Calif. jury slams Maryland Casualty

November 03, 1994|By David Conn | David Conn,Sun Staff Writer

Four weeks after Los Angeles-area businessman Edward V. Dempsey bought an insurance policy from Maryland Casualty Co., his construction company burned to the ground. It was an accident, he said, caused when spilled fuel caught fire.

But what followed for three years, a Los Angeles jury found this week, was no accident.

Through a series of delays and harassing maneuvers, Maryland Casualty intentionally worked to deny paying Mr. Dempsey's claim, the jury agreed. Ruling in favor of the businessman, the panel came in with a remarkable verdict: the insurer was ordered to pay $3 million for the claim -- and $58 million in punitive damages.

"They literally tried to crush [Mr. Dempsey] through financial terrorism," said Mr. Dempsey's lawyer, Kevin E. Monson of Fountain Valley, Calif. The company had treated its customer "like an enemy," he said.

A Maryland Casualty spokeswoman, Sarah Adams, said her company was "deeply disappointed by the verdict. We believe it's neither supported by the law or the facts of the case. We are vigorously pursuing an appeal."

The size of the award was not expected to cause lasting financial harm to the Baltimore-based insurer. But the verdict against the company, which is owned by l,6p6,12l the giant Swiss-based Zurich Insurance Co., might tarnish its reputation.

In fact, at the time Mr. Dempsey's business went up in flames, Maryland Casualty was fighting a similar legal battle in San Diego. In August of that year, the company was ordered to pay $7.5 million in punitive damages, on top of $381,000 in actual damages, for wrongly denying the validity of a customer's policy and failing to defend him in a costly lawsuit.

The judge in that case called Maryland Casualty's actions "absolutely unbelievable."

"The Maryland," as the company is known, also denied the allegations in that earlier case. The 1991 award later was settled out of court for an undisclosed amount.

The two cases, while unrelated, illustrate the length to which jurors will go to punish what they see as malfeasance by insurers.

Another insurance risk

At the same time, it points out the risks that insurers face in fighting their own customers when they suspect fraud, some observers said.

One reason for large awards in such cases is that "there's very little guidance given to juries," said Sherman Joyce, president of the American Tort Reform Association, a Washington-based group that lobbies for restrictions on punitive awards. "It's basically, 'Here's this big company, do what you want, make them hurt.' "

The April 1991 fire that burned down Mr. Dempsey's construction and equipment manufacturing company came less than four weeks after he had become insured by Maryland Casualty.

After the fire, a supervisor at the insurer looked back over his policy. She determined that Mr. Dempsey's application contained false statements, including assertions that no flammable material was maintained on site and that Mr. Dempsey's previous insurance had never been canceled or turned down for renewal before.

That much is not in dispute. But the two sides differ over most of what happened next. According to Mr. Monson, the plaintiff's attorney, the insurer's supervisor wrote to Mr. Dempsey rescinding the policy and accusing him of attempting to defraud Maryland Casualty. She cited the presence of flammable material at the company and a series of canceled or unrenewed insurance policies in Mr. Dempsey's past.

Mr. Monson acknowledged mistakes on the policy application but said that the insurer's agent filled it out, not Mr. Dempsey.

The supervisor then sent copies of the letter to 20 of Mr. Dempsey's customers in the mistaken belief that they were also insured under Mr. Dempsey's policy, Mr. Monson said. The letter was tantamount to accusing Mr. Dempsey of insurance fraud, he added.

Maryland Casualty's attorney, William C. Bottger, called Mr. Monson's version of the case "absolutely untrue -- plaintiff hyperbole."

While saying that "disappointed would be an understatement," Mr. Bottger maintained that Maryland Casualty acted in good faith, was entitled to annul the policy and will be vindicated on appeal.

Mr. Bottger, a partner in the Los Angeles firm of Latham & Watkins, said Mr. Dempsey's insurance application was "replete with false information and statements, and when we discovered that, we promptly rescinded the policy."

Application in question

Mr. Bottger said the issue of whether Mr. Dempsey knew of the false information on the application "was hotly disputed."

After the fire, an arson investigator hired by Maryland Casualty wrote a report calling the fire an accident, according to Mr. Monson. It was caused, he said, when Mr. Dempsey's 30-year-old son, Michael, accidentally dropped a large container of fuel that he was using to fill his speedboat's tank.

Maryland Casualty "buried the report" and accused Mr. Dempsey of arson in a countersuit filed after Mr. Dempsey sued the company, Mr. Monson said.

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