Triable Issue of Fact Exists As to An Insurer’s Failure to Settle Where Subrogation Demand Letter Represented an Opportunity to Settle Within Policy Limits

In Planet Bingo LLC v. The Burlington Ins. Co. (No. E074759, filed 3/18/2021, ord. certified for partial pub.), the Court of Appeal found a triable issue of fact existed as to whether a carrier is liable for bad faith failure to settle after it failed to respond to a subrogation demand letter.

In Planet Bingo, a battery installed in a handheld electronic gaming device started a fire in a bingo hall in London, England. Planet Bingo had designed the device, arranged for its manufacture and shipped it to a distributor.

After Planet Bingo gave its insurer, Burlington Insurance Company notice of the loss, Burlington investigated pursuant to a reservation of rights though it perceived no coverage issues at the time. Sometime later, the operator of the bingo hall notified Burlington that its damages totaled $2.6 million.

In 2014, AIG Europe Ltd., the carrier for the distributor, notified Planet Bingo that it had agreed to pay $2.6 million for the damages caused by the fire and that it was asserting a subrogation claim against Planet Bingo for the $2.6 million. AIG also advised that it was prepared to engage in alternative dispute resolution, negotiations or mediation with the objective of avoiding the cost of litigation.

Planet Bingo notified Burlington of AIG’s claim and Burlington subsequently denied coverage on the grounds that (1) the fire did not occur in the United States or Canada and (2) Planet Bingo had not been sued in the United States or Canada – both conditions of the Burlington policy.

Planet Bingo subsequently sued Burlington for breach of contract, breach of the implied covenant of good faith and fair dealing and declaratory relief. The trial court entered judgment on the pleadings for Burlington on the ground that there was no coverage as the fire had occurred outside the United States or Canada. Planet Bingo appealed and the Court of Appeal reversed and remanded on grounds that there was at least a potential for coverage at the time because it was still possible that Planet Bingo might be sued in the United States or Canada.

AIG then sued Planet Bingo in California at the urging of Planet Bingo’s attorneys. Burlington accepted the defense of Planet Bingo subject to a reservation of rights and then settled with AIG for the policy’s limits of $1,000,000 in exchange for AIG’s release of all claims against Planet Bingo.

Burlington’s defense of the suit and settlement of the action for policy limits rendered Planet Bingo’s claims based on failure to defend and failure to indemnify moot. Only Planet Bingo’s claim that Burlington’s inadequate investigation and failure to settle led to lost profits remained.

Burlington filed a motion for summary judgment contending it had no pre-litigation duty to settle because it never received an offer to settle within the policy limits. The trial court granted the motion, agreeing that Burlington was not liable for failure to settle. On appeal, Planet Bingo contended there was a triable issue of fact as to whether Burlington was liable for pre-litigation failure to settle.

Planet Bingo’s claim-handling expert testified that AIG’s letter soliciting alternative dispute resolution was routine in industry practice and offered a clear invitation to negotiate a settlement less than the $2.6 million. Planet Bingo’s expert further testified that there is a well-known industry custom in such subrogation claims of accepting policy limits for a full release of the insured.

The Planet Bingo court first noted that a liability policy’s express promise to defend and indemnify the insured against injury claims implies a duty to settle third-party claims in an appropriate case, citing Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 401.

The appellate court distinguished the facts of Planet Bingo from the paradigm case of an insurer’s failure to settle where a third-party claimant makes a reasonable settlement offer within policy limits, the insurer rejects it and the third-party claimant goes to trial which results in a judgment in excess of the policy’s limits. The Planet Bingo court noted that a settlement offer within policy limits was never on the table for Burlington to accept and there was no judgment in excess of the Burlington policy.

In its motion for summary judgment, Burlington did not argue the absence of an excess verdict precluded Planet Bingo from alleging bad faith failure to settle and, as a result, the court declined to address the question of whether an excess verdict is required and instead focused on whether the lack of an offer to settle within the policy limits precludes bad faith failure to settle.

The Planet Bingo court quoted the holding in Howard v. American Nation Fire Ins. Co. (2010) 187 Cal.App.4th 498, 525, that “An insurer does not breach the duty to settle if it never has an opportunity to settle…. [T]he opportunity to settle is typically shown by proof that the injured party made a reasonable settlement offer within the policy limits and the insurer rejected it.”

Further, the Planet Bingo court looked to the holding in Heredia v. Farmers Ins. Exchange, (1991) 28 Cal.App.3d 1345, 1354-1355, in which a third-party claimant offered to settle a case against insureds for policy limits but conditioned the offer on an agreement that the insureds would remain parties in the action through trial with defense counsel provided by the insurer in order to avoid an “empty chair” defense by other defendants. The Planet Bingo court pointed out that in Heredia, the insurer could not be liable for failing to accept the offer because the settlement offer was in excess of the policy limits as it required the insurer to continue to provide a defense in addition to tendering its limits.

Beyond Heredia’s apparent confinement of failure to settle claims, the Planet Bingo court pointed to Boicourt v. Amex Assurance Co. (2000) 78 Cal.App.4th 1390, where the court determined an insurer’s liability for failure to settle can extend to circumstances where a formal offer to settle within limits has not been extended. In Boicourt, the court was tasked with determining whether a carrier’s pre-litigation refusal to disclose policy limits to a third-party claimant, without the consent of its insured, served as a basis for a bad faith claim where the claimant later obtained an excess judgment against the insured. In support of its holding, the Boicourt court noted that a carrier’s refusal to disclose policy limits cuts off the possibility of receiving an offer within policy limits and acts as a refusal to open the door to reasonable negotiations.

The Planet Bingo court reasoned that at a minimum, the Boicourt holding recognized the existence of an opportunity to settle within the policy limits can be shown by evidence other than a formal settlement offer. Applying this principle to the facts at hand, the Planet Bingo court noted the significance of AIG’s subrogation demand letter and the expert testimony that a subrogation demand letter “offers a clear invitation to negotiate a settlement for less than that amount,” as well as testimony that it is a well-known industry custom to accept policy limits for a full release of the insured. The Planet Bingo court held this testimony raised a triable issue of fact as to whether the letter represented an opportunity to settle within policy limits and as such, Planet Bingo made a prima facie case that Burlington was liable for failure to settle. Given this finding, the court declined to address the claim that Burlington conducted an inadequate investigation, reversed summary judgment and remanded the case.

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March 23, 2021