SC Appeals Court: Insurer’s Bad Faith Meant Award Was 10X Policy Limit

Jose Castillo didn’t ask his insurance company to defend him from a lawsuit that alleged his shoddy construction caused millions of dollars in water damage to a townhouse project, so his insurer didn’t provide a defense.

That turned out to be a big mistake. A panel of the South Carolina Court of Appeals on Wednesday affirmed a trial court order requiring Pennsylvania National Mutual Casualty Insurance Co. to pay an award totaling $27,339,535, even though the policies it sold Castillo’s company provided only $2.5 million in coverage.

The appellate panel said it found nothing in South Carolina law that allows a liability insurer, when it is aware that a lawsuit has been filed against its insured, to fail to provide a defense just because the policyholder didn’t ask for coverage. The panel affirmed Berkeley County Circuit Court Judge Roger Young’s award of punitive damages, bad faith damages and the plaintiffs’ attorney fees and costs.

“Many of the trial court’s findings that support its bad faith determination also support its determination that Penn National’s conduct was willful and reckless,” the opinion says.

Castillo’s company, named JJA Framing, was a subcontractor for Portrait Homes when it built Persimmon Hill, a development with 388 townhouses in the Charleston suburb of Goose Creek. Construction of the development began in 2002.

Castillo’s contract required him to indemnify Portrait Homes from any claims arising out of his work. Penn National issued five commercial general liability policies to JJA Framing during the period the project was underway. Portrait was named as an additional insured.

In the years after the work was done, homeowners began complaining about water intrusion into their units. The Permission Hill Homeowners Association and one of the homeowners filed a lawsuit against Portrait Homes in October 2012. The complaint was amended later to include JJA Framing as a defendant after an engineer for Portrait Homes blamed the problems on the subcontractor’s faulty framing and flashing work.

The plaintiffs tried and failed to get Penn National involved.

In June 2013, an attorney for Portrait Homes notified Penn National about the lawsuit. In April 2014, an attorney for the HOA notified the carrier that a default judgment would be entered against JJA unless the company filed an answer to the complaint. The lawyer sent the insurer a reminder a month later.

Penn National didn’t respond until September 2014, when it advised the HOA’s lawyer that no coverage was owed because no additional insured endorsement had been added to JJA’s policy.

Portrait Homes filed a lawsuit in December 2014 seeking a declaratory judgment that coverage was owed under the Penn National policies. The HOA filed a lawsuit against Penn National in February 2015 accusing the carrier of bad faith. Portrait Homes amended its complaint later to accuse Penn National of bad faith.

In June 2016, a default order was issued requiring JJA to pay the HOA $4,156,976.89. Portrait Homes’ insurers also paid the HOA $3,850,000 to settle claims against it.

The claims against JJA were not resolved by those settlements. During a bench trial, Penn National’s insurance expert, Bernd Heinze, testified that Penn National had acted in bad faith in a different matter and was ordered to pay $6 million in punitive damages.

The trial also revealed that Penn National had defended Castillo against a similar construction defect claim by the owner of a single-family home approximately two years before the problems at the Persimmon Hill project became known. There was no evidence that Castillo had asked for a defense in that case, according to the opinion. A footnote to the opinion says JJA was involved in at least four other construction defect lawsuits.

Young determined that Penn National had decided it would not hire counsel to defend JJA from the lawsuits unless Castillo asked it to. The insurer even hired an independent claims adjuster, who visited Castillo at his new residence in North Carolina and asked him whether he wanted Penn National to provide a defense.

According to testimony at trial, Castillo told the insurer he did not want a defense. However, the trial court found that Penn National had failed to disclose to Castillo that he was surrendering a policy benefit that he had already paid for, that an engineer had determined his work was the cause of the water intrusion or that the damages in the case would likely amount to millions of dollars.

Young determined that Penn National’s refusal to provide a defense unless the insured requested one was an “improper” additional hurdle “and not required to trigger a duty to defend under the JJA policies.”

“Penn National’s conduct, in addition to being in conflict with the insuring agreements of the policies, is the exact type of conduct that South Carolina bad faith law seeks to deter,” Young wrote in his decision.

Young ordered Penn National to pay the $2.5 million it owed from the five insurance policies, which each had a $500,000 limit. In addition, the judge ordered the insurer to pay pre-judgment interest, damages for bad faith refusal to pay and attorney fees and costs. Altogether, the award amounted to more than 10 times Penn National’s maximum exposure had it defended JJA from the claims against it.

The appellate panel said Judge Young’s orders were “well-reasoned.”

“We find no error in the trial court’s reasoning and calculations,” the opinion says.

Topics Carriers South Carolina