Why Would Court Reject Insurer’s Request for Prejudgment Interest?
October 31, 2012 |Suppose an insurer provides a defense to an insured and settles the claim over the insured’s objection. Suppose the insured refuses to pay the deductible and the insurer sues for breach of contract. If the insurer obtains a judgment against the insured, is the insurer entitled to prejudgment interest?
That was the issue in the decision issued by a federal district court in South Carolina in Liberty Mutual Fire Ins. Co. v. J.T. Walker Industries, Inc., No. 2:08-2043-MBS (D.S.C. Sept. 28, 2012).
The case arose after five lawsuits were filed against J.T. Walker Industries, Inc., and MI Windows & Doors, Inc. (collectively, “MI Windows”) in a South Carolina state court alleging that windows manufactured by MI Windows were defective. MI Windows tendered the cases to its commercial general liability insurer, which defended each case under a reservation of rights and eventually settled each case over MI Windows’ objection. The CGL policies each contained a $500,000 deductible, requiring MI Windows to reimburse the insurer for the first $500,000 per occurrence spent on defense and indemnity costs. However, MI Windows refused to reimburse the insurer for these five settlements and for various associated defense and claim handling fees.
The insurer filed suit, alleging that MI Windows had failed to pay amounts due under the policies and seeking $851,443.53 in damages. A jury found MI Windows liable for breach of contract and awarded $894,416.01 to the insurer. The court found that the amount awarded to the insurer had to be remitted by $210,000. The insurer accepted the revised judgment of $684,416.01 instead of a new trial, and also requested $205,404.78 in prejudgment interest.
The Decision
Because state law governs an award of prejudgment interest in a diversity action, the court applied South Carolina law, which provides that prejudgment interest may be awarded where the measure of recovery “is fixed by conditions existing at the time the claim arose.”
It then decided that prejudgment interest was “not appropriate” in this case because the amount due to the insurer was not capable of being readily ascertained at the time the claim arose. According to the court, before the value of the amount due could be fixed, it had to determine the rights of the parties under the policies. In construing those policies, it continued, it “confronted complex issues under South Carolina insurance law.” The court observed that in this case “the value of the amount due was not certain under the policies.” It reasoned that the fact that the insurer pleaded $851,443.53 in contract damages but maintained a judgment of $684,416.01 after the court remitted the award supported its determination that the insurer’s entitlement “was not susceptible to a formulaic determination by the parties at the time the claim arose.”
The Rivkin Rule
There may have been more underlying the court’s decision rejecting the insurer’s request for prejudgment interest than appears from its reasoning on that issue. In addition to its award in favor of the insurer, the jury found the insurer liable for breach of contract and awarded it $18,290. The court permitted that award to stand, although it overturned the jury’s decision in favor of MI Windows on its bad faith and punitive damages claims. These factors may have added to the court’s decision to reject prejudgment interest – a decision that ultimately lies in the discretion of the court.
