By: Robert J. Moss, Esq. March 12, 2001

Worse for the defense, once a tiny quantity of economic harm is established,
all hell breaks loose. Every iota of emotional distress, such as outrage
over the unfairness of it all, is recoverable whether or not it was actually
caused by the economic harm.

The hoopla in the defense community over the economic harm issue really took
off when the decision came down in Waters v USAA (1996) 41 Cal. App. 4th
1063. You will recall that Judge Water's Hancock Park mansion burned down
and USAA had his fire coverage. USAA dared to disagree with hizoner about
how much it was going to cost to repair the fire damage. In that case, the
court of appeals took away a $1.375 million emotional distress verdict the
downtown LA jury had awarded to the plaintiffs.

The court in Waters clearly and unequivocally did this because Waters had
failed to establish economic harm. After a fairly comprehensive discussion
of the case law on the subject, the court held "In sum, case law simply does
not permit recovery of emotional distress damages where, as here, there is
no evidence of financial loss." (Id. at p. 1081.)

Does this mean that now all wealthy plaintiffs who can afford to pay their
own medical bills while they wait for the UM arbitration to conclude are
precluded from collecting emotional distress damages? Absolutely not! For
some reason, not explained in the decision, the attorney for Waters, Mr.
Shernoff himself, intentionally (I cannot believe he did it accidentally)
failed to introduce evidence of economic harm. The Waters clearly had some
economic harm, which would have sufficed as a predicate for the emotional
distress damages, but for some reason the evidence was never introduced.

The appellate court goes to some lengths to point this out. The court notes
that at oral argument plaintiffs' counsel argued that the Waters incurred
attorney fees in trying to collect their policy benefits and Mrs. Waters
incurred some hospital bills due to her emotional distress. The court
indicated that this would have been enough. (Id. at p. 1081, including fn.
15.) The problem was the record contained no evidence of it at all!
Shernoff never asked Judge Waters "Judge, did you incur any attorney fees in
trying to make USAA pay what they owed you?"

There probably is a good explanation for why Shernoff never asked this
question or why he never introduced evidence of Mrs. Water's hospital bill.
Shernoff is no slouch in this field. But for whatever reason he didn't, and
that is the only reason the court took the verdict away.

So, while it is true that showing economic harm is a condition precedent to
the recovery of emotional distress damages, in almost every bad faith case
imaginable, there is going to be some economic harm. In the typical
low-pay/slow-pay Uninsured Motorist case, for example, the plaintiff can
show that if the insurer had offered the policy limit in the first place, he
never would have had to hire an attorney. Or, if they had settled the claim
before arbitration, the contingent fee would not have gone up from 33 2% to
40%. Attorney fees incurred because of the carrier's refusal to pay
benefits is economic harm. Indeed, the court of appeals apparently felt so
bad for the plaintiffs in Waters they took it upon themselves to provide a
laundry list of various types of economic harm so that future plaintiff
attorneys would not suffer so devastating a loss. They list:

* Medical or hospital bills incurred.
* Attorney fees.
* Interest paid on borrowed funds.
* Interest lost because personal funds had to be advanced to cover
loss-related expenses.
* Loss of investment opportunity because personal capital was
committed to loss related expenses (Id. at p. 1069.)

There may be some bad faith cases out there where there is absolutely no
economic harm as defined by the court in Waters, but they are the exception,
not the rule. Any attorney worth his or her salt can establish some kind of
economic harm in almost any case.

Now for something really scary.

One might think that since so-called insurance bad faith is really all about
depriving plaintiff of money, that compensation for that tort should be
based on what that deprivation of funds actually caused. (Duh?) For
example, if plaintiff had to forego chemotherapy because she couldn't afford
to pay for it herself, most of us can accept that emotional distress over
that issue would be compensable. It was caused by the economic harm.

However, if Donald Trump was the plaintiff and admits that he had no real
problem paying a few hundred thousand in attorney fees and medical bills,
but was really pissed off because no one treats Donald Trump that way; many
of us would argue that since economic harm did not really cause Mr. Trump's
anger, it should not be compensable as emotional distress damages. His
anger may be real and constitute emotional distress, but it is caused not by
the deprivation of funds, rather by his bruised ego or, more charitably, an
insult to his sense of justice or fairness.

Not only would many of us feel that way, but, believe it or not, we would
actually find some legal authority for that position. In Blake v Aetna
(1979) 99 Cal. App. 3d 901, a widow sued her late husband's life insurer for
not paying on his death claim. The jury found for plaintiff and awarded
$10,000.00 damages for emotional distress. (She obviously was not nearly as
upset over the death of her husband as the Waters were over the damage to
their house.) The court of appeals took the emotional distress damages away
from the plaintiff, however, because the plaintiff's emotional distress was
not caused by financial hardship resulting from nonpayment of the claim.

So, there has to be some causal link between the economic harm and the
emotional distress, right? Not! In Clayton v USAA (1997) 54 Cal. App. 4th
1158 plaintiff's 15-year-old son was killed in a car accident. Plaintiff
collected $125,000 from the carrier for the adverse driver and presented an
under-insured motorist claim against his own carrier, USAA. USAA at first
offered him $10,000.00 on top of the money he already received and, before
arbitration two years later, ended up settling with him for the balance of
his policy limit, $175,000.00.

He then sued USAA for bad faith arguing that USAA should have paid the
$175,000 sooner. While it is not mentioned in the published appellate
decision (I tried that case) the evidence was that plaintiff was a wealthy
guy and did not need the $175,000.00 for any special reason. He had an
attorney before the under-insured motorist claim was ever made, so we argued
that USAA did not cause him to incur the contingent fee. It was true,
however, that according to their contingent fee agreement his attorney fees
went up by 10 % because the case got closer to arbitration, ergo economic
harm under Waters to the tune of about $30,000.00.

In any event, Mr. Clayton freely admitted that the attorney fee increase
caused him no emotional distress. He didn't care about the money. He
suffered distress over the whole situation because it was not fair to treat
him that way just after his son died. It dishonored the memory of his son
to offer so little money. He thought it was unfair that USAA put him
through a deposition and almost an arbitration hearing. That was it. The
jury gave him $400,000.00 for emotional distress.

We argued, citing Blake, that since his emotional distress was not caused by
the deprivation of funds, that it should not be compensable. The court of
appeals in Oakland did not agree with the Blake decision. The court
acknowledged that Blake says what it says, but informed us that "We are not
convinced, however, that Blake correctly reflects the law of this state."
(Id. at p. 1161.)

The court in Clayton made it clear that, while plaintiff must establish at
least some smidgen of economic harm to recover any emotional distress
damages, there is absolutely no need for there to be any connection between
the economic harm shown and the emotional distress claimed. The court's
rationale was that economic harm must be shown only to "validate the
seriousness" of plaintiff's emotional distress. "Once economic loss is
shown," held the court, "the plaintiff is entitled to recover for all
emotional distress proximately caused by the insurer's bad faith without
proving any causal link between the emotional distress and the financial
loss." (Id. at p. 1161.)

So, that is the state of the law. Not so good for the defense. However, a
few defense oriented observations to close on a positive note:
* At least some economic harm must be shown. As in Waters, some
plaintiff attorneys may forget or opt not to introduce such evidence.
* "...a delay in paying policy benefits, even if in an unreasonable
manner, does not in itself establish economic loss to the plaintiff."
Maxwell v Fire Insurance Exchange (1998) 60 Cal. App. 4th 1446 at p. 1450.
* If plaintiff is relying on attorney fees to establish economic harm
in a U/M or UIM bad faith case, watch when the contingent fee contract was
entered into. I would argue that if plaintiff hires the lawyer on this
basis before any bad faith conduct occurs (for example, when he is pursuing
the U/M or UIM), then this "economic harm" was not caused by the bad faith.
Also, remember it is only attorney fees incurred to collect the policy
benefit that constitutes economic harm. The contingent fee to prosecute the
bad faith case itself is not economic harm. Maxwell (supra) p. 1450.
* The California Supreme Court has remained silent on the post Waters
debate over the link between economic harm and emotional distress damages.
While the Waters court relied on older Supreme Court cases to support it's
conclusions, the Supreme Court may very well take a more anti-litigation,
pro-insurer approach as it has in other areas.