S. Carolina Insurer’s Bad Faith Causes $27M Loss from Policies with $2.5M 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 $27,339,535.46 to developer Portrait Homes and the Persimmon Hill Homeowner’ Association, even though the policies it sold Castillo’s company provided only $2.5 million in coverage.

The appellate panel said in its opinion that 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 M. 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.

Plaintiff’s attorney John T. Chakeris said the insurer opened a door for punitive damages when it sent independent claims examiner Gayle McLeod, more than a year after the HOA filed its lawsuit. to Castillo’s home in Huntersville, North Carolina to ask whether he wanted coverage. He said while under cross examination by fellow plaintiff’s attorney Phillip Ward Segui Jr., McLeod acknowledged that she didn’t tell Castillo that he was entitled to a defense attorney at no cost to him.

Chakeris said his law firm asked for punitive damages equal to three times actual damages, the maximum amount allowed by law, but Judge Young awarded only one times the actual damages amount.

“The money is big, obviously,” he said, “but the particularly frustrating thing about this process is you have a carrier that decides they are not going to participate in defense or indemnity when there is coverage available,” he said. “That’s also frustrating to insurance carriers that are doing what they are supposed to.”

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 settlement didn’t resolve the claims against JJA.

The plaintiffs uncovered more damaging evidence that was submitted during a bench trial in the case against JJA. Penn National had hired an insurance expert, Bernd Heinze, to testify on its behalf. Chakeris said Heinze had been hired as a plaintiff’s witness in another case and testified against Penn National. Under cross examination by Segui, Heinze testified that Penn National was ordered to pay $6 million in punitive damages in the previous case.

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 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.

The judge 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.