Before ordering Interstate Fire & Casualty Co. and Fireman’s Fund Insurance Co. to pay a $25.5 million punitive damages judgement that technically was not covered by the policy, U.S. District Judge Alan B. Johnson had some choice words for the insurers. He accused the insurers of “demonstrating a complete disregard of the insureds’ exposure to punitive damages”; “lull[ing] [the policyholders] into a false sense of security”; and “lurking in the bushes” with a reservation of rights letter sent on the eve of trial.
In the underlying case, a tenant in the insured’s apartment complex alleged that she was seriously injured by carbon monoxide poisoning. The insurers agreed to defend the owners without any reservation of rights. Nineteen months went by; the insurers fully controlled the defense and refused to accept a settlement offer within the policy limits, despite several pleas from the insureds. Eleven days before trial, the insurers’ counsel lost a summary judgment motion. Only then did the insurers send a letter disclaiming coverage for the punitive damages claim and suggest that the insureds obtain their own counsel for that issue – eleven days before trial!
Quoting a similar case, Judge Johnson noted that “irrespective of the actuality of non-coverage, the insurer must accept the equitable consequences of its deliberate choice to assume full control of the litigation, without a reservation of rights, because the ostensible insured was induced to, and did, relinquish control of his defense to the insurer. And those equitable consequences involved shouldering the burdens of any liability arising from the litigation that it deliberately elected to control.” Quoting Cornhusker Cas. Co. v. Skaj, 786 F.3d 842, 853-54 (10th Cir. Wyo. 2015) (internal citations omitted).
The case is Interstate Fire & Casualty Co. et al. v. Apartment Management Consultants LLC et al., case number 2:13-cv-00278, in the U.S. District Court for the District of Wyoming.