JUNE 2006 BAD FAITH CASES EVIDENCE SUFFICIENT TO ESTABLISH BAD FAITH IN DENYING CLAIM & IN HANDLING CLAIM;LOSS PAYEE HAS STANDING; PUNITIVE AWARD WITHIN DUE PROCESS (Western District)

In Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., the defendant insurance company filed post-trial motions after the jury returned a verdict in favor of plaintiff on both counts, breach of contract and bad faith.  Plaintiff, who was named as a loss payee under the insurance policy issued by defendant insurance company, filed suit seeking payment under the policy for mining equipment that was destroyed or rendered unrecoverable.  The jury found that the defendant insurance company had lacked a reasonable basis for denying benefits to plaintiff and awarded $20 million in punitive damages on the bad faith claim, which the court reduced to $4.5 million.  Challenging the bad faith award, the insurer asserted that (1) the evidence was not sufficient to find that the loss was caused by an accident; (2) the policy had been cancelled before the date of loss, and (3) the plaintiff had made misrepresentations.  The court concluded that the jury expressly considered and rejected these arguments.  The court further found that a loss payee did have standing to bring a bad faith action, having rights independent of the insured. 

Next, the carrier argued that bad faith cannot exist when the claim amount is in dispute.  The trial court found that the evidence introduced at trial established that the insurer knew that the value of the claim was in excess of the policy limits, that it did not offer to pay any portion of the claim, and that it failed to properly handle the claim.  The company then argued that the punitive damage award violated federal due process.  The trial court disagreed, finding that the jury relied on the jury questions that the defendant insurance company proposed, and that the jury was appropriately instructed on the issue of punitive damages.  Lastly, the insurer argued that since bad faith and punitive damages are statutorily reserved for the court, the trial court erred by submitting these issues to the jury.  The trial court concluded that because the court had rejected a similar issue at trial, and the issue was not adequately addressed in the post-trial motions, it would not reverse its previous ruling.

Date of decision:  June 2, 2006

Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., United Stated District Court for the Western District of PA, No. 02-2116, 2006 U.S. Dist. LEXIS 36027 (W.D. Pa. June 2, 2006) (Ambrose, C. J.)