An Allianz unit that waited 18 months after a complaint was filed to reserve its right to disclaim coverage for punitive damages is obligated to pay a $1.95 million punitive damages award, in a case involving a young woman who was injured by a malfunctioning furnace in her apartment that exposed her to carbon monoxide gas, an appeals court has ruled.

The young college student who was injured, Amber Lompe, prevailed in a lawsuit against her landlord and its management company, Hayward, California-based Apartment Management Consultants LLC, and was awarded $3 million in compensatory damages and $25.5 million in punitive damages, of which $22.5 million was allocated against AMC, according to Thursday’s ruling by the 10th U.S. Circuit Court of Appeals in Denver in Interstate Fire & Casualty Co. v. Apartment Management Consultants LLC.

The 10th Circuit later vacated the punitive damages award against Sunridge and reduced the punitive damages award against AMC to $1.95 million.

Allianz unit Interstate had provided primary and excess liability insurance coverage to AMC and the landlord, Salt Lake City, Utah-based Sunridge Partners LLC, including a general liability insurance policy with a $1 million per occurrence and a $2 million aggregate policy limit, which included an explicit punitive damages exclusion.

Interstate also issued an excess liability policy with a $10 million per occurrence and $10 million aggregate limit that followed the form of the underlying primary policy, but did not include a specific punitive damages exclusion, according to the ruling.

Although Ms. Lompe filed her complaint in the case in May 2012 and Interstate assumed her claim’s defense 10 days later, “Interstate did not reserve its right to disclaim coverage for punitive damages until November 20, 2013 – eighteen months after the complaint was filed, one month after the district court denied AMC and Sunridge’s motion for summary judgment, and just eleven days before the jury trial began,” the ruling said.

During this 18-month period, “Lompe made a clear and unequivocal offer to settle within the Primary Policy” and AMC “made three separate demands that Interstate settle the case, but Interstate refused,” the ruling said. 
In December 2013, Interstate filed suit in U.S District Court in Cheyenne, Wyoming, seeking a declaration it had no coverage obligation for punitive damages under either the primary or excess policy.

The district court ruled against Interstate, and was affirmed by a three-judge appeals court panel. “Interstate argues that because AMC knew of the punitive damages exclusion no prejudice resulted for its related reservation of rights,” the ruling said.

“But this argument ignores the inherent nature of the prejudice that results from relinquishing control of the defense to the insurer. As the district court found, even if punitive damages were discussed in correspondence between Interstate and AMC, AMC did not know Interstate’s intentions concerning reliance on the punitive damages exclusion,” it said.

“We see no error in the district court’s determination of prejudice” requiring Interstate to “shoulder the burdens of any liability arising from the litigation that it deliberately elected to control,” the ruling said, in citing an earlier case.

The ruling said also that “Interstate attempts to rely upon the ‘follows form’ provision of the contract to incorporate the Primary Policy’s punitive damages exclusion into the Excess Policy” because the exclusion was in effect at the excess policy inception.

It said, however, that “Allowing a retrograde application of the Primary Policy’s punitive damages exclusion to cancel the clear coverage obligations of the Excess Policy to pay AMC’s ‘ultimate net loss’ above the Primary Policy’s aggregate limit would be inconsistent with the provisions of the Excess Policy that excite agreed to provide such coverage.”

Attorneys in the case could not be reached for comment.