Liberty Mut. Fire Ins. Co. v. JT Walker Indus., Inc., Nos. 12-2256, 12-2350, 2014 WL 504086 (4th Cir. Feb. 10, 2014).

The Fourth Circuit permitted recovery of punitive damages for bad faith despite insured’s inability to prove actual or consequential damages, where the insurer’s settlement of underlying claims was found to be willful, wanton, or reckless.

MI Windows & Doors, Inc., a subsidiary of J.T. Walker Industries, Inc. (collectively, “MI”) manufactures windows and doors.  MI, alongside other contractors and developers, was named as a defendant in five property damage lawsuits alleging that defective manufacturing and installation of MI windows and doors led to progressive water damage in five condominium developments.

Liberty Mutual Fire Insurance Company (“Liberty”) insured MI under six commercial general liability policies, each of which had a $500,000 deductible. When MI tendered the defense of the suits to  Liberty, Liberty  agreed to defend MI and retained counsel to represent it in each of the five lawsuits.  MI expressed to Liberty that it did not wish to settle the cases and instead desired to proceed to trial in order to defend the reputation of its products. Despite MI’s objection, Liberty settled each of the five lawsuits. Because each claim settled for no more than $500,000, Liberty sought reimbursement from MI for the full settlement amounts in accordance with the deductible under the Policies. When MI refused to reimburse the requested settlement amounts, Liberty filed suit in the United States District Court for the District of South Carolina. Liberty sought declaratory relief concerning its right to refuse and control settlement, as well as damages for breach of contract. MI countersued, alleging breach of contract and bad faith.

The district court, despite holding that Liberty retained sole discretion to settle the underlying cases and that MI consequently lacked authority to approve the settlements, denied Liberty’s motion for summary judgment with respect to MI’s bad faith claim. The court denied the motion for two reasons. First, the court held that MI’s inability to approve of settlements did not preclude a finding that Liberty acted in bad faith in settling the claims. Second, the court held that the settlement amounts provided sufficient evidence for MI to take its bad faith claim to a jury.

At trial, MI offered evidence that Liberty failed to disclose cer- tain portions of settlement discussions, including the timing of two of the settlements, and that Liberty’s claims expert had failed to closely review the reserves for each case.  The jury returned a verdict in favor of both parties.  It ruled in Liberty’s favor on its breach of contract claim, holding MI liable for the amount billed by Liberty to MI for the five settlements.  On MI’s bad faith claim, the jury ruled in MI’s favor, finding Liberty liable for $684,416.01 in consequential damages and awarding MI $12.5 million in bad faith punitive damages.

The district court granted Liberty’s motion for judgment notwithstanding the verdict (JNOV) on the grounds that MI failed to prove actual or consequential damages flowing from any bad faith, and therefore was not entitled to punitive damages. The court reasoned that MI failed to prove that absent bad faith, MI would have spent less than the settlement amounts on defense costs and potential damages. The court also denied MI’s request for attorney’s fees.

On appeal, the United States Court of Appeals for the Fourth Circuit affirmed the district court’s ruling that MI failed to prove direct or indirect damages. The appellate court reasoned that without any evidence of what MI would have spent on trial and on potential liability, the jury lacked a legally sufficient basis for determining the amount of actual damages caused by Liberty’s alleged bad faith actions. The jury’s verdict, in essence, reject- ed the possibility of MI incurring any defense costs.

Despite affirming the district court’s ruling regarding MI’s fail- ure to prove damages, the appellate court reversed its ruling that absent such damages, MI could not receive punitive dam- ages.  Rather, the court held that an absence of ascertainable damages does not preclude punitive damages. The Fourth Circuit remanded and instructed the district court to determine whether the evidence supported the jury’s finding that Liberty acted “willfully, wantonly, or recklessly” in settling the underly- ing claims. If the district court finds such evidence, the court will have to consider whether punitive damages are appropriate and whether the jury’s verdict was excessive.

The appellate court further held that MI was not entitled to attorney’s fees because South Carolina courts have never awarded attorney’s fees as consequential damages in bad faith tort actions.  MI was also not entitled to attorney’s fees under a South Carolina statute that provides for an award of fees where an insurer refuses to defend or pay a claim without rea-sonable cause.  Liberty’s settlements, while they may have been in bad faith, did not equate to a failure to defend or refusal to pay.