First Circuit affirms judgment that insurer acted in bad faith in shutting down investigation that would have made insured's liability clear

Last summer I posted about Capitol Specialty Ins. Co. v. Higgins, in which the United States District Court for the District of Massachusetts held that an insurer, Capitol Specialty Insurance Corp., had acted in bad faith and was liable for treble damages when it failed to investigate fully and settle a claim by Kailee Higgins, a minor who worked at a strip club owned by policyholder PJD. Higgins alleged that she was injured in a drunk driving accident after drinking at the club. 

The United States Court of Appeals for the First Circuit has now affirmed that decision in all respects except for the determination of  prejudgment interest.  __ F.3d __ (1st Cir. 2020), 2020 WL 1164681.

Capitol tendered its policy limit after attorney's fees it had paid. PJD and Higgins then entered into a consent judgment for $7.5 million.  They agreed that Centerfolds would pay Higgins $50,000 and assign its claims against Capitol to Higgins.

Higgins then sued Capitol for bad faith settlement practices under Mass. Gen. Laws chs. 93A and 176D on her own behalf and as assignee of PJD's claim against Capitol.  The United States District Court ruled in Higgins' favor on her own claim, assessed actual damages of $1.8 million against Capitol, and trebled actual damages to $5.4 million.

Both parties appealed.  Higgins argued that the District Court should have adopted the $7.5 million consent settlement amount as actual damages and that it failed to rule on the claims against Capitol assigned to her by PJD.

Capitol appealed the findings against it, the calculation of actual damages, and the award of prejudgment interest on treble damages rather than actual damages.

The First Circuit first addressed the question of actual (or single) damages.  It noted that under Mass. Gen. Laws ch. 93A the amount of actual damages is the amount of a judgment.  The court affirmed the District Court's finding that the consent judgment was not a judgment within the meaning of the statute.  Higgins argued that the consent judgment should be the basis for damages because it was reasonable and non-collusive. The First Circuit held that the District Court had found, in using the phrase "not an arm's length transaction," that the $7.5 million judgment was sufficiently collusive as to preclude it from being a judgment within the meaning of the statute.

Massachusetts Lawyers Weekly  quoted me on that aspect of the case.   As I pointed out there, allowing parties to call a settlement a "consent judgment" and then making the settlement amount the basis for 93A damages would result in consent judgments that are farther and farther from the actual value of the case. After all, when they have agreed that the claimant will not collect the judgment from the policyholder, the policyholder has nothing to lose by agreeing to whatever figure the claimant suggests.  The larger the number, the more the claimant will recover from the insurer if they prove a 93A violation.

The First Circuit next rejected Higgins' claim that she was entitled to additional damages from the claim against Capitol assigned to her by PJD.  "Given that Capitol met its duty to defend and that, as to indemnity, Capitol offered the policy limit to Higgins, we are doubtful the insurer violated a duty to PJD."

The First Circuit also held that there was no evidence of any monetary loss as to the assigned claim, which is required under Mass. Gen. Laws ch. 93A §11.  Higgins argued that Capitol's actions caused PJD monetary loss by exposing it to a judgment in excess of the policy limit, causing an erosion of the policy limit to attorneys' fees, causing it to pay $50,000 in exchange for the covenant not to sue, and causing it to incur fees and expenses to its personal counsel while defending the court action.

The First Circuit rejected those arguments.  There was no evidence that Capitol could settle the claim within the policy limit.  The erosion of funds for attorney's fees was actually less than Capitol should have spent in investigating the claim.  Capitol's actions did not cause PJD to pay the $50,000 in settlement or the necessity of personal counsel because its exposure was above the policy limit. 

The First Circuit then addressed Capitol's argument that the District Court had erred in holding that it failed to conduct a reasonable investigation, in violation of  Mass. Gen. Laws ch. 176D.  Capitol had shut down its investigation after minimal and inadequate work had been done on it, when its own investigator had told it more work needed to be done, its attorney immediately realized there was a good likelihood of liability, and it should have known that there was a good likelihood of liability.  

For those reasons, the First Circuit  affirmed the District Court's finding that Capitol's action's had been willful, knowing and in bad faith, making it liable for multiple damages.

Finally, the First Circuit agreed that the District Court had erred when it calculated prejudgment interest on the trebled damages rather than single damages.  The court held that if there had been a judgment, prejudgment interest would have applied to the entire amount.  With no judgment, it applied only to single damages.

Summer camp insurance and coronavirus

I received an email from a sleepaway camp where I'm considering sending my younger daughter this summer.  The camp advised families to strongly consider purchasing camp insurance because of the potential impact of coronavirus.

I took a look at the policy being offered for that camp and another one my daughter will attend.  Although they vary in some of the details, the pertinent coverages are the same.  The insurer will reimburse me for camp fees if:

1)  My daughter cannot attend camp because she is sick.
2)  My daughter cannot attend camp because she is personally quarantined.

The policies do not provide for a return of fees if the camps are closed because of coronavirus.

I have reached out to a couple of camp directors to ask whether fees will be returned by the camp itself if camp is cancelled.  The response I'm getting is that they have never had to deal with a situation like this before and they are looking into it.

Some thoughts and takeaways:

1)   Sleepaway camp is the best. Attending and working at them were bright spots in my life, and my younger daughter has loved hers as well.  (My older daughter . . .  let's just say every camp is not right for every kid.)

2)  Before deciding on whether to purchase camp insurance for your child, read the policy that is offered.  If it's like the ones that I have seen, your calculation should not be based on how likely you think that it is that the camp will close.  It should be based on how likely you think it is that the camp will remain open but your child will not be able to attend because he or she is personally sick or quarantined.

3)  I'm not trying to join in the coronavirus fear-mongering.  Whether or not camps close or stay open may well have more to do with the perception of the dangers of coronavirus than the actuality of how dangerous it is.

4)  Obligatory reminder: wash your hands.