The Federal District Court for the District of Puerto Rico recently issued a 58-page decision on post-trial motions in which it extensively discussed Puerto Rico law concerning insurer bad faith and consequential damages in the context of an alleged bad faith denial of coverage. Oriental Financial Group, Inc. v. Federal Insurance Co., Inc., C.A. No. 00-2035-JAG (August 1, 2008). Based upon its analysis of these issues, the court overruled several aspects of two juries’ verdicts and dismissed more than $7 million in damages previously awarded for bad faith consequential damages.

The insurer, an Indiana corporation with its principal place of business in New Jersey, denied coverage on fidelity clause claims made under two consecutive financial institution bonds issued to the insured, a Puerto Rico company. The insured brought suit for breach of contract, bad faith and breach of the covenant of good faith and fair dealing. The case went to trial and the jury returned a verdict in favor of the insured on certain of its breach and bad faith causes of action, awarding $453,219 in direct damages and more than $7 million in consequential damages. However, the jury also rejected or failed to reach a verdict on several of the insured’s causes of action, rejecting more than $9 million in alleged damages. A second jury later rendered a verdict in favor of the insurer on a cause of action based upon a separate proof of loss.

After the verdicts, both the insurer and the insured sought new trials and judgment as a matter of law on a number of issues decided against them. The insured argued that it had established breach and bad faith as a matter of law as to its proofs of loss and that it was therefore entitled to an additional $3.4 million in damages. The insurer argued that it was entitled to a new trial or judgment as a matter of law on the insured’s causes of action for bad faith and its requests for consequential damages, potentially reducing the awarded damages by more than $7 million. In resolving these post-trial motions, the court examined in detail Puerto Rico law regarding bad faith and consequential damages in the context of insurance coverage disputes.

Bad Faith

Under Puerto Rico law,

A party acts with bad faith (“dolo”) when it “knowingly and intentionally, through deceitful means, avoids complying with its contractual obligation . . .” Dolo entails a malicious intent to do harm, and is thus differentiated from mere negligence . . . It is the voluntary and conscious breach of a legal duty . . . Whoever asserts the claim of bad faith (“dolo”) has the burden of proof and may prove it either directly or through circumstantial evidence, like any other fact . . . [W]hen a party acts with bad faith (“dolo”) in breaching a contract, the aggrieved party may recover all damages that originate from the nonfulfillment of the obligation.

The insurer argued that there was insufficient evidence for the jury to have found that it acted in bad faith in denying the insured’s claims.

The court first noted that, because the jury found that certain of the claims were appropriately denied, the insurer’s actions as to those claims could not form the basis for a bad faith claim. Second, the court examined a laundry list of 25 actions taken by the insurer in handling and investigating the insured’s claims, which the insured claimed were evidence of bad faith. The court rejected each item as evidence of bad faith and awarded the insurer judgment as a matter of law on the grounds that:

“[The insurer’s] conduct during the investigation was reasonable and even lenient towards [the insured]. The evidence shows that [the insurer] conducted a prudent investigation and that it did so as expeditiously as possible under the circumstances. Moreover, [the insurer’s] decision to deny coverage was supported by the facts presented in the POLs and by the investigation. [The insurer’s] actions are those of a diligent insurer and cannot be reasonably interpreted as deceitful means to avoid compliance with contractual obligations. Accordingly, on the basis of the evidence presented, a rational jury would not have found that [the insurer] acted with bad faith (“dolo”).

Consequential Damages

Under Puerto Rico law, “[i]n the absence of a finding of bad faith (‘dolo’), ‘the losses and damages for which a debtor in good faith is liable, are those foreseen or which may have been foreseen, at the time of constituting the obligation, and which may be a necessary consequence of its nonfulfillment.’” The court was therefore faced with determining whether the damages previously awarded by the jury for bad faith (where there is no requirement of foreseeability, only causation) were in fact a foreseeable consequence of the insurer’s breach of contract at the time it issued the bonds in question.

The insured argued that, as a foreseeable consequence of the denials of coverage, it was forced to issue a restatement of its financials, resulting in more than $7 million in legal and accounting expenses, damages to its brand value and marketing and public relations expenses to rehabilitate its image. The insurer argued that the restatement was not caused by the denial of coverage and that, even if it had been so caused, the insurer could not have foreseen that denial of a $453,219 claim would cause more than $7 million in damages to the insured.

After reviewing the record, the court stated that it “was unable to find any evidence that had to do with the necessity of the restatement as a result of [the insurer’s] denial of coverage.” The court therefore concluded that the insured “failed to meet its burden in proving that the issuance of the restatement was foreseeable or even related to the denial [of coverage].”

Based upon these two decisions, the court dismissed over $7 million in damages previously awarded by the juries.

If you would be interested in learning more about claims and coverage issues in Puerto Rico or about the Puerto Rican or other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.