Insurance Carrier Hit With $85-Million Verdict : Judgment: Costa Mesa-based American States acted in bad faith by refusing to cover a client, jurors decide.

A Costa Mesa-based insurance company has been hit with an $85-million jury verdict for its bad faith in refusing to defend a developer against claims of shoddy work.

Orange County Superior Court jurors, in a 9-3 vote, sent a message to American States Insurance Co. on Friday by awarding Lompoc developer Louis A. Montalvo everything he sought at trial.

“The company did not honor its contract with a customer, and it just seemed as though this was the sort of thing that could happen to anyone,” said juror Charles Reince, 45, of Huntington Beach.

Montalvo’s attorney, Gerald L. Kroll of Beverly Hills, said in an interview that he specifically asked jurors for at least $80 million in punitive damages because that was 50% of American States’ investment income last year.

“If we had asked for, say, a million or two,” Kroll said, the company probably would not have felt the effect. “We wanted a big enough award to make sure that it makes a difference and that (the company) won’t breach a contract again.”

The total award, Kroll said, makes up 7.6% of American States’ $1.05-billion net worth.

The award consists of $5.2 million for emotional distress, $250,000 for breach of contract and $80 million in punitive damages for failing to deal in good faith with Montalvo.

Attorneys for American States, which is an affiliate of Lincoln National Corp. in Fort Wayne, Ind., could not be reached for comment. But Bob Jones, a spokesman for Lincoln National, said, “We intend to pursue all of our legal remedies and don’t agree with the verdict.”

Montalvo, 74, sued American States in March, 1991, alleging that the company reneged on its policy to indemnify the developer for any claims resulting from his construction work on a condominium project in Lompoc that was completed in June, 1980.

Ten years later, in March, 1990, a group of homeowners at the complex sued Montalvo. The homeowners contended that the construction work had been shoddy and resulted in serious water damage during the storms of 1983 and 1988.

Montalvo turned the case over to American States, asking for a defense and indemnification. He told the insurance company that the homeowners were willing to settle for $250,000, Kroll said.

American refused to defend Montalvo, arguing that the policy covered defects only for a year and that the policy had expired by the time any damage occurred.

A Superior Court judge in Santa Barbara ruled against the builder, finding that the work was defective and ordering him to pay $1.7 million to the homeowners.

“I felt badly about being saddled with the $1.7 million,” Montalvo said Monday. “Now, I’m happy the jury saw fit to get me out of that dilemma. I would have lost everything I own.”

Kroll said he argued before the Orange County jury that American States had breached its contract and failed to deal with Montalvo in good faith. The company never even investigated the claims against Montalvo before denying him coverage, the lawyer said.

Another factor in their judgment, jurors said, was evidence showing that company officials had written memos to each other, allegedly agreeing that they would not defend Montalvo because it would cost the company too much to take on his case.

Testimony showed that company officials hired a new attorney to take over for another lawyer who initially told them Montalvo should be covered, jurors said.

The officials “were only interested in themselves,” said juror Tom Poe, 23, of Los Alamitos. “They were basically concerned with saving money and it didn’t work out for them.”