The First Bad Faith Case
RULING ON A LAWSUIT brought by Southern California attorney William Shernoff on behalf of a disabled roofer, the California Supreme Court in 1979 handed down a landmark decision that set the legal precedent enabling policyholders to sue their insurance companies for acting in “bad faith.”
Egan was the first Supreme Court decision to hold an insurance company guilty of bad faith for failing to investigate a policyholder’s claim adequately.
The case opened a vital door for consumers, making it easier for them to bring their insurance companies to court. It enabled consumers to obtain favorable verdicts not just for their claims but for damages suffered because of mental distress and for punitive damages.
During the trial that led to the ruling, Shernoff Bidart Echeverria LLP founding partner, William Shernoff, proved to the satisfaction of the jury that the defendant, Mutual of Omaha, committed bad faith by reclassifying 55-year old Irish immigrant Michael Egan’s injury (he had fallen from a ladder) as a sickness rather than an accident. It used this reclassification as a pretext to deny Mr. Egan’s benefits under his disability insurance policy.
The jury awarded Mr. Egan $45,600 in disability benefits and $78,000 for emotional distress. It went on to assess a $5.1 million punitive damages award against the insurance company, which constituted a record-setting judgment at the time.
The legal precedent created by Shernoff in Egan lives on as the foundation for all insurance bad faith actions today.