APPEAL from a judgment of the Superior Court of Los Angeles County. Mary Ann Murphy, Judge. Affirmed in part; reversed in part and remanded with directions. (Los Angeles County Super. Ct. No. BC331524).
The opinion of the court was delivered by: Doi Todd, J.
CERTIFIED FOR PUBLICATION
In this insurance bad faith case, respondent Amerigraphics, Inc. (Amerigraphics) sued its insurer, appellant Mercury Casualty Company (Mercury), after Amerigraphics's business premises were flooded, and Mercury denied full coverage under the policy. There are two primary issues on appeal.
First, what is the meaning of the "Business Income" coverage in the policy which states that Mercury will pay an insured during its period of suspended business operation the "(i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred...; and [¶] (ii) Continuing normal operating expenses incurred, including payroll." We agree with the trial court that under the plain meaning of this policy, an insured is entitled to be paid under both subparts without having to offset the two amounts in the event operating expenses exceed net income.
Second, we consider whether an award of punitive damages that is ten times the amount of compensatory damages and prejudgment interest was correctly calculated and comports with due process. We are satisfied that substantial evidence supports an award of punitive damages, that the amount of compensatory damages should not include prejudgment interest, and that under the circumstances of this case the amount of punitive damages should not exceed compensatory damages by more than a 3.8-to-one ratio.
FACTUAL AND PROCEDURAL BACKGROUND
The Insured, the Loss, and the Policy
Amerigraphics is a printing and graphics design company. It was founded in 1997 as a close corporation by Mark Volper and Boris and Marina Smordinsky. The company leased the first floor of an office building on Ventura Boulevard in Sherman Oaks, California. Before moving in, Volper and the Smordinskys made several tenant improvements, including repairing doors and windows, upgrading the electrical and plumbing systems, and installing modern electrical fixtures, tiles and a new ceiling, at a total cost of about $53,000. After moving in, they made additional tenant improvements between 2001 and 2002 totaling $20,133. The company did well financially from 1997 to 2000, but business fell off sharply after the September 11, 2001 attacks, and 2002 was a particularly "bad" year.
On Monday, April 14, 2003, Volper discovered that the company's premises were completely flooded. Water was cascading from the ceiling and leaking down the walls, leaving two inches of standing water. Volper and the landlord discovered that the source of the water was a broken water heater in a second-floor restroom. The water damaged all of Amerigraphics's electrical equipment, including a printer that Amerigraphics had purchased for $11,995, and a scanner that had cost $5,176.
Volper called RM Consulting, the company that had sold and serviced the equipment, to evaluate the damage. RM Consulting spent four hours working on the printer and scanner, and determined that both pieces of equipment had been irreparably water damaged.
Amerigraphics was insured under a "California Special Multi-Peril Policy" issued by Mercury in 1999 that covered damage to business personal property, which includes property used in the business and tenant improvements, and loss of business income due to business suspension. The policy had been renewed for a three-year term from October 9, 2002 to October 9, 2005, and the annual premium was $1,516. The business-interruption coverage, titled "Business Income," provides in relevant part: "We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your `operations' during the `period of restoration.'... [¶]... [¶] We will only pay for loss of Business Income that you sustain during the `period of restoration' and that occurs within 12 consecutive months after the date of direct physical loss or damage.... [¶] Business Income means the: [¶] (i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred....; and [¶] (ii) Continuing normal operating expenses incurred, including payroll."
After learning that his insurance broker had failed to immediately report the loss, Volper telephoned Mercury on Friday, April 18, 2003, and reported the loss himself. Mercury assigned the claim to adjuster Ken Brown, who called Volper the following week. Brown admitted at trial that he never discussed the available coverages under the policy with Volper, nor did he fill out Mercury's "coverage checklist" that required the adjuster to discuss the various coverages and to check off the coverages discussed and the date of the conversation.
Because the water damage had created mold and asbestos, Amerigraphics was forced to find a temporary location until the remediation was completed. Volper was unable to find any property on Ventura Boulevard available on a short-term lease, but he did find space on the second floor in a building in Hollywood. Amerigraphics relocated on May 20, 2003, and Mercury paid the relocation expenses and the rent for the new premises. The same month, Volper provided Mercury with a preliminary loss evaluation listing items of business personal property worth approximately $43,000. Mercury paid $10,000 toward the business property loss.
The Investigation Relating to the Printer and Scanner
Because adjuster Brown was located in Mercury's San Diego office, Mercury hired an independent local adjusting company, Cunningham Lindsey (C-L), to investigate the claim. Volper gave C-L the report from RM Consulting stating that the printer and scanner had been irreparably damaged. C-L recommended an examination by an equipment refurbishing company. Under the policy, Mercury had the option of repairing or replacing damaged equipment. Brown's supervisor, Chris Boedecker, did not consult RM Consulting and decided that it would be "worthwhile" for Mercury to get a second opinion on the condition of the printer and scanner.
On May 20, 2003, 38 days after the loss, Mercury had a salvage company remove all the damaged equipment from Amerigraphics's premises, including the printer and scanner. The printer and scanner were then sent to Hi Tech Restoration (Hi Tech), a company which locates vendors to evaluate and repair equipment.
On June 10, 2003, Hi Tech arranged for another company, Advanced Data Products, to evaluate the printer. The report from Advanced Data Products erroneously stated that the printer had been in a fire, that its technician had installed a part provided by "the customer" (though Amerigraphics had not provided any parts), and that the technician tested the unit and found it to be "okay." Hi Tech itself tested the scanner and reported on June 10, 2003 that an "O.K. Function light test" was performed, and that the unit needed software to be tested. Amerigraphics had no software that could be used to test the scanner. Hi Tech later admitted that it was unable to perform a "complete functional test of the scanner."
Although the tests were performed in June 2003, Mercury did not advise Volper of the results until September 2003, when it provided him with the reports. At that time, Mercury took the position that the equipment had been restored to its pre-loss condition, and requested that Volper retake the equipment. Volper found the reports to be unprofessional and inaccurate, and refused to accept the equipment until Mercury could provide samples created on the machines demonstrating that they functioned properly. Volper later received unidentified copies of black and white images that were claimed to have been made on the scanner. Volper called Mercury and complained to Boedecker that "there is nothing here which indicates who, when, on which equipment" the samples were made. Boedecker agreed that this information was necessary, but Mercury was unable to obtain the information.
Ultimately, at Volper's urging, Mercury had the equipment reexamined in June 2004, more than a year after the loss. The testing report on the scanner stated that "we find the unit unable to calibrate and come to the ready state. An internal inspection and diagnostic test revealed that both the Mainboard and connecting CCD boards are defective." The report indicated that repairs would cost about $434. The printer was also found not to print properly, and its magenta ink system was not working and had to be replaced, which would cost $156.
The "Business Income" Claim
In August 2003, frustrated and concerned that he had not heard from Mercury about the status of the machines, Volper called his insurance broker, who advised him that the policy might provide coverage for Amerigraphics's "normal operating expenses" during the period the business's operations had been interrupted. Volper called Brown and told him he wanted to make a claim for normal operating expenses. Brown responded that there was no such coverage. Volper then sent Brown a letter enclosing a copy of the relevant policy page with the relevant provision circled. Brown then requested that Volper provide him with a list of the normal operating expenses Amerigraphics had incurred.
On September 17, 2003, Volper sent Brown a list of $59,467.16 in expenses incurred between April 10 and September 12, 2003. Volper's enclosure letter stated that he could provide copies of checks to document each item he had listed, and ended with the plea: "Please, review this part of the claim as soon as possible, because we need the funds just to stay alive." Volper got no response for several months.
In January 2004, Mercury hired a forensic accounting firm to investigate the loss of income claim, but did not notify Volper that it had done so until late March or April. At the end of April, Volper spoke with the accountant, who requested certain information about Amerigraphics, including two years of monthly sales records, one year of operating expenses, and an income tax statement for 2002. It took Volper several weeks to gather the information, which he provided to the accountant by late May 2004.
By letter dated September 15, 2004, Mercury informed Amerigraphics that it was denying the loss of business income claim. Mercury explained its decision as follows: "[The accountant] determined that you incurred a $0 loss in business. Projected expenses of $311,842.40 exceeded projected income of $154,932.65 resulting in a projected loss of $156,909.75. Actual expenses of $76,636.62 exceeded the actual income of $29,259.94, resulting in an operating loss of $47,376.68. During the loss period you had an actual operating loss of only $47,376.68, compared to a projected operating loss of $159,909.75. These results indicate that you did not sustain additional operating losses during the loss period and therefore did not sustain a business income loss."
The Tenant-Improvements Claim
In June 2004, out of frustration with Mercury's handling of the claim, Volper once again called his broker. The broker suggested that Amerigraphics might have a claim for damage to the tenant improvements it had made. Although Boedecker, the Mercury claim supervisor, had identified tenant improvements as an issue to be addressed, Brown never pointed out the coverage provision to Volper, and did not instruct C-L to investigate tenant improvements. By this time, Brown had been replaced on the file by adjuster Rome Oliver. Volper called Oliver to make a claim for tenant-improvement losses, and Oliver immediately told Volper there was no such coverage.
Once again, Volper sent Oliver a copy of the relevant policy page, with the tenant-improvements provision circled. In response to Oliver's subsequent request, Volper sent a letter on June 14, 2004 identifying the $73,000 in tenant improvements Amerigraphics had made. Mercury replied on August 16, 2004 denying the claim for tenant improvements, stating: "Our investigation revealed no damage to the Tenant Improvements as a result of this covered water loss. Since there was not any physical damage to the tenant improvements, your claim for these items is not covered."
After the denial letter had been sent, Mercury instructed C-L to reopen its file on the case, which had been closed for about eight months, and to inspect the premises to determine whether there had been any damage to Amerigraphics's tenant improvements. Between September and December 2004, C-L sent Oliver four supplemental reports, explaining that it was trying to find out from the landlord's insurer, State Farm, whether it had paid the landlord for tenant improvements and that State Farm was not cooperating. C-L's second supplemental report identified an estimated loss by Amerigraphics of $45,000, which C-L calculated by taking the $73,000 figure submitted by Volper and prorating it over the life of the lease.
On December 14, 2004, Volper wrote to Oliver complaining about the delay in paying the claim and asked for $23,000, which he said "we dearly need to survive." Then "out of absolute desperation," Volper sent two or three letters to Mercury's president, asking him to intervene to get the claim paid. At least one of Volper's letters to Mercury's president was routed to Mercury's senior vice-president in charge of claims, who in turn routed it to Boedecker's supervisor, but she never followed up to see how the claim was handled.
In February 2005, Mercury decided to give Amerigraphics the "benefit of the doubt," and on February 3, 2005 (693 days after the loss), sent Amerigraphics $23,000 as "payment in full" for its tenant- improvements claim.
In April 2005, Amerigraphics sued Mercury for breach of contract and bad faith. Prior to trial, Amerigraphics sought a judicial interpretation of the policy's "Business Income" provision, known more commonly in the industry as a business-interruption clause. The trial court held multiple hearings on this issue following multiple rounds of briefing. The court ultimately concluded that the plain language of the policy provided coverage for both elements stated in the definition, i.e., an insured was entitled to recover both net income and continuing normal operating expenses without having to offset one against the other.
The case then proceeded to the first phase of trial before the jury on the issue of liability. Volper testified that by September 2003, he and Smordinsky were borrowing money to keep Amerigraphics afloat. By June 2004, the company was completely out of money. Volper testified that if Mercury had provided a working scanner and printer and had paid the company's claims by November 2003, he believed he could have kept the business going, and that although Amerigraphics continued to pay the fees necessary to maintain its right to do business, it no longer functions as a going concern.
Boedecker conceded that a company in the printing and scanning business, like Amerigraphics, could not function without a printer and scanner. He also admitted that Mercury made no attempt to provide Amerigraphics with a replacement printer and scanner while Mercury was adjusting the claim. And he conceded that nothing in the claim file, which was approximately 1,000 pages long, reflected any concern that Amerigraphics would go out of business due to the delays in handling the claim. Boedecker also confirmed that he communicated by e-mail with his unit, that e-mail pertaining to a particular claim was required to be kept in the file, and that six to seven people within Mercury worked on the claim, as well as eight outside entities. Yet when Mercury produced the claim file, it contained only two e-mails.
After the presentation of evidence by both sides, including expert witness testimony, Mercury moved for non-suit on the issue of punitive damages, arguing that there was insufficient evidence of malice, fraud or oppression. The court denied the motion and stated that there was more than enough evidence for the issue to go to the jury. The parties agreed that Amerigraphics's claim for attorney fees as tort damages under Brandt v. Superior Court (1985) 37 Cal.3d 813 (Brandt) would be decided by the court in a posttrial motion. The parties also agreed on the ...