Background
Michael Egan had a health and disability policy with Mutual of Omaha that paid lifetime benefits for total disability caused by an accidental injury, but only three months of benefits for an illness that did not confine him to his home. After a work-related back injury and later surgery, the claim handlers reclassified his condition from “injury” to “illness” based on a records review. They never contacted his treating physicians and never had him examined, even though he offered to see any doctor the insurer chose. The jury awarded $123,600 in compensatory damages against the insurer and $5 million in punitive damages.
What the court held
The court affirmed that the insurer breached the implied covenant of good faith and fair dealing as a matter of law by failing to investigate properly. To protect the insured’s interests, an insurer must “fully inquire into possible bases that might support the insured’s claim.” It cannot deny payment without thoroughly investigating the foundation for the denial.
The court also held that the claims manager and adjuster, who decided claims with broad discretion and little oversight, were managerial employees whose conduct could be imputed to the company for punitive damages. Even so, a $5 million award, more than 40 times the compensatory damages, was excessive as a matter of law and was reversed. The individual adjusters were not personally liable because they were not parties to the insurance contract. In a footnote, the court allowed future policy benefits as part of tort damages.
Why it matters
Egan was a disability case, but its duty to investigate is often cited in life insurance delay and denial disputes under California law. Examples include denials that rest on a records review alone, on medical conclusions never checked with the treating doctors, or on a classification that cuts off coverage. It builds on Gruenberg v. Aetna. For claims under employer plans governed by ERISA, see Pilot Life v. Dedeaux, where these tort remedies are generally preempted.
Read the opinion
Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809 (1979) (Justia).
Not legal advice. This page summarizes general rules and the specific statutes cited. Your policy's wording, the state whose law applies, and whether the coverage came through an employer can all change the result. See the disclaimer and editorial policy.