$12-Million Award Against Insurers Is Upheld by Judge : Courts: Record punitive fine is meant to teach the firm a lesson for refusing to pay fire damages, judge says.

A Torrance Superior Court judge Thursday let stand a jury’s award of $12 million in punitive damages, the largest in the Torrance court’s history, against an insurance company for refusing to pay fire damages to a client.

Noting that “the idea of punitive damages is to teach a lesson,” Judge William E. MacFaden rejected motions by an attorney for Farmers Group Inc. and its subsidiary, Fire Insurance Exchange, that sought a reduced award or a new trial.

Jurors had voted 9 to 3 on Aug. 29 to order the companies to pay the $12 million to Bart Cleveland, owner of a Manhattan Beach rental house destroyed in an arson fire more than four years ago. In addition to the punitive damages, the jury ordered the companies to pay Cleveland $167,000 in actual damages.

According to Cleveland and his attorney, Michael Whitehill, Farmers tried to implicate Cleveland as a suspect in the June 3, 1987, fire at a Manhattan Beach home he had purchased four months earlier.

Both private and government investigators cleared Cleveland, who was in Hawaii at the time of the fire, of any wrongdoing. But after he was cleared, Farmers demanded that he testify at a private hearing and give them his income tax records for the previous five years, paperwork for any other insurance claims he had ever made and documentation for all other insurance policies he held.

Cleveland refused and sued the company for bad faith four months after the fire. The company rejected the claim and would not discuss settlement of the case.

During the trial, Whitehill showed jurors memos exchanged between a Farmers investigator and a Fire Department investigator that, the lawyer argued, showed that the company was not acting in good faith. “Make the insured think that if he collects, we will nail him,” one of the memos said.

“They basically made me feel like I was an arsonist and they were asking me to do unreasonable things to collect what they owed me,” Cleveland said Thursday after the judge’s ruling was announced. “I feel fantastic about this decision.”

Noting that the insurance company is likely to appeal the jury’s award, however, Cleveland said he cannot yet count on receiving the money.

“But it isn’t just the amount that makes this significant; it’s winning that really is awesome against such a huge company like Farmers,” he said. “They mistreat a lot of people and there aren’t a lot of people who can take the time and the money like I did to stand up to them.

“I just hope and pray that they get the message that they can’t do this to people.”

Defense attorney Joseph C. Girard told jurors at the trial that the memos referring to “nailing” the insured did not relate to Cleveland’s case and instead referred to “war stories” between colleagues.

He also argued that Cleveland was not entitled to collect because he refused to testify at the private hearing or provide the background information requested, both required under the insurance policy he had purchased.

“Mr. Cleveland broke his promise to submit to the examination under oath in this loss under suspicious circumstances, and his claim was denied for that reason alone,” Girard said.

Whitehill said he believes the record award against Farmers is warranted because the company has assets of close to $4 billion.

“The jurors were appalled at an insurance company that would treat its own insured this way,” Whitehill said. “They wanted to make sure the company would feel this and, hopefully, learn a lesson from it.”