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"Supreme Court of Appeals of West Virginia Reverses First-Party Bad Faith Verdict of $25 Million in Punitive Damages: AIG v. Hess Oil (No. 12-0705)"

Litigation Alert
November 13, 2013

Summary:

On October 25, 2013, the Supreme Court of Appeals of West Virginia issued its opinion in AIG v. Hess Oil ("AIG"). Finding that the jury's punitive damages verdict against the insurance companies was prejudiced by multiple errors committed by the trial court, the Court set aside the verdict and remanded for a new trial.

Facts:

One of Hess Oil's underground storage tanks was located in Mt. Storm, West Virginia, and covered by Commerce and Industry Insurance Company ("C&I") for environmental remediation claims. On April 15, 1997, the West Virginia Department of Environmental Protection ("DEP") issued a Confirmed Release Notice to Comply with regard to the Mt. Storm site, and an investigation found some environmental contamination. Hess Oil ("Hess") did not file a claim with C&I for the Mt. Storm contamination at issue in the DEP's April 15, 1997 notice.

Hess renewed its policy with C&I in October of 1997. The following year, the DEP notified Hess of "observed changed conditions" at the Mt. Storm site. Hess provided notice of the potential claim to C&I, and C&I's claims handler, AIG Domestic Claims (n/k/a Chartis Claims) accepted coverage. However, after paying $622,000 in corrective action costs, AIG disclaimed coverage based on alleged inaccuracies in its notice of claim and in the policy renewal application submitted by Hess.

Ryan Environmental subsequently brought a civil action against Hess, which had dissolved in 2008, seeking money for the work its employees had performed. Hess then asserted claims against the insurance companies, asserting a first-party bad faith claim and a declaration regarding its insurance coverage.  And the insurance companies cross-claimed against Hess, alleging breach of contract and negligent misrepresentation. Former shareholders of Hess, notably, were not named parties; however, much of the evidence that Hess introduced at trial focused on the damage to Hess's former shareholders.

In 2011, the jury awarded Hess $5 million in compensatory damages, and $53 million in punitive damages because the jury found that the insurance companies "willfully, maliciously, and intentionally utilized an unfair business practice." AIG, p. 6. The punitive damages award was reduced to $25 million, and both sides appealed.  Ultimately, the Supreme Court  of Appeals of West Virginia set aside the punitive damages award and remanded for a new trial.

New Syllabus Point:

 

5. A dissolved corporation that is asserting a claim solely in its corporate name under authority of West Virginia Code § 31D-14-1405(b)(5) (2009) may not recover damages for the personal aggravation, annoyance, and inconvenience of its non-party former shareholders.

Syl. pt. 5, AIG v. Hess Oil.

Analysis of the Ruling:

The insurance companies argued that the trial court wrongly treated former shareholders of Hess as the corporate entity itself for evidentiary, damages, and verdict purposes throughout the trial, despite the fact that the shareholders were not named parties. The Court agreed, affirming the principle that corporations are to be viewed and treated as separate from their shareholders. AIG, p. 9.

West Virginia Code § 31D-6-622(b) (2009) states: "Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation. . . ." The Court in AIG pointed out that corporate dissolution does not alter this fact. Hence, Hess inadequately supported its cross-claim at trial with evidence of damages to former shareholders, and without any evidence of damages to Hess.

The Court also rejected the trial court's reliance on Hayseeds to support the proposition that a corporation can experience personal damages in the nature of aggravation, annoyance and inconvenience. AIG, pp. 12-16. The Court did not settle the issue of whether a corporation can experience damages of a personal nature, but simply rejected the Hayseeds dicta as inapplicable to a dissolved corporation and inapplicable where the former shareholders are not named parties.

The opinion touches on several other interesting issues as well. The Court found error with the trial court's decision to allow Hess to present evidence of future remediation costs: "We do question, however, whether there was any basis for the jury's consideration of this evidence without any predicate showing that the Browns, as former shareholders, were responsible for the cleanup costs." AIG, p. 23. Finally, the Court took issue with the absence of settlement demands: "And, if no clear demand for settlement was made by Hess Oil, this case may fall outside the rulings of this Court that permit recovery for an excess of policy limits." AIG, p. 23.

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