The Maryland Casualty Co. won a strong dose of relief in a California lawsuit yesterday, as the judge who presided over the case threw out a $61 million jury award against the Baltimore insurer and ordered a new trial.
Retired California Superior Court Judge William Drake ruled that "there was an insufficiency of evidence" against "the Maryland," as the company is known, "and that the damages awarded were excessive," according to a written summary of the verbal ruling he handed down yesterday. The ruling was in response to the Maryland's motion for a new trial.
The case was decided Oct. 25 by a jury that determined the company had acted in bad faith toward a client, Los Angeles-area businessman Edward V. Dempsey. A month after he bought his policy in 1991, Mr. Dempsey's construction company burned to the ground. He testified that the fire occurred when his son accidentally spilled some fuel he was using to fill up his speedboat.
Maryland Casualty, citing inaccuracies on Mr. Dempsey's insurance application, denied that the policy was valid and spent several years investigating the possibility of insurance fraud and arson. The jury assessed $3 million in compensatory damages against the Maryland and $58 million in punitive damages.
"We were flabbergasted not only in losing the compensatory side, but we felt the punitive damages verdict was absurd," said a much-relieved Barry J. Gilway, chief executive officer of the Maryland Commercial Insurance Group, one of whose trade names is Maryland Casualty. The Maryland is owned by the Swiss-based Zurich Insurance Co.
"I think our reputation was marred by the original verdict," Mr. Gilway said. "On the other hand, I've got all my customers saying, 'Geez,you people are one of the best in making prompt claims payments.' "
Judge Drake's decision bolsters Maryland Casualty's argument that Mr. Dempsey committed fraud when he applied for his policy in 1991, according to William C. Bottger, the insurer's attorney in Los Angeles.
The decision "vindicates our view that Maryland's conduct has been absolutely appropriate in all respects, and we're absolutely confident" of victory at a new trial, said Mr. Bottger. A conference to schedule a new trial is set for Jan. 27.
Kevin E. Monson, Mr. Dempsey's attorney, said he plans to appeal the ruling, adding that he was "at a loss" to say why Judge Drake threw out the verdict.
"I think the evidence supported the verdict, I think the jury was right, and I think we'll beat 'em again," Mr. Monson said.
One of the key determinations the jury weighed was the nature of the relationship between the Maryland and its agent, a Southern California company called Andreini & Co. The Andreini vice president who submitted the application was a longtime friend of Mr. Dempsey, and the jury had to decide on whose behalf he was acting -- Mr. Dempsey or the insurance company, according to Mr. Gilway.
Among inaccuracies cited by Maryland Casualty on Mr. Dempsey's application was a statement that he hadn't been canceled by any other insurer recently. Mr. Gilway said that in fact Mr. Dempsey had been canceled 15 times in the previous three years.
But Mr. Monson said that while Mr. Dempsey had received a number of cancellation notices because of late payments, he was canceled only once before turning to Maryland Casualty.
The jury apparently decided that Andreini was acting as the Maryland's eyes and ears, and therefore that the insurer knew or should have known about the problems with the application. The Maryland's fraud investigation, therefore, was viewed as a sham, intended only to harass the company's customer, according to Mr. Gilway.
He said a major frustration from the original verdict was its chilling effect on insurers' investigations into fraud. The National Insurance Crime Bureau estimates that between 10 percent and 25 percent of the cost of property and casualty premiums in the United States is lost to fraud.
"The bottom line is that you as a consumer and I as a consumer are demanding high-quality, low-cost products," Mr. Gilway said. The October verdict made it more difficult to keep costs down by pursuing suspected fraud, he added.
"He's wrong," Mr. Monson said, dismissing Mr. Gilway's explanation. The jury "understood the evidence, the [judge's] instructions were correct, there was no mistake."