November 10, 2003 - Insurance Law Verdict in Bad Faith Lawsuit Totals $3.28 Mil. in Punitives;
The Luzerne County verdict said to be third highest bad-faith award in the state
Awarding the state's third highest bad-faith insurance verdict, a Luzerne County judge has issued $3.28 million in punitive damages to a Hazelton building contractor.
The verdict, which totaled $4.92 million including compensatory damages, was a victory for Philadelphia attorney Richard N. Shapiro, who represented the plaintiff in Corch Construction Co. Inc. v. Assurance Co. of America, PICS Case No. 03-1754 [C.P. Luzerne] October 2003 [32 pages].
Last week, Luzerne County Common Pleas Judge Mark A. Ciavarella Jr. finalized his verdict, in which he found the insurer, Assurance Co. of America, breached its contract with Peter Corch when it failed to immediately investigate and pay his claim under a builders' risk policy he purchased for a 1998 medical-building project.
"The defendant ... was motivated by self-interest and ill-will in the handling of the plaintiff's claim because, although its stated purpose was to look for coverage, it denied coverage despite the fact that there was no evidence supporting the denial," Ciavarella wrote. "As a result of the defendant's bad-faith actions in this matter, the plaintiff Corch's 30 years of success in the construction business has been severely damaged and tainted."
In 1997, Corch had planned to construct a medical building on property he owned in Hazleton. He took out loans to help finance the project and purchased the yearlong builders' risk insurance policy, according to the opinion.
Under the additional coverage portion of the policy, the building's construction was covered for direct losses resulting from the collapse of all or part of the structure caused by the use of defective materials or methods in construction, according to the opinion.
Corch hired subcontractors to install the building's foundation and foundation walls. One of the subcontractors used a foundation system that required builders to pour concrete for the wall foundations into Styrofoam forms instead of wooden forms, and to use wooden jams to support the window and door joints until the concrete hardened, according to the opinion.
But when the wooden blocks were removed, parts of the building started to collapse, Shapiro said. In August 1998 when Shapiro's client first notice the problem, he told his insurance agent about the problem, and she reported the claim under the builders' risk policy to Assurance. Assurance told her there was no coverage under the policy "because there was an issue of workmanship," according to the opinion.
At the direction of the Assurance Builders' Risk Office, the insurance agent sent the claim to the company's general liability office. She noted in the claim that Corch should be contacted as soon as possible because the job site had been shut down because of the collapsing foundation walls and the delay was costing him money, according to the opinion.
The agent tried in early October 1998 to again report the claim to the builders' risk office, and was again told there would be no coverage under the policy. She submitted the claim anyway. Assurance received the claim Oct. 22, 1998, or two months after the walls began collapsing.
The investigator sent to check the construction site noted the foundation wall was "actually falling apart," and that "it was clear where concrete had actually fallen out ... like popcorn falling apart and some pieces are football size," according to the opinion. The investigator took photos of the walls, but the photos were missing from the claim file [Assurance employees testified that it would be inappropriate for these photos to be removed], according to the opinion.
The investigator's supervisors reviewed the file and decided the policy's collapse coverage would not apply because the wall had not collapsed, the opinion stated.
The insurance company hired an engineer, Russell Daniels, who wrote a report concluding that the crumbling of the foundation wall was caused by poor workmanship and use of defective materials by the subcontractors. Ciavarella noted that he didn't believe the supervisors when they said they had met after receiving Daniels' report or that they had reviewed any case law on the law of collapse in the state, according to the opinion.
"There is no documentation in any of the defendant's files citing cases it reviewed or the fact that it reviewed cases or consulted with a lawyer," Ciavarella wrote.
In reference to Daniels' report, Ciavarella said the insurance company denied coverage "and therefore obtained an expert report in a transparent effort to support the denial. The report, however, only addresses the total collapse and is conspicuously silent as to whether or not part of the structure collapsed."
The company unreasonably relied upon Daniels' expert report "which in and of itself supports a finding of bad faith," Ciavarella wrote. "Bad faith occurs when an insurance company makes an inadequate investigation or fails to perform adequate legal research concerning a coverage issue."
Ciavarella found the insurance company had committed eight counts of bad-faith conduct, including outright denying the builders' risk claim by refusing to accept the claim report for two months and for having "no reasonable basis for denying the claim and ignoring the overwhelming evidence of partial collapse."
Ciavarella awarded $1.64 million damages to compensate Corch for the cost of the collapse damage, the cost of loans he incurred to re-start the project with a new foundation, the cost of working out concessions with the tenant doctors who had planned to rent space in the building, and the loss of past and future rental profits on the property, according to the opinion.
"The court rejects the defendant's claim that the damages suffered by the plaintiff were caused by the negligent construction of the foundation walls," Ciavarella wrote. "This flawed argument overlooks the entire point of the plaintiff obtaining the policy of insurance which for a premium obligated the defendant to timely investigate and pay for a covered claim. Had it done so, by all of the credible evidence of record the project after a short hiatus would have been back on track and completed in a timely manner."
Shapiro, who represented Corch, said the situation pushed his client to the edge of bankruptcy. Corch lost the tenant doctors who had signed up to rent space in the building, and had to promise to pay for their design of the building's interior in order to win back their leases, Shapiro said. Corch also went back to the banks to obtain more loans - they refused his applications because of the stalled status of his project.
In the meantime, Corch couldn't afford the rent on his townhouse and moved into the on-site construction trailer until he couldn't afford the rent on that, Shapiro said.
Eventually, the doctor tenants made other plans, Shapiro said. The building now stands one-third completed.
To sanction the insurance company from repeating its bad-faith behavior, the judge awarded punitive damages, doubling the amount of compensatory damages to $3.28 million, according to the verdict.
Last June, the Pennsylvania Supreme Court ruled in Mishoe v. Erie Ins. Co., PICS Case No. 03-0837 [Pa. June 2, 2003] Nigro, J.; Castille, J., concurring; Cappy, J., dissenting [27 pages], that the state's bad-faith statute does not grant a plaintiff the right to a jury trial. Some attorneys argued that such a step was needed to curtail so-called runaway jury verdicts.
"After the Mishoe case eliminating jury trials in state court, I think this case shows that judges can still impose substantial punitive damages awards," said Richard L. McMonigle Jr., a defense attorney at Post & Schell in Philadelphia who wrote the book, "Insurance Bad Faith in Pennsylvania," which is published by American Lawyer Media Inc., the publisher of the Law Weekly.
Joseph Roda chairs the insurance bad faith section of the Pennsylvania Trial Lawyers Association.
"This case is a perfect example of the adage, 'Be careful what you wish for, you just might get it,'" said Roda of Roda & Nast in Lancaster. "If you look at the top six punitive damages awards in the state, Nos. 2, 3, 4 and 6 are all non-jury verdicts, and all in the seven-figures."
The highest bad-faith verdict in the state was a $5.5 million award for punitive damages issued by a jury in U.S. Eastern District Court in 1997 [Leab v. Cincinnati Ins. Co.]; however, that verdict was remitted to $35,000.
A Centre County judge issued the second highest punitive damages award, for $3.35 million in 2002 [Colyer v. National Grange Mutual Ins. Co.].
"I'm not so sure for policyholders in Pennsylvania that judge's decisions will be a bad thing," said Roda, who argued the Mishoe case before the Supreme Court last year. "Judges are not deterred by a big award and the courts are more familiar with insurance industry practices. Juries might be hesitant because they're not familiar with making decisions with money of that magnitude. Judges do it all the time."
McMonigle predicted that the insurance company in Corch would appeal
Ciavarella's decision because he deduced that a question exists as to whether the loss at issue was covered under the builders' risk policy.
"Generally, a builders' risk policy is not a warranty that construction won't fail," said McMonigle, who represents Zurich Insurance Group [Assurance Co. of America is a unit of Zurich].