Insurance Claims Bad Faith
Missouri Court of Appeals Affirms Award of Compensatory Damages Against Insurer Based Upon Bad Faith Failure to Settle and Overall Failure to Handle Construction Defect Claim In Good Faith
Traub Lieberman Straus & Shrewsberry LLP
September 29, 2014
The Missouri Court of Appeals recently affirmed an award of compensatory damages against an insurer based upon bad faith in Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas. Co., 2014 Mo. App. LEXIS 975 (Missouri Court of Appeals 2014). The declaratory judgment coverage action arose out of an underlying construction defect action in which claims were asserted against Advantage Buildings & Exteriors, Inc.(“Advantage”) in connection with allegedly defective exterior wall panels supplied by Advantage which sought coverage from its insurer, Mid-Continent Casualty Company. Mid-Continent issued a timely reservation of rights letter informing Advantage that it would be promptly notified of the outcome of the coverage analysis. Mid-Continent then sent a second letter notifying the insured that defense counsel had been assigned.
Defense counsel advised Mid-Continent of the exposure faced by Advantage and urged Mid-Continent to settle the claim but Mid-Continent did not make any settlement offers. Moreover, while Mid-Continent concluded that its exposure (based upon covered claims) was limited to $53,000 related to interior damages, Mid-Continent failed to communicate this to its insured.
Advantage hired private counsel who demanded that the carrier settle the claim within the policy limits. Although Mid-Continent concluded that Advantage faced substantial exposure beyond policy limits Mid-Continent failed to respond to the demand to settle the claim and failed to communicate its findings to the insured.
Mid-Continent did attend a final mediation in July 2010 but due to its refusal to make a meaningful settlement offer beyond $50,000, Mid-Continent was asked to leave the mediation. The remaining parties settled, leaving Advantage as the only defendant in the upcoming trial. After the mediation, Mid-Continent initiated a declaratory judgment action, informed the insured of its conclusion regarding the insured’s exposure and advised of its coverage position, leaving the insured exposed for most of the $3 million claim.
A $4.6 million judgment was entered against Advantage which then filed a cross claim for bad faith against Mid-Continent in the declaratory judgment action. The court in the declaratory judgment action applied Oklahoma law to the coverage issues but Missouri law to the bad faith claim. Following the trial on the bad faith claim, the jury awarded $3 million in compensatory damages and $2 million in punitive damages to the insured.
On appeal, the Court of Appeals found that the initial reservation of rights letter did not meet the established standards regarding clarity and timeliness and the insurer failed to “promptly” advise the insured of its position once the coverage analysis was completed. Since a carrier who defends an action “with knowledge of non-coverage” without a proper reservation of rights letter is precluded from later denying liability due to non-coverage, the Court of Appeals concluded that Mid-Continent was prohibited from limiting coverage for the claim. Thus, the Court of Appeals affirmed the judgment for $3 million in compensatory damages against the insurer. Due to erroneous jury instructions the case was remanded for the jury to determine the amount of punitive damages.
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SOURCE: www.traublieberman.com