Missouri appellate court finds insurer bad faith in construction defect dispute, based, in part, on insufficient reservation of rights.

A Missouri appellate court affirmed a jury verdict against an insurer for bad faith. The court held that the insurer’s reservation of rights letters were insufficient and, as a result, the insurer was precluded from later denying liability due to non-coverage. Therefore, the court found that the trial court did not err in submitting the bad faith claim to the jury despite its declaratory judgment that the policy language did not expressly provide coverage.

Advantage Buildings & Exteriors, Inc. (“Advantage”) was sued for breach of warranty, negligence, and property damage as a result of construction defects in a building for which Advantage had supplied the exterior wall panels. Advantage tendered the claim to its insurer. The insurer informed Advantage by letter that it would “investigate the claim and perform a coverage analysis but that it was reserving its right to assert that there may be no duty to defend or indemnify against [the] claims” and that it would “promptly advise [the insured] of the outcome of such analysis.” The insurer then sent a second letter to Advantage stating that it would “conditionally accept the defense of Advantage in the litigation” and that it had hired an attorney to defend Advantage. The letter also stated that if other facts come to the insured’s attention that Advantage would be promptly informed.

Defense counsel hired by the insurer informed the insurer that Advantage was likely to lose, facing millions in damages, and advised the insurer to settle the claim. Despite that advice, the insurer did not make any settlement offers and failed to respond to any settlement proposals by the underlying plaintiff. Four days before the underlying trial was to begin and two years after the insurer determined its policy provided limited coverage for $53,000 in interior damages only, the insurer finally informed Advantage that it believed that its policy did not cover most of the claims at issue and that the expert witness that Advantage needed to support its case was not going to testify at the trial.  The insurer then filed a declaratory judgment action against Advantage seeking a declaration that it had no obligation under the policy to defend or indemnify Advantage in connection with the underlying claim.

After judgment was entered against Advantage for the underlying claim, Advantage filed a counterclaim against the insurer in the declaratory action suit alleging bad-faith for failure to settle. The trial court granted summary judgment for the insurer, finding that the underlying claims were not covered under the insurance policy and therefore the insured was not liable to Advantage for the judgment. The issue of bad-faith, however, was presented to a jury. The jury found in favor of Advantage and awarded $3,000,000 in compensatory damages and $2,000,000 in punitive damages. The insurer appealed.

The appellate court held that the reservation of rights letters issued by the insurer were insufficient. Under Missouri law, “the insurer owes the insured a duty to assert a proper reservation of rights that is timely and clear and that fully informs the insured of its position” (emphasis omitted). The appellate court found that the reservation of rights letters were vague and did not constitute an effective reservation of rights. The appellate court also held that by waiting two years, the insurer did not “promptly” advise Advantage of its position once it had concluded its coverage analysis.  The court ruled that due to its failure to provide an effective reservation of rights, the insurer was liable under the policy to its limits, despite the policy language to the contrary. Consequently, the circuit court did not err in submitting the bad faith claim to the jury.

As to the bad faith claim, the court found that there was substantial evidence of each type of bad faith under Missouri law: failure to fully investigate a claim, ignoring that a verdict could exceed policy limits, refusing to consider settlement offers, and not keeping an insured informed of settlement offers or the risks of an excess judgment. The court also found that the evidence supported the conclusion that there was an overall failure to handle the claim in good faith because the insurer recognized a need to split the file, but it did not do so until two years later.

The appellate court did, however, grant the insurer’s appeal regarding damages based upon erroneous jury instructions. The issue was remanded for a new trial as to the amount of both compensatory and punitive damages. Advantage Buildings & Exteriors, Inc. v. Mid-Continent Casualty Co., No. WD76880 (Mo. Ct. App. Sept. 2, 2014).