Advantage Buildings & Exteriors, Inc. v. Mid-Continent Casualty Company ( 2014 )

Missouri Cbourt of AppeaIs
Western District
ADVANTAGE BIJILDINGS &
EXTERIoRS, INC., WD_%SS°
Respondent, oP1N1oN FILE!)=
v } September 2, 2014
MID-CoNTINENT CASUALTY
CoMPANY,
Appellant.
Appeal from the Circuit Court of Jackson C0unty, Miss0uri
The Honorable Wesley Brent P0well, Judge
Before Division Tw0: Victor C. Howard, P.J., lanies Edward Welsh, and Anthony Rex Gabbert, JJ.
Mid-Continent Casualty Company appeals the circuit court's entry of final judgment on a
jury verdict in favor of Advantage Buildings & Exteriors, Inc., on Advantage's bad-faith failure-
to-settle claim. The jury awarded Advantage both compensatory and punitive damages. We
affirm in part and reverse in part.
Factual and Procedural Background
In July 2008, Advantage was sued by Alsation Land Company, Vallejo, LLC, for breach
of warranty, neg1igence, 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, Mid-Continent, with whom it held a Commercial General Liability (CGL) insurance
policy, with a $I,OO0,000 policy limit for each occurrence, and a $2,000,000 umbrella policy, l
Mid-Continent informed Advantage by letter dated August 12, 2008, 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 Alsation's claims. In conclusion, the
letter stated that Mid-Continent "will promptly advise you of the outcome of our coverage
analysis." On September 2nd, Mid-Continent sent Advantage another letter stating that it would
conditionally accept the defense of Advantage in the litigation (while still reserving its rights)
and advising that it had hired an attorney, Eric Swanson, to defend Advantage. The second letter
promised that "[i]f other facts come to our attention, we will promptly inform you of them."
Early on, Attomey Swanson recognized that Advantage was exposed to millions of
dollars in damages and advised Mid-Continent that "Alsation will ultimately prevail at trial." He
advised Mid-Continent to settle the claims. Despite that advice, Mid-Continent did not make any
settlement offers to Alsation on Advantage's behalf. Although Mid-Continent concluded that its
coverage was limited to approximately $53,000 in interior damages to Alsation's building, it
failed to infonn Advantage of that fact.
After more than a year without hearing from Mid-Continent, Advantage hired its own
counsel, Phil Richards, who on June 2, 2010, demanded in writing that Mid-Continent settle
Alsation's claim within the insurance policy limits due to the likelihood that Advantage would
face liability exposure in excess of the policy limits. Mid-Continent did not respond.
‘Alsation also sued Walton Construction Company, LLC, the general contractor, for negligent design,
manufacture, and construction of the building. Walton later filed a third-party claim against The Bratton
Corporation, the subcontractor that erected the steel for the building and hung the exterior wall panels.
2
Alsation and all the defendants in the underlying litigation participated in a final
mediation on July 10, 20l0. Mid-Continent attended on behalf of Advantage. Mid-Continent
had concluded that Advantage faced substantial "uncovered exposure" in October 2009, nine
months earlier, and noted in its case file that Advantage should attend mediation for that reason.
Mid-Continent did not advise Advantage of those determinations, however, until five days after
the mediation, on July 15.
Alsation sought hundreds of thousands of dollars from Advantage at the mediation, but
Mid-Continent gave Swanson the authority to offer only $50,000 on Advantage's behalf. Due to
its refusal to make any meaningful effort to settle, the mediator asked Mid-Continent to leave.
Alsation settled with Walton and third-party defendant Bratton for $2,400,000.2 This left
Advantage as the only defendant in Alsation's upcoming trial with only a few days to prepare.
Two days after the mediation, on July l2, Attomey Richards demanded that Mid-
Continent settle the case within policy limits. That same day, Alsation's attomey wrote
Advantage and made an offer to settle all of Alsation's claims against Advantage for $800,000.
Mid-Continent did not respond to the offer. Alsation made another settlement offer on July 21
for the policy limit of $1,000,000. Mid-Continent did not respond to that offer either, and the
final offer to settle within policy limits expired.
On July 14, Mid-Continent filed a declaratory judgment action against Advantage,
Alsation, and Walton, seeking a declaration that it had no obligation under the CGL or umbrella
policies to defend or indemnify Advantage in connection with Alsation's claims.
The next day, on July 15--four days before the scheduled trial date and nearly two years
after Mid-Continent had promised to "promptly" advise Advantage about its coverage analysis--
zAlsation later settled its claims against the architectural finn on the project, as well.
3
Mid-Continent finally informed Advantage's counsel by letter that its policy did not cover most
of Alsation's $3 million claim against Advantage. The expert witness on whom Advantage had
intended to rely could not testify for Advantag``é' at trial. Thus, the case was set for trial on July
l9th, and Advantage had no expert witness to refute Alsation's claimed damages.
Consequently, Advantage entered into an agreement with Alsation under which it agreed
to pay Alsation $500, to sue Mid-Continent for any claims it might have, and to give Alsation the
proceeds of those claims. Alsation agreed to not execute on any judgment against Advantage, to
fund Advantage's claims against Mid-Continent, and to accept whatever damages Advantage
could recover from Mid-Continent in full satisfaction of its claim.
On July 22, 2010, Alsation and Advantage appeared before the circuit court for a bench
trial. Following Alsation's presentation of evidence, the court concluded that Advantage was
negligent and awarded Alsation $4,604,000 in damages for diminution-in-value, ordering that
Advantage "shall receive credit for amounts pzii'd" by Walton and Bratton.
Mid-Continent then amended its declaratory judgment petition, seeking a declaration that
it was not contractually liable to Advantage for the amount of the Alsation judgment. Advantage
filed a counterclaim against Mid-Continent alleging bad-faith failure to settle.
Mid-Continent moved for summary judgment on its declaratory judgment action and on
Advantage's bad-faith claim. In January 2012, the court granted summary judgment for Mid-
Continent on its claim that it was not liable to Advantage for the Alsation judgment. The court
held that Oklahoma law govemed the coverage issue and that, under Oklahoma law, Advantage's
policy did not provide coverage for Alsation's claims. The court held that Missouri law applied
to Advantage's bad-faith claim and denied Mid:-Continent's summary judgment motion on that
claim due to the fact that "bad faith is generally a fact question."
4
In June 2012, Advantage's bad-faith failure to settle claim against Mid-Continent was
tried before a jury. Advantage sought compensatory and punitive damages, and Mid-Continent
requested a bifurcated trial, pursuant to section 5 1 0.263, RSMo.3 Advantage claimed the
$4,604,000 Alsation judgment as its compensatory darnages. The court did not pennit Mid-
Continent to tell the jury about the declaratory judgment ruling that there was no coverage for
Alsation's claim. j
Following the first stage of trial, the jury found in favor of Advantage on its bad-faith
claim, awarded $3,000,000 in darnages, and found that Mid-Continent was liable for punitive
damages. In the second stage, the jury awarded Advantage $2,000,000 in punitive damages.
Mid-Continent filed a motion for set-off seeking to reduce the jury award by the amount
of Alsation's settlements with Walton and Bratton. The court ultimately denied that motion and
entered final judgment on the jury's verdicts. The court also denied Mid-Continent's post-trial
motions for remittitur and for judgment notwithstanding the verdict (JNOV) or new trial.
Liability Issues
Mid-Continent raises ten points on appeal. We first address its claims related to liability
for compensatory damages (Points I-III and VII-VIII). In Points I and III, Mid-Continent
contends that the circuit court erred in denying its motion for JNOV on Advantage's bad-faith
failure to settle claim in which Mid-Continent argued that Advantage did not make a submissible
case for bad faith.
3Statutory references are to the Revised Statutes of`` Missouri (RSMo) 2000, as updated by the 2011
Cumulative Supplement.
We review the denial of a JNOV motion de novo to determine whether the plaintiff made
a submissible case. See Rinehart v. Shelter Gen. Ins. Co., 261 S.W.3d 583, 595 (Mo. App.
2008). That court explained that:
To make a submissible case, a plaintiff must present substantial evidence
regarding every fact essential to liability. Substantial evidence is that which, if
true, has probative force upon the issues, and from which the trier of facts can
reasonably decide a case. In determining whether a plaintiff has made a
submissible case, we presume that the plaintiffs evidence is true and disregard
any of the defendant's evidence which does not support plaintiffs case. We view
the evidence and all reasonable inferences to be drawn therefrom in the light most
favorable to the plaintiff.
1d. (citations omitted). "It is only where there is a complete absence of probative fact to support
the jury's conclusion that this Court will decide [that] the plaintiff did not make a submissible
case." Id. (emphasis added).
Under Missouri law, "[a]n insurance company has a duty to defend an insured when the
insured is exposed to potential liability to pay based on the facts known at the outset of the case."
Truck Ins. Exch. v. Prairie Framing, LLC, 162 S.W.3d 64, 79 (Mo. App. 2005). This is true "no
matter how unlikely it is that the insured will be found liable and whether or not the insured is
ultimately found liable." Id. The duty to defend potentially insured claims arises "even though
claims beyond coverage may also be present."‘l Id. Coverage is determined by comparing the
policy with the allegations in the pleadings. Ia’.
"Upon proper notice to the insured, Missouri law permits an insurer to defend its insured
but reserve the right to later disclaim coverage." Id. at 88 (emphasis added). If the 'ffully-
notified insured" accepts the insurer's defense under a reservation of rights, then the insurer's
‘Here, Mid-Continent determined that its coverage for Advantage was limited, at the most, to the interior
damages to Alsation's building, which totaled approximately $50,000. Because there was at least potential coverage
at the outset of the case under Mid-Continent's policy for at least a portion of the damages claimed, Mid-Continent
owed Advantage a duty to defend it against the entire lawsuit.
6
offer will not be considered a denial of coverage. Ia’. (citing Brooner & Assocs. Constr., Inc. v.
W. Cas. & Sur. Co., 760 S.W.2d 445, 447-48 (l\/lo. App. l988)) (emphasis added).
However, 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. See Kinnaman-Carson v.
Westport Ins. Corp., 283 S.W.3d 761, 765 (Mo. banc 2009); see also Butters v. City of
independence, 513 S.W.2d 4l8, 424-25 (Mo. 1974); Brooner, 760 S.W.2d at 447. The insurer
must conduct any investigation and analysis of the claim "with reasonable diligence" and must
"promptly notif[y] the insured of its position once the process is complete." 3 NEW APPLEMAN
ON INSURANCE LAW LIBRARY EDITION, § l6.03 [3][d] [i] (2014). A liability insurer that assumes
the defense of its insured should promptly advise the insured of any grounds on which it appears
that all or any part of that asserted liability might not be covered. Ia'. at § 16.03 [3][c] [i]. The
reservation of rights letter should be "specific and unambiguous," should "fully explain the
insurer's position . . . with respect to the coverage issue," and "must avoid any confusion." 22
HoLMEs' APPLEMAN oN INsURANcE 2D, § 136.7[B][2] (2003).
Here, after being sued by Alsation in Jackson County Circuit Court, Advantage tendered
the lawsuit to its insurer, Mid-Continent. Shortly thereafter, Mid-Continent advised Advantage
in a letter dated August 12, 2008, 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. In conclusion, the letter stated that Mid-Continent "will promptly
..s
advise you of the outcome of our coverage analysis.
On September 2nd, Mid-Continent sent :Advantage a second letter. Most of it was
identical to the first letter, with the exception of a few new provisions. lt reiterated that Mid-
SThe Au ust 12 2008 letter is set forth in Appendix A.
7
Continent was reserving its rights and that it would "promptly inforrn" Advantage if other facts
came to light.é
Mid-Continent contends that there was no basis for Advantage's bad-faith claim because
it properly agreed to defend Advantage, undera "reservation of rights," while it was in the
process of investigating the claim and doing al"coverage analysis" and because it was ultimately
determined that there was no coverage as to the claim. We disagree.
As explained by our Supreme Court, an insurer "can effect a proper reservation of rights"
where it provides notice to its insured that its defense of an action "should not be construed as a
waiver of any policy defense," and the insured accepts the defense "with full knowledge of the
position of the insurance company." Kinnaman-Carson, 283 S.W.3d at 765 (emphasis added).
As stated, however, a "proper" reservation of rights must be both clear and timely, and the
insured must fully understand the insurer's position. See z'd.,' Butters, 513 S.W.2d at 424-25;
Brooner, 760 S.W.2d at 447; 3 NEW APPLEMAN, supra; 22 HOLMES, supra.
Here, both letters only vaguely informed the insured that Mid-Continent would
investigate and perform a coverage analysis and that it was reserving its right to assert that there
may be no duty to defend or indemnify against the claims.7 The letters generally discussed the
nature of the underlying lawsuit and set forth various provisions of Advantage's general liability
policy. Neither letter clearly and unambiguously explained how those provisions were relevant
to Advantage's position or how they potentially created coverage issues, 'l``he first letter stated
that Advantage would be "promptly advised" of the outcome of the "coverage analysis." The
°The September 2, 2008 letter is set forth in Appendix B.
7As previously noted in fn. 4, supra, there was an unequivocal duty for Mid-Continent to defend the action
because of the coverage for interior damage.
.``\8
second letter stated, additionally, that Mid-Continent would conditionally accept the defense of
Advantages (while still reserving its rights to contest coverage) and that it had hired an attomey,
Eric Swanson, to defend Advantage. lt also promised to "promptly" inform Advantage "[i]f
other facts come to our attention." Despite not actually analyzing anything or explaining what
coverage issues might exist, both letters stated:
The above analysis constitutes our best efforts to inform you of all factors, which
we are currently aware of, that may affect our ultimate responsibility to provide a
defense and/or indemnification for damages that may be imposed against you in
this litigation. ‘
'l``his did not constitute an effective reservation of rights,
Moreover, Mid-Continent did not "promptly" advise Advantage of its position once it had
concluded its coverage analysis. The evidence at trial showed that the day after sending its
second letter to Advantage, Mid-Continent determined that "coverage will play a vital aspect of
this loss." On September 3, 2008, Mid-Continent concluded that "the only potential coverage
with respect to this loss is to the interior of the building" (estimated to be around $50,000). By
October 28, 2009, Mid-Continent knew that "the insured was certainly at risk of obtaining a large
judgment against them" if Alsation was able to prove its claims. Mid-Continent knew that such a
judgment would exceed the limits of Advantage's policy, exposing Advantage to "a very
significant, multimillion dollar exposure" with little or no insurance coverage. Despite having
promised, in its purported reservation of rights letter, to share its coverage analysis "promptly,"
Mid-Continent did not inform Advantage of the outcome of its actual coverage analysis until two
years later, just four days before Advantage's trial.
$See fii. 7, supra.