Summary: The insured, an oil distribution company, brought an unfair trade practices action against its insurer following denial of coverage on an environmental remediation claim. The insurer brought a cross-claim for breach of contract and negligent misrepresentation due to the lack of reporting a prior claim on the insured’s application. A jury entered verdict in favor of the insured, but the trial court reduced the punitive damage award from $53 million to $25 million. Both parties appealed and the Supreme Court of Appeals found that the insured, which was dissolved and suing in its own name, could not recover damages for the personal aggravation, annoyance, and inconvenience of its non-party former shareholders. The Supreme Court of Appeals also found there was instructional error on the standard for demonstrating fraudulent misrepresentation in the insurance policy application because the action was for negligent misrepresentation, not fraud.
AIG Domestic Claims, Inc. v. Hess Oil Company, Inc. 751 S.E.2d 31 (W.V. 2013)
The insured owned underground storage tanks at various service stations in West Virginia. Sometime in 1996, the insured applied for and obtained insurance coverage from the insurer for environmental remediation claims at its various sites.
In 1997, after insurance was procured, the Department of Environmental Protection issued a notice to the insured of possible environmental contamination at one of its sites. In October 1997, when it was time for the policy renewal, the insured submitted either one or two applications to the insurer. The insurer acknowledged receipt of only one of the applications. The application acknowledged by the insurer did not include a report of the prior notice of environmental contamination. The other application, which the insured admitted during closing arguments may have been a draft only sent to its agent, did include a report of the prior notice of contamination.
The insurer issued a new one-year policy with a $1 million limit of coverage. The insurer agreed to pay “reasonable and necessary costs that the insured is legally obligated to pay for corrective action due to confirmed releases resulting from pollution conditions from an underground storage tank system which are unexpected or unintended from the standpoint of the insured.” To invoke coverage, claims had to be reported to the insurer in writing during the policy period.
In February 1998, the Department of Environmental Protection advised the insured regarding “observed change conditions” at its site including complaints of vapors, petroleum slicks, and globules. The insured eventually provided notice of the potential claim to the insurer in January 1999 and coverage was accepted by the insurer in July 1999. The insurer paid $622,000 in corrective action costs for cleanup of the site. However, once the insurer learned of the 1997 notice from the Department of Environmental Protection for the same site, it disclaimed coverage based on the alleged inaccuracy in the October 1997 application submitted by the insured and its prior notice.
Due to the coverage disclaimer, an environmental contractor responsible for the remediation and cleanup work at the site brought a civil action against the insured seeking to collect $252,000 for work its employees had performed. The insured filed cross-claims against the insurer seeking both a declaration regarding its entitlement to insurance coverage and also asserting a first-party bad faith claim. The insurer filed cross-claims against the insured alleging breach of contract and negligent misrepresentation. Through these cross-claims, the insurer sought $622,000 for the environmental remediation costs it had paid prior to the filing of the lawsuit as well as $260,000 to reimburse it for the settlement the insurer had reached with the environmental contractor after suit was filed.
After seven days of trial, the jury awarded the insured $5 million in compensatory damages and the case proceeded to the punitive damage phase after the jury found the insurer had willfully, maliciously and intentionally utilized an unfair business practice while knowing the claim was proper. The jury awarded $53 million to the insured in punitive damages. However, the trial court reduced the punitive damage award to $25 million.
The insured appealed seeking to have the full amount of the punitive damages award reinstated while the insurer appealed seeking a grant of judgment as a matter of law or, alternatively, a new trial.
The insurer argued the trial court wrongly viewed and treated the former shareholders of the insured as the corporation for evidentiary, damage, and verdict purposes throughout the course of the trial. The claims and the action at issue were either brought by or against the corporation, which was dissolved in 2006. The shareholders were not named parties. The insurer objected consistently during the trial to testimony and evidence by former shareholders. The insured advanced its cross-claim at trial as though the non-party former shareholders were personally liable for the cleanup of the site after the disclaimer of coverage. The jury was urged to award damages for the emotional impact the coverage disclaimer had on the individual shareholders. The trial court allowed the jury to consider the effect the coverage disclaimer had on the individual shareholders as both relevant and determinative with regard to the issue of injury and damages.
The Court found that the record was clear that no injury was suffered by the insured corporation in connection with the claim initiated by the environmental contractor, which the insurer settled and obtained a release in favor of the insured. The individual shareholders also testified at trial that the insured corporation suffered no damages. Without the evidence concerning the emotional damage suffered by the individual former shareholders there would have been little or no evidence of injury for the jury to consider. The Supreme Court of Appeals held that a dissolved corporation that is asserting a claim solely in its corporate name may not recover damages for the personal aggravation, annoyance, and inconvenience of its non-party former shareholders.
Once it made this finding, the Supreme Court of Appeals did not reach the issues of whether future remediation costs and punitive damages were recoverable. While the case was being remanded for a new trial, the Supreme Court of Appeals did question whether future remediation costs were recoverable because there was no clear demand for settlement made by the insured within the policy limits. In West Virginia, an insurer may be held liable beyond its policy limits upon proof that the policyholder made a reasonable demand within the policy limits. In this case, future remediation costs would put the total loss well in excess of the $1 million policy limit.
The Supreme Court of Appeals also found that the trial court committed an instructional error when it allowed submission of an instruction relating to West Virginia’s statutory fraud claim which requires a finding of intentional conduct. This was error because the insurer had cross-claimed only for negligent misrepresentation relating to the failure to report the 1997 claim on the 1998 insurance application.
The takeaway from this case, besides the willingness of West Virginia juries to award exorbitant damages against insurance companies, is to pay close attention to who is an actual insured under the applicable policy, what party brought suit, and what party has actually suffered any extra-contractual damages. Sometimes what might be considered a technicality, like failing to name former shareholders as parties, can have a major impact on the outcome of the case.
By Aaron French
