Insurance Recovery Law

Fourth Circuit Allows Punitive Damages Against Insurer For Bad Faith Despite Lack Of Actual Damages

Why it matters
A policyholder is not required to prove ascertainable damages to be entitled to an award of punitive damages against an insurer when a jury finds liability for bad faith, the Fourth Circuit Court of Appeals has ruled. Rather, where a jury finds a “willful or reckless invasion of a legal right,” nominal damages, which are an adequate basis for an award of punitive damages, are presumed. The holding is a victory for policyholders, allowing them to make a case for punitive damages without demonstrating an ascertainable loss, and potentially providing them with additional leverage in bad faith cases.

Detailed Discussion
J.T. Walker Industries and its subsidiary, MI Windows and Doors, were defendants in five separate product defect actions filed by homeowners associations as a result of alleged water damage. MI had several liability policies with Liberty Mutual Fire Insurance Company, all of which were subject to $500,000 deductibles. MI pushed Liberty to take the product defect cases against it to trial, concerned that, by settling, MI would be viewed as an easy target in subsequent litigation. But Liberty settled and paid all five suits, although each suit was settled for amounts within the deductible.

Under its policies, Liberty had the right to settle claims and suits. Because each of the suits was settled within the deductible, Liberty sought to recoup from MI the settlement amounts it had paid. MI refused to pay, and Liberty filed suit. MI responded with a bad faith counterclaim, alleging that Liberty acted unreasonably in settling the cases.

The case went to trial, and the federal court jury in South Carolina handed down a split verdict. The jury agreed that MI owed Liberty contract damages and ordered MI to pay Liberty $894,416.01. But the jury also determined that Liberty was liable for actual and punitive damages on MI’s bad faith claim, awarding MI $684,416.01 and an additional $12.5 million in punitives.

The district court set aside the entirety of the bad faith damage award against Liberty based on a finding that MI had suffered no actual damages because MI had not paid the cost of the settlements. Without actual damages, the district court held, punitives were not available.

Both parties appealed on numerous grounds. The Fourth Circuit affirmed the majority of the lower court’s rulings, including the jury award against MI and the dismissal of the actual damages award against Liberty. Importantly, however, the court vacated the district court’s ruling on the punitive damages award.

“An absence of ascertainable damages does not necessarily preclude nominal or punitive damages where, as here, the jury finds a party liable for punitive damages,” the court opined. Although the court acknowledged that punitive damages are generally only awarded where a court also awards actual or nominal damages, “[w]here a jury finds a willful or reckless invasion of a legal right, a court presumes that nominal actual damages are merged into a punitive damage award.”

MI was entitled to the opportunity to have the jury consider liability for punitive damages, the court explained. The jurors were properly instructed on the issue and held Liberty liable for “willful, wanton, or reckless” actions. “As a result, MI is not prohibited from receiving punitive damages,” the court concluded.

The panel did not, however, reinstate the $12.5 million punitive award. Instead, it remanded the case for the district court to consider whether the evidence supported the jury’s finding that Liberty acted willfully, wantonly, or recklessly. “If the court finds the evidence sufficient, then nominal damages may be presumed, and the court must consider whether punitive damages are appropriate and whether the jury’s award was excessive.”

To read the decision in Liberty Mutual Fire Insurance v. J.T. Walker Industries, click here.

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10th Circuit: Policy’s Anti-Assignment Provision Doesn’t Block Post-Loss Transfer Of Claim

Why it matters
Further reinforcing the substantial majority view, the Tenth U.S. Circuit Court of Appeals recently held that a policyholder was entitled to assign a post-loss claim despite an anti-assignment provision in a property policy. The case involved a property owner’s efforts to obtain the insurance proceeds of a loss on the property where the policy at issue was issued to the bank holding a mortgage on the property. When the bank assigned the claim to the property owner, the insurer refused to pay, relying on a standard anti-assignment provision in the policy. But the Tenth Circuit held the insurer’s refusal was improper because it was “well-settled” that the anti-assignment provision did not prohibit assignment of a claim for a loss that already had occurred.

Detailed Discussion
City Center West LP owned a commercial property in Colorado that was subject to a mortgage held by Summit Bank & Trust. When Summit learned that City Center had failed to insure the property, Summit obtained a property policy from American Modern Home Insurance Company.

The policy listed Summit’s parent company, Heartland Financial, as the “named insured mortgagee,” and provided that losses would be paid to the named insured mortgagee. It also included a non-assignment provision that stated: “Assignment of this Policy shall not be valid unless we [American Modern] give our written consent.”

In 2011, the property was damaged by vandalism and burglary. City Center notified American Modern of the loss and requested payment. American Modern refused to make any payment to City Center (although it did issue a partial payment to Summit Bank). Summit Bank then assigned to City Center all their rights with respect to the claim.

City Center sued American Modern, asserting claims for bad faith and breach of contract. A federal district court in Colorado granted summary judgment in favor of American Modern based on the anti-assignment provision. But the Tenth Circuit reversed, focusing on the “this Policy” language of the provision. According to the court, “[i]t is undisputed that the entire policy was not assigned to City Center.” Rather, “[t]he assignment was only the assignment of one claim for a specific piece of property.”

American Modern argued that the term “Policy” also captured any rights flowing from the policy that would not exist otherwise—such as City Center’s claim. The court squarely rejected that argument, citing prominent insurance treatises. “[T]he weight of authority is that assignment of a post-loss claim under an insurance policy is not an assignment of the policy,” the panel reasoned. “The great majority of courts adhere to the rule that general stipulations in policies prohibiting assignments of the policy, except with the consent of the insurer, apply only to assignments before loss, and do not prevent an assignment after loss.”

The court found further support in Colorado law, which recognizes a difference between an assignment of a contract and an assignment of a claim under a contract. “The distinction between assigning a contract and assigning a claim for money due under that contract has particular force in the insurance context,” the court explained. “There is very good reason to forbid pre-loss assignment of a policy, because the insurer’s risk can be greatly altered by a change in the insured. There is ordinarily no such change in risk once the loss has occurred. That context must be considered in interpreting the non-assignment clause.” Because the assignment by Summit Bank clearly occurred after the loss to City Center’s property, the court held, the district court erred in granting summary judgment to American Modern.

To read the decision in City Center West v. American Modern Home Ins. Co., click here.

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SIR Can Be Satisfied By Third Party Payment, Florida Supreme Court Holds

Why it matters
Addressing a factual situation that is not uncommon, the Florida Supreme Court recently held that a payment made by a subcontractor under an indemnity agreement counts toward meeting the insured general contractor’s self-insured retention. The court further held that the subrogation provision in the policy did not abrogate Florida’s “made whole doctrine,” which requires that the insured be made whole before its insurer when a covered loss occurs. The decision resulted in the subcontractor’s insurer paying $1 million of a $1.6 million settlement, the general contractor’s insurer paying $600,000, and the general contractor paying nothing. In addition to relying on interpretation of the self-insured retention language in the policy, the court reasoned that the general contractor already had paid its share when it bargained to obtain indemnification from its subcontractor.

Detailed Discussion
A homeowner was injured when she fell while using her attic stairs. The homeowner sued ICI Homes, the company that built her home. ICI turned to subcontractor Custom Cutting, which was responsible for the installation of attic stairs in the home, pursuant to an indemnification clause in the subcontract between ICI and Custom Cutting.

Custom Cutting and its insurer, North Pointe Insurance Company, along with ICI and its insurer, General Fidelity Insurance Company, participated in a mediation of the homeowner’s claim. The parties agreed to a $1.6 million settlement. On behalf of Custom Cutting, North Pointe paid $1 million, but it was not resolved who should pay the remaining $600,000.

ICI’s policy with General Fidelity contained a $1 million self-insured retention endorsement, which stated that General Fidelity would provide coverage only after ICI had exhausted the $1 million SIR. According to General Fidelity, because North Pointe, not ICI, had paid the $1 million, ICI was responsible for $600,000. ICI, on the other hand, argued that General Fidelity was responsible because the $1 million SIR had been satisfied, even if ICI had not paid it.

Both parties contributed $300,000 to satisfy the settlement, and reserved their rights against each other. ICI then sued General Fidelity. A federal district court in Florida ruled for General Fidelity, but on appeal, the Eleventh Circuit Court of Appeals found no controlling Florida law and certified two questions to the Florida Supreme Court. Specifically, the Eleventh Circuit asked: 1) whether the General Fidelity policy allows ICI to apply indemnity payments received from a third party towards its self-insured retention; and 2) if the answer to question no. 1 is yes, whether the subrogation provision in the policy results in General Fidelity being made whole before ICI.

As to the first question, the SIR endorsement in the General Fidelity policy stated “[w]e have no duty to defend or indemnify unless and until the amount of the ‘Retained Limit’ is exhausted by payment of settlements, judgment, or ‘Claims Expense’ by you” and “The ‘Retained Limit’ will only be reduced by payments made by the insured.” Although General Fidelity argued that this language unambiguously required ICI to pay the SIR from its own pocket, the Florida Supreme Court disagreed. “The language of the instant policy states that the retained limit must be paid by the insured, but does not specify where those funds must originate,” the court wrote. “Requiring payment to be made from the insured’s ‘own account’ is not necessarily the same as requiring that it be paid ‘by you.’”

Further, the court added, ICI “paid for” the SIR by negotiating for the indemnity protection afforded by the subcontract with Custom Cutting. “The contract between Custom Cutting and ICI, which included the right to indemnification, was entered into six years before the General Fidelity policy was purchased by ICI,” the court said. “ICI paid for the indemnity protection in the purchase price of the Custom Cutting subcontract and therefore hedged its retained risk in this manner. ICI bargained for and paid for this right to indemnification and, without an express policy provision to the contrary, should be able to use it to satisfy the SIR.” Thus, the court answered the first certified question in the affirmative.

As to the second certified question, ICI cited the “made whole” doctrine, applied by Florida courts, requiring that the insured be made whole before its insurer when a covered loss occurs. General Fidelity argued that the subrogation provision in its policy trumped the “made whole” doctrine and required that its loss be satisfied first by the amounts recovered from Custom Cutting. The court disagreed, holding that the “‘made whole doctrine’ is still applicable despite the insurance subrogation provision. As Florida law explains, because subrogation is an offspring of equity, equitable principles (such as the ‘made whole doctrine’) apply even when the subrogation is based on contract, unless the contract contains express terms to the contrary. . . . In the absence of such express language, equitable principles prevail.”

To read the decision in Intervest Construction of Jax, Inc. v. General Fidelity Ins. Co., click here.

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