Why it matters

An insured may be able to recover under a breach of contract theory even though the insurer paid out the policy maximum to cover a settlement in the underlying litigation, a federal court judge in Louisiana has determined. The dispute involved a product liability complaint filed against the insured that settled for $24 million. More than 14 months went by without the insurer taking part in the defense, although it ultimately chipped in $4 million, the policy maximum, to the settlement. In the insured’s subsequent breach of contract suit, the insurer contended that it was not liable for any additional damages because it had already paid its full policy limits. But the court – applying Washington law, which was silent on the issue – noted several decisions that have found damages are available to an insured if the insurer ultimately fulfills its obligation, but does so in an untimely manner. The time value of money was sufficient to constitute damages should the insured win the case, the judge wrote, denying the insurer’s motion for summary judgment.

Detailed Discussion

In 2009, REC Solar Grade Silicon filed suit against The Shaw Group alleging that faulty pipes sold by Shaw resulted in damages to REC. Shaw sent the complaint to a third-party adjustor, F.A. Richard and Associations (FARA), that managed Shaw’s policy with Zurich American Insurance Company.

The policy provided a $2 million “per occurrence” limit and a $4 million aggregate cap; Shaw was responsible for a deductible of $750,000 per occurrence.

FARA concluded Shaw was likely liable for the claims in REC’s suit and informed Zurich. More than a year later, the insurer informed Shaw that it would defend the company under a full reservation of rights. Until that point, Shaw had retained and paid its own counsel.

The REC case settled for more than $24 million: $20,750,000 in damages and Shaw’s agreement not to pursue an uncontested counterclaim valued at $3,804,520.50. Zurich chipped in $4 million and Shaw paid at least one $750,000 deductible.

Shaw then filed suit against Zurich, alleging a breach of the duty to promptly pay defense costs and failure to make good faith attempts to settle the REC suit (by not participating in settlement conferences), as well as violations of Washington state law.

Zurich moved for summary judgment on all of the claims, and the court denied each in turn.

The insurer argued that the delay was due to the policy’s complex “unbundled” nature, where one entity was responsible for paying claims and another for administering claims. The insurer also argued that Shaw was required first to pay its deductible.

As to Zurich’s argument that its liability was exhausted by payment of the $4 million policy limits, U.S. District Court Judge James J. Brady found that Shaw could be entitled to an additional payment for the “time value of money” damages.

“[T]he Court finds Zurich’s argument – that an insurer could fail to defend for fourteen months and then not be liable for any damages because the insurer paid costs later – illogical,” he wrote. “The Court finds that ‘time value of money’ is sufficient to constitute damages should Shaw prove its case.”

Judge Brady, applying Washington law, found no direct precedent but cited support from “several federal district courts interpreting general contract principles [that] have found that damages are available even if the insurer ultimately fulfills its obligation in an untimely manner.”

And, despite Zurich’s argument that Shaw would obtain double recovery for the same harm, the court refused to allow a setoff for the $4 million payment. Shaw’s bad faith claims are based in tort, not contract, the court said.

The judge also denied summary judgment to Zurich on Shaw’s claim that Zurich refused to settle in bad faith and deferred ruling on the issue of whether Shaw needed to pay a second $750,000 deductible.

To read the opinion in The Shaw Group Inc. v. Zurich American Insurance Co., click here.