Defending the Deep Pocket: California Proposition 51 Offset and Vicarious Liability

Author: David Kahn

Guest Editor: Catie R. Johnson

February 5, 2018 2:12pm

California Proposition 51 was enacted as part of tort reform legislation in 1986 to stop plaintiffs from suing entities for no reason other than their “deep pockets.”  Under a joint and several liability paradigm, which is the rule of law in California, each joint tortfeasor is 100% liable for all awarded damages. So, even a 1% at fault defendant could end up paying the entire judgment if the other tortfeasors are not financially viable.

Proposition 51, codified in Civil Procedure Section 1431.2, was an attempt to limit joint and several liability only to economic damages.  The effect of the legislation is to limit the amount of general or non-economic damages (i.e. pain and suffering) a joint tortfeasor is required to pay to its proportional share based on percentage of fault.  However, there are exceptional situations when Proposition 51 does not apply, one of the most common being a defendant against whom liability is imposed vicariously through the operation of law rather than based on actual fault or wrongdoing.  Perhaps the most common example is the doctrine of respondeat superior, where liability is vicariously imposed by operation of law based on the relationship between two defendants.

No Proposition 51 Offset When Liability Is Imposed By Law Not Fault

A defendant may be vicariously liable for the negligent conduct of another defendant based on relationship such as employer/employee, principal/agent, partner, joint venture, vehicle owner/driver and parent/child.  In such cases, where liability is derivative, the Proposition 51 offset for noneconomic damages does not apply.  Miller v. Stouffer (1992) 9 Cal. App. 4th 70, 83-85.  In Miller, a housekeeper acting in the course and scope of employment with a homeowner struck a pedestrian with her vehicle while running an errand for the homeowner.  The homeowner argued on appeal it was entitled to a Proposition 51 offset for plaintiff’s non-economic damages based on its comparative fault percentage of zero.  The Court of Appeal did not agree and held the homeowner/employer’s liability was not based on fault but on its status as an employer.  Ibid.  The homeowner/employer was not a joint or concurrent tortfeasor but rather stood in the shoes of the housekeeper/employee and the entire liability as to the plaintiff was thus co-extensive.  Ibid.

Horizontal v. Vertical Liability

The key to analyzing the potential exposure of a deep pocket defendant is to first determine whether liability is horizontal, vertical or both.  The California Supreme Court case Diaz v. Carcamo (2011) 51 Cal. 4th 1148 illustrates the distinction.  In Diaz, the court held when an employer stipulates to liability and accepts liability for its employee’s negligence, the employer cannot be named on the special verdict form as a separate empty chair defendant under a negligent hiring and retention theory. This is considered vertical liability. However, the court also noted there may be an independent theory of liability against an employer such as providing an employee with defective equipment in which case liability against the employer would be horizontal and the Proposition 51 offset would apply based on direct percentage of fault. Thus, the deep pocket employer would be responsible for the imputed share of its employee’s negligence (vertical liability) and its own independent proportional share of damages based on fault (horizontal liability). The Proposition 51 offset for noneconomic damages would apply to the horizontal allocation of liability but the vertical allocation would be restricted to the percentage of fault allocated to the negligent employee/agent.

The Proposition 51 Shield

The policy informing the limitation of Proposition 51 when a defendant’s liability is vertical only  based on vicarious liability is to shift the risk to the party who benefits from the enterprise and to ensure an injured party is compensated in the case where the negligent tortfeasor has limited assets. Miller v. Stouffer, 9 Cal. App. 4th 84. Although the deep pocket defendant does not enjoy the benefits of Proposition 51 as to its own independent conduct, the deep pocket defendant’s liability is restricted to the percentage of fault allocated to its employee/agent.  Ibid. The Miller court noted if plaintiff had sued another motorist, public entity, or vehicle manufacturer, under Proposition 51, the homeowner would have been “shielded from noneconomic damages” beyond those attributable to the employee.  Ibid.  Thus, when there is more than one financially viable tortfeasor, damages are insulated based on the percentage of fault allocated to the deep pocket’s employee/agent. However, the converse is also true: if neither tortfeasor is financially viable, the deep pocket defendant could be stuck with the entire judgment.

Takeaways

Representing a deep pocket defendant necessitates careful analysis of the allegations made by plaintiff in the pleadings as well as the actual evidence developed during discovery. Understanding whether the theories of liability are vertical and/or horizontal is key to evaluating exposure for noneconomic damages.  Also critical to the analysis is identifying any contractual indemnity provisions which may shift any potential liability exposure, as well as defense costs, elsewhere. A complete understanding of the potentially negligent employee/agent’s financial condition and the availability of insurance coverage also factors heavily in evaluating financial exposure to a deep pocket client whose liability is entirely derivative, i.e. vertical.

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