Business Law Journal

In Camden Systems, LLC v. 409 North Camden, LLC, a California Court of Appeal recently affirmed that a limited liability company (“LLC”) “shall have all the powers of a natural person in carrying out its business activities”, which included ratifying its prior acts. Moreover, the California Court of Appeal affirmed that a member does not have standing to challenge actions taken before it became a member of the LLC, of record or beneficially; and that LLC operating agreements may (with some limitations) deviate from and supersede statutory default provisions.

In Carriere v. Greene, et al., the California Court of Appeal recently reversed a trial court’s award of attorney’s fees to a plaintiff for “prevailing” on an appeal and on a post-trial motion because the plaintiff had lost at trial and was therefore not a prevailing party.  This holding clarified that even where a contractual attorney’s fees clause exists, only a prevailing party is allowed attorney’s fees — and only one side may be the prevailing party in the whole of a lawsuit.

In Mazik v. GEICO Gen. Ins. Co., the California Court of Appeal recently affirmed an award of $1 million in punitive damages, throwing into sharp relief the fact that companies are liable for the wrongful conduct of their “managing agents”.  This holding explained that a “managing agent” under California Civil Code §3294(b) includes an employee who’s “systematic application of policies” realistically determines corporate policy, even if such policies are not formally adopted by the corporation.

Background

On August 11, 2008, Michael Mazik (“Mazik”) was involved in a serious head-on collision with another driver who had crossed over double yellow lines into Mazik’s lane on a highway in Riverside County, with both vehicles traveling at approximately 45 to 50 miles per hour.  The other driver was killed.  Mazik suffered multiple lacerations and abrasions, as well as deformities of the heel hone and destruction of the joint.  As Mazik medical expert testified, the heel bone “literally exploded”.

Thereafter, Mazik received the other driver’s full insurance policy limit of $50,000, and Mazik’s attorney subsequently submitted a claim on December 31, 2009 to Mazik’s $100,000 underinsured motorist policy with GEICO General Insurance Company (“GEICO”) for the remaining $50,000 (offset by the money Mazik had already received).  After receiving Mazik’s demand, a GEICO claims adjuster prepared a written “Claim Evaluation Summary” (“Evaluation”), which ostensibly summarized Mazik’s medical records and assessed values for his medical expenses, lost income, and “pain and suffering”, but omitted important information.  The Evaluation determined a negotiation range for the full value of Mazik’s claim to be $47,047.86 to $52,597.86 (including the $50,000 that Mazik had already received).  After preparing the Evaluation, the adjuster obtained approval from GEICO’s regional liability administrator, Lon Grothen (“Grothen”), to reject Mazik’s claim for $50,000 and on January 22, 2010, GEICO instead offered Mazik a settlement of $1,000.  Then in September 2010, after a new claims adjuster began working on the file (but without receiving any additional information), GEICO increased its settlement offer to $13,800.  On January 22, 2011, GEICO further increased its offer to $18,000, with a note from Grothen stating that he had “Increased The General Damage Range To Increase The Possibility of Settlement.”

On February 16, 2012, GEICO served a statutory offer to compromise Mazik’s claim for $18,887, which Mazik rejected to reiterate his demand for the policy limit of $50,000.  GEICO did not make any additional settlement offers, because as Grothen explained “there was no negotiation from the other side. They never came off their policy limit. We call that throwing good money after bad. If we can’t get them to negotiate, he would have been — it’s bidding against yourself.”  On August 31, 2012, even after GEICO had received copies of Mazik’s medical records documenting his continuing issues three years after the accident, Grothen gave his “Ok To Move This Toward Arbitration. I Do Not See This As A Policy Limits Case.”  The arbitration took place in April 2013, and the arbitrator issued an award for the full policy limit to Mazik.  GEICO subsequently provided Mazik with a check for $50,000 in June 2013 — 30 months after the jury in this case concluded that GEICO should have paid the policy limits.

Mazik filed his action for bad faith against GEICO on May 7, 2014, and the case was tried before a jury in July 2016.  The jury awarded compensatory damages of $313,508, and punitive damages of $4 million.  The trial court reduced the punitive damages to $1 million.

Standard for “Managing Agents”

An employer may be liable for punitive damages based upon the acts of an officer, director, or managing agent.  The California Supreme Court explained in White v. Ultramar, Inc. (1999) 21 Cal.4th 562 (“White”), that managing agents are employees who “exercise substantial independent authority and judgment in their corporate decisionmaking so that their decisions ultimately determine corporate policy.”  The California Supreme Court further explained that a “plaintiff seeking punitive damages would have to show that the employee exercised substantial discretionary authority over significant aspects of a corporation’s business.”  White, at p. 577.  Such a requirement is not satisfied merely by the ability to hire and fire workers.

The Court of Appeal found that there was ample evidence that Grothen was a managing agent of GEICO; for instance, Grothen had wide regional authority over the settlement of claims, and his responsibilities affected a large number of claims.  The Court also noted Grothen had testified that an important part of his job was to establish settlement standards within his region.  This broad decision-making responsibility for establishing GEICO’s settlement standards reasonably supported a finding that Grothen ultimately determined corporate policy, even if not through policies formally adopted by GEICO.  As the Court reasoned “an employee’s authority over the systematic application of policies in a claims manual or other formal corporate document might determine corporate policy as effectively as the formulation of the policies themselves.”

Grothen’s Conduct Applied to the Punitive Damages Standard

After holding that Grothen qualified as a “managing agent” the Court analyzed his conduct against the backdrop of the punitive damages standard.  The Court of Appeal found that Grothen had satisfied several of the factors: Mazik was financially vulnerable; GEICO’s oppressive conduct was not only repeated, but there was reason to believe that Grothen had widely promoted his adversarial approach of selectively relying only on favorable facts in violation of his fiduciary duties; and there was evidence that GEICO had intentionally manipulated the facts to create a favorable record justifying its offers to Mazik below his policy limits.  Thus, there was sufficient evidence that Grothen had engaged in oppressive conduct by ignoring information concerning the serious and permanent nature of Mazik’s injuries, and that GEICO, through Grothen, had deliberately “cherry-picked” favorable medical information and disregarded unfavorable findings.  Furthermore, the jury had a sufficient basis to conclude that Grothen had approved unreasonably low offers to Mazik, which ignored his medical records showing the serious and permanent nature of his injuries.

Conclusion

The decision in Mazik highlights the potential liability that a business may face when it vests non-executive level employees with extensive decision-making power.  Even though the business entity may believe that such employees are not determining corporate policy, the reality of their decisions may prove otherwise.  Contact your counsel at Atkinson, Andelson, Loya, Ruud & Romo for a thorough analysis of such liabilities.