Court Orders Insurer to Pay $27M for Failing to Defend in Construction Defect Case

The South Carolina Court of Appeals upheld a significant ruling against Pennsylvania National Mutual Casualty Insurance Co. (Penn National) for failing to defend its policyholder, Jose Castillo’s company JJA Framing, in a construction defect lawsuit. The case highlights critical aspects of insurer duties and the consequences of bad faith actions.

Background of the Case: JJA Framing, contracted by Portrait Homes for a townhouse project in Goose Creek, faced a lawsuit over water damage allegedly caused by faulty construction. Castillo didn’t request a defense from Penn National, his insurer, which led to a default judgment and significant damages.

Penn National’s Inaction: Despite being aware of the lawsuit and being notified multiple times, Penn National did not provide a defense, claiming no coverage was owed as no additional insured endorsement was added to JJA’s policy.

Court Findings and Ruling: The trial court and the appellate panel found Penn National’s conduct willful and reckless. It was determined that the insurer’s failure to defend, despite not being explicitly requested by the policyholder, was against South Carolina law and constituted bad faith.

Consequences for Penn National: The insurer was ordered to pay the $2.5 million policy limit, plus additional damages for bad faith refusal, attorney fees, costs, and pre-judgment interest. The total award exceeded $27 million, significantly more than the potential liability had Penn National provided a defense.

Legal Implications: This case underscores the importance of an insurer’s duty to defend policyholders and the severe penalties for failing to act in good faith. It also highlights that insurers must proactively engage in defense obligations, even if not explicitly requested by the policyholder.

This ruling serves as a cautionary tale for insurers, emphasizing the necessity of adhering to their duty to defend and the potential for substantial punitive damages in cases of bad faith.