Appellants Reply Brief — Mutual of Omaha Insurance v. Egan

pe?" Bupreme Court, U. fe ~ |

f FILED

i FEB g 1980

IN THE | “MICHAEL RODAK, JR., CLERR

Supreme Court of the United States

October Term, 1979.

No. 79-1073.

MUTUAL OF OMAHA INSURANCE COMPANY, a corporation,

| Appellant,

vS.

MICHAEL EGAN,

Appellee.

On Appeal From The Supreme Court of California.

MOTION TO DISMISS APPEAL.

STEPHEN L. ODGERS,

Counsel for Appellee,

a member of the

LAW OFFICES OF HERBERT HAFIF,

269 W. Bonita Avenue,

Claremont, Calif. 91711,

(714) 624-1671; (714) 631-0600,

Attorneys for Appellee.

February 7, 1980.

Parker & Son, Inc., Law Printers, Los Angeles. Phone 724-6622

SUBJECT INDEX

Page

Preliminary Statement............... aretha wees os l

Motion to Dismiss Appeal ...................000. 2

Statutes Merely Declarative of Common Law Principles

Are Not Subject to the ngpens: Jurisdiction of

f << | GEE eee Be ae Oe Pe © eee ee ee re 2

The Application of the State Statute, Which Is the Subject

of Appellant’s Complaint of Constitutional infirmity,

Has Furnished the Appellant Protection .......... 8

The ‘‘Federal Question’’ Is a Johnny-Come-Lately Ar-

gument That Was Not Raised at the Trial Court Level 11

But by This Time, the Trial Court Had Ruled That Appel-

lant Had, in Bad Faith, Denied Egan His Benefits

Under the Policy. Mutual Had Admitted Liability (as a

Practical Matter) by This Time ................. 15

Appellant Mutual of Omaha Inflicted Carefully Calcu-

lated Harm Upon Its Policyholder Michael Egan ... 16

Rigid State Standards Governing the Circumstances of

Award and Amount of Punitive Damages sip

Ample Protection to Defendants ................ 23

A. The First Major Standard of Judicial Review

Available to the Court Is the ‘‘Exemplary’’

Standard, Sometimes Called the ‘‘Deterrent’’

Ee iy 00 cig cake ood © koa ne ns 24

B. The Second Standard of Damage Review Is the

Nature of the Wrongful Acts ............... 27

C. The Third Major Standard on Damage Review Is

the Wealth of the Defendant ............... 28

D. The Fourth Major Standard of Judicial Review Is

a Comparison of the Award With the ‘‘Earnings”’

-, EE 6b vio 4d Wk 008 6 ko ts ocd cds 29

Therefore 80% of the Money Goes Back to the

General Public in the Form of Taxes ...... 29

Page

E. “he Fifth Standard of Judicial Review Is the

Comparison Between Actual Damages and Puni-

tive DOMES fii. eave ate CA 30

F. The Sixth and Final Standard of Judicial Review

Is the Verdict Comparison Standard ......... 31

Appellant Mutual of Omaha Is a Fiduciary to Appellee

Michael Egan, and Must Fairly Investigate His Ciaim 31

Conttumiee oo) 2.260 - ZIV FRC ie 35

ili

TABLE OF AUTHORITIES CITED

Cases Page

Barrera v. State Farm Insurance Company, 71 Cal.2d

659, 79 Cal. Rptr. 106................0005. 33, 34

Bellus v. City of Eureka, 69 Cal.2d 336, 71 Cal. Rptr.

2 ANSE TE re 5 3S eae VAT Feared ear ree 33

Bertero v. National General Corporation, 13 Cal.3d 43,

RE Sk MS WO Stock eke ee 28, 31, 35

Blackman v. McCoy, 169 Cal.App.2d 873, 339 P.2d

RRR OE rt BADR A On en arOT en oP aP 11

Bollinger v. National Fire Insurance Company, 25

Cal. 28 S99, 159 PSE FF8 ce ek eet 3a; 32

Brewer v. Second Baptist Church, 32 Cal.2d 791, 197

P.ae Ths SSG So be Ocoee yr are ee ea 23

Burton v. Wilmington Parking Authority, (1961) 365

U.S. 715, 81 S.Ct. 856, 6 L.Ed.2d 45........... 5

Caminetti v. State Mutual Life Insurance Company, 52

Cal.App.2d 321, 126 P.2d 165 ................. 32

Commissioner of Internal Revenue v. Glenshaw Glass

COME, Se I BO420 oii os bE i 29

Comunale v. Traders and General Ins. Co., 50 Cal.2d

es a ee be. Bae aS hese eek 3, 34

Crisci v. Security Insurance Company of New Haven, 66

Cal. 20:425, 5@Cal. Rote: 13 i 3, 34

Cunningham v. Simpson, | Cal.3d 301, 81 Cal. Rptr.

Saah Men Ke te WE delle SEE is od oi iS % 9, 26

Dahnke-Walker Milling Company v. Bondurant, (1921)

257 U.S. 282, 42 S.Ct. 106, 66 L.Ed. 239 ....... 9

Delos v. Farmers Insurance Company, 93 Cal.App.3d

GOS, EFF Gey BRE Ge oi nde ee ek Sieecices 33

Ferraro v. Pacific Finance Corporation, 8 Cal.App.3d

Sa ER ERS fads CR Ci di wee ee is 27,28 .

Finney v. Lockhart, 35 Cal.2d 161, 217 P.2d 19. . 30, 31

iv

Page

Fletcher v. Western Nat. Life Ins. Co., 10 Cal.App.3d

ROP I RS TO Gs ieee irda bg.e 2 wc 13, 15, 35

Forte v. Nolfi, 25 Cal.App.3d 656, 102 Cal. Rptr. 455

SRE TE TEOR ea eee CeO. CET tee ee cee 9, 28

G. D. Searle and Company v. Superior Court, 49

Cal.App.3d 22, 122 Cal. Os 28 iviecdinieae

German Alliance Insurance Company v. Lewis, 233

U.S. 389, 34 S.Ct. 612, 58 L.Ed. 1011.......... 32

Gomez v. Perez, 409 U.S. 535, 93 S.Ct. 872, 35

sia) colnet Eee EE I ree 6, 7, 11

Gray v. Zurich Insurance Company, 55 Cal.2d 263, 54

witht ooh Sosy MEE ee ee 34

Greenberg v. Equitable Life Assurance Society of the

U.S., 34 Cal.App.3d 994, 110 Cal. Rptr. 470..... 8

Gruenberg v. Aetna Insurance Company, 9 Cal.3d 566,

ae CM. Mp OO sa 88 es 25, 33

Hagen v. Gallerano, 169 A.2d 186................ 26

Hicks v. Miranda, (1975) 422 U.S. 332, 95 S.Ct. 2281,

So ps gs ck ER ER COT ee 36

Horn v. Guarantee Chevrolet, 270 Cal.App.3d 477, 75

on ga snd, See PTT TOT oe RR nN 28, 29, 31

Memphis National Gas Company v. Beeler, 315 U.S.

649, 62 S.Ct. 857, 86 L.Ed. 1090............_ 10

Miller v. Dollar Steamship Lines, 19 Cal. App.2d 206, 64

ORAS EEE OES wieiviel |S cue toein 13

Montoya v. H. C. Moore and Mutual of Omaha Insur-

ance Company, 7 N.Mex. 326, 422 P.2d 363..... 34

Neal v. Farmer’s Insurance Company, 21 Cal.3d 910,

RF NE OO shi sotnsiccied cinta, oe: 24

Nelson v. Abraham, 29 Cal.2d 745, 177 P.2d 931 ... 33

People v. Langtree, 64 Cal. 256, 30 Pac. 813....... 4

ee

Page

Shernoff v. Superior Court, 44 Cal. App.3d 406, 118 Cal. :

a ae were LES Pere Pee 8

Silberg v. California Life Ins. Co., 11 Cal.3d 452, 113

Ry SRE BOR ak ba NEA sok wk ee 3

Sloan’s Estate, In Re, 7 Cal.App.2d 319, 46 P.2d 1007 4

Sturges v. Charles L. Harney, Inc., 165 Cal. App.2d 306,

RB ey rer Sea W saaele apie eas 27

Toole v. Richardson-Merrtell, Inc. , 251 Cal. App.2d 689,

ee ee a he LE,

Ward v. Taggert, 51 Cal.2d 736, 336 P.2d 534 ..... 26

Wetherbee v. United Insurance Company of America,

265 Cal.App:2d 921, 71 Cal. Rptr. 769..........

5ettk eS 26, 29, 30, 31, 35

United States v. Regan, (1914) 232 U.S. 37, 34 S.Ct.

BED, FO a WOE hae Ko hk oe ee 26

Rules

Rules of Const, Rule 300) oe . ce esr 2

Statutes

California Civil Code, Sec. 3294 ........ 3, 6, 8, 9, 10

California Code of Civil Procedure, Sec. 657(7) ..... 13

California Code of Civil Procedure, Sec. 659a ... 13, 14

California Constitution of 1849, Art. XII, Sec. 1 .... 3

California Constitution of 1879, Art. XXII, Sec. 1... 3

United States Code, Title 28, Sec. 1257(2)

Textbooks

Book of Approved Jury Instructions Instr. 14.13 ..... 36

Book of Approved Jury Instructions (West Publishing

Py GD Wi vin 0 PE SRR O he din ke kee da dancces 12

vi

- Page

Seminar on Insurance, A. Knachadour, Chief Legal

Counsel, Department of Insurance, State of California

er ey Bee ee, ee ee 8

Witkin, California Procedure, 2d Ed. (1971) pp. 2510-

Sn Ee i, 13

IN THE

Supreme Court of the United States

October Term, 1979.

No. 79-1073.

MUTUAL OF OMAHA INSURANCE COMPANY, a corporation,

Appellant,

VS.

MICHAEL EGAN,

Appellee.

On Appeal From The Supreme Court of California.

MOTION TO DISMISS APPEAL.

Preliminary Statement.

The following pages of this Motion to Dismiss Appeal

will affirmatively establish that Appellant Mutual of Omaha

Insurance Company, a corporation, is not entitled to any

relief in this Court and that therefore its ‘‘appeal’’ under

28 U.S.C. §1257(2) must be dismissed. Dismissal occurs

because:

1. Statutes merely declarative of the common law

are not subject to the appeals jurisdiction under 28

U.S.C. 1257(2) and may only be brought to this Court’s

attention by writ of certiorari;

ae. wee

2. The application of the state statute, which is the

subject of appellant’s complaint of constitutional in-

firmity, has furnished, at the appellant’s demand, pro-

tection from and caused vacation of a punitive damage

award;

3. The federal question was not timely raised;

4. Appellant Mutual of Omaha inflicted carefully

calculated harm upon its policyholder Michael Egan;

5. Rigid California state standards governing the

circumstances of award and amount of punitive dam-

ages supply ample protection to Appellant;

6. Appellant Mutual of Omaha is a fiduciary to

Appellee Michael Egan under a significant duty to in-

vestigate and otherwise deal fairly with its policyhold-

ers as a matter of California public policy

Motion to Dismiss Appeal.

This motion is made pursuant to Rule 16(1) (a) (appeal

not within jurisdiction of Court); (b) (no substantial Federal

question is presented that was timely or properly raised or

expressly passed on in the lower court); and (d) (the verdict

and judgment of the lower courts were proper and work no

hardship upon the appellant and there is no substantial fed-

eral question. )

Statutes Merely Declarative of Common Law Principles

Are Not Subject to the Appeals Jurisdiction of

1257(2). 7

This Court is requested to take judicial notice of the fact

that punitive damages are a creature of the common law of

England, and that at the time of the separation of the colonies

from Great Britain the common law of England prevailed

as the law of each of the new states. Subsequently, as each

additionai state came into the Union, the basic principles

a oa

of the common law of England continued as the fundamental

law of each new state. State constitutions so declared.

For example, Article XII, Section 1 of the California

Constitution of 1849 stated: |

**Sec.1. All rights, prosecutions, claims, and con-

tracts, as well of individuals as of bodies corporate,

and all laws enforced at the time of the adoption of this

Constitution, and not inconsistent with, until altered

or repealed by the Legislature, shall continue as if the

same had not been adopted.’’ (West Ann. Calif. Code)

Likewise, the California Constitution of 1879 contained

similar provisions in Article XXII, Section | (West Ann.

Calif. Code.)

One of the principles of the common law codified by the

Legislature in 1872 (California Civil Code Section 3294)

states:

*“‘In an action for the breach of an obligation not

arising from contract, where the defendant has been

guilty of oppression, fraud, or malice, express or im-

plied, the plaintiff, in addition o actual damages, may

recover damages for the sake of example and by way

of punishing the defendant.’’'

Thus, as early as 1872 the California Legislature had

merely codified in statute the common law principle that

upon a showing of an intent to cause injury a person can

recover punitive damages. That the Legislature created no

'A claim for breach of the implied duty of good faith and fair dealing

is imposed by law and is not a creature of contract. Therefore punitive

damages for violation of the implied duty rests upon tort principles,

not contract principles. See Comunale v. Traders and General Ins. Co.,

50 Cal.2d 654, 328 P.2d 198; Crisci v. Security Ins. Co., 66 Cal.2d

525, 58 Cal.Rptr. 13; Silberg v. California Life Ins. Co., 11 Cal.3d

452, 113 Cal.Rptr. 711.

ovis

new principle of law that did not exist at common law or

that it did not add to or change the content of the common

law of California was made clear in the case of Toole v.

Richardson-Merrell, Inc., 251 Cal.App.2d 689, 60 Cal.Rptr.

398, 419 where the court stated:

‘‘Our opinion did not dispose of appellant’s conten-

tion that Civil Code §3294, which authorizes punitive

damages for ‘. . . oppression, fraud, or malice. . .’ is

unconstitutional because it contains no standard by

which to measure the punishment, nor any limitations

as to the amount to be awarded. We find no merit in

this contention. A plaintiff s right to exemplary or pu-

nitive damages, when the defendant’ s conduct justifies

the award, is generally accepted, and may exist even

in the absence of statute. Some authorities have said

that the right to such damages is as old as the right

to trial by jury. When allowable, the amount to be

awarded lies within the sound discretion of the trier of

fact (Citations omitted) but must bear a reasonable

relationship to actual damages suffered (Citations

omitted). Our statute does no more than recognize the

right to punitive damages where the defendant had heen

found guilty of wrongful conduct showing fraud,

Oppression or malice. . . . Where, as here, its existence

as a fact is supported by evidence in the record, we

see no offense to the Constitution, and no deprivation

of any constitutional right of appellant in committing

the assessment of such damages, including the amount

to be allowed, to the sound discretion of the jury.”’

(Emphasis added. )’

"People v. Langtree, 64 Cal. 256, 30 Pac. 813 and Jn Re Sloan's

Estate, 7 Cal.App.2d 319, 46 P.2d 1007 hold a Statute re-enacting the

common law leaves unaffected those earlier principles.

re os

At this juncture, the unsoundness of Appellant Mutual

of Omaha’s contentions become exceedingly clear — ac-

cording to them every case arising under the common law,

where it has been adopted by a state constitution or clarified

by state legislative action, (one or both) is therefore a ‘‘stat-

ute’’ entitling the aggrieved party to a right of appeal under

28 U.S.1257(2).

The obvious burden that would be placed upon this Court

by recognizing a right of review for every person claiming

aggrievement by such a circuitous route would place an

unbearable burden upon the Court.

Every automobile accident in every state in the Union,

every slip and fall case on a banana peel in a supermarket

— indeed every tort (see Conclusion, infra) under this theory

of the appellant would entitle a case to the dignity of review

as a matter of right.

Such is not the law. Burton v. Wilmington Parking Au-

thority, (1961) 365 U.S. 715, 721, 81 S.Ct. 856, 860, 6

L.Ed.2d 45 establishes the principle that a statute which is

merely declarative of the common law is not the type of

statute contemplated by 28 U.S.C. 1257(2).

In that case, the plaintiff brought suit in state court claim-

ing that a city which operated a parking garage systemati-

cally refused to serve the persons who were members of

minorities.

The Delaware State Supreme Court found that a statute

which gave the restaurant operator the right to refuse service

to anyone did not involve any type of state action, only

private action, and further that the statute in question merely

confirmed a common law result.

This Court dismissed the appeal.

Likewise, the result in this particular case is merely the

recognition of the right by plaintiff to common law damages

ay ee

known as punitive damages, which happens to have been

codified by the State Legislature of California but which

also otherwise exists independently of statute (Toole v. Rich-

ardson-Merrell, supra).

It is to be noted that the California Supreme Court in its

opinion specifically referred to Toole v. Richardson-Merrell

as well as to Civil Code §3294 — thereby indicating that

punitive damages is a creature of the common law codified

in California with the Legislature providing that there must

be fraud, malice or oppression prior to their award.

Thus, since C.C. §3294 is merely declarative of the com-

mon law, a right of appeal under §1257(2) does not lie.

Gomez v. Perez, 409 U.S. 535, 93 S.Ct. 872, 35 L.Ed.2d

56 reiterates this proposition.

The dissent in Gomez noted that the case came to the

Supreme Court «nder a right of appeal under §1257(2) —

and the dissent felt ‘‘cheated’’ by the fact that no true statute

of the State of Texas was directly involved in the appellant’s

claim of denial of Federal constitutional rights. In fact the

dissent felt so strongly about that and the nebulous phrasing

of the claimed denial of other Federal constitutional rights,

absent the proper statutory reference, that it would not even

have treated the appeal as a petition for writ of certiorari

as the majority did.

In Gomez the State Legislature of the State of Texas had

adopted an elaborate statutory scheme providing for the right

of child support from the natural father upon the birth of

the child, and extending such rights to the child even after

the divorce of the parents. It was conceded by all parties

that the statutory scheme protected only legitimate children.

The statutes in no way augmented, supplemented or changed

the common law of Texas that illegitimate children had no

Support rights from their natural fathers. Under this state

Son

of circumstances the majority conceded that there was no

right of appeal and it was not the statute that deprived the

illegitimate child of the constitutional rights but, on the

contrary, it was the Texas common law that deprived them

of constitutional rights.

Having recognized the basic proposition that a claim that

the common law deprives persons of a federal constitutional

right can only be reached by writ of certiorari, not appeal,

the majority of the court then proceeded to treat its notation

of probable jurisdiction for certain ‘‘non-appealable’’ issues

as being the grant of a writ of certiorari.

The Court was careful to also note that the appellee State

of Texas had specifically asserted no prejudice, and affirm-

atively stated that it was ready to meet any constitutional

issue that the Court found in the case.

The tenor of the California Supreme Court opinion makes

it clear that its decision is basically enforcement of common

law public policy and ‘‘the special relationship between the

insurer and the insured illustrates the public policy consid-

erations that may support exemplary damages in cases such

as this.’’ (California Supreme Court Opinion, Mutual’s Ju-

risdictional Statement, p. A9.)

For example, it notes that there is a special fiduciary

relationship between the policyholder who buys a policy of

insurance and the insurance company. This common law

created fiduciary duty adds impetus to the enforcement of

a strong public policy of the State of California to support

injured, seriously disabled policyholders at the expense of

the insurance companies, as contracted for by the insurance

companies, and not the public coffers.

Thus, the whole essence of the concept of the fiduciary

duty coupled with the statutory recognition of this common

law right to punitive damages puts in the hands of the private

aa.

policyholder powerful tools in insuring him the benefits due

him.

It has long been noted that the Department of Insurance

of the State of California lacks any significant power to

obtain policy benefits for policyholders. Their powers are

limited generally to drafting of broad prospective regulations

governing insurance, and not the remedying of past indi-

vidual wrongs. Greenberg v. Equitable Life Assurance So-

ciety of the U.S., 34 Cal.App.3d 994, 110 Cal.Rptr. 470;

Shernoff v. Superior Court, 44 Cal.App.3d 406, 118

Cal.Rptr. 680; Seminar on Insurance, A. Knachadour, Chief

Legal Counsel, Department of Insurance, State of Califor-

nia, February 26, 1977, sponsored by the California Trial

Lawyers Association.

The Application of the State Statute, Which Is the Sub-

ject of Appellant’s Complaint of Constitutional In-

firmity, Has Furnished the Appellant Protection.

Indeed, as explained infra, Appellant Mutual of Omaha

fails to tell this Court that it is the very statute challenged

(California Civil Code §3294) that furnished Appellant

Mutual of Omaha substantial and material protection against

the so-called unbridled discretion of the jury.

What the appellant does not tell this Court is that over

a period of many years, in the State of California, a relatively

rigid body of law has developed surrounding the awarding

of punitive damages.

The application of these principles strictly defines fraud,

malice and oppression. Likewise, there has developed def-

inite, substantive tests for determining whether the amount

awarded as punitive damages is excessive.

In fact, the application of these standards has sent the

issue of the amount of punitive damages back to the trial

court for further trial and determination.

=)

It is difficult for the appellant to realistically advance the

proposition that this statute, as applied to the appellant, has

unconstitutionally deprived it of any rights whatsoever.

A review of the appellate history of this case shows that

the appellant has invoked these very principles, discussed

infra, to decry the imposition of punitive damages upon

itself. .

Effectually speaking, the appellant has relied upon this

extensive body of law to relieve itself of the payment of this

judgment.

It has long been clear that:

‘*A statute may be invalid as applied to one state of

facts and yet valid as applied to another. (Citations

omitted.) Besides a litigant can be heard to question

a Statute’s validity only when and so far as it is being

or is about to be applied to his disadvantage.’’ Dahnke-

Walker Milling Company v. Bondurant, (1921) 257

U.S. 282, 289, 42 S.Ct. 106, 108, 66 L.Ed. 239, 243.

It is well-settled under California law that the size of a

punitive damage award furnishes a proper basis for an attack

upon it in the Appellate Court as being excessive as a matter

of law, and that this remedy is available for punitive damage

awards whether under the ~ 2 per se or C.C.

§3294. Forte v. Nolfi, 25 Cal.Ap 56, 102 Cal.Rptr.

455; Cunningham v. Simpson, | Cal.3d 301, 81 Cal.Rptr.

855.

Appellant in California State court sought, and in fact

received (by reversal of the punitive damage judgment) the

protections afforded a litigant under C.C. §3294.

At this late date it is antithetical for the appellant to now

claim that the application of §3294, as applied to Appellant

Mutual of Omaha, is “‘unconstitutional’’.

a wn

In fact, an examination of Mutual of Omaha’s opening

brief filed in the intermediate Court of Appeal in the State

of California shows that 50 or more pages, out of a 113

page brief, were devoted to arguments that the award of

punitive damages was excessive as a matter of law (tested

by the standards developed under both case law and C.C.

§3294), and that the jury instructions failed to properly

communicate to the jury the full extent of the protections

afforded under these laws.

At the time that appellant Mutual filed its ‘‘Reply Brief

for Appellant Mutual of Omaha Insurance Company’”’ (its

last brief in the intermediate Court of Appeal) it again de-

voted tens of pages to the same proposition.

Likewise, when it filed its ‘‘Petition for Hearing’’ in the

California Supreme Court Appellant sought and was granted

the benefits of decisional law interpreting C.C. §3294.

At each instance Appellant Mutual of Omaha sought the

benefits of the decisional law surrounding C.C. §3294.

And received them.

Mutual of Omaha does not deny that at this point it is not

under a compulsion to pay Appellee Michael Egan one dime

in punitive damages — and that under its view of the de-

cision might never have to for it claims that the appellee’s

fundamental right to punitive damages must be retried in

the trial court, and that he must reprove malice, fraud, intent

to harm, etc. all over again.

Since Appellant Mutual has sought, and received the pro-

tection of the challenged statute — C.C.§3294 and did not

even consider raising the issue of constitutionality until it

was too late, the principle of Memphis National Gas Com-

pany v. Beeler, 315 U.S. 649, 650-651, 62 S.Ct. 857, 859,

86 L.Ed. 1090 applies:

“It is not enough that an appellant could have

launched his attack upon the validity of the statute itself

as applied; if he has failed to do so we are without

jurisdiction over the appeal.’’

An examination of the trial court briefs below will show

that appellee Egan, because of the untimeliness (Blackman

v. McCoy, 169 Cal.App.2d 873, 339 P.2d 169) of the ap-

pellant’s constitutional challenge, never responded to it in

the courts below, beyond string-citing a long line of Cali-

fornia cases holding punitive damages constiwutional. Ap-

pellee never responded to the voluminous brief submitted

at the last minute to the California Supreme Court on the

subject. Nor did that court treat appellant’s contention be-

yond doing what appellee Egan had done — string-citing

the cases upholding the constitutionality.

To now force Appellee Egan (who is not in an econom-

ically strong position because of his injury) to meet this

challenge at this late date would be prejudicial to appellee

and force him to undertake a vast amount of costly legal

research on defendants’ esoteric claims. Out of the hundreds

of hours spent on this case, appellee and his counsel have

spent less than two hours meeting appellant’s spurious

claim. Prejudice definitely would result to appellee. (Cf.

Gomez v. Perez, supra.)

The ‘‘Federal Question’’ Is a Johnny-Come-Lately Ar-

gument That Was Not Raised at the Trial Court

Level.

Michael Egan, appellee-plaintiff, filed his Complaint on

February 22, 1973 against Appellant Mutual of Omaha In-

surance Company. That Complaint sought punitive dam-

ages.

Appellant Mutual of Omaha answered the Complaint,

along with the individual defendants’ named therein, and

pa:

no defendant demurred, or made a motion to strike punitive

damages on any ground, let alone on the ground that they

were unconstitutional.

Ultimately, the case came to trial slightly more than a

year later. At no time during the course of trial did any

defendant contend that punitive damages were unconstitu-

tional. .

No party filed any trial brief with the court so contending.

In California. there are standard jury instructions con-

tained in the ‘‘Book of Approved Jury Instructions’ (West

Publishing Co. Sth Ed.) which are given to the jury. To the

extent that the Book has no jury instructions, they are drafted

by the parties and submitted to the trial judge. Regardless

of the source of the instructions i.e., whether they are in

the Book or submitted by counsel, no jury instruction is

given until counsel and the court have a discussion as to

the applicability or non-applicability of a requested instruc-

tion. In the event of failure of agreement, the court makes

the decision as to which instructions are given. If the other

side’s instruction is given, it is deemed excepted to. In this

particular case at no time did any defendant object or ad-

vance in the trial court the issue that punitive damages are

unconstitutional. To the contrary, the actions of the defend-

ant were that they were constitutional — the defendants

themselves offered numerous jury instructions on guides for

the jury in determining punitive damages. Some of those

were given.°

Offering instructions on an issue that the party claims

improper for the jury waives the error, as does failure to

affirmatively plead it as a defense in the answer. Witkin,

*Clerk’s Transcript 484, 522. Other instructions offered by the de-

fendant on the subject were refused as redundant or incorrect. (CT 537,

538, 539, 540, 544, 546, 547, 548, 549, 550 and 551.)

a

California Procedure, 2nd Edition (1971) pp. 2510-2511,

and pp. 4257-4258; Fletcher v. Western Nat. Life Ins. Co.,

10 Cal.App.3d 375, 407, 89 Cal.Rptr. 78, 98; Miller v.

Dollar Steamship Lines, 19 Cal.App.2d 206, 211, 64 P.2d

1163, 1166.

None of these instructions, or any argument carried on

during the trial even hinted at the appellant’s now made

claim that punitive damages are unconstitutional.

In fact, when the appellant filed its motion for Judgment

Non Obstante Veredicto, the unconstitutionality argument

was not even mentioned. This was on December 11, 1974

— almost a year and one-half following the filing of the

original lawsuit!!!

In fact, the first hint ever that the appellant indicated that

it would make this argument was when it filed some of the

papers in support of the motion for new trial on December

23, 1974 where it stated it ‘‘will later argue’’ about un-

constitutionality (emphasis added).

In fact, appellant barely managed to deliver the argument

in support of unconstitutionality until January 3, 1975 —

a couple of days before oral argument on the new trial

motion.

Appellant’s contention was clearly late.

California Code of Civil Procedure §657(7) states that

‘‘error in law, occurring at the trial and excepted to by the

party making the application’’ is a ground for granting a

new trial (emphasis added).

But, the appellant never excepted to this ‘‘error’’ at the

time of trial. It waited until after the trial.

Further, California Code of Civil Procedure §659a states

that within ten days after serving the notice of motion for

new trial, the moving party must serve all affidavits upon

the adverse parties to be used in support of a motion for

a

new trial. No affidavits were served supporting appellant’s

just-raised contentions of. unconstitutionality.

Such lateness accounts for the ignoring of the claim by

the trial court (Jurisdictional Statement Appendix B); the

ignoring of the so-called ‘‘issue’* by the Court of Appeal

in this intermediate-level appellate opinion; and for the short

shrift given it by the California Supreme Court (other than

its notation that constitutionality of punitive damages had

long been upheld in a line of cases (both State and Federal)).

(Jurisdictional Statement Appendix A, pp. A8-A9.)

There is no validity to the further claim of Appellant

Mutual (Jurisdictional Statement, p. 5) that:

‘At trial, appellant unsucessfully sought to limit the

standardless and chilling application of §3294 during

argument On proposed jury instructions. See .. . Cl.

30. 932.""

This simply is not true and is an example of appellant’s

virtual concealment from this Court of its cold, calculated

acts aimed at depriving appellee Egan of his substantial

rights under his insurance policy.

Defendants’ instruction referred to reads:

‘‘An insurance company is privileged, in pursuing

its own economic interest, te assert its legal rights in

a permissible way if it has a good faith belief that such

rights exist. If it has such a good faith belief, the

insurance company is further privileged to communi-

cate its position to its insured even though it is sub-

stantially certain that by so doing it will cause him

emotionai distress. (Cl.Tr. 552)’’. (emphasis added. )

The appellant, by this instruction, would have put the

issue of appellant’s breach of its duty of good faith to the

jury as a question of fact.

to sb a

a re eo ne ct TR RE RR:

‘evil siat

But by This Time, the Trial Court Had Ruled That

Appellant Had, in Bad Faith, Denied Egan His Ben-

efits Under the Policy. Mutual Had Admitted Lia-

bility (as a Practical Matter) by This Time.

The trial court determined, as a matter of law, that Egan

had been unjustifiably denied his benefits, and that the in-

surance company knew or should have known it.

In other words there was no question of fact for the jury

to decide on liability for compensatory damages; only the

amount was left as a jury issue.

There was never a legitimate position that the insurance

company had that it could communicate to its insured that

would, at the same time, cause the insured emotional dis-

tress, and be privileged because the insurance company

acted in bad faith from the start.

The facts in this case were so clear cut (and as noted in

the next section admitted by appellant’ s counsel) that noth-

ing in them gave rise to such privilege.

But for the lack of the necessary facts to cause application

to this particular case, the appellant’s proposed instruction

is a perfectly valid principle of California law.

Fletcher v. Western National Life Insurance Company,

10 Cal.App.3d 376, 395, 89 Cal.Rptr. 78 holds as a prin-

ciple of law, that if an insurance company has justified

doubts about its policyholder’s entitlement to benefits it may

communicate those doubts to the insured even though it may

Cause serious and substantial harm to the insured.

But here, the trial court (which was sustained both by the

intermediate Court of Appeal and the California Supreme

Court) found that the Appellant Mutual of Omaha had no

reasonable doubts as to Appellee Michael Egan’s entitle-

ment to benefits.

Since the trial court thus directed a verdict for Appellee

Michael Egan on the issue of his right to some compensatory

eae me

benefits (to be determined in amount by the jury) (as op-

posed to punitive damages) the foregoing instruction has no

sort of meaning as attributed to it by appellant.

It is clearly an effort by appellant to bootstrap its way to

the necessary position that it timely raised the federal ques-

tion.

Appellant Mutual of Omaha Inflicted Carefully Calcu-

lated Harm Upon Its Policyholder Michael Egan.

In 1962, Mr. Michael Egan purchased the disability in-

come insurance policy which became the subject of this

litigation. He purchased the policy, which would pay him

$200 a month in the event of total disability, for protection

for himself and his family because of his hazardous occu-

pation as a roofer (RT 91, lines 22-25).

Essentially, the policy provided for lifetime total disa-

bility benefits if the disability was the result of an accidental

injury but only three months of benefits if a total disability

was a result of a nonconfining sickness. (A confining sick-

ness also provided lifetime benefits.)

On May 11, 1970 Mike Egan, a Mutual of Omaha pol-

icyholder, Stepped on a ladder, it broke, and he fell one

Story to the ground (RT 95, lines 16-23). Mutual verified

the truth of this (RT 159, lines 17-20), and opened the file

as an accident claim (RT 160, lines 8-1 1; 237 lines 10-12).

The policy expressly promised (CT 32) **To serve with

justice and integrity those whose protection has been

entrusted to our care. To support right principles and

oppose bad practices in health and accident insurance.

To develop character, ability and knowledge. To value

honor above profit. Thus to be faithful to ourselves and

to those we serve.”’

Egan had filed his claim for benefits on approximately

May 20, 1970 (RT 102, lines 23-25). Despite its promise

om

Mutual made no payment, which required Egan to travel

to Los Angeles with a friend to personally ask for payment.

Upon his arrival he was taken to see Mutual’s managing

agent, Mr. Segal. The first payment for the accident was

then made at the end of September 1970 (RT 103, lines 10-

19).* Segal promised regular checks (RT 104).

Egan’s next contact with Mutual of Omaha was in No-

vember 1970 when Thomas McEachen, ‘‘Manager of Ben-

efits Department’’ for Mutual of Omaha, stopped by Egan’s

house and insulted him, laughed at him, and finally called

him a fraud (RT 106) in front of his family. He refused to

pay Egan and told Egan he would get no more benefits (RT

107). But on February 5, 1971 McEachen wrote to Egan

enclosing a $626.66 draft stating this ‘‘represents full pay-

ment of benefits’’ under the policy. All payments up to this

point were coded and classified as payments on an ‘‘acci-

dent”’ claim.

Around the first day of March 1971 Egan underwent back

surgery due to the accident (RT 114, lines 6-9, 275, lines

1-5).

About May 6, 1971 Mutual had consciously decided to

convert Egan’s ‘‘accident’’ to a ‘‘sickness’’ (CT 299-300).

Approximately three weeks before this conversion Mutual

knew that Egan had had his back operated on and that it

was now likely to be a long-term disability. The post-surgery

form received on April 15, 1971 (CT 295) asked the doctor

to fill in if it was due to ‘‘sickness’’ or ‘‘injury.’’ The

portion relating to sickness was left blank, the portion re-

lating to injury was filled out. At CT 296 it was stated on

the form by the doctor that the patient had ‘‘increasing

‘This was nearly a five month delay. In the court below Mutual

characterizes this as an ‘‘on-the-spot’’ payment; despite this being ap-

' proximately five months’ post-accident, they only paid him for three

months.

on

difficulty over the last four to five years with several dif-

ferent accidents. ”’

After deciding to convert the claim to a sickness, Mutual

had its corporate agent stop by appellee’s house in mid-May

1971 (RT 588, lines 4-6) to tell him he was no longer

entitled to benefits because he was disabled due to sickness

(RT 117, lines 9-10, 23-28, 118, lines 1-9, 161, lines 25-

28, 162, lines 1-13). If Egan was disabled as a result of

sickness, and not accident, the company would save, over

$40,000 in benefits (RT 253). Appellant’s counsel figured

at trial exactly $45,600 would be saved by this decision.

(RT 900).

On the subject of this termination the verbatim testimony

of the appellant and its corporate agents is now set forth:

Mr. Romano, the home office analyst who was present

when the wrongful conversion took place, said when ques-

tioned by Egan’s counsel:

‘“Q. Sir, AT THE TIME a person such as yourself,

being an experienced analyst, would know that that

type of action would be wrong; is that correct?

A. That's corxect.’’ (RT 427, lines 8-11). (em-

phasis added.)

‘“‘Q. Can you tell us why action was taken to ter-

minate Mr. Egan’s benefit without consulting one med-

ical doctor?

A. No sir, I can’t.

Q. That's quite improper, isn’t it?

A. It would be wrong, I believe, yes.’’ (RT 426,

lines 19-23).

‘“A. Well, I did noi make the decision.

Who made it?

I assume Mr. Segal made it.

You with him at the time (sic)?

That’s correct.’’ (RT 428, lines 22-26).

POPn

oa

‘*Q. [Reading from the claims file, it said] .. .

When this [a Retail Credit Report] is received, further

contact will be made with policyholder to settle and

close on basis of sickness! Now, that got back to the

home office, didn’t it?

A. That is correct.’’ (RT 423, lines 22-26).

Romano further testified at RT 423, lines 23-25 that he

‘‘rode with Jon Segal to secure a copy of the medical records

and checked the Workmen’s Compensation records.’’ And

at RT 424, lines 25-26 testified that ‘‘with the information

we developed, it did raise a question of sickness versus

injury.’’ As shown, a fabricated distinction.

Segal testified:

‘*Q. Are you [Mr. Segal] prepared to concede at

this time that the company did not handle Mr. Egan’s

claim properly in May of 1971?

A. Yes.’’ (RT 322, lines 23-25).

‘‘Q. I think you have testified — well, let me ask

you.

Having looked at the file and having been sitting

here for the earlier part of the day and answering ques-

tions, do you have any opinion as to whether or not

this claim was handled properly on the 19th of May,

1971?

A. Well I have pondered this considerably, and I

feel that it could have been seme more handling done

at that time. (sic)’’ (RT 321, lines 7-14).

‘*Q. Wouldn’t that have been the proper thing to

do [check with the operating physician as to the cause

of disability], sir?

A. I believe so. (RT 250, lines 20-22)... . [BJut

certainly further investigation should have or could

have been done.’’ (RT 251, lines 3-5).

‘*Q. If you had it to handle at the present time,

i.

and if you have any opinion, how would you handle

it?

A. Well, for sure I would make certain that the

doctors were contacted and, perhaps, an independent

medical examination would be suggested and done,

perhaps.

And further review by a medical department, by our

medical department, claims department.’’ (RT 371,

lines 15-21).

Agent McEachen testified:

‘‘Q. Do you feel that action by the company was

wrong? (RT 371, lines 8-9).

THE WITNESS: There could be a question, yes. |

meant, could be more information than may be nec-

essary in order to — but this is after — this is hindsight,

I mean. Truly — I meaii, maybe I am kinda dense.”’

(RT 371, lines 16-19).

Willard Gustin, a Vice President and Manager of Con-

tinuing Disability Department, brought from Omaha, Ne-

braska testified:

‘“Q. On May 11 someone now back at Mutual of

Omaha, number one, knew that Mr. Eagen had under-

gone surgery as a proof of loss from the doctor came

in, and then, number two, agent Jon Segal was about

to convert this to a sick.. ‘ss claim?

A. Somebody saw this. There isn’t any doubt about

it, because there is an initial here.

Q. Okay. Well, now, this conversion from an ac-

cident to a sickness would be something of importance,

would it not?

A. Yes.’ (RT 588, lines 20-28). (Emphasis added.)

‘““Q. Conversion from an accident claim to a sick-

ness claim, would in effect deprive a policyholder out

Pn

ae vine

BE DEONY

a

of lifetime benefits.

Do you understand that?

A. Yes.’’ (RT 604, lines 17-21).

‘‘A. And your question was, should it (Egan’s

claim] have been set up as long-term disability then?

Right at that very time [that Egan was terminated from

payment under his policy]? If it would have been seen

by an analyst, absolutely should.

Q. And there is no doubt that at that time it should

have been seen by an analyst?’’ (RT 606, lines 16-28).

‘A. In my opinion it should have.’’ (RT 607, line

1).

Gustin then tried to explain that a slip-up may have oc-

curred and maybe Egan’s file got lost in a corporate

‘‘crack.’’ But when questioned about a California Depart-

ment of Insurance inquiry he agreed that some correction

should immediately have taken place!

‘‘That letter [from the California Department of In-

surance] that you showed me is here [in the file], July

7, 1972, that should have gone to a member of the

staff of the department that handles this type of letter

and something should have been done, I agree. I agree

with you 100 percent.’’ (RT 609, lines 1-4) (Emphasis

added).

‘“‘Q. Certainly as of that date, even if the file fell

in that deep wide crack, someone would be obliged to

pick it up and analyze it and see what happened, is that

right?

A. It would appear so.’’ (RT 598).

Appellant’s Attorney in final argument told the jury, *‘!

think compensation is clearly warranted, but I think that is

enough’’ (RT 878, line 28, 881, line 1). And later on said,

‘‘Ladies and gentlemen I think that’s fair compensation. No

one is trying to say that the decision was right. Everybody

=

has said it was wrong’’ (RT 901, lines 22-24, 900). And

Mr. Doutre, defense trial attorney, in final argument stated

that all Mutual employees, well “they thought it was a

wrong decision. Well, fine. We say that. .. .” (RT 903,

lines 11-12 ).

Mutual’s attorney Wild, in his argument before the judge

on the new trial motion stated,

‘’. . . I believe that every Mutual of Omaha witness

who testified in the case testified that in retrospect,

looking back, further follow-up was probably in order

or was in order in that the decision at the time that it

was made was not based upon enough information.”’

THE COURT: ‘“‘I believe that they were unanimous

in that.’’

Mr. Wild: ‘‘I believe they were, too.’’ (RT 990,

lines 21-28, 991, line 1).

On this basis of the foregoing testimony, the trial judge

found that Mutual only violated the duty of good faith and

fair dealing (CT 481) and reaffirmed (after careful actual

review of the entire transcript (RT 968, lines 20-27) the

correctness of his decision to remove from the jury the issue

of good faith Mutual attempted to inject by the previously

quoted proposed instruction.

The trial judge DID NOT direct a complete verdict for

the appellee as to all defendants.

As to Mutual of Omaha, he left to the jury the question

of whether this breach of the duty of good faith and fair

dealing caused the appellee any compensatory damages

(both as to the amount and their nature, that is, whether

Egan was entitled to future policy benefits because of con-

tinuing disability, and whether he deserved any emotional

distress damages whatsoever) and he also left the question

Sncheeincheisl ES aD TENSE O BK sits

of whether the appellant’s acts were of such sufficient evil

to warrant punitive damages, and if so, the amount of the

punitive damages.

Rigid State Standards Governing the Circumstances of

Award and Amount of Punitive Damages Supply

Ample Protection to Defendants.

Appellant Mutual of Omaha’s counsel should be repri-

manded for cunningly misciting the case of Brewer v. Sec-

ond Baptist Church, 32 Cal.2d 791, 801, 197 P.2d 713, at

719. At its Jurisdictional Statement (p. 15, footnote 18) it

quotes the Brewer decision as stating ‘‘the granting or with-

holding of the award of punitive damages is wholly within

the control of the jury and may not legally be influenced by

any direction of the court.’’ (Appellant’s emphasis).

Appellaht’s placement of the ‘‘period’’ after the word

‘court’ in the above quotation gives the distinct impression

that that is a complete sentence of the California court.

This is false. The appellant has purposely misled this

Court by leaving off the rest of the sentence that reads ‘‘that

in any case the plaintiff is entitled to them.”’

In fact, the whole paragraph from which that sentence

comes is directed to the proposition that a plaintiff is never

entitled to punitive damages no matter how gross or evil the

conduct of the defendant.

That paragraph noted that in California once a plaintiff

shows the commission of a tort then plaintiff is entitled, as

a matter of right, to compensatory damages.

The court held, however, that an entirely different rule

prevailed in the situation of punitive damages — no matter

how evil or wrongful or malicious the conduct shown by

the plaintiff, he is never entitled as a matter of right to

punitive or exemplary damages.

Likewise, no court may ever direct a verdict for the award

of punitive damages in a jury trial.

Pn,”

And that is exactly what the Supreme Court of California

was saying in the sentence prior to its butche byA

Mutual. Kihicer nrg

; Mutual also left off the next succeeding sentence that says

upon the clearest proof of malice in fact, it is still the

exclusive province of the jury to say whether or not punitive

damages shall be awarded.”’

And in this case (CT 486) the jury was instructed ‘‘the

law provides no fixed standard as to the amount of such

punitive damages, but leaves the amount to the jury’s sound

discretion, exercised without Passion or prejudice.’

The determination of whether the jury acted under passion

or prejudice is controlled by approximately six standards

The California Supreme Court in the Egan opinion referred

to its recent decision in Neal v. Farmer's Insurance Com-

pany, 21 Cal.3d 910, 148 Cal.Rptr. 389.

The undersigned, as amicus on behalf of the California

Trial Lawyers Association, urged the court to collect to-

gether and review all applicable standards for review of

—— damages in one case. The court apparently took

the suggestion, and so did at 21 Cal.3d 927-928

Cal.Rptr. 399. a

A brief examination of those factors now follows.

A. The First Major Standard of Judicial Review Available to the

Court Is the “*Exemplary” Standard, Sometimes Cailed the

“‘Deterrent’”’ Standard.

Public policy recognizes that certain types of conduct

represent a greater threat to society than do other types of

wrongful conduct, and the need for large awards is greater

or lesser, according to the widespread fallout of such acts

among the general public.

In certain cases, involving an emotional, sudden utterance

of a slanderous statement by one individual to another, with

few third parties present, the court recognizes that iho is

less of a public danger of repetition and widespread harm

than in cases where the conduct is more deliberate and where

it represents the threat of similar conduct to vast members

of the public. In the area of insurance, where the types and

forms of insurance are extremely limited, the right of the

public to count on fair treatment from insurance companies

selling such policies becomes paramount. As the Court

noted in Gruenberg v. Aetna Insurance Company, 9 Cal.3d

566, 566, 108 Cal.Rptr. 480, 491, ‘‘the insurer has insisted

upon and assumed high fiduciary obligations by the express

terms of the only type of insurance an insured can buy.’’

The possibility that a company such as Mutual may at-

tempt to add to its billion dollars in assets by classifying

clearcut accidents as sicknesses, particularly when such ac-

tions were deliberate, done by high-ranking managerial em-

ployees and continued over a long period of time, represents

a threat to the public’s financial security that is staggering

in its national implications.

This is particularly so when done by an extremely large

company after point blank warnings by the State Insurance

Commissioner that it is treading on very thin ice, and after

being warned prior to actual suit that punitive damages will

be sought if a lawsuit is filed.

Such a callous attitude by an extremely large company

to disabled individuals of small means encompasses very

many people indeed.

A need for an example or deterrent in certain cases is

objectively apparent, based upon the arithmetic scope of the

company itself (a completely objective fact) and its inter-

relationship with the arthmetic scope of the industry within

which it operates (again, a completely objective arthmetic

fact). In such a situation, there is no vagueness. There is

only discretion and judgment in the trier of fact. This above

ae

principle of deterrence is set forth in many cases — Ward

v. Taggart, 51 Cal.2d 736, 336 P.2d 534; Hagen v. Gal-

lerano, 169 A.2d 186; Wetherbee v. United Insurance Com-

pany of America, 265 Cal.App.2d 921, 71 Cal.Rptr. 769;

Cf. Cunningham v. Simpson, 1 Cal.3d 301, 81 Cal.Rptr.

855.

Appellant Mutual is being punished for the magnitude of

the wrong perpetrated, and its misuse of corporate wealth.

The cases are clear that the imposition of a fine by a civil

jury by a preponderance of the evidence test does no vio-

lence to the constitution. United States v. Regan, (1914)

232 U.S. 37, 46-49, 34 S.Ct. 213, 58 L.Ed. 494.

Nor is there any allure to the appellant’s argument that

it is really the ‘‘policyholders’’ that are being punished

because it is a mutual insurance company owned by the

policyholders. Any money appellant Mutual of Omaha

would pay to the appellee does not come from the pockets

of Mutual policyholders. The mutuality of this appellant is

sham. Appellant keeps ail the money and never pays cash

dividends to its policyholders. This was established by ap-

pellant’s counsel at the trial (RT 725-726). Its refusal to pay

cash dividends clearly explains how it has amassed its cor-

porate wealth.

The conclusion that the insurance company will be driven

from the field of insurance by application of the deterrent

standard is somewhat flip. Logically, it is advocating that

the insurance companies become a law unto themselves and

opts for a situation of irresponsiblity reminiscent of that

which lately occurred in the nation’s capital.

In reality, when the insurance company does what it is

supposed to do and stops with the fraud, the malice, and

the oppression, then there will be no punitive damage awards

to pay. The cost of insurance will not be affected because

_

operation of an insurance company (as would be the payment

of personal injury awards in malpractice cases).

Obviously, the way to keep the cost of insurance down

to the public and at the same time encourage payment of

due benefits is to make the management responsible.

Nobody pays a fine unless the law is broken. For one to

suggest that punitive damage awards will be unbearable to

the insurance company is a sad commentary on that insur-

ance company’s practices and suggests that the insurance

company has entered into the wrong field of corporate en-

terprise.

B. The Second Standard of Damage Review Is the Nature of the

Wrongful Acts.

The legally malicious and wrongful acts sued upon can

be as varied as letting out the air of a neighbor’s tires or

shooting them out with a rifle while the neighbor is in the

car. These two acts are qualitatively and quantitatively dis-

tinguishable, from which different amounts of damage

would necessarily flow.

Similarly, the wrongful act might involve lower echelon

people with limited discretion, acting upon sudden impulse,

where in other cases the wrongful act might involve delib-

erate, manipulative, grossly unconscionable exercises of

discretion which result in an oppressive denial of plaintiff’s

rights over a prolonged period of time. Schroeder v. Auto

Drive Way Company, 11 Cal.3d 908, 921, 114 Cal.Rptr.

622, 631; Ferraro v. Pacific Finance Corporation, 8

Cal.App.3d 339, 87 Cal.Rptr. 226, 231; G. D. Searle and

Company v. Superior Court, 49 Cal.App.3d 22, 122

Cal.Rptr. 218; Toole v. Richardson-Merrell, 251 Cal.App.2d

689, 60 Cal.Rptr. 398; Sturges v. Charles L. Harney, Inc.,

165 Cal.App.2d 306, 331 P.2d 1072.

The evidence clearly shows that the actions of Mutual of

Omaha occurred over a long period of time from the time

—

Egan was initially injured through McEachen’s November

1970 visit calling him a fraud through receipt of the April

15, 1971 claims form showing disability due to accident,

through actual conversion of his accident to sickness,

through the ignoring of the California Insurance Commis-

sioner’s inquiries over a space of a year and a half. Clearly,

McEachen and Segal, the. corporate managers, were of a

completely different category than June Bush, a lowly cler-

ical employee flown from Omaha by Mutual to say she

recognized her initials on the claims file jacket.

C. The Third Major Standard on Damage Review Is the Wealth

of the Defendant.

This is a constitutionally definite standard, capable of

determination down to the finest double entry decimal point.

Bertero v. National General Corporation, 13 Cal.3d 43,

65, 118 Cal.Rptr. 184, 200; Forte v. Nolfi, 25 Cal.App.3d

656, 689, 102 Cal.Rptr. 455, 477. This prinicple of eval-

uation recognizes that the same malicious act done in the

one instance by a poor person, and in the second instance

by a wealthy person, may warrant a different penalty, which

penalty shall be weighed against the wrongdoer’s net worth.

Ferraro v. Pacific Finance, 8 Cal.App.3d 339, 349, 87

Cal.Rptr. 226, 231-232.

Thus it is that a $500.00 penalty may be adequate pun-

ishment for a man with assets of $3,000.00 and a net worth

of $1,000.00, whereas the application of the same 50%

Standard of taking of net assets may be excessive when

gpplied to a wealthy corporation, especially viewed in re-

lationship to the other applicable standards. Certainly,

where the award amounts to only a fraction (less than 2%)

of the company’s total assets, it cannot be held to be con-

stitutionally excessive. Horn v. Guarantee Chevrolet, 270

Cal.App.3d 477, 484, 75 Cal.Rptr. 871, 876.

iii.

D. The Fourth Major Standard of Judicial Review Is a Compar-

ison of the Award With the ‘“‘Earnings’’ of Appellant.

In the present instance, the net earnings of Mutual of

Omaha for the year just prior to the award of the jury in

this particular case was in excess of $22 million dollars.

Comparison with the earnings of the defendant is absolutely

proper. Wetherbee v. United Insurance Company of Amer-

ica, 18 Cal.App.3d 266, 271. The tax effect is interesting.

Starting from appellee Egan’s side, the United States

Supreme Court in the case of Commissioner of Internal

Revenue v. Glenshaw Glass Company, 348 U.S. 426 held

that punitive damages are taxable. The Court stated:

‘“The common question is whether money received

as exemplary damages . . . must be reported by a tax-

payer as gross income under . . . the Internal Revenue

Code . . . The Commissioner determined a deficiency

claiming as taxable the entire sum less only deductible

legal fees . . . Here we have instances of undeniable

accessions to wealth, clearly realized, and over which

the taxpayers have complete dominion . . . We would

do violence to the plain meaning of the statute . . .

were we to say that the payments in question here are

not gross income.”’

Thus, the proceeds as to Egan are taxable. At the rate of

70% federal income tax because the punitive damages would

represent ‘‘unearned income’’. Additionally, the State of

California exacts 10% maximum taxes on the award.

Therefore 80% of the Money Goes Back to the General

Public in the Form of Taxes.

Consequently, appellant is ill-equipped to claim that the

appellee Egan has received a windfall. In essence, he has

brought a taxpayers suit on behalf of the general public,

including Mutual of Omaha policyholders, who otherwise

would never see any cash payments from Mutual.

— S

Likewise, the Court may take judicial notice that under

the Internal Revenue Code the corporate tax structure is

approximately 50% and that payments of judgments, as well

as attorneys fees incurred arising out of business-related

purposes are fully deductible from gross income. Therefore,

keeping in mind the 50% tax rate on corporate earnings,

Mutual would be out of pocket only $1.25 Million Dollars.

The award is not repugnant to the Constitution.

E. The Fifth Standard of Judicial Review Is the Comparison Be-

tween Actual Damages and Punitive Damages.

Once again, we have an objective basis of comparison.

In fact, the standard of review is so easy of application that

there has been a temptation to develop it as a sole slot-

machine-like answer to all cases. It is so definite and easy

of application that some courts have given into the temp-

tation, and sometimes with disastrous results. The fact that

this standard must be used in connection with the other

Standards is clearly demonstrable since the cases will run

the gamut from a man shooting at cars on a roadway, causing

possible serious injury and a $1.00 flat, to the same man

causing the same flat tire by letting the air out of his neigh-

bor’s tires while the neighbor sleeps.

Would the 2,000:1 ratio of Finney v. Lockhart, 35 Cal.2d

161, 217 P.2d 19, 21, cover the damage done in both cases?

Certainly, the 200:1 ratio of the Wetherbee, supra decision

would in no way be adequate to cover the first course of

conduct where the threat of death coincided with the advent

of the same $1.00 in compensatory damages. Depending

on the other facts in a given case, the ratio is, at best, only

one of the guidelines to be used. It has its uses, but such

ratios can no more be the single automatic criterion of review

than can the standard insurance adjuster’s settlement ratio

of ‘‘three to one’’ general to special damages be an answer

to all cases in a personal injury field. Such a single standard,

while certain, cannot become the automatic standard of ap-

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pellate review of jury decisions. Bertero v. National General

Corp., 13 Cal.3d 43, 65, note 12, 118 Cal.Rptr. 184, 200,

note 12.

F. The Sixth and Final Standard of Judicial Review Is the Verdict

Comparison Standard.

This standard obviously cannot be used by the jury, but

only by an appellate court. It is used with caution.

The problem with using such a standard on review is that

the only argument that can be made is that the award is

‘too high’’ or ‘‘too low’? — but how? where? The other

Standards are really the more intellectually probative ones.

What is high in one jurisdiction may be low in another.

In a new area of tort law, where the awards have been

developing for a few short years, it is almost impossible to

get any meaningful comparison on some ‘‘absolute amount”’

basis. Times, social needs, policies of industries, and money

values will necessarily all operate to defeat any such absolute

standard; but admittedly, this standard, too, is there to be

used by the reviewing court together with the other five

standards. The cases impose upon use of this particular

appellate standard the requirement that such review occur

with great respect for the opinion of the jury in this area

and that it be done with great deference to the opinion also

of the trial judge. The cases indicate that it be avoided if

there is substantial evidence to support the award. Bertero,

supra; Finney v. Lockhart, supra; Wetherbee, supra; Horn

v. Guaranty Chevrolet, supra.

Appellant Mutual of Omaha Is a Fidiciary to Appellee

Michael Egan, and Must Fairly Investigate His

Claim.

As is evident from the tenor of the California Supreme

Court opinion, it considered the securing of policy benefits

to injured and disabled policyholders to be of prime public

policy for the courts of the State of California. As pointed

out, supra, the inability of the Department of Insurance for

—

the State of California to effectively secure redress to in-

dividual policyholders for individual wrongs reinforces the

need for effective private litigation.

The appellant would lead the Court to believe that the

duty of an insurance company to serve its policyholders by

investigating their claims is a new, novel and unique prop-

Osition of law to the State of California that never existed

prior to the Egan decision.

From the earliest days, the courts of the State of California

have followed the holding of the United States Supreme

Court in the case of German Alliance Insurance Company

v. Lewis, 233 U.S. 389, 34 S.Ct. 612, 620, 58 L.Ed. 1011

which was expressly adopted in California in the case of

Caminetti v. State Mutual Life Insurance Company, 52

Cal.App.2d 321, 126 P.2d 165, 168 which stated:

‘‘To the contention that the business is private, we

have opposed the conception of the public interest. We

have shown that the business of insurance has very

definite characteristics, with a reach of influence and

consequence beyond and different from that of the or-

dinary businesses of the commercial world, to pursue

which greater liberty may be asserted. The transactions

of the latter are independent and individual, terminating

in their effect with the instances. The contracts of in-

surance may be said to be interdependent. They cannot

be regarded singly or isolatedly, and the effect of their

reiation is to create a fund of assurance and credit, the

companies becoming the depositories for the money

of the insured, possessing great power thereby, and

charged with great responsibility.’’

Subsequent to the Caminetti case the California Supreme

Court in the 1940’s in Bollinger v. National Fire Insurance

Company, 25 Cal.2d 399, 154 P.2d 399, 406 squarely

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placed the burden of a fiduciary duty upon insurance com-

panies as to its insureds.

Everytime the question has come before the court it has

held that insurers are fiduciaries to their insureds growing

out of the contractual relation, owing the highest standard

of fair dealing to them, including the duty to affirmatively

take action to disclose to them the basis of their decisions.

Nelson v. Abraham, 29 Cal.2d 745, 177 P.2d 931, at 934;

Gruenberg v. Aetna Insurance Company, 9 Cal.3d 566, 108

Cal.Rptr. 480; Delos v. Farmers Insurance Company, 93

Cal.App.3d 642, 155 Cal.Rptr. 843, and Egan are just some

of the cases that have so held. All of them recognize the

inherent purpose common in disability funds to be that they

‘“*be liberally construed to promote their beneficent

purpose (citation omitted) . . . to protect the reasonable

expectations of those whose reliance is induced that

underlie the rules of construction in favor of the insured

in insurance cases and in favor of the party of reduced

bargaining power in cases involving other standardized

insurance contracts. . . . Another [purpose] is to pro-

vide subsistence. . . .”’ Bellus v. City of Eureka, 69

Cal.2d 336, 71 Cal.Rptr. 135, 144.

Appellant Mutual’s claim that prior to Egan there was

no duty upon an insurance company to investigate the claims

of its insured lie ill in its mouth. More than a year before

Mutual’s pe:petration of its calculated acts to deprive Egan

of his benefits, the California Supreme Court had decided

the case of Barrera v. State Farm Insurance Compamy, 71

Cal.2d 659, 79 Cal.Rptr. 106, 109, 113, 114 and 119,

where it stated:

‘“We conclude that an automobile liability insurer

must undertake a reasonable investigation of the in-

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sured’s insurability within a reasonable period of time

from the acceptance of the application and the issuance

of a policy. . . . [This is] [b]ecause of the ‘quasi-pub-

lic’ nature of the insurance business and the relationship

between the insurer and the insured (footnote omitted),

the rights and obligations of the insurer cannot be de-

termined solely on the basis of rules pertaining to pri-

vate contracts negotiated by individual parties of rel-

atively equal bargaining strength. . . . the reasonable

expectation of both the public and the insured is that

the insurer will duly perform its basic commitment: To

provide insurance. ... [defendant’s claims] would

frustrate the purpose of the imposition of a duty upon

the insurer to undertake a reasonable time from the

acceptance of the application and issuance of the pol-

icy.”’

Defendant Mutual had ample warning both from Barrera

and other cases as to its required standard of conduct. (Crisci

v. Security Insurance Company of New Haven, 66 Cal.2d

425, 58 Cal.Rptr. 13; Comunale v. Traders and General

Insurance, 50 Cal.2d 654, 328 P.2d 198; Montoya v. H.C.

Moore and Mutual of Omaha Insurance Company, 7

N.Mex. 326, 422 P.2d 363, and Gray v. Zurich Insurance

Company, 55 Cal.2d 263, 54 Cal.Rptr. 104.)

In this particular case many amicus briefs were filed in

the courts below, most by the insurance industry. By the

time one finishes with these amicus briefs, it becomes ev-

ident that the dispassionate approach of Henry Kissinger has

simply been a role played; in reality these briefs are not

amicus to the court, but amicus to the insurance industry.

The general tenor of these briefs is that insurance com-

panies should not be liable for punitive damages because

of the great public need they serve by supplying benefits

to injured people. Their position is that their acts, no matter

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how malicious, should not be judged. The cry is that public

service demands that they be free from ‘‘harassment’’ and

the threat of the punitive damage lawsuit.

But as noted by the California Supreme Court this is an

unsound propostion — because of the varied role they play

in society they should be subject to punitive damages when

they callously overstep their legitimate bounds.

The California Supreme Court notes that an insurer who

has adopted willingly the fiduciary’s role should not be

given the license of corporate irresponsibility.

Directly and logically the Supreme Court of California

simply held that managerial agents who can spend the cor-

porate money, who can deny claims, who can allow claims,

and handle the majority of the population of the State of

California should not be allowed to consciously decide in

advance that the policyholders’ benefits will be cut off be-

cause they have decided to deem a fall from a roof to be

a ‘‘sickness’’ rather than ‘‘an accident.”’

Conclusion.

The California Supreme Court has held punitive damages

constitutional in the case of Bertero v. National General

Corporation, 13 Cal.3d 43, 118 Cal.Rptr. 184; Toole v.

Richardson-Merrell, Inc., 251 Cal.App.2d 689, 60 Cal.Rptr.

398; Fletcher v. Western National Insurance Company, 10

Cal.App.3d 376, 89 Cal.Rptr. 78, and Wetherbee v. United

Insurance of America, 265 Cal.App.2d 921, 71 Cal.Rptr.

769.

Carried to its logical extremes, appellant should be ar-

guing that the award of general damages of approximately

$78,000 made to appellee herein should likewise be declared

unconstitutional as void for vagueness. After all, the jury

was instructed in even less definite standards and California

Appellate Courts exercise even less control over awards of

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general damages than they do punitive damages. In fact,

the standard instruction to the jury is, according to the Book

of Approved Jury Instructions (14.13):

‘‘No definite standard or method of calculation is

prescribed by law by which to fix reasonable compen-

sation for pain and suffering . . . in making an award

for pain and suffering-you shall exercise your authority

with calm and reasonable judgment and the damages

you fix shall be just and reasonable in light of the

evidence. ”’

Yet appellant does not make this claim — the shallowness

of its position clearly shows through considered in this con-

text.

In conclusion, this case should be dismissed for lack of |

a timely raised substantial federal question, let alone one

created by an invalid statute. The constitutionality of pu-

nitive damages has been considered numerous times by the

California Supreme Court, both in light of California State

Constitutional, and Federal constitutional principles. Pu-

nitive damages have been found to serve valid public pol-

icies.

The same result should occur here that occurred in Hicks

v. Miranda, (1975) 422 U.S. 332, 344, 95 S.Ct. 2281,

2289, 45 L.Ed.2d 223 the Court held:

‘“We are not obligated to grant the case plenary

consideration and we did not; but we were required to

deal with its merits. We did so by concluding that the

appeal should be dismissed because the constitutional

challenge to the California statute was not a substantial

99

one.

Dated: February 7, 1980.

Respectfully submitted,

STEPHEN L. ODGERS,

Attorney for Appellee Michael Egan.