In a recent case (November 2006), the California Court of Appeal held that an assessment of punitive damages against a general contractor is warranted for lying about insurance coverage to the detriment of the property owner.

In the case of Kelly v. Haag, San Diego County Superior Court Case No.GIC830629, the property owner employed his friend to do work on his condominium. The property owner asked the contractor if he had insurance, and the contractor said he did. During demolition work one of the workers broke a fire sprinkler head.

The fire sprinkler head leaked for 15 to 20 minutes, because the worker did not know where the water shut-off valve was. The condo as well as the condos underneath were damages. After the incident the contractor confessed that he was actually uninsured.

The condo owner filed a lawsuit and among other things alleged fraud. The court assessed $159,140.22 in compensatory damages against the contractor and a subcontractor. The court also assessed $75,000 in punitive damages against the contractor individually, finding he had a minimum net worth of $750,000.

The contractor appealed and the Court of Appeal reversed the punitive damages assessment. The court of appeal reiterated the purpose of punitive damages.

The court stated that an award of punitive damages hinges on three factors: the reprehensibility of the defendant's conduct; the reasonableness of the relationship between the award and the plaintiff's harm; and, in view of the defendant's financial condition, the amount necessary to punish him or her and discourage future wrongful conduct.

The court stated that it is obvious that the punishment must be severe enough to keep the contractor from engaging in that conduct, but the punishment must not be so excessive such that the defendant does not have the ability to pay. In determining the proper assessment of punitive damages the defendant's actual financial condition is
essential.

The assessment of punitive damages should be based on the defendant's net worth, but that other factors must also be considered such as income. The financial condition at the time of trial is what is relevant, not what the financial condition could be or was.

In this case the only evidenced presented was oral testimony from the plaintiff's sister. The plaintiff's sister worked for plaintiff's real estate development company and oversaw the condominium remodel. Even though the court did not address the relationship it clearly can be construed as biased opinion instead of admissible evidence.

She testified that the contractor purchased a large home and that he owned a home in San Diego for eight to 10 years. She had no knowledge of the equity or debt of the defendant.

In this case the contractor did not testify and the plaintiff's attorney failed to obtain information from the contractor through a process called discovery. So there was insufficient evidence to show what if any property the contractor owned and what if any debt was on the property. Basically the contractor's financial status was unknown.

The court of appeal dismissed the punitive damages assessment on the grounds that the condo owner failed to produce enough evidence as to the wealth of the general contractor, but the court essentially stated that the assessment would stand if the property owner had presented sufficient evidence to establish the financial position of the contractor.

The condo owner asked for a retrial on the issue of punitive damages, but the court denied the request. The court declined to allow the plaintiff to pursue a second trial on the issue of punitive damages, because the plaintiff had a full and fair opportunity to present the case and plaintiff failed to provide sufficient evidence to prove the wealth of the defendant.

In California punitive damages are usually assessed when there is fraud, oppression, or malice. Any type of deception is generally considered fraud. In this case punitive damages were approximately 10% of the net worth of the defendant. Punitive damages are capped based on the underlying claim. A multiplier of more than 5-7 times the underlying
claim is generally considered too excessive.

In this case the 75,000 assessment was less than a multiplier of one, so there was no problem as far as the amount of the award. If the contractor had a wealth in excess of $1.5 million the court would have been able to assess about $700,000 in punitive damages. How much is assessed depends on how bad the conduct is. Knowledge and intent of conduct usually results in greater punishment.

Contractors usually generate more complaints than any other industry and as a result have caused the California Legislature to enact very complicated rules and regulations pertaining to contractors and juries are less likely to look favorably to a contractor when deciding on punitive damages.

In this case the critical part was proving the net worth and general financial status of the contractor and there was no jury to decide punitive damages.

If punitive damages are assessed and paid, then they have be shared with the State of California. California law was changed to increase revenues to the State from windfalls to plaintiffs from punitive damages.

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Arnold Hernandez, is an attorney in San Marcos, California. He represents small businesses and individuals primarily in employment law and in personal injury claims. More information at http://www.arnoldhernandez.com