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Insurers took it on the chin Thursday when the California Supreme Court ruled 4-3 that they could be held accountable for hefty attorney fees in bad-faith actions over contractual benefits. The decision could subject insurance companies to millions of dollars in extra fees if their actions force policyholders to hire attorneys to recover monetary benefits. The court’s opinion also knocked down Allstate Insurance Co.’s argument that closing statements by plaintiffs lawyer Ian Herzog prejudiced jurors by insinuating that everybody, including the trial court judge, cheats a little now and then. The justices found the argument harmless error. Herzog’s clients, Fareed and Rashida Cassim, had sued Allstate after the company failed to resolve a claim over their Palmdale, Calif., house, which burned in 1990. Allstate said it had resisted out of suspicions that the Cassims had set the fire and claimed reimbursements — for lost property and out-of-home expenses — to which they were not entitled. After a 38-day trial in 1999, jurors in Los Angeles County Superior Court found that the Cassims were not at fault and that Allstate had acted in bad faith. They awarded the family nearly $3.6 million in compensatory damages and $5 million in punitive damages. In addition, retired Superior Court Judge Harold Cherness granted the Cassims nearly $1.2 million in so-called Brandt fees, which are awarded when a plaintiff has sustained damages through an insurer’s bad faith. Such damages can include the plaintiff’s costs to hire a lawyer on a contingency basis to fight for contract benefits. Allstate, joined by a platoon of amici curiae, had argued that Brandt fees — first outlined by the high court in 1985′s Brandt v. Superior Court, 37 Cal.3d 813 — should be limited to 40 percent of the disputed benefits as opposed to 40 percent of the total compensatory damages. In the Cassims’ case, the rejected benefits amounted to only about $41,000. So under the insurer’s scheme, Brandt fees would have totaled about $16,000, as opposed to the $1.2 million imposed by the trial judge based on the compensatories of $3.6 million. The high court disagreed with both the insurers and the trial court. “Plaintiffs agreed, as is generally the case, to pay their attorney an unallocated and undifferentiated 40 percent of their total recovery, whatever that might be,” Justice Kathryn Mickle Werdegar wrote. “To conclude that to obtain a $40,856.40 contract recovery, plaintiffs are out of pocket precisely $16,342.56, no more and no less, is therefore a fiction.” Werdegar also set forth a complex formula to determine proper Brandt fees by requiring the trial court judge to evaluate the number of hours worked on recovering contract benefits — for which the 40 percent contingency fee will apply — as opposed to the hours worked jointly on that issue and the suit against the insurer. While the rule hurts insurers most, it places the burden of proving the apportionment on the plaintiffs. Chief Justice Ronald George and Justices Joyce Kennard and Carlos Moreno concurred with Werdegar. In a concurring and dissenting opinion, Justice Marvin Baxter accused the slim majority of setting up a “complicated yet uncertain method of calculation” that “all but guarantees increasingly complicated and protracted litigation over Brandt fees.” He also said that it shouldn’t matter when the plaintiffs’ separate contract and tort causes of action are tried. “Whether the claims are tried together or separately, in separate trials or in bifurcated proceedings,” Baxter wrote, “the out-of-pocket cost to the plaintiff under a contingent fee agreement remains the same.” Justice Janice Rogers Brown and Richard Sims III, a justice from Sacramento’s 3rd District Court of Appeal sitting by assignment, concurred with Baxter. Allstate’s lawyer, Peter Abrahams, a partner at Encino, Calif.’s Horvitz & Levy, couldn’t be reached for comment. But Pamela Dunn, who represents amici curiae United Services Automobile Association and State Farm General Insurance Co., said the ruling would expose insurers to far higher Brandt fees. She also said the formula set out by the majority will be nearly impossible for judges to calculate and will require post-trial trials to determine appropriate fees. “I thought Brandt used to be complicated, but now, wow,” said Dunn, a partner at Pasadena, Calif.’s Dunn Koes. “They took what was pretty clear and nobody had any trouble with and made it very unclear and inviting more litigation.” Herzog, the Santa Monica, Calif., lawyer representing the Cassims, agreed that the new formula “will add a certain degree of complexity and litigiousness,” but felt that it’s a step toward keeping insurers honest. If insurance companies are going to put him and his clients through the ringer in bad-faith actions, he said, “they are going to have to pay the appropriate fee.” The ruling is Cassim v. Allstate Insurance, 04 C.D.O.S. 6812. LIMITS ON LIE DETECTOR EVIDENCE In a separate ruling Thursday, the justices stood firm by a state law that categorically excludes lie detector evidence at trial, unless all parties accede to its use. Jaleh Wilkinson had challenged the 1983 law by saying she should be able to submit polygraph evidence to fight her 1999 arrest by Santa Monica police on a charge of driving under the influence. She claimed she was a victim of GHB, the date-rape drug, and argued that Evidence Code �351.1, which prohibits lie detector evidence at trial, violates her civil rights. Wilkinson pointed to a 1998 Supreme Court concurrence by Anthony Kennedy in United States v. Scheffer, 523 U.S. 303, where he and three other justices objected to polygraph evidence, but said that a per se exclusion of such evidence might be unwise. Chief Justice George ruled Thursday that Wilkinson hadn’t shown that during the 2 1/2 years between Scheffer and her trial that lie detector evidence had become generally recognized by the scientific or legal communities. The ruling is People v. Wilkinson, 04 C.D.O.S. 6828.

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