Insurer May Be Punished Even If It Defends And Settles Suit Within Policy Limits Based on the Testimony of an “Expert” who Concluded a Subrogating Insurer Will Always Accept a Policy Limits Demand
I have never been a fan of the tort of bad faith. In Planet Bingo LLC v. The Burlington Insurance Company, E074759, Court Of Appeal Of The State Of California Fourth Appellate District Division Two (March 18, 2021) extended the tort for failure to negotiate a settlement of a subrogation claim because it should have expected the subrogating insurer was willing to accept a policy limits settlement.
FACTS
An electronic gaming device designed and supplied by Planet Bingo, LLC (Planet Bingo) caused a fire in the United Kingdom. Several third parties made demands that Planet Bingo pay their damages resulting from the fire. AIG the subrogating British Insurer demanded more than Burlington’s policy limit and eventually sued Planet Bingo who was defended by Burlington and the AIG suit was eventually settled for the policy limits. Planet Bingo, claiming damages for delay, sued for breach of contract and bad faith against Burlington.
In the suit against Burlington by Planet Hollywood, the trial court granted summary judgment for Burlington; in essence, it ruled that Burlington had provided all of the benefits due under the policy.
Planet Bingo appealed. It contended that Burlington conducted an inadequate investigation. It also contendd that Burlington wrongfully failed to settle the third-party claims; instead, Burlington denied coverage, in the hope that the claimants would sue Planet Bingo in the United Kingdom, which would have let Burlington off the coverage hook. Planet Bingo asserts (and Burlington does not dispute) that it lost profits because the fire claims remained pending and unsettled.
The California Court of Appeal held that Planet Bingo made out a prima facie case that Burlington is liable for failure to settle even though none of the claimants made a formal offer to settle within the policy limits, one subrogee sent a subrogation demand letter; according to Planet Bingo’s expert witness, in light of the standards of the insurance industry, this represented an opportunity to settle within the policy limits.
In July 2014, attorneys representing AIG Europe Ltd. (AIG) wrote to Planet Bingo. They reported that Leisure had settled with Beacon for £1.6 million and that AIG was Leisure’s insurer. They demanded that Planet Bingo pay the £1.6 million. They also stated: “With the objective of avoiding the costs of litigation, our client is prepared to enter into alternative forms of dispute resolution.
THE EXPERT TESTIMONY
Planet Bingo’s expert on insurance claim handling testified that “[s]uch a letter is routine in industry practice and offers a clear invitation to negotiate a settlement for less than that amount . . . .” Moreover, there is a “very well[-]known industry custom in such subrogation claims of accepting policy limits for a full release o[f] the insured.”
Planet Bingo sued Burlington. The operative (second amended) complaint asserted causes of action against Burlington for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief.
The trial court granted summary judgment in favor of Burlington.
PRELITIGATION FAILURE TO SETTLE
Although an insurance policy normally only carries an express statement of a duty to defend, an insurer’s duty to settle is derived from the implied covenant of good faith and fair dealing which is part of any contract.
This case is different than the usual failure to settle cases. First, a settlement offer within the policy limits was never actually on the table. In July 2014, AIG demanded payment of £1.6 million — an amount well in excess of the policy limits. It did also offer to participate in alternative dispute resolution; nevertheless, it never committed to accept any lesser amount.
Second, there was never any excess judgment. AIG did eventually sue, but Burlington managed to settle that action for the policy limits. Nevertheless, Planet Bingo claims it was damaged because Burlington’s failure to settle before litigation was filed damaged its business reputation and ultimately destroyed its business in the United Kingdom.
Thus, it has been said that an insured’s claim for bad faith based on an alleged wrongful refusal to settle first requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits.
The Court of Appeal stated that it “is significant that AIG was claiming as subrogee, and its letter was a subrogation demand letter.” This raised a triable issue of fact as to whether the letter represented an opportunity to settle within the policy limits. There was at least a potential for coverage, depending on whether Planet Bingo was ultimately sued in the United States or Canada.
The injuries here were the injuries to Planet Bingo’s primary rights under the policy and under the implied covenant of good faith and fair dealing. They are the flip side of Burlington’s alleged misconduct — its inadequate investigation and its failure to settle. Thus, the lost profits alleged in the second amended complaint resulted from the same misconduct and the same injuries that were alleged in the original complaint.
Because the trial court granted summary judgment, it never ruled on Burlington’s request for summary adjudication “that [Burlington] cannot be liable for punitive damages.” On remand, the court is directed to rule on this aspect of the motion. It may, in its discretion, receive additional briefing, evidence, or argument; however, it is not required to do so.
ZALMA OPINION
This decision, if it stands an appeal to the Supreme Court, has expanded the tort of bad faith to failure to settle a suit because an “expert” concluded that a subrogation demand far in excess of the insurer’s policy limits was “really” an offer to settle within limits because of the custom and practice of the industry. This ruling opens a Pandora’s Box of bad faith torts and punitive damages when an insurer does, as did Burlington, everything required of it by the policy and both defended and indemnified its insured. By this case an expert’s contention that Burlington should have negotiated a settlement – or offered its limits – immediately allowed for a finding of bad faith. I testify as an expert and could not testify that a subrogating insurer, like AIG, would always accept a policy limits offer when the defendant has assets and understand that experts often differ.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost
equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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