SC will decide if $53M punitive damages award against insurers is too much

CHARLESTON – A once-$53 million punitive damages award against three insurers is among the issues the state Supreme Court took up on Sept. 24-25.

The court heard oral arguments in the appeal of a Harrison County case in which Hess Oil Company was awarded $53 million in punitive damages, but Circuit Court Judge Thomas A. Bedell reduced the amount to $25 million.

The insurer defendants - AIG Domestic Claims, Chartis Claims and Commerce and Industry Insurance Company - say that amount is still too high, while Hess Oil wants the original figure reinstated.

“(T)he Court concludes that the aggravating factors in this case outweigh the mitigating factors and that a high award of punitive damages is proper,” Bedell wrote.

“The Court believes the only way to fulfill the purposes of punitive damages against Defendants with such financial prowess as the ones herein is to make award a substantial amount of damages to Hess Oil; however, the Court also recognizes that the AIG Defendants’ conduct in no way approached the ‘actual evil intent’ that would deem an award exceeding the prescribed 5:1 ratio proper.”

The lawsuit was brought over unpaid invoices for environmental remediation work performed at Mount Storm, a community in Grant County.

Hess Oil – a local company, not the Fortune 100 corporation based in New York City - owned a gas station at which an underground leak was discovered in 1997.

At the time, Hess was insured for Underground Storage Tank liability by the State of West Virginia, but never filed a claim under that policy. The State terminated the UST insurance program later that year.

Hess says it submitted applications for insurance to the AIG defendants on Oct. 15 and Oct. 30, 1997. AIG says it only received the Oct. 30, 1997, application.

In February 1998, an oil spill on an adjacent property was discovered. The AIG defendants concluded it was Hess’ responsibility and remediation was required and covered under the policy.

Commerce and Industry paid approximately $622,000 in cleanup costs over the next 10 years.

In 2009, the AIG defendants denied coverage because of an alleged inaccuracy in Hess’ Oct. 30, 1997, insurance application.

Ryan Environmental brought suit against all parties for $252,000 in remediation and cleanup work, and Hess and the AIG defendants brought cross-claims against each other over which should pay.

In May 2011, the AIG defendants resolved the claim by reimbursing the disputed costs to Ryan Environmental. It then sought the $822,000 it paid to Ryan Environmental from Hess Oil.

A jury awarded $5 million in compensatory damages to Hess Oil and found that the AIG defendants had acted maliciously, awarding $53 million in punitive damages.

Using the 5:1 ratio, Bedell multiplied the jury’s $5 million award of compensatory damages by five to arrive at the $25 million figure.

His decision pleased neither side. The defendants called the original $58 million award “jaw-dropping.”

“There is no basis for the jury’s finding that the… defendants acted with actual malice, a necessary requisite for punitive damages,” their appeal brief says.

“And even if there were, the judgment is unconstitutionally disproportionate to any injury here: The $25 million punitive award is almost 100 times the $253,000 in remaining costs that Hess might have had to pay after the disclaimer of coverage, and five times larger than even the jury’s baseless $5 million ‘compensatory’ award – a ratio that exceeds the bounds of due process where, as here, compensatory damages are ‘substantial.’”

The defendants made other gripes with the case. One is that the court allowed the jury to award damages to Hess for emotional injuries incurred only by its shareholders, they say.

Others claim the defendants were prevented from objecting to jury instructions until after the jury had retired, evidence of future remediation costs should not have been introduced and two Hess witnesses testified without the AIG defendants being allowed to prepare.

Hess Oil’s appeals brief deals with the issue of punitive damages. It also says the coverage dispute was “conjured” by the AIG defendants and that the jury’s determination on punitive damages resulted from AIG’s “egregious” conduct.

“Even if the factual basis of the punitive damage award is disregarded in favor of a strict, legal analysis of the award’s compliance with state and federal due process constitutional standards, the circuit court erred through its reduction in the punitive damage award,” Hess Oil’s appeals brief says.

“The case law discussed below confirms that the jury’s punitive damage award complied with state and federal due process standards and should be reinstated in full. It was error for the circuit court to reduce the award, thereby usurping the critical role of the jury as fact finder, in fashioning the proper deterrence and punishment for egregious conduct for the AIG defendants.”

Justice Robin Davis disqualified herself from hearing the appeals. In her place is former Justice Thomas McHugh.

Other civil appeals that took place Sept. 24-25 include:

-Robert L. Burnworth’s appeal of a legal malpractice ruling in favor of the law firm Robinson & McElwee in Kanawha County Circuit Court;

-Edwin Miller Investments’ appeal of a Berkeley Circuit Court decision that determined CGP Development was entitled all condemnation proceeds from three condemnation petitions;

-Bluestone Industries’ appeal of a Wyoming Circuit Court decision that set aside a verdict in its favor and ordered a new trial in a deliberate intent case filed by Timothy Keneda;

-Cara New’s appeal of a Logan Circuit Court decision that found arbitration requirements in GameStop’s employee handbook enforceable;

-Taylor County Assessor Judith Collett’s appeal of a decision that returned the assessments of several reserve coal properties to the initial values provided by the State Tax Commissioner;

-Ocwen Loan Servicing’s appeal of a Kanawha Circuit Court decision that found its motion to compel arbitration in a mortgage lawsuit was unenforceable the Dodd-Frank Act and unconscionable under state law;

-U-Haul Co. of West Virginia’s appeal of a Kanawha Circuit Court decision that denied its motion to compel arbitration;

-A certified question from Harrison Circuit Court that asks if the state’s version of the Uniform Limited Liability Company Act affords complete protections to members of an LLC against a plaintiff seeking to pierce the corporate veil;

-Freda Bradley’s appeal of a Logan Circuit Court decision that ruled her floor did not “collapse” as would be required for coverage under her Farmers & Mechanics insurance policy;

-Anthony J. Veltri’s appeal of a Taylor Circuit Court decision that would remove him from his position as a county commissioner; and

-David McComas’ appeal of a Cabell Circuit Court decision that granted ACF Industries summary judgment in his lawsuit alleging an explosion at work injured him.

From the West Virginia Record: Reach John O’Brien at jobrienwv@gmail.com.