Travelers Indemnity Co. has lost its appeal against an award for $26.46 million for bad faith in a California appeals court majority decision.

The dispute was over the insurer's obligations under a garage's liability policy.The First Appellate District of the Court of Appeal here in late April voted 2-1 in upholding a 1997 Alameda County Superior Court jury award for failure to fulfill its contractual obligations to Gordon Vann, who operated Vann's Auto Body Shop in Berkeley for about 40 years.

In July 1991, Mr. Vann's Berkeley landlord, Bruce Williamson, filed suit in Alameda County Superior Court for $1 million, accusing the tenant of hazardous waste contamination to the owner's property.

Mr. Vann's policy contained a limited pollution exclusion that wouldn't cover the policyholder unless the contamination was ''sudden and accidental.'' In dispute was whether the pollution was ''sudden and accidental.'' The company argued that the pollution occurred over an extended period of time.

Travelers in 1996 settled with the landlord for $50,000, but Mr. Vann incurred $187,513.72 in attorney fees, which the carrier refused to pay. The landlord's suit apparently led Mr. Vann to go into bankruptcy.

Mr. Vann filed suit against Travelers in 1993 and was awarded $1.46 million for general damages and $25 million in punitive damages in Alameda County Superior Court. Travelers appealed.

Justice Zerne Haning, writing the majority opinion, stated, ''Travelers' behavior toward Vann, personally, and as indicative of a broader recalcitrance to honor contractual obligations and the rule of law, manifests a high degree of reprehensible conduct. ''Given Travelers highly reprehensible conduct toward Mr. Vann, its general pattern of behavior . . . its net worth, net income and expressed refusal to change its practices and procedures to conform with the law, the award was appropriate,'' said Mr. Haning.

In the dissenting opinion, Presiding Justice Clinton Peterson said that the compensatory and punitive damages were unwarranted. ''Punitive damages could not be assessed against the insurer here, because its alleged bad faith was negated on the record of this case, as a matter of law,'' Mr. Peterson said. Traveler's said after the trial it was considering an appeal.