A couple of weeks ago, the Louisiana Supreme Court addressed the issue of whether an insured can recover damages for mental anguish caused by an insurer’s breach of its statutory duty of good faith and fair dealing. Wegner v. Lafayette Insurance Company, Nos. 2010-C-0810, 2010-C-0811 (March 15, 2011)
The Wegeners’ two-story home sustained severe damage caused by wind and flooding as a result of Hurricane Katrina. Lafayette Insurance Company insured the home with coverage limits of $229,000 for the dwelling, $22,900 for other structures, $114,500 for personal property, and $45,800 additional living expenses. The Wegners filed a claim with Lafayette and received less than $25,000 for the structure, less then $2,500 for the contents, and were denied money for additional living expenses.
The Wegeners then hired an engineer, who determined that in addition to damage caused by wind driven water infiltration, excessive wind pressures caused the house to move laterally on its foundation, loosened the primary framing member connections, and damaged the wooden structures. The engineer recommended the structure be demolished. Lafayette hired its own engineers (HAAG), and they determined that flooding caused nearly all of the first story damage and found no structural damage to the house. Based on this report, Lafayette made no further adjustments or payments.
The Wegeners also filed a claim with their flood insurer, State Farm Insurance Company, which paid the policy limits of $198,900 for the dwelling and $27,000 for contents. Nearly two years later, State Farm also paid the Wegeners an additional $8,330 for Increased Cost of Compliance (ICC) to demolish the structure, for total payments of $234,230.
The Wegeners then filed suit against Lafayette, arguing their home was a total loss and they were entitled to the full amount of their policy limits. They also sought payment for additional living expenses, mental anguish damages, and statutory penalties and attorney’s fees pursuant to La. R.S. 22:658 and La. R.S. 22:1220 (now La. R.S. 22:1973). The case went to trial, and the jury returned a verdict in favor of the Wegeners, awarding them an additional $20,000 for damage to the structure, an additional $4,000 for damage to contents, and $45,800 for additional living expenses. The jury found that Lafayette violated La. R.S. 22:1220(B)(1) and/or (5), but no award was made for mental anguish damages or penalties under La. R.S. 22:1220(C).
Thereafter, the trial court granted the Wegener’s Motion for Judgment Notwithstanding the Verdict or New Trial, finding that, pursuant to La. R.S. 22:1220, "the facts and inferences point so strongly and overwhelmingly in favor of plaintiffs that reasonable jurors could not arrive at a contrary verdict, that the defendant’s actions in failing to pay plaintiffs for their additional living expenses within sixty (60) days after receipt of satisfactory proof of loss were arbitrary, capricious and without probable cause." The trial court awarded $91,600 in penalties, which was twice the amount awarded by the jury for additional living expenses.
Both parties sought review of various issues, and the case ultimately made its way to the Louisiana Supreme Court. There, Layfayette sought review of the jury’s finding that Lafayette violated La. R.S. 22:1220; the award of $45,800 for additional living expenses; the trial court’s exclusion of evidence of the Wegeners’ flood insurance claim and proceeds; and the trial court’s grant of the JNOV and award of $91,600 in penalties. The Wegeners sought increases in the amounts of damages and penalties, or alternatively a new trial.
Noting that the Wegeners’ claim for mental distress was based on Lafayette’s alleged violation of its statutory duty under La. R.S. 22:1220, and not a breach of their insurance contract with Lafayette, the Court held that La. C.C.1998, which prohibits mental anguish/emotional distress damages on a breach of contract claim, did not apply in the Wegener’s case. Instead, the Court looked to the text of La. R.S. 22:1220, which provides that an insurer owes a duty of good faith and fair dealing to its insured. The Court noted that the general and special damages award authorized by the statute is directed at a violation of that statutory duty and is misconduct outside of the scope of an ordinary breach of contract. Affirming the Fifth Circuit’s reasoning in Dickerson v. Lexington Ins. Co., 556 F.3d 290 (5th Cir.2009), the Court concluded that “La. C.C. art.1998 has no applicability in a claim for emotional distress/mental anguish damages under La. R.S. 22:1220.”
The Court then determined that the jury instructions on the mental anguish damages, which required proof of an intent to aggrieve the Wegeners before damages could be awarded, contained legal error. La. R.S. 22:1220 permits "any general or special damages" with no limitation or additional requirement other than the breach of duty by the insurer; intent is not a requirement. The jury was also unable to properly decide whether the Wegeners were entitled to penalties under La. R.S. 22:1220. Penalties are allowed under La. R.S. 22:1220 even if no damages have been awarded, but the particular structure of the jury interrogatories in this case forced the jury to skip the issue in its deliberations. Based on these errors, the Court vacated the verdict and remanded the case for a new trial.
As the case was to be retried, the Court also addressed Lafayette’s argument that the evidence of the Wegeners’ flood insurance claim and payments was improperly excluded. In Louisiana, an insured may not recover in excess of his or her actual loss, but can recover under each policy until the total loss sustained is indemnified. Because the experts at the trial below offered differing opinions on the amount of damages and cost to rebuild the Wegeners’ home, evidence of the flood payments was relevant.
Evidence of flood insurance payments is relevant to the issue of what uncompensated losses remained. Without the benefit of evidence relative to the Wegeners’ flood insurance claim, the jury is essentially required to award damages to the Wegeners in a vacuum, without having the ability to determine whether such an award is double recovery.
Accordingly, the Court held that evidence of payments for flood loss would be relevant and admissible at the new trial.
Please tune in next week for another bad faith discussion.