Diamond Woodworks, Inc. v. Argonaut Insurance

Before us are an appeal and a cross-appeal from a judgment awarding $658,000 in compensatory damages for fraud, breach of contract and insurance bad faith and $5.5 million in punitive damages. Briefly, defendant Argonaut Insurance Company (Argonaut) issued á workers’ compensation insurance policy to Builders Staff Corporation (BSC), a now-defunct employee leasing company. Plaintiff Diamond Woodworks, Inc. (Diamond), a client of BSC, transferred all of its employees to BSC, and BSC leased the employees back to Diamond. Argonaut issued certificates of insurance listing Diamond as the insured, with the caveat that the certificate did not alter or amend the policy and that only BSC’s employees working at the jobsite were covered under the policy. Argonaut, BSC, and Argonaut’s registered agent, Arthur Gallagher and Company (Gallagher) understood Diamond was not insured. Under the BSC/Diamond employee leasing contract, coverage of new hires was dependent upon Diamond’s timely submission and BSC’s approval of employment application packets for each employee. In practice, the provision was never enforced.

Diamond hired an employee whose BSC employment application packet had not…