Articles

The Builders Exchange

"CONTRACTOR TAKES ON INSURANCE COMPANY AND WINS"

The California Court of Appeal recently upheld a multi-million dollar jury verdict in an action brought by a general contractor against his insurance company.

For persons in the construction industry, this case demonstrates what can happen to a contractor forced to do battle with his or her insurance company. Fortunately, in this case, there is a happy ending for the contractor.

The case in question concerns Mark R. Freeman, a general contractor, and West American Insurance Company, a subsidiary of Ohio Casualty Group, which issued Mr. Freeman's comprehensive general liability insurance policy.

In the mid l980's, Mr. Freeman designed and constructed a home in Palo Alto. The house was sold by Freeman to the Pierces. The Pierces later noticed a warping problem with their hardwood floors. Mr. Freeman made efforts to remedy the problem, later removed the floors and ultimately agreed to replace them. The Pierces however declined this offer pending a determination of the cause of the problem. The Pierce's later discovered other problems with their home and eventually sued Mr. Freeman claiming the house was negligently designed and constructed. Unfortunately for Mr. Freeman, this was only the beginning of his problems.

Mr. Freeman's real problems began when he tendered the defense of this lawsuit to West American who "accepted" the tender under a reservation of rights. In other words, West American agreed to provide a defense, but expressly reserved the right to deny coverage later based on one of the exclusions found in the subject policy. West American then hired a law firm to defend the action.

The law firm hired by West American hired several experts to investigate the Pierce Complaint. The opinion of each of these experts was favorable to Freeman's defense. In essence, the experts agreed that the foundation built by Freeman had been properly constructed and the problems with the house were not of Freeman's doing. Despite these opinions, the law firm did not seek to exonerate Freeman from liability or join others in the lawsuit who might be at fault. In fact, in an apparent effort to minimize expenses, no real work was done on the file.

Once settlement discussion began, West American agreed to fund a partial settlement of the lawsuit related only to structural repairs to the foundation. This offer was made subject to West American's right to seek reimbursement for funds it contributed to losses not covered under the policy. West American advised Freeman that if he choose not to settle as proposed, West American would not fund any settlement or judgment related to the foundation which exceeded the amount they were offering. West American also threatened to stop funding Freeman's defense.

Mr. Freeman was opposed to this settlement. He believed he was not at fault for the structural problems and that others should be joined in the lawsuit. Mr. Freeman also believed that the costs estimates provided by the Plaintiff were too high. Finally, Mr. Freeman was concerned about his reputation.

Despite these concerns, Freeman reluctantly agreed to settle because he felt he could not "afford to take on the insurance company".

Instead of having the matter behind him, however, Mr. Freeman's troubles were just heating up. Less than a year after the Pierce litigation had settled, West American sued Freeman seeking reimbursement of the funds paid on Freeman's behalf to settle the Pierce litigation as well as the defense costs it had paid to the attorneys it had selected and the fees it had paid to Mr. Freeman's own counsel claiming there was no coverage.

Thus, after paying over $60,000 in premiums, being subject to a law firm that did not adequately defend him, and agreeing to a settlement under protest for items that were not his fault, Freeman was forced to defend a lawsuit seeking reimbursement of the settlement and the fees paid to "defend" the Pierce litigation.

At that point, Freeman had had enough. He counter-sued for bad faith. By the time of trial, Freeman had lost his business and was liable for over $300,000 in attorneys' fees. Fortunately, the jury agreed he had been wronged and awarded him $1.3 Million in actual damages and $12 million in punitive damages. This award was upheld on appeal.

Mr. Kershner is with the Law Offices of Gary Kershner, a member of the Exchange since l955. The law firm acts as general counsel in litigation and non-litigation matters for a variety of small and med-size businesses. Mr. Kershner is planning a seminar on insurance issues in the construction industry. If interested, give Scott Leary a call and look for an announcement on the exact date and time of the seminar.