, training or education such as would qualify him as an expert on insurance industry practices. It is no answer, that certain of his professional efforts are aimed at discovering insurance company derelictions of duty, and then taking them to task." Id. at 66.

California Shoppers does not mean that an attorney can no longer act as an expert in a bad faith case. While a legal expert can still testify as to the legal import of a policy, the strength of the underlying case and an insured's liability due to the insurer's bad faith, etc., an insurance industry expert should testify as to the insurance industry's standards and practices. The relationship between the insurance industry expert and legal expert will be complimentary if handled appropriately and will be problematic and overly cumulative if handled incorrectly. Each expert should address the evidence from a different angle and demonstrate how it was despicable from both perspectives.

An attorney can be particularly effective if he has in-house insurance experience, or has assisted in drafting procedural manuals and policies. Whether his experience is recent should be taken into account. If an attorney has not worked in-house for twenty years, his knowledge of the effects of more recent regulations and legal developments on common practice may be called into question. See Hurtado v. Western Medical 222 Cal.App.3d 1998 (1990) and Paxton v. Stewart 68 Cal.App.4th 331 (1998).

B. PREPARATION OF AN EXPERT

The most important element of proper preparation of an expert is early retention and participation. About 90% of all experts are first contacted and retained by telephone. The "super experts," however, are those who are retained early by personal interview. Designating an expert without prior consultation can lead to embarrassing situations or even the belated determination of a conflict of interest. No substitute exists for an early meeting to explain the direction of the case and to provide time estimates.

The jury instructions should act as your road map from the first expert meeting through the presentation of testimony and closing arguments. Relevant documents should be produced to the expert for review as soon as they are available. This will prevent the expert from being deluged with the documents at the last minute and will allow the attorney to keep the expert up-to-date on the developments in the case. Summary judgment motions and critical witnesses' entire deposition transcripts are critical in presenting the facts to your expert.

The C.C.P. §2034 designation should be as broad as possible, i.e., regarding bad faith case. A copy of the designation should be sent to the expert before deposition, to make sure that the expert's testimony is consistent. A pre-deposition meeting is mandatory, regardless of the witness's experience. An attorney needs to explain the need for this expert and where that testimony fits in the presentation of the case, not the other way around. While he should not be coached, the expert should understand the areas he is expected to address and may suggest the theories of recovery, which he believes can be expanded. Prior to deposition, the quality, weaknesses, strengths and style of the deposing attorney should be described to the expert.

In deposing an opponent's experts, an attorney would ask him to state precisely why he was hired and what his assignment was. This is an easy trap for an inexperienced expert who doesn't know that he is not supposed to be an advocate. Remember, don't allow your own expert to fall into that same trap.

The issue of fees should never be a problem area with an expert. Fees should be addressed up front at the first meeting. At the deposition, the attorney should always mark the time at the end and calculate the fees on the record. Any embarrassing situation which could arise surrounding fees should be prevented.

C. TRIAL TESTIMONY

1. Qualifications

An expert's qualifications can be boring. Jurors are unlikely to respond well to counsel reading from a c.v. One should elaborate, describe and impress the jury with the credentials. The expert can describe his degrees, the prestigious schools he attended and the number of years it took to attain his position. Any particular training for the specialty about which he will be opining should be included. The jury should know these qualifications were no small feat, but they don't need to know the names of all of the articles he wrote. They should be left with the impression that the expert lives, sleeps and breathes his specialty.

2. First Educate Generally, then Specifically

An average person merely considers paying their insurance premiums a necessary evil, but spends little time recognizing what insurance is really supposed to buy them - peace of mind. After an accident or a loss, an insured normally sighs with relief, "Thank God I'm covered." That is the first point the plaintiff's and the expert witness's testimony should make clear. In conjunction with the basic purpose of insurance, the jury should be educated on the covenant of good faith and fair dealing in every insurance policy. The provisions and need for this covenant cannot remain a vague legal term to the jury, or the case will remain an uphill battle. The insured entered into an adhesion contract with reasonable expectations that the insurer would properly handle a financially and emotionally stressful situation.

With judges frequently placing time limitations on expert testimony, the temptation arises to shorten the time spent on general issues of insurance. Don't give in to the temptation. If jurors do not understand the "language of insurance," they cannot be expected to determine whether the insurer acted improperly. The reasons for the extensive regulation of the insurance industry and the expected claims handling practices should be made a clear standard for the jurors to measure the defendant insurer against. The insurer's employees are paid to their job and handle stressful and difficult situations. The jurors must recognize that they are not to compare the insurer's employees' conduct against a more lax standard found in other businesses. If they perform their jobs improperly, insureds will be left without transportation or a roof over their heads. Starting in voir dire, the jurors should be taught to empathize with the insured and recognize the insurance company for the big bad company that it is.

The jury should also be taught to read a policy. They need to understand the difference and relationship between definitions, conditions, exclusions and endorsements. Presume the jury starts with no knowledge of this information. Irrelevant terms in the insuring agreement should also be isolated for the jury and disposed of as such. The expert's job is to take the mystery out of the subject matter.

An expert's analysis of the construction of a policy should take into account some basic legal principles. The mutual intention of the parties at the time a contract is formed will govern its interpretation, and if possible, such intent is to be inferred solely from the written language of the contract. AIU Ins. Co. v. Superior Court, 51 Cal.3d 807 (1990). If the language is clear and explicit, the contract language will govern its interpretation. Cal. Civil Code §§1638, 1633, Bank of the West v. Superior Court 2 Cal. 4th 1254 (1992). The policy should be read as a lay person would read it, not as it might be analyzed by an attorney or an insurance expert. Crane v. State Farm Fire & Cas. Co., Cal. 3d 112 (1971). "Technical words are to be interpreted as usually understood by person in the profession or business to which they relate, unless clearly used in a different sense." Cal. Civil Code § 1645. As such, an expert should be used for those terms considered "technical."

After the jury has been given its general education, the expert should address the specifics of the case. An expert's testimony should be limited to those areas in which his expertise is strong. The witness should not be stretched too thin, or he may be cross-examined and find himself on thin ice. Ignoring California Shoppers and having a lawyer testify on coverage and claims handling procedures is a mistake frequently made.

To question beyond the scope of his designation into a strong and favorable area of the expert's specialty will not harm the questioner. Opposing counsel may object, but if sustained, the presumption will be left that your expert would have said something favorable. Of course, this should also be expected of the opposition, and if it will likely pose a problem, it should be preempted by a motion in limine.

The best experts make the case on cross-examination. Prepare an expert for the expected cross-examination prior to testifying and educate him as to the weaknesses of his opinion. In preparing for cross, the expert should recognize what to give in on and should be prepared for traps which could cause a problem.

In giving opinions, the expert can reiterate each piece of evidence on which he bases his opinion. This point is crucial as it enables the jurors to recognize how they should see the evidence. The expert should be prepared to simplify by analogy and utilize demonstrative evidence. Jurors will remember more of what they hear and see, and will listen more attentively to testimony they find interesting. In addition, they have gotten use to seeing court rooms on television and expect technology and special effects.

Visual aids can be used in countless ways to illustrate the methods by which an expert reached his opinion. For instance, an expert on claims adjusting should not just say he reviewed several thousand documents. Rather, the boxes of invoices, receipts, etc. reviewed should be placed on the counsel table or on the floor for effect. This concrete example will have a more profound effect on the jury than merely testifying that "he read a lot."

Extremely relevant documents should invariably be enlarged, highlighted and discussed by an expert in an attempt to get the jury to read them. These documents can easily also be photocopied onto transparencies using color photocopiers to allow an expert to annotate them during an overhead presentation. In the bad faith arena, any "smoking gun" documents can be enlarged and highlighted for emphasis. These visual aids also allow the expert to stand up and leave the impression of a scholar and professor teaching.

On redirect, the basic point of an expert's purpose may be emphasized. He should be asked if he is there to advocate for one side or the other. In response, he will affirm that he is there to help the jury understand the facts and enable them to reach the right decision.

3. Opinion as to Ultimate Issue

An expert witness' testimony is allowed regarding an opinion "[r]elated to a subject that is sufficiently beyond common experience that the opinion of an expert would assist the trier of fact." Cal. Evid. Code §801(a). On the other hand, an expert opinion on the ultimate issue of the case was historically excluded as a usurpation of the province of the jury. Cal. Evid. Code §805, however, has addressed that issue and specifically provides: "Testimony in the form of an opinion that is otherwise admissible is not objectionable because it embraces the ultimate issue to be decided by the trier of fact."

In balancing Section 801 and 805, it is within the judge's discretion not to admit expert evidence as to the ultimate issue if he does not believe that it will assist the jury. Addressing this issue, the California Supreme Court explained, "[w]e can conceive of many ways in which a lay jury, in assessing the conduct and motives of an insurance company in denying coverage under its policy, could benefit from the opinion of one who, by profession and experience, was peculiarly equipped to evaluate such matters in the context of similar disputes." Neal v. Farmers Ins. Exchange 21 Cal.3d 910, 924 (1978). Accordingly, the admission of this testimony will depend upon the trial judge.

An award of punitive damages, requires a finding by clear and convincing evidence that defendant was guilty of fraud, malice or oppression, which is defined as "despicable conduct." BAJI 14.71. See Gagnon v. Continental Casualty Company 211 Cal.App.3d 1598 (1989). Whether an expert can testify to the ultimate issue of an insurer's conduct as "despicable" is a recurring problem that will depend upon the judge. Any open-ended question on cross-examination may leave the door open for the expert to describe the insurer's conduct as "despicable" or "malicious," which he needs to be prepared to do.

D. EMOTIONAL DISTRESS DAMAGES IN THE BAD FAITH SETTING

Evidence and expert opinion regarding emotional distress damages need to take into account the complex and sometimes convoluted line of case law addressing emotional distress damages incidental to insurance bad faith claims. See Crisci v. Security Insurance Co., 66 Cal.2d 425 (1967); Gruenberg v. Aetna Ins. Co. , 9 Cal.3d 566 (1973); Jarchow v. Transamerica Title Ins. Co., 48 Cal.App.3d 917 (1975).
In Torres v. Automobile Club of Southern California, 15 Cal.4th 771 (1997), the California Fourth District Court of Appeal reviewed the history of the development of the law in this area and clarified the extent and severity of loss required. When the only damage other than emotional distress is financial, Torres provides for recovery of emotional distress damages in either of two situations:
1. "There must be a showing of 'substantial' injury other than the emotional damage"; or
2. "[T]he emotional distress damage itself must be severe, substantial or enduring."

The Court reasoned that requiring sufficient severity of either the financial injury or the emotional injury "validates" claims and prevents trivial or fraudulent actions.

The California Second District Court of Appeal concurred with the reasoning in Torres and further emphasized the fact that "a claim for emotional distress in a bad faith action cannot stand alone, but must be accompanied by some showing of economic loss." In addition, since the emotional injuries were incidental to the financial injuries, no statutory remedy of prejudgment interest should be awarded. Continental Insurance Company v. Superior Court of Los Angeles County, 37 Cal.App.4th 69 (1995).

More recently, the court has clarified that in first party bad faith cases, damages for emotional distress are only recoverable when the insured has suffered some financial loss, and insurer's mere denial of benefits is insufficient to support the claim. Waters v. United Services Auto. Ass'n, 41 Cal.App.4th 1063 (1996).

A successful plaintiff must reach the threshold requirement of economic damage in order to recover for emotional injuries. However, these economic damages in a bad faith claim may include such losses as damage to personal credit due to inability to pay outstanding debts and attorney fees accrued in order to collect wrongfully withheld funds.