The First Circuit Court of Appeals (“Appeals Court” or “Court”) has affirmed $6.5 million of the $8.4 million unfair claim practice judgment that Capitol Specialty Insurance Corporation (“Capitol”) had appealed from the United States District Court sitting in Worcester (“district court”).
For the details of the district court case, See Agency Checklists’ article of May 7, 2019, “$8.4 Million Bad Faith Judgment against Capitol Specialty on Exotic Dancer’s Injury Claim.”
On the appeal, the claimant, Kailee Higgins (“Ms. Higgins”), is a former exotic dancer in a Worcester nightclub, Centerfolds II (“Centerfolds”), now closed. When Ms. Higgins worked at Centerfolds in 2010, she was twenty years old. The evidence showed that she had been served alcohol when during her shift and had left the club after having had fifteen drinks. She was escorted to her car at 2:00 a.m. by a club bouncer, but twenty minutes later, she was involved in a horrendous accident that left her severely injured.
Ms. Higgins sued the nightclub’s insurer, Capitol, under G.L. c. 93A, the unfair business practice act, for violating G.L. c. 176D’s insurance-claim-handling requirements.
Her unfair claim practice suit alleged Capitol had liability under c. 93A for its violation of c. 176D’s provisions in “refusing to pay claims without conducting a reasonable investigation” and for “failing to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”
After hearing the evidence, the district court judge found that Capitol had only conducted a cursory and one-sided investigation to deny Ms. Higgins’ severe and valid bodily injury claim. As a result of Capitol’s minimal investigation and recalcitrance in acknowledging its insured’s liability, the judge found Ms. Higgins had suffered actual damages independent of her bodily injury claim of $1.8 million. Since he found that Capitol’s actions were willful, he exercised his right under c. 93A to treble the damages to $5.4 million.
With prejudgment interest assessed on the full $5.4 million, the district court judgment totaled over $8.4 million, which Capitol appealed, after having to post a $10 million appeal bond.
Ms. Higgins’ job of exotic dancing and pushing drinks
On November 27, 2010, Kailee Ms. Higgins was a 20-year old who was by all accounts an attractive, intelligent, young woman. When Centerfolds hired her three months before her accident, she had to provide a driver’s license and birth certificate. Centerfolds understood she was not old enough to drink. As an exotic dancer at Centerfolds, she was not paid an hourly rate or salary but relied on tips from customers for her income.
Centerfolds advised Ms. Higgins upon hiring that she was to pressure customers to buy drinks. Most often, the same customers would buy her drinks, which required Ms. Higgins to drink alcohol, even though she was underage. While working at Centerfolds, the wait staff or bartenders never refused to serve her a drink or asked for proof of her age. Centerfolds also maintained a “Champagne Room,” which enabled the dancers to give private dances to a customer. The dancer would make significantly more money in tips in the Champagne Room than dancing on the stage. Drinks in the Champagne Room were served by “Shot Girls” who were present on the floor to enhance the opportunities for customers to purchase alcohol for themselves and the dancers.
On November 27, 2010, Ms. Higgins worked a shift at Centerfolds. Before starting her shift, she had three shots of Patron Tequila at Centerfolds. During her shift, she consumed at least twelve more shots of Tequila in the club and the Champagne Room, and she became heavily intoxicated. Ms. Higgins testified that personnel from Centerfolds never tried to prevent her from drinking.
Ms. Higgins has a catastrophic auto accident fifteen minutes after being escorted to her car
Centerfolds had a stated policy of having a bouncer escort every dancer to their vehicle at the end of their shift, or to call a cab to take a dancer (or customer) home who was intoxicated.
Ms. Higgins’ shift ended around 2:00 a.m. (on November 28), and she too was escorted to her car by a bouncer. The bouncer had to take the keys from her, open the car door, and physically sit her into the driver’s seat. He then gave the keys back to her and watched as she started her car. Before Ms. Higgins drove away, she texted a friend, “hehe maaad drunk lol.” Ms. Higgins was allowed to drive away in a heavily intoxicated condition.
Within minutes of leaving Centerfolds, Ms. Higgins’ car and the car of an off-duty Worcester police officer collided violently.
As a result of the accident, Ms. Higgins was in a coma for eighteen days. She suffered serious and permanent injuries, including traumatic brain injury, multiple facial bone fractures, a dislocation fracture of her left orbit socket, and a shattered nose. Her teeth were knocked out, a lip was ripped open, she sustained a large laceration on the left side of her face, and her left arm was permanently damaged.
She has had over a dozen surgeries to rebuild and reconstruct her face. The surgical repair of her left eyeball left her with a permanently damaged, mismatched left eye.
After leaving the hospital, she went to the Spaulding Rehabilitation Center for several weeks. Her medical expenses exceeded $239 thousand, and she lost $58 thousand in wages
Centerfolds’ liquor liability policy and CGL policy involved
Centerfolds immediately reported Ms. Higgins’ accident to its insurance broker. The broker then put Centerfolds’ liability insurer, Capitol, on notice of a potential claim. The notice advised Capitol that Ms. Higgins, had sustained serious bodily injuries in a car accident shortly after leaving work at Centerfolds and that she was underage.
Centerfolds’ Commercial General Liability policy (“CGL”) provided two distinct coverages. The first coverage provided a $1,000,000 limit for sums that Centerfolds became “legally liable to pay because of `bodily injury’ … to which this insurance applies.” However, this general liability coverage had a liquor liability exclusion, which eliminated coverage for bodily injuries resulting from an insured being liable for “The furnishing of alcoholic beverages to a person under the legal drinking age…” The other coverage, contained in a “Liquor Liability Coverage Form,” provided up to $300,000 for losses sustained “by reason of the selling, serving, or furnishing of any alcoholic beverage.”
Capitol’s only pays $568.00 for an initial investigation before closing its file
On December 15, 2010, Capitol referred the claim to an independent adjusting company with instructions to do a “limited investigation” of Ms. Higgins’ accident.
The adjuster sent a preliminary report of his investigation to Capitol. He reported that Centerfolds’ owner, the general manager, who was the brother of the owner, and one bartender had denied that Ms. Higgins had been drinking at the club or that she appeared intoxicated when she drove away. Upon the receipt of the report and the adjuster’s advice that they intended to interview other witnesses, Capitol advised the adjuster to do nothing more. It paid the adjuster’s $568.00 bill and closed its file.
Fourteen months later, on February 3, 2012, an attorney representing Ms. Higgins sent a letter of representation alleging that Centerfolds served Ms. Higgins liquor while she was underage to the point of intoxication and had allowed her to drive away from the club while intoxicated. Capitol did not conduct any further investigation regarding the attorney’s allegations. Instead, it sent a general denial of “any liability on the part of its insured for Ms. Higgins’ injuries.” The letter also denied, without any further investigation, that the insured had “served alcohol to your underaged client” and that “they are not responsible for the injuries sustained by her.”
Once lawsuit filed, assigned defense attorney concludes damages exceed the policy limit and liability is reasonably clear
On February 22, 2013, Ms. Higgins filed a civil complaint against Centerfolds in state court. The complaint alleged that Centerfolds had negligently caused her injuries by:
- Serving her alcohol.
- Encouraging excessive consumption of alcohol by its dancers.
- Failing to ask her for proof of her age: and,
- Escorting her to her car for her to drive away while she was obviously intoxicated.
The complaint alleged that when, after being taken to the hospital, she had a blood alcohol test, it showed more than double the legal limit.
Capitol retained Boston Attorney Jeffrey Stern (“Attorney Stern”) to defend Centerfolds. He initially reviewed “the [151-page] police report, including witness statements, accident reconstruction report, search warrants, toxicology report, and cell phone records.” The report, according to Attorney Stern, stated that Ms. Higgins’ “failure to yield” had been identified as the “primary cause of the accident, with her high blood alcohol content” and the speed of the other car “listed as contributing factors.”
Attorney Stern also reported that a police detail officer inside the club that night noted that she may have consumed alcohol in the “Champagne Lounge” and that there had been multiple servers on the floor. He pointed out that this testimony was inconsistent with the signed statement of Centerfolds’ bartender that she was the sole source of alcohol served, and of Centerfolds’ bouncer who said he escorted a not intoxicated Ms. Higgins to her car after her shift. Further, Attorney Stern advised that he had learned that at about 2:30 a.m. Ms. Higgins texted a friend, “hehe maadd drunk lol.”
Subsequently, Attorney Stern wrote to Capitol that “there is a real possibility that Patrons bought drinks for [Ms. Higgins]” and that the [owners] had admitted that Centerfolds was aware of Ms. Higgins’ age. Later, Attorney Stern sent Capitol a memo reporting that Centerfolds’ general manager had said that “it is common for patrons to buy drinks for dancers” and that it was “not uncommon for dancers to have something to drink (or use weed) before they come to the club.”
Attorney Stern also advised Capitol that “there is clearly seven-figure potential,” and the likely verdict, if Ms. Higgins prevailed, was “$500,000 to $1,000,000.” After taking Ms. Higgins’ deposition in December 2013, He recommended that Capitol offer the policy limit to Ms. Higgins as “the exposure, in this case, is clearly in seven figures.”
Declaratory judgment on coverage for CGL and $7.5 million consent judgment
When Capitol finally made the offer of the remaining balance of its liquor liability coverage, which had liability limits continually reduced by claim costs, of $284 thousand, Ms. Higgins’ rejected the offer. He demanded that Capitol pay $1.3 million: The full CGL limit plus the liquor liability endorsement limit without deduction for claim costs.
On June 23, 2014, Capitol filed a federal court action against Ms. Higgins and Centerfolds seeking a declaration, and the maximum amount available to Ms. Higgins was $300,000.00 under the liquor liability policy. Ms. Higgins answered the complaint and asserted counterclaims against Capitol for violations of c. 93A and unfair claim practice c. 176D.
While the declaratory judgment proceeded in the district court, Centerfolds and Ms. Higgins negotiated a settlement where Centerfolds paid Ms. Higgins $50 thousand, assigned her its rights against Capitol, and entered a consent judgment of $7.5 million in favor of Ms. Higgins. Ms. Higgins, for her part, agreed to enforce the consent judgment only against Capitol and not Centerfolds.
Capitol never received any notice that Ms. Higgins and Centerfolds had reached an agreement or that they would be entering a consent judgment.
Ms. Higgins then amended her counterclaim in the federal lawsuit to add her assigned rights from Centerfolds.
Capitol was successful in its declaratory judgment when on September 1, 2015, the district court entered summary judgment that the only policy limit available to Centerfolds to indemnify against Ms. Higgins’ claim was the $300,000.00 liquor liability endorsement limit.
Based on the declaratory judgment in its favor and the consent judgment between Centerfolds and Ms. Higgins, Capitol paid Ms. Higgins the remaining amount under the liquor liability coverage of $267,170.88.
An eight-day trial before a district court judge results in $8.4 million judgment
With the question of coverage decided and the tort claim settled, the only remaining claims concerned the unfair claim practice case brought by Ms. Higgins against Capitol.
After eight days of trial in 2017, the judge took Ms. Higgins’ claim under advisement. In March 2019, he ruled in favor of Ms. Higgins on her direct claims concluding that Capitol had willfully violated Chapter 93A, Section 9, by its actions that violated c. 176D, Section 3(9)(d) (obligation to conduct a reasonable investigation) and 3(9)(f) (obligation to settle if liability is reasonably clear).
The district court concluded that Capitol had violated these provisions by:
- Ending its initial $584 investigation “[d]espite knowing virtually nothing about the events of the evening other than self-serving statements from select employees;” and,
- Failing to further investigate after receiving Ms. Higgins’ attorney’s letter alleging Centerfolds’ serving his client, a minor, liquor.
Also, the district court held that if Capitol had “used minimal effort and expense” in investigating the claim, it would have discovered who was working the night of the accident. It also would have then learned about Centerfold’s policy of requiring dancers to encourage patrons to buy drinks for them, whether they were underage or not.
The district court also determined that liability had been reasonably clear before Capitol’s offering of the policy limit because it was clear that Centerfolds regularly provided Ms. Higgins alcohol despite being aware, she was only twenty years old, a violation of Massachusetts law.
The district court found that Capitol’s unfair claim practice had caused her $1.4 million in damages, independent of the bodily injury damage she suffered as a result of the auto accident caused by Centerfolds’ allowing her to consume alcohol on its premises. The judge found Capitol’s violations were knowing and willful, which under G.L. c. c. 93A, allowed him to award double or treble punitive damages. He chose to treble the damages resulting in a $5.4 million award before prejudgment interest at twelve percent per annum. The addition of prejudgment interest on the $5.4 million award brought the total judgment entered $8.4 million.
Cross Appeals by filed by both parties to the district court’s decisions
Following the district court’s entry of final judgment, both Capitol and Ms. Higgins appealed.
Ms. Higgins claimed that the district court should have used the $7.5 million consent judgment between her and the nightclub as the base for trebling her damages. Also, she claimed that the district court had failed to rule on the claims against Capitol assigned to her by Centerfolds as part of their settlement.
Capitol opposed Ms. Higgins’s appeal but also claimed that the district court had committed error by:
1. Finding that Capitol had violated the unfair claim practice statute, c. 176D.
2. Finding that Capitol’s unfair claim practice violations were willful.
3. Improperly assessing Ms. Higgins’ actual damages for Capitol’s c. 176D violations; and
4. Improperly awarding $2 million in prejudgment interest on the $3.6 million punitive damage award as opposed to only interest on the actual damages awarded of $1.8 million.
The appeals court rules in favor of Capitol on using the consent judgment as the measure of punitive damages
The first item the appeals court dealt with was Ms. Higgins’ claim that the underlying consent judgment entered into without Capitol’s participation with the insured, Centerfolds, was the amount that the district court was legally required to use for the multiple damages awarded.
Ms. Higgins based her appeal on this issue on the statutory provisions of c. 93A that states, “the amount of actual damage is to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction on occurrence.”
Ms. Higgins argued this statute made the $7.5 million agreement for judgment the basis for the punitive damage to be multiplied. If allowed, that calculation would have made Capitol liable for $15 million in punitive damages.
The appellate justices, however, agreed with the district court judge that he did not have to apply this judgment as the basis for punitive damages. To both The appeals court and the district court, the consent judgment for $7.5 million was made under sufficiently collusive circumstances as to make it nonbinding for judicial purposes. Also, the appeals court noted there was “a substantial risk of “under-litigation in the negotiation of [the] agreement” such that the district court did not have to treat it as a binding judgment.
Ms. Higgins’ Claim for the Failure of the district court to Find Liability on the Assigned Claims by Centerfolds
Ms. Higgins also argued that contrary to the rulings of the district court she had a right to collect on the assignment of rights from Centerfolds for four items: Capitol’s failure to settle Centerfolds liability, the erosion of the full limit by defense costs, the $50 thousand Centerfolds paid to extinguish its liability, and the attorney fees Centerfolds expended to settle its liability above the policy limit.
The Court addressed each item and found no liability, stating:
- As to the exposure to liability in excess of the policy limits “there is no evidence that Capitol ever could have settled at the policy limit and have secured a release of all liability for Centerfolds.”
- As to the erosion of the policy, the Court found that if anything, “Capitol should have expended more funds to investigate further.”
- The $50,000.00 Centerfolds paid to release its exposure above the policy limit it purchased was not an injury caused by Capitol.
- Finally, Centerfolds’ personal attorney’s fees and expenses was not an injury caused by Capitol since this was an independent undertaking by Centerfolds to reduce or eliminate its corporate liability above and beyond Capitol’s policy limit.
Capitol has its prejudgment interest exposure reduced but loses on the rest of its appeal
On the issue of the liability under the two sections of c. 176D, the Court decided it did not have to reach the issue of whether Capitol had violated Section 3(9)(f), regarding failure to settle.
The Court addressed only the failure of Capitol to conduct a reasonable investigation. The Court reiterated the history of the claim, as stated earlier. It concluded that the district court’s findings based on the initial inadequate investigation conducted by Capitol showed the district court’s finding of liability was adequately supported by the evidence.
The appellate court then addressed the question of whether the judge had committed error in finding Capitol’s violation was willful.
The appeals court noted that Capitol had shut down the initial investigation on January 11, 2011, after its claim investigator had only provided accounts of only three of a large number of relevant witnesses and those witnesses interviewed had “incentive to dissemble,” and after its investigator had told Capitol he intended to pursue additional lines of inquiry. When in February 2012, Capitol again denied liability for the claim made by Ms. Higgins’ attorney, it did so without any additional investigation. As the Court put it:
“These actions came from an insurance company surely knowledgeable about bars and clubs subject to liquor liability laws as to which it provided liquor liability coverage.”
The Court went on to say once Attorney Stern had become involved, he was quickly able to acquire the information that tended to show Centerfolds’ liability “within weeks.” As a result, the Court found that the district court’s factual findings on this point were not in error, finding that “Capitol’s conduct was willful, knowing, and in bad faith.”
The Court agrees the unfair claim practice damages properly included mental anguish
A major argument for Capitol was that Ms. Higgins was only entitled to damages in the form of lost interest. The Court noted that under Massachusetts law, the measure of actual damages is in cases involving unfair claims was:
“typically [the] loss of the use of such funds [payable by the insurance company] from the time when the claim should have been paid to the time that a settlement of judgment was paid.”
However, Massachusetts law also allows emotional distress damages arising from violations of c. 93A under certain circumstances.
Here the appeals court noted that while Ms. Higgins’ bodily injury damages from the accident were not compensable in the unfair claim practice suit, the Court accepted the district court’s findings on the adverse consequences of Capitol’s unfair claim practice violation as including:
- Depriving Ms. Higgins of the opportunity to engage in a timely settlement process,
- Delaying for several years, her obtaining of the liquor liability policy proceeds, needlessly forcing her to litigate her tort claims against Centerfolds.
- Causing her to be unable to pay her significant unpaid medical expenses for a period of years.
- Causing her physical and mental anguish and emotional distress, in addition to the severe physical, mental, and emotional injuries that she sustained in the motor vehicle accident, [and]
- Diminishing by almost $33,000.00, the insurance coverage that was ultimately left her with diminished policy limits reduced by litigation costs incurred by Capitol once she made a claim.
The appeals court found these consequences were adequately supported by the evidence that:
- Ms. Higgins supported herself and her younger sister solely on tips from dancing at Centerfolds.
- She received no salary from Centerfolds and, indeed, had to pay Centerfolds for the opportunity to dance at the club.
- Before the accident, she earned enough to have her own apartment.
- After the accident, her medical costs were immediate and recurrent.
- The evidence is she had no insurance from her work, and Capitol does not suggest she had any insurance or means of support and put in no evidence to that effect.
- Ms. Higgins spent weeks in the hospital, followed by a stay at a rehabilitation facility.
- She had numerous emergency surgeries to repair facial injuries.
- She could no longer work and so lost her sole means of support for herself and her sister.
- She could no longer afford her apartment and was forced to move into disability housing.
The appeals court agreed with the district court’s finding that Capitol knew, or should have known, of the extent of Ms. Higgins’ injuries and that she could no longer work. Thus, the consequences to Ms. Higgins of Capitol delaying payment for a better part of five years were foreseeable that:
- Ms. Higgins, lacking both a source of income and medical insurance, would experience emotional distress and mental anguish about her inability to support herself and her sister or to pay her medical or other bills.
- Ms. Higgins’ living arrangements would change for the worse and that her fear of financial ruin would escalate during the nearly two-year period between the filing of her claim and her receipt of the insurance proceeds.
- Ms. Higgins would need to hire an attorney to file a lawsuit, and that would impose both financial and emotional costs.
Based on these findings, the appeals court affirmed the district court’s $1.4 damage award for the damages to Ms. Higgins occasioned by Capitol’s failure to reasonably investigate her claim against Centerfolds.
The Court rules punitive damages not entitled to the addition of prejudgment interest
In this case, the district court had not refused to strike the prejudgment interest on the punitive damage portion of its award. However, the appeals court did. The appeals court found that Massachusetts law was that the adding of prejudgment interest to penal sums under c. 93A would compound the penalty and would violate the purpose of the Massachusetts prejudgment interest statute.
The original judgment of $1.8 million-plus, the $3.6 million in punitive damage had $3,018,600 in prejudgment interest, as amended, added at the Massachusetts statutory rate of twelve percent per annum.
The decision of the appeals court removing the prejudgment interest from the final judgment will reduce the district court award by $2,012,400. Notwithstanding this deduction, the final judgment before post-judgment interest and attorney fees will total $6,406,200, per Agency Checklists’ calculation.
The final judgment of the First Circuit Court of Appeals
The appeals court’s final order in the thirty-eight-page decision is:
We affirm the decision of the district court in all respects except its award of prejudgment interest. As to prejudgment interest, we reverse and remand for calculation of prejudgment interest on Higgins’ actual damages. (Emphasis in original).
