We have been tracking developments at the RAA Re Contracts Conference, which took place this week in New York, as previously reported on www.insurereinsure.com.

On Wednesday, Arthur Gang of Partner Re U.S. gave an instructive presentation concerning extra contractual obligations (“ECO”) and losses in excess of policy limits (“XPL”). He presented a useful recap of the seminal Supreme Court case, State Farm Mutual Automobile Insurance Co. v. Campbell, in which an insured (Campbell) was involved in a highway collision that resulted in a fatality and disabling injuries to other drivers. His policy with State Farm had a $50,000 limit and the plaintiffs’ attorney offered to settle for that policy limit. State Farm, however, refused to settle, despite an initial investigation that indicated liability and a “near certain possibility” of excess verdict.

A jury verdict was ultimately rendered against Campbell for $185,849, from which State Farm only agreed to pay the $50,000 policy limit and refused to cover any defense costs in an appeal of the verdict. When the lower court’s judgment was affirmed on appeal, State Farm then agreed to pay the entire amount. Nevertheless, Campbell sued State Farm for fraud, bad faith and intentional infliction of emotional distress, and sought damages for an amount that far exceeded the limits of the State Farm policy.

Mr. Gang explained that there is a tripartite relationship between an insured and insured which includes the duty to defend, indemnify and act in good faith. In the Campbell case the allegation was that State Farm acted in bad faith by gambling with its insured’s (Campbell’s) money and, as a result, Campbell was damaged from the degree of concern and uncertainty he endured. In his lawsuit against Sate Farm, Campbell sought extra contractual damages – damages beyond anything covered in the policy – on account of how State Farm handled his case. The jury awarded Campbell $2.6 million in compensatory damages and $145 million in punitive damages, an award which was affirmed by the Utah Supreme Court. Upon appeal, the U.S. Supreme Court held that the $145 million in punitive damages was excessive in that it was not proportionate to the compensatory damages, but noted that State Farm’s claims handling merited no praise and simply remanded the case to the lower courts for recalculation of the damages.

Mr. Gang suggested the case demonstrates that when things start to go wrong in a case, they often do not get better. At the end of the day, instead of settling for the $50,000 policy limit when it had a chance to do so, State Farm was obligated to pay $185,849 for the jury verdict, $1,002,087 for extra contractual compensatory damages, $9,018,780 for extra contractual punitive damages and an unknown amount in legal expenses for over twenty years of litigation. Cases such as this one have resulted in ECO and XPL clauses being inserted into modern reinsurance contracts and Mr. Gang went on to give an informative overview of these types of provisions.