LOS ANGELES - Amoco Chemical Co.'s $386 million punitive damage windfall in a bad-faith case became a $4 million shortfall last week when a California appellate court overturned the verdict and ordered the company to pick up its insurers' costs. The coverage case arose from suits filed between 1985 and 1989 by six municipal sewer and irrigation districts that had bought composite pipe made of a sandwich construction of glass, sand and isophthalic resin, and lined with bisphenol resin. The pipe was made by a former Amoco division in Riverside, Calif. The municipalities - in Alaska, California, Hawaii and North Dakota - all claimed that the pipe, with the trade name Techite, was defective.
Between 1987 and 1992, Amoco spent more than $45 million to defend and settle the lawsuits without any contribution from its insurers. When Amoco notified its general liability insurance companies of its claim, the insurers issued reservation of rights letters and said they needed more information to complete their investigations, court papers say.
The December 1993 jury verdict in Amoco Chemical Co. vs. Lloyd's of London was considered the largest punitive damage award ever in an insurance bad-faith case. However, the trial court later reduced the punitive award to $71 million in response to insurers' post-trial motions.
Now, not only does Amoco lose $106 million - including compensatory damages, legal fees and interest - but it also must pay insurers' cost of obtaining a bond for 11/2 times the amount of the award while the case was on appeal.
The unpublished decision by the 2nd District California Court of Appeal in Los Angeles turned on one issue: an error in the definition of the word ``accident'' used by the trial court in its jury instructions.
Lawyers for the insurers argued that ``accident'' should be construed as a sudden, unexpected event, citing California case law dating back 100 years. But Amoco maintained that California law does not require that an accident be sudden.
On appeal, the 2nd District Court sided with the insurers and remanded the case for a new trial.
But, because the appeals court's decision is not certified for publication, it will not be of precedential effect in other cases.
``It is far more probable than not that a different jury instruction would have resulted in a substantially different calculation of damages,'' Justice Miriam Vogel wrote in the 20-page decision issued June 4. ``It follows that the entire judgment must be reversed and the matter remanded for a new trial of all issues.''
In addition to the $386 million punitive damage award, a Los Angeles Superior Court jury had awarded $34.1 million in compensatory damages, plus $1.6 million in lawyers' fees and $3.5 million in prejudgment interest to Amoco after a two-month trial, during which two Amoco units - Amoco Chemical Co. and Amoco Reinforced Plastics Co. - alleged that Lloyd's of London and its other insurers delayed claims payment for six years. The trial court also reduced those damages to a total of $35 million.
Amoco went ``from a situation of being up some $400 million to being down $3 [million] or $4 million,'' said Vito C. Peraino, a partner with Hancock, Rothert & Bunshoft in Los Angeles, who represented the insurers on appeal.
The $3 million to $4 million figure is an estimate of the premium insurers paid for a bond equal to 11/2 times the award amount, as was required by the court.
``We're disappointed by the decision and we expect to prevail on rehearing,'' said an Amoco spokesman.
Amoco lawyers could not be reached for comment.