(Failure to Settle Based on Pre-Suit Offer to Settle Subrogation Claim Demanding Amount in Excess of Policy Limits Supported Bad Faith Claim Based on Opportunity to Settle Within Policy Limits)

(April 2021) -  In Planet Bingo LLC v. The Burlington Ins. Co., ---Cal.App.5th --- (March 18, 2021), the California Fourth District Court of Appeal reversed the trial court's entry of summary judgment in favor of Burlington Insurance Company ("Burlington") against insured, Planet Bingo LLC ( "Planet Bingo"). The parties' dispute arose out of a fire caused by a handheld gaming device supplied by Planet Bingo to Leisure Electronics Limited ("Leisure"). The devices were distributed by Leisure in the United Kingdom. Pursuant to a lease, the gaming device in question was supplied to Beacon Bingo, a/k/a Riva Gaming ("Beacon"). Beacon operated a gaming parlor in London. A fire caused damage to the parlor on September 12, 2008. Ultimately, it was determined that the fire was caused by the gaming device.

Subsequently, after several years, Planet Bingo received a letter from attorneys representing AIG Europe Ltd. ("AIG") noting that AIG, on behalf of its insured, Leisure, had settled Beacon's fire claim for 1.6 million. The letter demanded that Planet Bingo pay Leisure £1.6 million. The letter also stated that in order to avoid litigation, AIG is prepared to enter into alternative forms of dispute resolution, including negotiations and mediation. Planet Bingo immediately notified Burlington of the claim in August 2014. In response, Burlington denied coverage of the claim based on the arguments that the fire did not occur in the United States or Canada, and Planet Bingo has not been sued in the United States or Canada as required by the Burlington policy. In February 2016, Planet Bingo sued Burlington in Orange County Superior Court for damages based on its failure to defend the Leisure claim. The trial court entered judgment in favor of Burlington. Subsequently, the Court of Appeal reversed such judgment because there was a potential for coverage as it was possible that Planet Bingo might be sued in the United States or Canada by Leisure.

In the meantime, AIG filed suit against Planet Bingo in the United States. Burlington defended Planet Bingo against this lawsuit and ultimately settled AIG's lawsuit for policy limits of $1.0 million.

Thereafter, Planet Bingo sued Burlington arguing in part that its failure to settle AIG's subrogation lawsuit before AIG filed suit against Planet Bingo constituted bad faith. In response, Burlington filed a motion for summary judgment arguing that since it did not receive a demand within policy limits from AIG at the pre-suit stage, there could be no claim based on failure to settle. The trial court agreed and entered judgment in favor of Burlington.

The Court of Appeal reversed the trial court's entry judgment and remanded the Planet Bingo lawsuit back to the trial court for further proceedings. The Court of Appeal held that there is a triable issue of fact relative to whether Burlington breached the covenant of good faith and fair dealing by failing to settle the AIG subrogation claim at the pre-suit stage. The Court of Appeal reasoned as follows:

In the paradigm case of an insurer's failure to settle, the third-party claimant makes a reasonable settlement offer within the policy limits; the insurer rejects it; the third-party claimant goes to trial; and the trial results in a judgment in excess of the policy limits. In this situation, the insurer becomes liable for the entire excess judgment. (e.g., Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 237 [178 Cal. Rptr. 343, 636 P.2d 32].)

This case is different, in two respects. 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.

In its motion for summary judgment, Burlington argued only the first distinction – the absence of an offer to settle within the policy limits. It did not rely on the second distinction-the absence of an excess judgment. It also did not argue that lost profits were not recoverable. Thus, it would not be appropriate for us to decide these questions. We leave it open to the trial court to decide whether Planet Bingo can recover lost profits, rather than an excess judgment, based on failure to settle. We focus instead on whether it matters that there was no offer to settle within policy limits.

"An insurer does not breach the duty to settle if it never had 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. [Citation.]" (Howard v. American National Fire Ins. Co. (2010) 187 Cal.App.4th 498, 525 [115 Cal. Rptr. 3d 42].)

. . .

Despite this flat statement in Graciano, however, Boicourt v. Amex Assurance Co. (2000) 78 Cal.App.4th 1390 (93 Cal. Rptr. 2d 763) held that an insurer can be liable for failure to settle even in the absence of a formal offer to settle within the policy limits. There, the claimant asked the insurer to disclose its policy limits. The insurer refused to do so (and did not ask its insured for permission to do so), explaining that it "had a 'policy not to disclose the amount of the policy limits."' (Id. at p. 1393.) The claimant then filed suit against the insured and recovered an excess judgment. (Ibid.) He later testified that he would have been willing to settle for the policy limits, had he known what they were. (Ibid.)

The appellate court held that a bad faith claim can be based on an insurer's prelitigation refusal to disclose the policy limits. (Boicourt v. Amex Assurance Co., supra, 78 Cal.App.4th at pp. 1393- 1399.) It explained that, in that situation, there is a conflict of interest between the insurer and the insured. (Id. at pp. 1397-1399.) "A conflict of interest can indeed develop without a formal settlement offer being made by the claimant." (Id. at p. 1397.) "[A] liability insurer '"is playing with fire"' when it refuses to disclose policy limits. Such a refusal '"cuts off the possibility of receiving an offer within the policy limits"' by the company's '"refusal to open the door to reasonable negotiations."' [Citation.]" (Id. at p. 1391.) Thus, the court also held that "a formal settlement offer is not an absolute prerequisite to a bad faith action "(Id. at p. 1399.)

. . .

At a minimum, Boicourt  means that the existence of an opportunity to settle within the policy limits can be shown by evidence other than a formal settlement offer. In Boicourt itself, the claimant's request for disclosure of the policy limits suggested an interest in settling within those limits. As the court stated, "the relevance of disclosure of policy limits to the settlement of an underlying claim cannot be gainsaid." (Boicourt v. Amex Assurance Co., supra, 78 Cal.App.4that p. 1393, italics omitted.) The claimant testified that he would have settled for the policy limits. (Ibid.) The court left to be determined, on remand, "Whether [the] request for policy limits represented a genuine opportunity to settle an excess claim within policy limits " (Id. at p. 1399.)

It is significant that AIG was claiming as subrogee, and its letter was a subrogation demand letter. Planet Bingo's expert witness testified that a subrogation demand letter "offers a clear invitation to negotiate a settlement for less than that amount " She also testified that there is a "very well[-]known industry custom in such subrogation claims of accepting policy limits for a full release o[f] the insured. This raised a triable issue of fact as to whether the letter represented an opportunity to settle within the policy limits. 

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