Successful Litigation Strategies in Recent $112 Million Punitive Damages Property Damage Insurance Case

Abstract: On March 22, 2024, an Indiana federal judge affirmed a historic $112 million punitive damages jury verdict—the largest punitive damages award ever handed down in a property damage insurance case. The facts of the case are not that atypical. Flooding damaged a manufacturing facility, and a claim was made under the policyholder’s “all risk” property insurance program. The insurers adjusted and paid the claim until covered losses exceeded their expected loss tolerances. When the policyholder demanded full recovery, the insurers abandoned the claim and denied coverage. This article examines the use of bad faith litigation in the corporate insurance context and offers one perspective on what can transpire if a corporate policyholder questions insurer conduct. This case validates the value of bad faith litigation in corporate insurance claims. Litigation strategies that enabled the jury to reach a verdict consistent with the facts presented are also addressed.

Introduction

On March 22, 2024, an Indiana federal judge affirmed a historic $112 million punitive damages jury verdict¹—the largest punitive damages award ever handed down in a property damage insurance case. This verdict stands out, in part, because corporate policyholders seldom bring bad faith cases against their insurers. This retrospective analysis highlights some of the litigation strategies that proved successful in a case where bad faith was aggressively
pursued.

Corporate Insurance Bad Faith Litigation

The insurance companies subject to this verdict² undoubtedly believe that bad faith has no place in the corporate insurance world. Under the law applicable to this case, an insurer engages in bad faith by: (1) making an unfounded refusal to pay policy proceeds, (2) causing an unfounded delay in making payment, (3) deceiving the insured, or (4) exercising any unfair advantage to pressure an insured into a settlement of his claim.³ Similar bad faith law is found in most other states as well. The law sets the bar for bad faith conduct relatively low because insurance companies are incentivized to minimize claim payments.

Despite this modest bad faith standard, few commercial policyholders bring bad faith actions. The reasons for this have little to do with insurer conduct.

The overwhelming majority of high-end law firms are precluded from filing bad faith actions. Insurance companies are prolific consumers of legal talent. Most established corporate law firms either represent insurance companies or defend claims paid for by insurers. These law firms find it difficult or impossible to bring bad
faith lawsuits on behalf of corporate clients. A breach of contract action may get approved by law firm management, but a bad faith action that could severely damage a law firm’s reputation with insurers is rarely authorized. No matter how skilled these litigators are, and no matter how large the corporate claim may be, their hands
are tied behind their backs when it comes to litigating against an insurance company.

This imbalance also extends to insurance brokers. The first place corporate policyholders look when they have a claim is their insurance broker. Insurance brokers depend on trustworthy relationships with insurers. Without these relationships, they cannot place coverage for corporate clients. Litigation brought by policyholders
is frowned on by insurers and bad faith litigation is even more concerning. When a significant claim is made, insurance brokers can find themselves in a “catch-22” situation, as they need to maintain advantageous relationships with both the insurers and their clients. Litigation is generally discouraged, and bad faith litigation is seldom recognized as a viable option.

The pre-litigation deck is undoubtedly stacked in favor of the insurers, and it is not uncommon for corporate policyholders to abandon or significantly compromise a claim. Only the most contentious of claims result in litigation, and only a small percentage of those claims are for bad faith. This case challenges these insurance industry norms.

Facts of This Case

The plaintiff in this case, Indiana GRQ, purchased a historic Studebaker manufacturing plant in South Bend, Indiana. Their plan was to bring it back to its former days of glory and make it a manufacturing hub for the reshoring of U.S. manufacturing. In 2016, a 100-year flood took out the manufacturing “crown jewel” of the facility—an underground electrical system capable of delivering enough electrical capacity to power a small city.⁴

The Studebaker plant is a million square foot facility, with miles of underground tunnels. The 2016 flood completely submerged the facility. It took days before employees could even reach the site. Water from the flood shorted out 11 energized transformers located in underground rooms connected to the underground tunnels, resulting in the destruction of the facility’s electrical infrastructure. To make matters worse, the transformers arced during the flood, causing them to release PCB (polychlorinated biphenyls) contaminants throughout the miles of underground tunnels underneath the facility, requiring substantial environmental cleanup.

The case started out like many other commercial property insurance losses. The insurers, led by Zurich, assembled a team to evaluate the loss and paid roughly $2.7 million to repair portions of the facility and to partially remediate PCB contamination. Once the easy portions of the claim were paid, the insurers approached Indiana GRQ to explore what they called “early settlement.” The claim took an abrupt turn when the insurers’ attempt to settle for a small amount of money was questioned by Indiana GRQ. From that point forward, the insurers sought only to minimize their losses under the policy and get out from the claim as quickly as possible.

The insurance claim had two main components: replacement of the damaged underground electrical system, and remediation of PCBs released from the transformers during the flood. The trial largely focused on the insurer’s bad faith conduct. With respect to electrical damages, the insurers hired experts to value the damaged electrical system but withheld these numbers from their insured because they were inconsistent with their desire to minimize their losses. Their conduct with respect to environmental damage, though, was much worse. The insurers surreptitiously co-opted Indiana GRQ’s environmental remediation consultant, soliciting from him reasons the insurers could use to deny the claim. This coordinated process culminated in meetings between Indiana GRG’s supposed environmental remediation consultant and the insurers’ attorneys, during which time the attorneys and the consultant conspired to formalize reasons to deny coverage for the claim.

After hearing the evidence, the jury awarded Indiana GRQ $87.5 million dollars in punitive damages, as well as $25 million in compensatory damages. The court later affirmed the jury’s award, noting with respect to the punitive damages that the insurers’ conduct “was disturbing, and the jury reasonably viewed it just so in awarding punitive damages against each insurer.”⁵ The court concluded that Indiana GRQ “presented more than enough evidence for a reasonable jury to find bad faith.”⁶ The case is now on appeal.

Successful Litigation Strategies

A bad faith action is markedly different from a breach of contract or declaratory judgment action. Breach of contract and declaratory judgment actions address what is and is not covered under an insurance policy. A bad action, in contrast, centers around understanding and proving underhanded insurance company conduct.

Discovery

Indiana GRQ sensed that the insurers turned against them during the claim adjustment process, but prior to litigation and discovery, they had no understanding of the scope of the insurers’ misconduct. The insurers abandoned the claim after Indiana GRQ advised them of their loss calculations. One day the insurers were paying the claim; the next they were denying coverage without any principled reason for doing so. Approved environmental remediation expenditures were abandoned midstream, and the insurers reversed course on replacement of the destroyed electrical system. Their arguments lacked any foundation in the insurance policies they sold to Indiana GRQ.

Discovery was initially oriented toward finding out why the insurers reversed course denied a claim that they previously contended was covered. Discovery ended with a realization that the insurers had willfully and intentionally sought to harm Indiana GRQ—more than enough to hold them liable for bad faith.

Three strategies shaped the bad faith case at the document production stage. First, Indiana GRQ challenged the insurers’ “loss reserves” assertions. The insurers made large redactions to the various adjuster reports claiming that these redactions were made because they were “loss reserves.” This argument made no sense as adjusters do not set loss reserves. Setting loss reserves is an internal accounting function for insurers, not adjusters. We challenged those redactions, and pointed out to the court that, even if the insurers were correct, loss reserves are discoverable in bad faith actions.⁷ The Court ruled in favor of Indiana GRQ, and the insurers produced unredacted versions of their adjuster reports. These unredacted versions of the adjuster reports confirmed our suspicion that the insurers were wrongfully hiding facts in discovery. The unredacted adjuster reports demonstrated that the insurers had calculated Indiana GRQ’s electrical loss, and that their number was quite close to Indiana GRQ’s own internal estimations as to the value of the lost electrical equipment. The insurers knew what it would cost to replace the damaged electrical system and that cost was consistent with Indiana GRQ’s estimates. Likewise, the unredacted reports showed that the insurers’ own estimates for the costs of the environmental remediation were much higher than what they had actually paid.

Second, Indiana GRQ leaned on the insurers for the production of adjuster billing records. When produced, these records indicated that opposing counsel and the insurance company’s adjustment team met with Indiana GRQ’s environmental expert in opposing counsel’s offices to formulate a strategy to deny coverage—indicating
that the insurers were in fact conspiring against Indiana GRQ and that they had coopted Indiana GRQ’s environmental consultant to do so.

Third, Indiana GRQ pressed for third-party records, including the records of Indiana GRQ’s environmental consultant who met with the insurers to devise a claim denial strategy. These records solidified the fact that the insurers deceived Indiana GRQ by convincing Indiana GRQ’s environmental consultant to work with them when he should have been working for Indiana GRQ.

Discovery of bad faith conduct continued through deposition discovery where the insurance company representatives further showed the absurdity of their coverage denial. There, insurance company witnesses proved critical. The insurers’ environmental expert theorized that PCB contamination was not caused by the flood simply because the Studebaker plant had historic manufacturing operations, but he offered no valid basis for that determination. The insurers’ bad faith expert claimed that the insurers denied the claim, in part, because Indiana GRQ abandoned the claim by not responding to the Insurers’ requests for information. When shown repeated communications to the contrary, he could not explain how his opinion was supported by the facts. The insurance adjusters claimed amnesia regarding meetings set forth in their time sheets. Similarly, the turncoat environmental consultant simply could not remember any of his interactions with the insurers. No insurance
company witness offered a credible explanation for their denial of coverage.

Trial Exhibit List and Stipulations

Another critical step was compilation of the exhibit list and negotiations with the insurers regarding admissibility of documents and stipulated facts. Before the commencement of trial, every document was analyzed for admissibility. Indiana GRQ carefully objected to insurer documents that had evidentiary admissibility
issues. The insurers were far less mindful of which documents they objected to.

This extra effort paid off at trial. Numerous times the insurers objected to the admissibility of exhibits for reasons not set forth in their pretrial objections. The court correctly held the insurers to the substance of their pretrial objections and did not permit the insurers to contradict their stipulations and representations previously made to the court.

The parties also agreed on stipulated facts. The most important of these was the insurers’ agreement that all insurers would be treated the same with respect to adjustment of the claim. The evidence unquestionably supported this stipulation as each of the seven insurers paid for and hired the adjusters and experts utilized
to deny the claim. Moreover, each of the seven insurers consented to actions taken by those experts and adjusters. At trial, however, certain of the insurers sought to distance themselves from the conduct of their adjustment team. The court rightly held them to their stipulations and did not allow the introduction of unnecessary
evidence.

Jury Selection

Indiana GRQ also faced critical decisions during jury selection. Much of the case was common sense, but there were some technical issues such as the value and usefulness of the underground transformers, and whether they released PCBs during the flood.

The court took control of the voir dire process by questioning potential jurors. Many prospective jurors angled to be dismissed, and some were dismissed by the court for cause. One juror was a high-voltage electrician for a nearby city. He had decades of experience with transformers and PCBs. Indiana GRQ presumed that
he would agree with its story because Indiana GRQ’s position on the transformers and the release of PCBs was factually correct. To Indiana GRQ’s surprise, the insurers did not exercise a peremptory challenge against this juror.

Cross-Examination

Each of the insurance company witnesses appeared to tell a good story on direct examination. The insurers blamed Indiana GRQ. They asserted that it was Indiana GRQ’s fault that the claim was closed out because they failed to communicate with the insurers. They also asserted that Indiana GRQ told them that there was no
need to replace the damaged electrical system, so they were just doing what their policyholder wanted. They also asserted that, despite having already spent millions to clean up PCB contamination, closer examination revealed that PCB contamination was not caused by the flood.

Indiana GRQ’s strategy at trial was to peek below this veneer and let the jury hear how the insurers were treating Indiana GRQ improperly. On cross-examination, nearly every one of the insurers’ witnesses cracked. The adjusters who testified on direct that Indiana GRQ was non-responsive recanted when confronted with
myriad communications proving the opposite were introduced into the record. Similarly, the adjuster’s statement that Indiana GRQ told the insurers not to replace the damaged electrical system did not hold up. When questioned on this, the adjuster had no idea who supposedly told him that Indiana GRQ had no need for the power
it lost, or who supposedly told him not to replace the damaged electrical equipment. Nor could he explain why he never mentioned this fact in his detailed adjuster reports. It appeared like he simply made this up to support the insurers’ position.

The insurers’ environmental expert fared worse. His position was that PCBs were not released during the flood. He offered no mechanism for how PCBs were released from historical operations but assumed that they were because, in his opinion, they were not released in the flood. He detailed his extensive observations of the transformers after the flood and opined that the transformers had not short circuited during the flood, and that PCB fluids were intact in the transformers when he observed them.

We knew from discussions with the individual at Indiana GRQ who escorted this insurance company environmental expert during his only visit to the site that the expert observed only two of the 11 transformers. During his visit, he exclaimed that he did not want to get his expensive shoes wet, so he cut his visit short because the site had significant amounts of standing water. This was consistent with what the adjuster testified to at trial, that at this site visit the transformers were sitting in a foot or more of water. The entirety of the insurers’ environmental expert’s credibility rested on his visit and what he observed.

On cross, the insurer’s environmental expert was shown a picture taken by the adjuster during this expert’s visit. In the corner of the photo, it showed someone’s shoe, a fancy shoe. We asked this expert if the shoe was his. He said “no” because he knew that if it were his shoe, he could not have observed all of the transformers and would have had no basis to claim that the PCB-containing fluids were not released during the flood. As he sat in the witness box, we noticed that he was wearing expensive “monk strap” shoes. We asked the court if it would be okay if the witness stood up and showed the jury his shoes. The court granted the request, and in a moment reminiscent of the O.J. Simpson trial (the famous glove incident), the jurors eagerly observed his shoes to see if they matched the shoes shown in the picture. The expert claimed that the straps on the shoes were different, leaving the impression that only the wearer of the shoes would know the difference between the shoes he wore then and the shoes he was wearing when he testified. His credibility was shot.

The Insurers Unauthorized Disclosure of Mediation Materials

Through discovery, Indiana GRQ learned that insurers intentionally disclosed confidential mediation materials to their experts, and their experts used these mediation materials to form their opinions.⁸ The insurers’ bad faith expert listed confidential materials in his expert report and stated in deposition that he relied on those materials to form his opinion. It is reprehensible that the insurers showed such little respect for the mediation process, so we brought it to the court’s attention. At trial, the court asked this insurance expert a simple question, was he relying on those mediation materials or not. He answered that he was not. But then the court questioned him on why he previously stated under oath that he did rely on those materials to render his opinions, and he had no answer. The court found that he had relied on confidential materials and that his testimony was unreliable. He was not permitted to testify.

Conclusion

The purpose of Indiana GRQ’s litigation strategies was to permit the jury to hear the facts and apply the law to reach a sound verdict. This is exactly what transpired. In affirming the jury’s award, the court noted that the insurers’ conduct “was disturbing, and the jury reasonably viewed it just so in awarding punitive damages against each insurer,” noting that Indiana GRQ “presented more than enough evidence for a reasonable jury to find bad faith.”⁹ The purpose of punitive damages is to punish past misconduct and to deter future misconduct. If the award is to deter future misconduct, there needs to be a recognition that the bad faith conduct recognized by the jury was valid. So far, this does not appear to be the case.¹⁰

Notes

* Mark Miller (millerm@millerfriel.com) is Founding Partner at Miller Friel LLP whose practice focuses on insurance claims and bringing clients seasoned business-oriented solutions to virtually any kind of insurance issue.

1. Indiana GRQ, LLC v. American Guarantee and Liability Insurance Company, Case No. 3:21-CV227 DLR (N.D. Indiana 2024). The award was over $114 million, including prejudgment interest and fees. Post judgment interest began accruing at the rate of 8 percent per annum on June 20, 2023.

2. American Guarantee and Liability Insurance Company; Interstate Fire & Casualty Company; Starr Surplus Lines Insurance Company; Chubb Custom Insurance Company; General Security Indemnity Company of Arizona; Axis Surplus Insurance Company; Ironshore Specialty Insurance Company.

3. See Allstate Ins. Co. v. Fields, 885 N.E.2d 728, 732 (Ind. Ct. App. 2008).

4. A witness testified at trial that the power capacity of the facility was equal to or greater than the entire power usage of the city of Mishawaka, Indiana.

5. Indiana GRQ LLC v. American Guarantee and Liability Insurance Company et al., 3:21CV00227, ECF 280.

6. Id.

7. Indiana GRQ LLC v. American Guarantee and Liability Insurance Company et al., 3:21CV00227, ECF 62; 88; Compton v. Allstate Prop. & Cas. Ins. Co., 278 F.R.D. 193, 195; 198 (S.D. Ind. 2011) (the court “understands that insurers are reluctant to share reserve information” but “the court has no basis for finding the information wholly irrelevant or for finding that the burden of revealing the information in the [claims handling] report outweighs any potential relevance.”).

8. Mediation materials are confidential, Indiana GRQ LLC v. American Guarantee and Liability Insurance Company et al., 3:21CV00227, ECF 147; In Code § 4-21.5-3.5-27 (2017)(a) (“Matters discussed during mediation are confidential and privileged”); Horner v. Carter, 981 N.E.2d 1210, 1211 (Ind. 2013) (“Indiana policy strongly favors the confidentiality of all matters that occur during mediation”) (citing Ind. R. Alter. Disp. Res. 2.11(a)(1)).

9. Indiana GRQ LLC v. American Guarantee and Liability Insurance Company et al., 3:21CV00227, ECF 280.

10. Post award insurance company commentators have catharized this award as the result of a “runaway jury.” See Insurer Quota-Sharing Lessons from $112M Bad Faith Verdict, May 20, 2024, article published in Law360.

Previously published in Journal of Emerging Issues in Litigation / Summer 2024, Vol. 4, No. 3, pp. 229–239.