CLARK, J., Concurring and Dissenting. — I concur in the majority opinion insofar as it holds that included within the implied covenant of [825]good faith and fair dealing is a duty to properly investigate claims and that the evidence establishes as a matter of law that the insurer was negligent in investigating. I also concur in reversal of the judgment against Segal and McEachen. However, I dissent on two grounds from the majority’s determination that a punitive damage award is permissible in this action.
First, punishing insurance companies for their settlement practices will necessarily result in the industry passing its punishment costs on to the public in the form of increased premiums. By unjustly enriching the claimant, the public ultimately punishes itself. Secondly, even assuming punitive awards are proper against an insurer for its settlement practices, the evidence is insufficient to sustain the instant award. Undisputed evidence shows that when McEachen and Segal were denying further benefits, all medical reports available to them warranted rejecting plaintiff’s demands. An insurer should not be deterred from denying claims when the medical information supplied it by an insured’s doctors reveals the claims are not compensable. Moreover, the conduct of McEachen and Segal may not be imputed to the insurer for purposes of sustaining an award intended as punishment.
Self Punishment
Civil Code section 3294 provides: “In an action for the breach of an obligation not arising from contract, where a defendant has been guilty of oppression, fraud, or malice, express or implied, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.” An action based on an implied covenant must be considered an action arising from contract.
Punitive damages are an anomaly in our civil jurisprudence. The civil law is concerned with vindicating rights and compensating persons for harm suffered as a result of infringement upon those rights. A plaintiff is customarily made whole for infringement by compensatory damages; punitive damages awarded to him rather than to the government constitute a windfall or unjust enrichment for plaintiff. (See, e.g., Carsey, The Case Against Punitive Damages (1975) 11 The Forum 57, 60; Note, Insurance Coverage of Punitive Damages (1974) 10 Idaho L.Rev. 263, 268.)
The purpose of punitive damage is to punish wrongdoers; deterring further commission of wrongful acts. (Evans v. Gibson (1934) 220 Cal. [826476], 490 [31 P.2d 389]; Morris, Punitive Damages in Tort Cases (1931) 44 Harv.L.Rev. 1173, 1183.) In the usual case, risk of liability for compensatory damage provides a substantial deterrent against wrongful conduct, and additional deterrence furnished by the risk of punitive damage is marginal at best. (Long, Punitive Damages: An Unsettled Doctrine (1976) 25 Drake L.Rev. 870, 888; Ghiardi, The Case Against Punitive Damages (1972) .8 The Forum 411, 418; Note, The Imposition of Punishment by Civil Courts: A Reappraisal of Punitive Damages (1966) 41 N.Y.U.L. Rev. 1158, 1161-1173.)1
The principal criticism to the concept of punitive damage is that standards are so vague that the determination whether to award is left to absolute and unguided jury discretion. (Brewer v. Second Baptist Church (1948) 32 Cal.2d 791, 801 [197 P.2d 713]; Ferraro v. Pacific Fin. Corp. (1970) 8 Cal.App.3d 339, 351 [87 Cal.Rptr. 226].) And the damages when awarded are “wholly unpredictable amounts bearing no necessary relation to the actual harm caused.” (Gertz v. Robert Welch, Inc. (1974) 418 U.S. 323, 350 [41 L.Ed.2d 789, 811, 94 S.Ct. 2997]; Ghiardi, The Case Against Punitive Damages, supra, 8 The Forum 411, 413-414.)
Others correctly criticize when the cost of punitive awards may be passed on to the public, resulting in a public subsidy of plaintiff windfalls. (Note, Insurance Coverage of Punitive Damages, supra, 10 Idaho L.Rev. 263, 268; Carsey, The Case Against Punitive Damages, supra, 11 The Forum 57, 60.) Such result, obviously contrary to sound public policy (cf. Gov. Code, § 818 (no punitive damages against a public entity)), is nonetheless risked when punitive damages are awarded against an insurer for deficiencies in its claims practice. (Cf. Borer v. American Airlines Inc. (1977) 19 Cal.3d 441, 447 [138 Cal.Rptr. 302, 563 P.2d 858].) The risk becomes a certainty for mutual insurance companies like Mutual. Because future premiums are based largely on past loss experience and administrative expense in the industry, such premiums can be expected to reflect punitive damages paid by the industry. “The public, then, is in the peculiar and indefensible position of penalizing itself with the payment going as unjust enrichment to someone for whom the tort law, through the medium of compensatory damages, already fully provides.” (Long, [827]Punitive Damages: An Unsettled Doctrine, supra, 25 Drake L.Rev. 870, 888; Note, Insurance Coverage of Punitive Damages, supra, 10 Idaho L.Rev. 263, 268.)2
Because each insurer can be expected to attempt to increase its profits and reduce its losses, punitive awards will serve as a substantial deterrent.3 However, the question raised is whether the deterrent factor is of sufficient importance to justify penalizing the public to support the unjust enrichment of the plaintiff, or whether we should adopt special rules eliminating awards of punitive damages where it is likely the cost will ultimately be borne by the public.4
In determining whether the deterrent, factor of punitive damages warrants the public punishing itself to unjustly enrich the claimant, it must be borne in mind that there are alternative deterrents to improper insurer claim practices. An insurer improperly denying benefits and breaching its covenant of good faith and fair dealing is not only liable for all compensatory damages — including damages for mental distress — but can also expect to incur substantial counsel fees and litigation expenses. Considering such deterrent factor, I am of the view that the public should not punish itself for the unjust enrichment of the claimant, and we should not impose punitive damages for improper claims practices.
[828]Although in other situations actions for breach of the obligations imposed by the implied covenant of good faith and fair dealing have been said to sound in both contract and tort, it must be concluded that within the meaning of the punitive damage statute (Civ. Code, § 3294), such an action is one “for the breach of an obligation . . . arising from contract,” making the statute inapplicable.
Sufficiency of Evidence
Our courts have recognized that the law does not favor punitive damages, granting them only in the most outrageous cases. (Beck v. State Farm Mut. Auto Ins. Co. (1976) 54 Cal.App.3d 347, 355 [126 Cal.Rptr. 602]; Ferraro v. Pacific Fin. Corp. (1970) 8 Cal.App.3d 339, 351 [87 Cal.Rptr. 226].) In Gombos v. Ashe (1958) 158 Cal.App.2d 517, 526-527 [322 P.2d 933], Justice Peters enunciated the limited basis for punitive damages award: “Punitive damages are allowed in certain cases as a punishment of the defendant. They are not a favorite of the law and the granting of them should be done with the greatest caution. They are only allowed in the clearest of cases. In order to warrant the allowance of such damages the act complained of must not only be willful, in the sense of intentional, but it must be accompanied by some aggravating circumstance amounting to malice. Malice implies an act conceived in a spirit of mischief or with criminal indifference towards the obligations owed to others. There must be an intent to vex, annoy or injure. Mere spite or ill will is not sufficient. Mere negligence, even gross negligence, is not sufficient to justify such an award.”
Although malice may be proven by circumstantial evidence, the evidence must establish malice in fact rather than malice implied by law. (Bertero v. National General Corp. (1974) 13 Cal.3d 43, 66 [118 Cal.Rptr. 184, 529 P.2d 608, 65 A.L.R.3d 878].) Mere breach of the covenant of good faith and fair dealing is in itself insufficient to support a finding of intent necessary to justify an award of punitive damages. (Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, at p. 463 [113 Cal.Rptr. 711, 521 P.2d 1103]; Beck v. State Farm Mut. Auto Ins. (1976) 54 Cal.App.3d 347, 355-356 [126 Cal.Rptr. 602].) Negligent investigation of a claim, while constituting a breach of the covenant of good faith and fair dealing, does not establish malice in fact.
When an insurer has substantial credible evidence that no further benefits are due under the policy, its refusal to pay additional benefits, without more, may not serve as a basis for awarding punitive damages. If [829]the rule were otherwise, the trier of fact would have discretion to award punitive damages in any case when upon conflicting evidence it found a breach of the insurance contract. Insurers would be unable to litigate questionable claims and would be required to pay dubious claims in all cases to avoid potential liability for punitive damages. The evidence at trial in the present case was sharply conflicting as to whether any benefits were due under the policy in addition to those previously tendered.5
The majority base the allowance of punitive damages on the conduct of McEachen and Segal. Viewing the evidence most favorable to plaintiff, their conduct does not warrant an award of punitive damages.
McEachen
Between 1963 and 1970 — prior to his instant injuries — plaintiff claimed and received benefit payments for three separate back-related disabling injuries. Plaintiff was injured in May 1970. He made a fourth claim in June for accidental back injury suffered during the course of his employment. Portions of the claim form were completed by both plaintiff and his physician. The physician estimated plaintiff would be able to return to work in August 1970. In September plaintiff upon returning from a trip to Ireland visited the agency and discussed his claim. This discussion resulted in payment to plaintiff under the policy’s accident provisions for a three-month period following date of injury.
Plaintiff filed a supplemental claim in October 1970, stating he was unable to return to work. However, his physician, who signed the claim form on 19 October, stated on the form that plaintiff had been disabled [830]only through 29 September.6 Because of this contradiction, defendant McEachen, an agency claims manager, investigated the claim. McEachen reviewed workers’ compensation and State Compensation Insurance Fund niedical records. These records indicated plaintiff and the examining physician had earlier agreed on a 1 July 1970 return to work date.
In short, when on 20 November McEachen visited plaintiff all of the available medical evidence stated either that plaintiff’s disability should have terminated long before 29 September or that it had terminated by that date. Obviously, McEachen faced with the undisputed medical evidence could not reasonably be expected to pay benefits beyond 29 September. Although, as the majority point out, plaintiff may have stated he needed money for the approaching Christmas season, an insurer is not Santa Claus. Plaintiff also offered to be examined by any doctor named by the insurer but since plaintiff’s doctor had stated he was not disabled, the onus was not on the insurer to obtain a second opinion.
Insofar as the majority opinion indicates that McEachen should have paid disability benefits for periods after 29 September, it is unreasonable. Insofar as the opinion suggests that McEachen’s refusal to pay such benefits furnishes a basis for punitive damages, it is absurd.
It is true that McEachen in denying benefits used intemperate language in stating that plaintiff was a fraud, but in view of the uncontradicted medical reports stating plaintiff was no longer disabled, such language does not warrant an award of punitive damages.7
Segal
Following his surgery on 26 February 1971, plaintiff submitted a new proof-of-loss form on 5 April 1971. This claim was assigned to defendant Segal, an agency claims adjuster. Segal was aided in his field investigations by claims analyst Romano from Mutual’s home office. Although not entirely clear, it appears Romano was assigned to the agency to assist in a [831]backlog of field investigations. Romano was not Segal’s superior; rather, he occupied a position equivalent to Segal’s position with the agency.
Segal and Romano, in the course of their field investigations, reviewed records of Workers’ Compensation Appeals Board, State Compensation Insurance Fund, and the hospital where plaintiff’s surgery was performed. State Compensation Insurance Fund records contained letters from Dr. Carpenter, plaintiff’s surgeon, and Dr. Singelyn. Dr. Carpenter stated in his letter: “[plaintiff’s medical] history appears consistent with a man with probable discogenic disease with multiple aggravations over the last several years, finally culminating in a specific incident a little over seven months ago . . . .” Dr. Singelyn stated in his letter: “I would apportion 50% of his current subjective complaints to his industrial injury, and 50% to the natural progression of his preexisting pathology of degenerative wear and tear osteoarthritis of the spine.” Neither Segal nor Romano made an effort to reach plaintiff’s physicians. Based on Segal’s review of medical records, plaintiff’s condition was reclassified from one of injury to one of nonconfining illness.
In May 1971 Segal visited plaintiff at home, telling him he suffered from an illness — not an injury. Segal handed plaintiff a check for medical costs and three months’ disability payments, the maximum benefits for disability due to nonconfining illness. Plaintiff did not cash the check. He testified he refused Segal’s offer of a larger check if plaintiff would surrender his policy.
In addition to the tendered benefits for illness, the policy provided for lifetime benefits if the insured became totally disabled as a result of an accidental injury “independent of sickness and other causes.”
The only reasonable construction of the information reviewed by Segal was that plaintiff’s disability was due to sickness or other causes in addition to the accident. Plaintiff’s surgeon reported discogenic disease, and the other doctor reported preexisting pathology. Again, insofar as the majority opinion may indicate that Segal should have paid accident benefits on the basis of the information available to him, it is unreasonable. Insofar as the opinion suggests that Segal’s refusal to pay such benefits warrants an award of punitive damages, it is absurd.
What practices are the majority attempting to deter by allowing punitive damages? Is it an improper insurance practice warranting [832]punitive damages to deny claims when the medical reports of the plaintiff’s treating physicians show that no benefits are due?
The only significant wrongful conduct on the part of the adjusters was that they did not make efforts to discuss the case with the physicians, instead relying upon the physicians’ written reports.8 Testimony at trial established that efforts to discuss the case with the attending physician would ordinarily have been made by a claims adjuster.9 However, the failure to make efforts to consult the physicians shows only a careless mistake. The adjusters, at most, acted on the basis of a careless mistake. (See Wolfsen v. Hathaway (1948) 32 Cal.2d 632, 649 [198 P.2d 1].) The fact the information resulted from poor investigation does not elevate their mental states to malice. An act performed on the basis of erroneous information, when the error is unknown, does not constitute oppression or fraud and cannot be equated with conduct “conceived in a spirit of mischief or with criminal indifference .... Mere negligence, even gross negligence, is not sufficient to justify” an award of punitive damages. (Gombos v. Ashe, supra, 158 Cal.App.2d 517, 526-527.)10
Moreover, even assuming the adjusters’ conduct could be found to be malicious, such conduct may not be imputed to Mutual for purposes of sustaining a punitive award.
Although the doctrine of respondeat superior generally imposes liability , on an employer for the torts of its employees, the doctrine will not support an award of punitive damages against a principal. (Ebaugh v. Rabkin (1972) 22 Cal.App.3d 891, 895 [99 Cal.Rptr. 706].) Punitive damages may properly be awarded against a principal for the acts of its agent only if: (a) the agent was employed in a managerial capacity and acted within the scope of his employment; (b) the principal ratified or approved the act; (c) the principal authorized the performance and [833]manner of performing the act; or (d) the agent was unfit and the principal was reckless in employing him. (Deevy v. Tassi (1942) 21 Cal.2d 109, 125 [130 P.2d 389]; Hale v. Farmers Ins. Co. (1974) 42 Cal.App.3d 681, 691 [117 Cal.Rptr. 146]; Rest.2d Torts (Tent. Draft No. 19, 1973) § 909.)
A managerial employee for purposes of imposing punitive damage must occupy a high level policy-making — as opposed to a policy-implementing — position. (E.g., Lowe v. Yolo County etc. Water Co. (1910) 157 Cal. 503, 510-511 [108 P.2d 297] [corporate president]; Davis v. Local Union No. 11, Internat. etc. of Elec. Workers (1971) 16 Cal.App.3d 686, 698 [94 Cal.Rptr. 562] [“No. 2 man”]; Toole v. Richardson-Merrell, Inc. (1967) 251 Cal.App.2d 689, 712 [60 Cal.Rptr. 398, 29 A.L.R.3d 988] [high level management].) When those who control the corporation, and who are in essence the corporation itself, seek to further its interest through adoption of malicious, oppressive, or fraudulent policies,» imposition of punitive damages may achieve its deterrent purpose because such award is directed at the corporation itself. However, to impose punitive damages because one of the corporate employees improperly applied an otherwise lawful and reasonable corporate policy, simply serves to enlarge judgments. In such case, the corporation itself may not properly be considered the actual wrongdoer. It has formulated policies and directed its employees in a manner consistent with the law. The deterrence, if any, is ineffective.
In Hale v. Farmers Ins. Exch., supra, 42 Cal.App.3d 681, 697, a claims supervisor — a position analogous to McEachen’s — with authority to deny claims, was held not a managerial employee for purposes of punitive damages. The fact McEachen possessed authority to accept or reject claims does not warrant finding him a managerial employee. As noted, the claims supervisor in Hale possessed such authority. Further, acceptance of such a rule would equate punitive damage liability with respondeat superior liability. Under such an approach virtually any employee having the capacity to effect a decision would be a managerial employee for purposes of assessing punitive damages. This would extend the concept to a vast majority of corporate employees.
The rule that punitive damages may be awarded against a corporation only for the conduct of its managerial employees does not permit a corporation to absolve itself of all responsibility merely by formulating a proper policy without supervising its execution. The corporation remains liable for all compensatory damages resulting from an incorrect decision by its employees. In addition corporate policy forming a basis for [834]imposition of punitive damages does not require a showing of a formal adoption of the policy by resolution or formal direction by a managing official, but may be established as a de facto policy upon a showing of uniform course of conduct by lower level employees. A single act by one employee in an isolated instance does not, of course, establish a de facto policy. Thirdly, the corporation may incur liability for punitive damages if it ratifies employee conduct.
The award of punitive damages may not be predicated on authorization or ratification of the adjusters’ conduct by Mutual. There is no evidence Mutual specifically authorized their conduct. Ratification may not be established by the fact Mutual continued to employ the adjusters. Retention alone cannot support an award of punitive damages. (Coats v. Construction & Gen. Laborers. Local No. 185 (1971) 15 Cal.App.3d 908, 915 [93 Cal.Rptr. 639].) A rule allowing mere retention to support a finding of ratification would be unduly harsh on employees as appears in this case. To allow retention without more to establish ratification would place a tremendous incentive on employers to terminate employees whenever any question concerning their conduct might be raised. (See Sullivan v. Matt (1955) 130 Cal.App.2d 134, 144 [278 P.2d 499].)
The record is simply not sufficient to sustain an award of punitive damages.
Because restitution requires the wrongdoer only to disgorge his ill-gotten gains, compensatory damage will not always constitute a deterrent, and punitive damage may be necessary to deter. (Ward v. Taggert (1959) 51 Cal.2d 736, 743 [336 P.2d 534].) However, when, as in the instant case, potential compensatory damages are not limited to restitution but extend to consequential damages as well, including mental suffering, the risk of potential compensatory damages constitutes a substantial deterrent against wrongdoing.
It has also been pointed out that in mass disaster situations, the award of punitive damages to early litigants may well preclude recovery of even compensatory damages to litigants who subsequently recover judgments. (See, Long, Punitive Damages: An Unsettled Doctrine, supra, 25 Drake L.Rev. 870, 877.) The same possibility of bankrupting the defendant to the prejudice of bona fide claims for compensatory damages exists whenever the conduct held to warrant punitive award is a widespread or common corporate practice.
While punitive damage award for wrongful claims practice will have a deterrent effect on such practices, I cannot agree with the analysis of footnote 14 of Neal v. Farmers Insurance Exchange (1978) 21 Cal.3d 910, 929 [148 Cal.Rptr. 389, 582 P.2d 980], that insurers engaging in the wrongful conduct will raise premiums to offset the punitive award whereas other insurers will not, implying that substantial costs will not be passed on to the public. Such analysis ignores the fact that risk of loss for purposes of calculating premiums is ordinarily based on industry-wide losses not the individual company’s losses. (Athearn, Risk and Insurance (2d ed. 1964) p. 497; Denenberg et al., Risk and Insurance (1964) p. 383.)
At least four states do not allow punitive damages, recognizing it is the policy of tort law to compensate victims for harm suffered and to limit defendant’s obligation to indemnification. (Zuger, Insurance Coverage of Punitive Damages (1976) 53 N.D.L.Rev. 239, 249 (La., Mass., Neb., Wash.).) Additionally, three states hold punitive damages are compensatory in nature and limit them accordingly. (Id.; N.H., Mich., Conn.)
The defense elicited testimony from plaintiff’s doctors that plaintiff’s disability was in large part, perhaps 50 percent, due to “discogenic disease,” changes that occur over the years rather than traumatic injury. Medical reports also reflected the presence of the disease. The policy limited accidental benefits to injuries “independent of sickness and other causes."
In addition, there was a sharp conflict of evidence as to whether plaintiff was totally disabled within the meaning of the policy. Prior to the 1971 surgery, plaintiff’s doctors repeatedly reported that plaintiff would be able to return to work on specified dates. In addition, the policy provided that plaintiff was not entitled to accidental benefits more than a year from injury unless he was unable to engage in any gainful work or service for which he was reasonably fitted by education, training or experience. Plaintiff’s orthopedic surgeon estimated that plaintiff would be able to return to work within three to six months of the surgery. In a report in 1972, the surgeon opined that plaintiff should be restricted from repetitive bending but could be on his feet throughout the day, could occasionally lift as much as 50 pounds, and need not be in a sedentary occupation. The surgeon testified at trial that there were occupations plaintiff could perform within limitations.
The physician testified at trial that when he examined plaintiff on 22 September, he stated he was going back to work on 29 September. When the physician examined plaintiff on 9 October, plaintiff stated his former employer did not have any vacant jobs. This information was not available to McEachen on 20 November.
There were additional circumstances questioning plaintiff’s good faith. During his trip abroad, plaintiff was collecting not only on the instant policy but also on a second one from the insurer, and he was entitled to workers’ compensation benefits while disabled. (He received a 73 percent disability rating on the compensation claim.)
Insofar as McEachen was concerned, a discussion with the attending physician would not have been helpful to plaintiff. Such discussion only could have confirmed the conclusion that petitioner’s total disability terminated by 29 September. (See fn. 5.)
The majority also suggests that Segal’s offer to settle was improper, warranting punitive damages. However, the majority concede that the offer was proper had Segal made a proper investigation. (Ante, p. 822, fn. 4.) Accordingly the basis of impropriety is the improper investigation.
There is also evidence of wrongdoing by the insurer in that plaintiff’s file was lost in the home office and that the ordinary procedures of review of adjuster’s decision to terminate benefits were not followed. The majority do not rely on the breakdown in the insurer’s ordinary procedures for review. In any event, the insurer’s negligent failure to follow its own procedures may not warrant punitive damages.