Judge Slashes Damages by $15.5M; Defense Asks for New Trial

Shannon P. Duffy
The Legal Intelligencer
April 14, 2006
Posted May 4, 2006

Five weeks after a federal jury in Pittsburgh handed up a $21.3 million verdict in Gallatin Fuels Inc. v. Westchester Fire Insurance Co., an insurance bad faith case, the trial judge slashed the jury's punitive damages award from $20 million to $4.5 million.

Now defense lawyers are urging Chief U.S. District Judge Donetta W. Ambrose to toss out the entire verdict, which stands at $5.8 million, or grant a new trial.

In the suit, Gallatin Fuels Inc. of Uniontown, Pa., sought coverage for the loss of mining equipment that was destroyed in April 2002 when the coal mine in which it was being used returned to its natural water level after the power to the mine was shut off.

Gallatin had supplied the equipment to Mon View Mining Co. to operate the Mathies Mine in Fayette County, Pa.

Mon View had obtained insurance from Westchester Fire, and Gallatin was named as a loss payee under the policy.

According to court papers, Mon View Mining Co. experienced financial difficulties in March 2002 and was unable to meet payroll, utility obligations and other debts. It also defaulted on its lease payments for the mining equipment leased from Gallatin.

Unable to pay its bills, Mon View idled the mine and sent workers home. Gallatin demanded return of its equipment, but Mon View refused.

Gallatin said it learned on April 5, 2002, that Mon View owed $548,000 in electric bills and that the power company was planning to shut off the electricity.

Maintaining electric power was critical to protecting the leased equipment because the mine used electric pumps to remove about 2 million gallons of water each day.

Ventilation would also be impossible without power, and federal authorities would prohibit reentry into the mine without elaborate inspections and reopening procedures, according to court papers.

Gallatin attempted to delay the power shut-off, but was unable. Its equipment was destroyed when the mine filled with water soon after the April 8 shut-off.

But when Gallatin made a claim under the policy, Westchester Fire denied the claim, insisting that there was no loss as defined by the policy and that Gallatin had failed to properly document the loss on the "proof of loss" form.

At trial, Gallatin's lawyers -- Christopher R. Opalinski and John H. Williams of Eckert Seamans Cherin & Mellott -- argued that Westchester Fire had engaged in bad faith.

Opalinski told the jury that the insurer "repeatedly put its own interest higher than its insured, carefully, selectively crediting evidence that favored itself, wholly fabricating evidence where necessary, to bully, harass, intimidate, threaten and coerce Gallatin Fuels into dropping its claim."

In its Feb. 21 verdict, the jury awarded Gallatin $1.325 million in compensatory damages on its breach of contract claim and $20 million in punitive damages on the bad faith claim.

But five weeks later, Ambrose reduced the punitive award to $4.5 million.

In a 20-page opinion, Ambrose applied the three-factor test announced by the U.S. Supreme Court in its 1996 decision in BMW of North America v. Gore.

Under Gore, a court reviewing a punitive damage awards must consider the degree of reprehensibility of the defendant's misconduct; the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

Ambrose found that the "most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct."

On the issue of reprehensibility, Ambrose said, the Supreme Court has instructed courts to considering five factors -- whether the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident.

After applying the five factors, Ambrose concluded that the $20 million award could not stand.

"First, the harm caused by defendant was economic, not physical. Second, defendant's conduct did not directly concern the health or safety of others. Thus, these two subfactors weigh against an exorbitant punitive damages award," Ambrose wrote.

But the third, fourth and fifth factors leaned in favor of the plaintiff, Ambrose found.

"Although plaintiff may not have been as financially vulnerable as many individual insurance claimants, the evidence indicates that plaintiff was under some financial strain as a result of Mon View's financial difficulties," Ambrose wrote. "There was also evidence that defendant was aware of this financial strain."

Despite that financial vulnerability, Ambrose said, the insurer "intentionally deprived plaintiff of funds to which it was entitled under the policy."

Ambrose also found the insurer's conducted involved "repeated actions" and was clearly intentional.

"There was an abundance of evidence presented at trial indicating that defendant's conduct was intentionally dilatory and was not the result of 'mere accident.' Among many other things, there was evidence at trial that defendant refused plaintiff's request for assistance in completing the proof of loss form and that the outside adjuster never explained that documentation of the value of the equipment was required to make the claim form complete," Ambrose wrote.

Considering all five factors, Ambrose concluded that the insurer's conduct "was clearly reprehensible and I in no way suggest that the jury erred in awarding punitive damages to plaintiff based on defendant's egregious and outrageous conduct."

But the jury's $20 million award was "exorbitant," Ambrose said, and "out of proportion to the reprehensibility of defendant's conduct."

Ambrose concluded that "a more modest (although still significant) punishment for that conduct, in the amount of $4.5 million" was sufficient.

On April 11, defense lawyers filed post-trial motions in which they urged Ambrose to set aside the entire verdict or, in the alternative, grant a new trial.

The motion was filed by attorneys William M. Wycoff and Jacqueline O. Shogan of Thorp Reed & Armstrong in Pittsburgh, along with C. Michael Johnson and Laurie E. Dugoniths of Fellows Johnson & La Briola in Atlanta, and Stephen A. Cozen and Richard M. Mackowsky of Cozen O'Connor.

In the motion, the defense team argues that Gallatin failed to establish one of the critical facts in any insurance claim -- that its loss was the result of a "fortuitous event," meaning that it could not have been foreseen.

"Failure to maintain electricity to run the pumps made it inevitable that water would eventually fill the mine and either destroy the underground mining equipment or render it inaccessible," the defense team wrote.

Those facts, the defense team argued, were clearly known to Gallatin prior to the power shut-off.

"Whether or not Gallatin intentionally made a reasonable business decision to prevent what was then a known inevitable loss is not the question. The question is whether or not the loss was inevitable from Gallatin's point of view at a time when the loss could have been prevented," the defense brief said.

Copyright © 2006 The Legal Intelligencer

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