A US court held Liberty Mutual Fire Insurance Co liable for nominal and punitive damages for settling claims close to the deductible limit in their own interests rather than the interests of the insured.
A window and door manufacturer was sued by a number of homeowners associations complaining of water damage from windows and doors manufactured by the insured. The insurers paid the claims up to amounts close to the deductible limits and tried to recover the deductibles from the insured.
Although punitive damages would not be awarded in South Africa, damages for actual loss could be awarded against an insurer for settling in its own interests against the interests of the insured.
The insured claimed that the insurer had settled for too much to get rid of the claims and had denied the manufacturer an opportunity to take the cases to trial in order to defend their products’ reputation and to avoid becoming an easy target for construction defect litigation.
A jury found that the insurer had acted in bad faith and awarded actual damages of $700 000 plus punitive damages of $12.5 million but upheld the insurer’s counterclaim for $900 000 to get deductibles back.
The appeal court held that the jury was not out of bounds in finding the underlying settlements unreasonably high. The decision was partly based on evidence that the insurer had budgeted for low reserve amounts, appointed counsel who was unprepared to conduct trials and fought with the insured over whether to litigate. The appeal court upheld the punitive damages award although criticised the South Carolina state law for allowing damages on bad faith principles where there is no proof of actual damage or loss.
Although punitive damages would not be awarded in South Africa, damages for actual loss could be awarded against an insurer for settling in its own interests against the interests of the insured. This has been good law since Groom v Crocker a 1937 English case where the insurers settled a claim and admitted that their insured had been negligent in relation to a motor collision, because it suited them, when he was not negligent at all. Cases of absence of good faith on the part of insurers are very rare however.