XXX Engineering, Inc. v. YYY Insurance, et al.
Case type: Insurance bad faith
Attorneys: Christopher J. Arndt, David B. Davis
Law Firm: Arndt & Doyle
Venue: California Superior Court, San Bernardino County
Side:  Plaintiff
Trier of fact: Jury
Testimony Issue: Lost profits
Testimony Dates: July 2, July 6, July 16 and July 30, 1998 
Case Summary: Plaintiff, a manufacturer of precision-machined products, contended that defendant insurance companies in bad faith failed to defend and indemnify plaintiff, which had been named a potentially responsible party by the United States Environmental Protection Agency (“EPA”).  Plaintiff claimed that defendants’ actions resulted in management distraction, lost sales and additional expenses. Plaintiff claimed that the significant time and effort management devoted to dealing with the EPA and related agencies should have been a burden borne by defendant insurance companies and that, as a result of the alleged bad faith, plaintiff’s customers were neglected and sales were lost.  Plaintiff claimed also that expenses and liabilities from EPA claims, which allegedly should have been covered by defendant insurance companies, drained the financial resources of the company, resulting in increased operating costs.
Testimony summary: Mr. Neches began by gathering sales and expense data from plaintiff’s business records.  To project what plaintiff’s sales would have been but for defendant insurance companies’ alleged wrongful acts, he used both industry-average and company-projected sales trends.  Plaintiff’s actual sales were subtracted from projected but-for sales to determine lost sales.  He analyzed plaintiff’s fixed and variable expenses to determine the marginal profit percentage on the lost sales.  Combining these analyses, he calculated lost profits.  When calculating future lost profits, he worked with plaintiff’s management to estimate the additional future costs needed to allow plaintiff to recover within five years to the level of sales it would have achieved but for defendants’ alleged wrongful acts.  Mr. Neches determined plaintiff’s additional operating expenses due to defendants’ alleged wrongful acts by analyzing the ratios of plaintiff’s expenses to its revenues during the relevant period.   He found that expenses increased approximately five percent after the alleged wrongful acts and calculated damages by applying this percentage to plaintiff’s sales. Mr. Neches testified that damages exceeded $10,000,000.  Defendants’ damages expert, a partner of a “Big 5” accounting firm, testified that there were no economic damages.  Mr. Neches advised plaintiff’s counsel on how best to cross-examine defendants’ damages expert and how to highlight effectively plaintiff’s damages in closing argument.  During the punitive damages phase of the trial, Mr. Neches testified regarding the values of defendant insurance companies based on his review of financial statements filed by defendants with the California Department of Insurance.  After trial, jurors had this to say about Mr. Neches’ testimony:  “Mr. Neches made the damages easy to understand.”  “His graphs were clear.”  “You felt that he really knew what the damages were and really cared about the plaintiff.”
Result: The jury awarded damages consistent with Mr. Neches’ testimony.  The parties settled before the issue of punitive damages was put to the jury.  Settlement terms included a confidentiality agreement.

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