A California appeals court has upheld a $50,000 punitive damages award plus more than $1 million in attorneys fees against Lloyd’s of London underwriters in connection with its denial of coverage under a fire insurance policy because of a mistake in listing the insured.

Saddleback Inn L.L.C., a subsidiary of Los Angeles-based J.K. Properties Inc., leased property in Santa Ana, California, known as the Saddleback Inn, according to Thursday’s ruling by the California Court of Appeals in Santa Ana in Saddleback Inn L.L.C. v. Certain Underwriters at Lloyd’s London et al.

In 2009, the insured on its property policy with Lloyd’s was listed as “J.K. Properties dba Saddleback Inn.” On previous insurance policies, the property was insured through Lloyd’s as “Saddleback Inn, LLC and J.K. Properties, Inc. dba Saddleback Inn.”

“Saddleback did not notice the error made on the policy,” said the ruling.

In January 2011, the Saddleback property suffered a fire resulting in a $2,150,000 million loss, and Saddleback submitted a claim to Lloyd’s, which hired an attorney to investigate the loss. 

In May 2011, the attorney sent a letter to Saddleback on behalf of Lloyd’s denying coverage “because Saddleback owned the property and J.K. Properties did not have an insurable interest in the damaged property,” according to the ruling.

J.K. Property and Saddleback filed suit against defendants including Lloyd’s in January 2012, charging breach of contract, professional negligence and bad faith. An amended complaint added a reformation cause of action to add Saddleback as an additional insured on the policy at issue. A reformation is a remedy available when an otherwise valid insurance policy does not reflect the parties’ true intentions.

At a bifurcated hearing in July 2014 in Santa Ana, the court determined Saddleback and Lloyd’s had intended Saddleback be named as the insured under the policy, and the court reformed the contract to list the named insured as “Saddleback Inn, LLC and JK Properties, Inc., dba Saddleback Inn.” Lloyd’s paid Saddleback $2,884,583, reflecting the $2,150,00 for the fire damage and $734,583 in interest.

During the second phase of the trial, a jury determined Lloyd’s had unreasonably denied payments and awarded Saddleback $50,000 in punitive damages, plus $1,062,117 in attorneys fees and expenses.

Lloyd’s appealed the punitive damages and attorneys fees awards, which a three-judge California Court of Appeals panel unanimously affirmed. 

“Underwriters argue there is no bad faith liability as matter of law when an insurer properly denied coverage under a policy as issued, even if a court later reforms the policy to provide coverage,” said the ruling.

However, said the court, “Ultimately, a claim for bad faith liability hinges on whether the insurer’s refusal to pay policy benefits was reasonable at the time.” 

“The record supports the jury’s determination Underwriters’ investigation was not complete or objective,” said the decision.

In upholding the attorneys fee award, the ruling said: “The trial court properly awarded Saddleback the full amount of fees incurred for the Underwriters’ failure to pay the policy benefits.”