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January 2014: Appellate Victory: Quinn Emanuel Secures Complete Reversal, New Trial in Bad Faith/Punitive Damages Case

January 2014

On October 25, 2013, Quinn Emanuel obtained a unanimous decision from the West Virginia Supreme Court of Appeals vacating all that remained of a $58 million jury verdict in a bad faith and punitive damages case against Chartis Claims, Inc. and Commerce and Industry Insurance Company, both subsidiaries of AIG. The firm had previously obtained a post-trial remittitur of the verdict, one of the largest in West Virginia history, to $30 million.

The origins of the case, captioned AIG Domestic Claims, Inc. v. Hess Oil Co., reach back to the late 1990s, when the Chartis companies agreed to insure an underground gasoline storage tank owned by a West Virginia oil distributor called Hess Oil. In 1998, the West Virginia Department of Environmental Protection alerted Hess to a leak from the tank that Chartis had insured. Hess submitted an insurance claim for the cleanup, and Chartis accepted coverage and remediated the site for a decade. During the course of this cleanup, Hess sold its business and dissolved. In 2008 a new Chartis claims analyst sought to increase reserves to continue the remediation. She discovered, through a routine FOIA request, that Hess had been notified of a leak at the same site in 1997—before it applied for the policy—but had not informed Chartis of that prior leak in its insurance application. When Hess’s former shareholders refused to provide any information about any of the spills, Chartis notified Hess that it was disclaiming coverage.

In various cross-claims and counterclaims filed after the environmental contractor sued Hess for payment (Chartis later settled that claim), Hess sued Chartis for bad faith denial of coverage and punitive damages, and Chartis filed a cross-claim seeking rescission of the insurance contract. At trial, Hess’s only evidence of injury concerned emotional distress allegedly suffered by Hess’s several former shareholders as an alleged consequence of Hess’s disclaiming insurance coverage based on Hess’s misrepresentations. Over Chartis’s trial counsel’s repeated objections that a corporation and its shareholders are separate entities—whether before dissolution or after—the trial judge allowed the shareholders to testify about their emotional distress, and instructed the jury that it could award damages to Hess for injuries suffered “through its former shareholders.” The jury found Chartis liable, awarding Hess $5 million in compensatory damages. The jury followed this award with a jaw-dropping $53 million punitive damages award.

Chartis retained Quinn Emanuel to take the lead role on post-trial motions and the subsequent appeal. The firm’s team, led by appellate practice chair Kathleen Sullivan, convinced the trial court that it was obligated under West Virginia law to reduce the $53 million punitive damages award to no more than $25 million (or five times compensatory damages), and then turned to the West Virginia Supreme Court of Appeals to eliminate the remaining $30 million judgment. In the Supreme Court, Quinn Emanuel argued that the trial court had ignored the basic principle that a corporation is separate from its shareholders, and that it had therefore erred in admitting evidence of, and instructing the jury to award, damages suffered only by Hess’s former shareholders. Quinn Emanuel’s briefs also highlighted the trial court’s other instructional and procedural errors, and argued that Hess had not put on evidence showing the intentional wrongdoing required for an award of punitive damages.

Just one month after Ms. Sullivan presented a marathon two-hour oral argument in Charleston, the West Virginia high court issued a unanimous published decision vacating the judgment, declining Hess’s request to reinstate the jury verdict, and remanding for a new trial on all claims. The Court—in a case of first impression interpreting West Virginia’s newly-revised corporations statute—agreed with Chartis that Hess could not recover damages for its former shareholders’ emotional harms. The Court further agreed that the trial court had incorrectly instructed the jury as to the legal standard applicable to Chartis’s misrepresentation claim. The Court concluded that the only proper remedy for these errors was to vacate the entire judgment, eliminating both the compensatory award and all remaining punitive damages.