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Supreme Court hears bad faith case

By: dmc-admin//December 11, 2002//

Supreme Court hears bad faith case

By: dmc-admin//December 11, 2002//

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The state Supreme Court is considering whether it is appropriate to preserve $3.5 million in punitive damages on a case that the District II Court of Appeals has remanded to the circuit court for a trial on bad faith.

Although the court of appeals reversed the circuit court’s summary judgment that Tower Insurance Co. had acted in bad faith regarding a claim by Trinity Evangelical Lutheran Church and School, the appellate court also determined that if a trial does show bad faith, the existing punitive damage award was appropriate.

During Dec. 4 oral arguments, an attorney for Tower told the Supreme Court that the insurance company had a right to a full trial on the bad faith issue. He also indicated the punitive damages award was excessive and that the insurer had the right to a new determination by the jury hearing the bad faith case.

Question of Coverage

The case arose from a 1995 accident involving a Trinity teacher who was transporting students and collided with another car. The school does not own any vehicles, so teachers transport students in their own vehicles. However, the school provides insurance coverage for those trips.

When the insurance policy came up for renewal one year earlier, Trinity obtained quotes from a variety of insurance carriers through Jim Rodrian, an independent insurance agent. One of the companies Rodrian approached was Tower Insurance Co.

Rodrian told the Tower underwriter that Trinity wanted "hired and non-owned" automobile insurance and he received a quote from Tower that he believed to be for this type of coverage. Trinity purchased the Tower policy through Rodrian. However, when Rodrian filled out the application for the policy, he inadvertently did not check the box requesting "hired and non-owned" coverage. When Tower issued the policy, it did not include coverage for the teachers’ personal vehicles.

The accident occurred in January 1995 and when Trinity notified Rodrian of the potential claim, Rodrian discovered that the policy did not include "hired and non-owned" coverage. He realized he had failed to check the proper box and contacted Tower asking that the coverage be provided. Tower declined to provide coverage and recommended that Rodrian contact his own insurer for liability coverage for his mistake. Rodrian and his insurer, Unity, spoke with Tower further and encouraged them to reconsider, providing case law that shows when reformation of an insurance policy is warranted. They refused.

When lawsuits arose three years later, Tower filed a motion seeking to remove itself from the case, arguing that the policy did not cover these claims. However, Tower did not tell the trial court that Rodrian had informed it of the error.

Trinity then hired an attorney and filed a claim against Tower for breach of contract. The claim sought reformation of the insurance contract. It soon was verified that Rodrian had asked Tower’s underwriter to include the "hired and non-owned" automobile coverage in the quote for Trinity and, at that point, Tower agreed to reform Trinity’s policy to include coverage for the teachers’ vehicles. Tower then paid $490,000 to settle the claims arising from the accident.

However, Trinity pursued a bad faith claim against Tower. The circuit court, in a sua sponte summary judgment, concluded that Tower’s conduct constituted bad faith. The court held a jury trial to determine damages and that jury awarded $3.5 million to Trinity in punitive damages.

Oral Arguments

Charles F. Smith, of the Chicago firm Skadden, Arps, Slate, Meagher & Flom, represented Tower during the Dec. 4 oral arguments. Smith argued that the issue of bad faith should go back to a jury for trial. If that jury finds bad faith, he said, it should be the one to determine the punitive damages.

"The primary issue on this appeal by Tower is whether the appellate court erred in splitting the baby," Smith stated.

Smith maintained that if the court of appeals agreed that a jury should determine the issue of bad faith, it should also have reversed the punitive damages so the new jury could set those damages at a level it found appropriate.

"It’s not your typical remand where you have tried the entire case to a jury and then it goes up to an appeal and there is a partial remand," Smith explained. "Here, what happened is we never had the chance to try our bad faith case to a jury."

He noted that the original jury started with the trial court’s summary determination that bad faith occurred, which automatically biased the jury against Tower. As a result, it gave an excessive punitive damages award. Smith argued that the only damage to Trinity, since Tower paid the $490,000, was the $17,000 in attorney’s fees. Therefore, the punitive damages established a 200:1 ratio.

The court of appeals compared the punitive damages with the amount full amount that Tower paid to establish a ratio of 7:1, which it deemed was appropriate.

Lawyers for Trinity argued that the trial court had sufficient reason to make a summary judgment of bad faith, therefore, the circuit court’s original judgment should stand. If the case does go back for a new trial, they maintained, the $3.5 million in punitive damages should remain in place if the new jury finds bad faith.

Links

Wisconsin Supreme Court

Related Resource

Oral Argument – Real Audio

Trinity was represented by Robert L. Jaskulski and Merrick R. Domnitz, both of the Milwaukee firm Domnitz, Maw-icke, Goisman & Rosenberg. Jaskulski indicated that there were "key facts" that supported Trinity’s cross appeal to uphold the trial court’s summary judgement.

"In this case, there are certain key facts that were undisputed at the time the trial court decided summary judgement," Jaskulski said. "They were undisputed when this case was tried to the jury and they remain undisputed to this day."

He indicated those facts included: the mistake by Rodrian, who was acting as Tower’s agent; Tower’s decision to deny coverage despite Rodrian’s admission of a mistake; Tower’s lack of meaningful investigation into the error; a Tower representative’s stated concern about the potential for a big dollar loss; and Tower’s attempt to withdraw from the case without telling the trial court of its agent’s mistake.

Domnitz argued the issue of preserving the punitive damages if the case does go back to a jury for trial on the issue of bad faith. Domnitz agreed with the court of appeals determination that the punitive damages were reasonable. He denounced the idea that those damages should only be compared with the legal fees when determining whether they were reasonable.

"Were you to issue a ruling that that is the true measure of punitive damages, I submit that you would create a tear in the fabric of insurance contractual law in Wisconsin that companies like Tower would try to drive a locomotive through," Domnitz said.

The case is Trinity Evangelical Lutheran Church and School – Freistadt v. Tower Insurance Co., 01-1201.

Tony Anderson can be reached by email.

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