Yes, I'm back, and thanks to all the well wishers. The hospital tests indicated that there was nothing serious going on, and I'm back to challenging fate on a daily basis. Ed.

Daily Development for Thursday, April 8, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri

INSURANCE; PUNITIVE DAMAGES: Developer may recover punitive damages from insurer for bad faith in refusing benefits under builder’s risk policy .

Corch Construction Co. v. Assurance Co. of America, (PICS Case No. 03-1754) C.P. Luzerne (Oct. 28, 2003).

Developer filed suit to recover for losses due to collapse of part of the foundation wall of his project during the course of construction. In the end, the recovery approximated almost $5 million, even though the policy limits were $800,000. Further, while the cost of the whole project is not set forth in the opinion, the court states that the collapse of parts of the foundation wall resulted in damages of only $132,000 that would have been covered under the valuation clause of the policy.

The collapse in question occurred while the owner was building a medical office building . Corch, a principal of the owner, had obtained a construction loan of $314,000 and had hired various subcontractors to install the foundation and foundation walls under a foundation-wall system designed by one of the subcontractors. Unfortunately, after the concrete was poured and hardened, defects appeared in the concrete.

A builder’s loss insurance policy covered “direct loss caused by or resulting from the direct physical loss involving collapse of all or part of the building or structure caused by, inter alia, use of defective materials or methods in construction, remodeling or renovation if the collapse occurs during the course of construction, remodeling or renovation.”

Corch promptly reported the claim to the insurance company through his insurance agent, and the agent pursued the claim on several occasions. However, the court concluded that the company dragged its feet in reviewing the claim and eventually rejected the claim in bad faith. Meanwhile, Corch had to shut down the job, and the delay in completing construction caused him substantial problems with his prospective tenants who were anticipating completion of the building by a certain date.
The court ruled that it had discretion to award not only compensatory, but also punitive damages for bad faith by the insurance company under a Pennsylvania statute (42 Pa. C.S. Section 8371). That statute provides that when an insurer has acted in bad faith, the insured may be awarded punitive damages, court costs and attorney’s fees.

The company tried to justify its denial of the claim for two reasons. First, it claimed that the policy did not cover a loss which was attributable to “negligent construction” of the foundation walls. Secondly, it claimed that the loss was not due to a “collapse” of the walls within the meaning of the policy. It apparently took the position that “collapse” did not include a condition whereby only portions of the wall came out, leaving it standing with “a honeycombed look.”

The court found that the refusal of recovery by the insurance company had no basis in law or in fact. After reviewing all of the evidence, the court found that both plaintiff and defendant’s engineering experts concluded that what remained standing of the foundation walls lacked structural integrity and that back-filling or applying loads would cause the remains of the foundation to completely collapse.

In reviewing the good faith issue, the court found that the insurance company’s testimony lacked credibility and was “totally unbelievable.” Also, that the company’s employees lied about meetings that they held to discuss the merits of the claim and their legal obligations to pay based on any legal precedent. The court explained that while no definition in the statute defines bad faith, case law does. A Pennsylvania Superior Court decision held that: “Bad faith exists where the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim. Bad faith on the part of an insurer is any frivolous or unfounded refusal to pay proceeds of a policy.”

The court cited a number of specific facts demonstrating bad faith behavior. It pointed out that there was no documentation in any of the insurance company’s files citing cases it reviewed, or that it ever consulted with a lawyer. Also, the court noted that there was no Pennsylvania case law that supported the company’s position on coverage. The court was “particularly troubled that photographs taken by defendant’s investigator were missing from the file and their whereabouts could not be explained at trial.” Other aspects of the insurer’s behavior that disturbed the judge included the insurer’s refusal even to accept the report of claim for a period of months, and its ignoring its own investigator’s report that the foundation wall was falling apart.
The court found that, the foundation wall resulted in damages of $132,000 under the valuation clause of the policy. But, in addition, the court ruled that the plaintiffs had proven that as a direct and proximate result of the insurer’s bad faith breach of the policy, plaintiff’s suffered compensatory damages which included additional interest, fees and other items associated with his loan of $142,000, additional costs needed to pay for tenant concessions of $300,000 and loss of rental profits, past and future of over $1 million.

In addition to these compensatory damages, the court awarded roughly $3,300,000 in punitive damages which was two times the compensatory damage award. Therefore the total verdict amounted to almost $5 million.

Reporter’s Comment: Note that This is not a claim for personal injuries under a liability policy, nor a claim for failure to pay medical bills under a health-care policy. It is a claim made under the property damage provisions of a fire and casualty insurance policy. It is not the result of a runaway jury verdict. In this case, Judge Mark A. Ciavarella made the award following a non-jury trial. The case is a significant precedent for claimants under insurance policies that think they are getting blown off by insurance companies for no valid reason. Knowing that verdicts are not limited by policy limits, or even the cost of construction, gives claimants a powerful negotiating tool.

Editor’s Comment: Although the easiest lesson to be drawn, of course, is not to act in bad faith. But bad faith often is in the eye of the “hind sight” beholder. It is a lot harder to spot that your client currently is engaged in activities that later will be found to be bad faith. Still, the case does provide some guidelines for insurers: If you’re going to base your rejection of a claim upon legal analysis, get a legal opinion supporting your position. And, if you’re in Judge Ciavarella’s court, make sure the opinion is grounded in cites to relevant precedent. Act in a reasonably prompt manner and be prepared to explain the source of any unusual delay in processing. And, by all means, “listen nicely” to the other side and react to all communications.

The Reporter for this item was Harris Ominsky of the Blank Rome firm in Philadelphia, writing in the Blank Rome “Real Estate Update.” Reprinted with permission.

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