State puts suit against Insurer in Limbo

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Dear All:

This is a classic case where immediate attention to the matter was crucial to remediation efforts. The insurer should lose on bad faith for offering $5,000 and for bad faith for the 17 day delay. They will also likely lose on the disposal of the personal goods and the cars because a prudent man would not allow those contaminated items to remain in the place for 17 days. It should be successfully argued that the adjuster had his chance to see the items based on the insured's call by 9am that day.

Story: http://www.projo.com/business/content/projo_20030622_ham22x.3c948.html

State action puts $10-million suit against Pawtucket Mutual in limbo 06/22/2003 BY DAVID McPHERSONJournal Staff Writer

WEATHERSFIELD, Vt. -- Puckered and peeling, the stain above Sam Hamill's head oozes black mold.

It extends across his garage ceiling about six feet in one direction, three feet in the other.

Like a giant marker, the stain circles the spot where water settled when pipes ruptured in Hamill's home during a Vermont cold snap just over two years ago.

Thousands of gallons leaked from the pipes over several days, spawning the ugly mold that infests the home and a lawsuit that is even uglier.

Hamill, 37, sued Pawtucket Mutual Insurance Co. in a Vermont court, claiming the Rhode Island insurer's slow response to the water catastrophe and a low-ball settlement offer allowed the mold to take hold in the house and forced him to abandon it.

He is seeking $10 million in damages.

The company struck back hard, digging into his personal, business and medical past. It charged that Hamill exaggerated or enhanced the damage and failed to comply with Pawtucket Mutual policies that covered his home, business and cars.

Now, after more than a year of fierce legal jousting in Vermont, the case is in limbo after Rhode Island insurance regulators took control of Pawtucket Mutual to prevent its collapse after years of mounting losses.

The company's uncertain future raises doubts about whether Hamill can ever collect anything close to the $683,000 claim he filed seven months after the house flooded. That figure included the damage to the house and personal property, loss of use and out-of-pocket expenses.

The future of the suit may rest, in part, in the hands of Marilyn McConaghy, the state's director of business regulation. She controls the company after a Rhode Island judge two months ago approved her request to place the company in rehabilitation status.

The Pawtucket Mutual executives who decided to mount the aggressive, costly defense have left the company, though one predicted to a Providence Journal reporter that it will prevail at trial.

Weathersfield is a town of about 2,800 residents located just across the Connecticut River from New Hampshire, and some 30 miles southeast of Rutland.

Hamill said he bought the home in June 2000 for $316,000 while still married, but he had separated from his wife by the time he moved in alone in December. He had spent the intervening months making improvements to the house and clearing trees to give him the marvelous view he desired.

The remote, two-story contemporary faces west toward New York state high up on Camp Hill, a 1,560-foot elevation. At one time, it was a dream home. Now, it is anything but that.

Mold is visible throughout -- in walls, closets and ceilings. The house is pockmarked by holes as a result of testing done by environmental inspectors for both Hamill and the insurance company. Carpets have been ripped up, and floor tiles have been chipped away.

The saga begins on Feb. 13, 2001.

The following is Sam Hamill's account of what happened:

Around 1:30 a.m. that day, upon returning from a five-day business trip, Hamill opened a side door to his garage and found water pouring down from the floors above. The water in the garage nearly reached his knees.

He ran to the first floor and found more water coming down from the second floor. In nearly every room, broken hot-water pipes hissed.

He rushed to find the water shutoff valve, but could not locate it.

He awoke a plumber in the middle of the night. The plumber arrived at the house at 3:30 a.m. and shut off the water with a promise to return a few hours later to begin making repairs.

The house was cold and saturated.

"I just threw some plastic down on the bed and went to sleep," Hamill recalled recently.

By the plumber's estimate, about 15,000 gallons of water poured through the house over the course of two days after a power outage knocked out his heating system. When the power was restored, the boiler fired up and continuously circulated water throughout the house before Hamill returned.

Pawtucket Mutual Insurance Co. is a 155-year-old property and casualty insurer with headquarters in downtown Pawtucket.

For the past five years, the property and casualty insurer posted consecutive operating losses, depleting the reserves set aside to pay claims to policyholders like Hamill.

Between the end of 2000 and the end of 2002, the company's statutory surplus -- the money available to pay claims -- dwindled from $34.8 million to $15.3 million. The situation continued to worsen this year as the surplus fell to just $8.5 million by March 30.

After monitoring the company's finances for more than 18 months, McConaghy took action. With the support of Pawtucket Mutual executives, she went to a Superior Court judge and asked that the company be placed into rehabilitation, a step removed from insolvency.

The goal of rehabilitation is to see if the company can be reorganized and either saved or sold to another insurer.

If it cannot be saved, Pawtucket Mutual will be liquidated, forcing policyholders to find new insurers. Unpaid claims would be covered by insurance guaranty funds in states where the company operated.

McConaghy hopes to be able to sell part or all of the company to another insurer and see it survive. For now, the company remains solvent with its assets exceeding its liabilities. "Our hope at this point is to rehabilitate it," she said last week.

During the rehabilitation effort, McConaghy has halted the writing of new policies by Pawtucket Mutual and its Narragansett Bay Insurance subsidiary. Existing policies are being renewed in Rhode Island and New York, but not in other states where Pawtucket Mutual did business.

As a result, the 118,736 policies in place at the end of 2002 had fallen to 104,776 by May 21. The number is expected to fall further to 97,079 by July 1.

In the event Pawtucket Mutual is declared insolvent, Rhode Island policyholders would be covered by the state's insurance insolvency fund, which covers claims up to a maximum of $300,000 and the return of premium payments owed to policyholders up to $10,000.

The insolvency fund is supported by a mandatory assessment on insurers that do business in the state.

A similar guaranty fund in Vermont protecting residents of that state also has a $300,000 claim limit that could restrict what, if anything, Hamill recovers should he prevail in his lawsuit.

At one time, Pawtucket Mutual operated in a dozen states on the East Coast, but as its financial problems mounted, it began to stop business in several states, including Vermont, Maine and Pennsylvania.

Hamill had obtained insurance coverage for his home, business and cars through a Lebanon, N.H., agent.

He reported the water damage to that agent about eight hours after he arrived home on Feb. 13, 2001, according to his suit. The agent, in turn, contacted Pawtucket Mutual that same morning, according to the court documents.

What happened next -- or more precisely what did not happen -- is at the heart of Hamill's suit.

It was not until 17 days after Hamill arrived home that an independent adjuster hired by Pawtucket Mutual showed up to assess the damage, according to Hamill's suit.

"By then, it was too late," said Myers, a Lebanon, N.H., lawyer representing him. The water had penetrated too deeply.

"What they should have done was they should have gotten a water remediation contractor there within 12 hours," Myers said. "You get somebody out there to dry the place out."

While waiting for the adjuster -- who also is named in the suit -- Hamill had obtained written estimates from several contractors who said it would cost between $155,655 and $200,000 to repair the house. They recommended gutting the interior and replacing it.

The adjuster offered Hamill $5,000 for minor repairs. Hamill rejected it, and the battle began.

After Hamill obtained legal help, he eventually accepted $10,000 from Pawtucket Mutual, but reserved his right to sue for more.

And he did. He filed his lawsuit in Windsor Superior Court on Nov. 21, 2001. He has sued the company on four counts: breach of contract, negligence, bad faith and punitive damages.

D. Hamill is an intense guy with an attention to detail. He easily recalls names, numbers and dates associated with his fight against Pawtucket Mutual.

He owns and operates a T-shirt design business, Today's Creations Inc., that, according to tax records turned over in the case, grosses more than $4 million a year.

He runs the business from a modest ranch-style home in West Lebanon, N.H., that he bought after moving out of the Weathersfield house he still owns.

In October 2001, a doctor advised Hamill to move out of the house, according to medical records filed in the case.

Photographs and medical records in the case show Hamill suffered from bleeding from the nose and eyes while still living in the house in the months after the water damage occurred. He also complained of dizziness.

As the weather had warmed up, mold started to grow, his suit charges.

Environmental experts he hired -- as well as one working on Pawtucket Mutual's behalf -- confirmed the presence of mold and called the house uninhabitable.

"Clearly, the microbiological contamination of this indoor environment is both substantial and extensive," states a report by Analytical Services Inc., a Williston, Vt., company working for Pawtucket Mutual. "The environment sampled for the above report should not be occupied in its present condition, particularly by any immunocompromised individuals or persons susceptible to allergies, asthma, or other respiratory, etc., conditions likely to be exacerbated by fungal exposure."

Another testing company Hamill hired called the house "abhorently contaminated" with high levels of fungi and bacteria. Some of the fungi and bacteria contained toxins, according to the AIM Group of Richmond, Vt.

Hamill says he has borrowed against the Weathersfield house to finance his lawsuit, which includes paying his lawyer and a team of environmental experts. He says the costs have exceeded $100,000.

Pawtucket Mutual responded to Hamill's lawsuit by questioning his credibility, motives and allegations. In court papers, the company describes the damage as minor and says that there was no mold evident when the adjuster and a contractor visited the Weathersfield house.

In a telephone interview last week, Pawtucket Mutual's former senior vice president, Harnish, predicted the company will be vindicated ultimately.

"We will win in front a jury, the company will win the case," predicted Harnish, one of 67 Pawtucket Mutual employees McConaghy laid off recently in a bid to cut expenses and keep the insurer in business.

Harnish declined to address Hamill's charges in detail.

When deposed by Hamill's lawyer, Harnish refused to answer many questions about the handling of Hamill's claim, invoking attorney-client privilege. In addition to overseeing claims at Pawtucket Mutual, Harnish also served as the company's general counsel.

Harnish and former company president J. Hennessey are seeking to collect from the company's executive retirement plan, but Providence Superior Court Judge Silverstein, who is overseeing the rehabilitation in Rhode Island, has ordered no such payments be made for the time being.

Even as Pawtucket Mutual was on the verge of takeover by the State of Rhode Island in late April, Vermont lawyers representing the company there pressed for more information on Hamill's background.

On April 30 -- one day before McConaghy took control of the company -- Pawtucket Mutual filed a motion in Windsor Superior Court in Woodstock, Vt., to order Hamill to turn over his business and medical records.

"Plaintiff's credibility is central to virtually every issue in this case and to Plaintif's entitlement to insurance coverage in the first instance," Pawtucket Mutual lawyers wrote in their motion to compel.

The insurer sought all of Hamill's medical records dating back to 1990 and business records back to 2001.

The request challenges Hamill's credibility, recites a history of filing insurance claims and questions the legitimacy of an additional $122,198 claim Hamill filed to cover two luxury cars he leased and stored in the home's garage. The cars -- a BMW SUV and a Mercedes sedan -- also are infested with mold and are worthless, Hamill says.

Pawtucket Mutual also questioned Hamill's attempt to recover $219,000 for personal property he says he had to throw out because of water damage. This includes televisions, furniture, computer equipment, cameras, comic books and even steaks and light bulbs.

"There are no witnesses to this personal-property disposal," the insurer's April 30 motion says. "There are also no records of when, how, and where these items were discarded."

The company pointed to dual business and personal claims Hamill submitted to Pawtucket Mutual and another insurer for the theft of jewelry, cameras and computer equipment in a bag allegedly stolen while Hamill played a video game at an arcade during a trip.

Hamill also has filed past insurance claims over allegedly ingesting glass at a Ground Round restaurant in Connecticut, sewage backup and a fire at two earlier homes and losses associated with three cars.

Arguing for the business and medical records, Pawtucket Mutual said they "may reveal a pattern and practice of false insurance claims" by Hamill.

Hamill's lawyer calls Pawtucket Mutual's questions about his background a "fishing expedition."

"They are fishing for a theory to defend conduct which is unconscionable," Myers wrote in one court document.

In an interview in his Lebanon, N.H., office, Myers explained the opposition to Pawtucket Mutual's request for business and medical records this way: "You shouldn't have to expose your entire life just because you're seeking redress through the court system."

There are doubts now about whether the case ever will get to trial.

In Providence, Silverstein ordered a 90-day stay against all litigation pending against Pawtucket Mutual while McConaghy sorts out its future.

In Vermont, Myers has asked the judge presiding over Hamill's lawsuit for a similar stay.

In that request, Myers wrote that it is not prudent to "commit time and resources" to the case while waiting to see what action McConaghy takes.

"Nor would it be prudent to proceed until Pawtucket's status is clarified," he wrote.

A hearing on the case is scheduled for July 11 in Windsor Superior Court.

McConaghy, the Rhode Island Department of Business Regulation director, said her rehabilitation team continues to explore its options on Pawtucket Mutual's future.

When the 90-day stay on litigation against Pawtucket Mutual expires, the defense against Hamill's lawsuit will continue, McConaghy said.

"I've been assured it's been handled appropriately," she said.