Bad faith liability for insurers arises before the duty to defend

The California Court of Appeal's recent decision in Planet Bingo, LLC v. The Burlington Insurance Co., 2017 Cal. App. Unpub. LEXIS 1056 (Feb. 14, 2018), confirms that insurers can face bad faith liability for dilatory claims investigations and other improper claims-handling activities even if there is no coverage under the policy. Although as yet unpublished, the decision provides insureds with both legal support and a roadmap for holding insurers accountable for bad faith claims handling, regardless of whether the claim at issue is ultimately covered by the insured's policy.

The Planet Bingo decision arises from a claim for fire damages Planet Bingo tendered to its general liability insurer, Burlington Insurance Company. By way of background, Planet Bingo designs a handheld electronic gaming device that is manufactured by an independent contractor and then shipped to Leisure Electronics, Ltd, a distributor in the United Kingdom. Leisure leased the devices to another company, Beacon Bingo. Planet Bingo trained Leisure on how to use and store the lithium batteries used in the devices, and Leisure, in turn, trained Beacon.

In late 2008, there was a fire on Beacon's property in London. An investigation conducted shortly after the fire concluded that it had been caused by a lithium battery in one of Planet Bingo's devices. Beacon made a claim against Leisure, and Leisure then made a claim against Planet Bingo. Planet Bingo then tendered the claim to Burlington, which -- according to Planet Bingo -- "undertook complete control of the [c]laim."

Over the next two years, Burlington told Planet Bingo that it was investigating the claim. In June 2011, Burlington closed its file on the claim because no lawsuit against Planet Bingo had been filed. However, Burlington did not tell Planet Bingo what it had learned about the cause of the fire, that Leisure and Beacon were in settlement negotiations, or that Leisure was likely to sue Planet Bingo for damages in excess of the $1 million policy limits.

Three years later, in June 2014, Leisure paid Beacon approximately $2.6 million to settle the fire claim. Leisure subsequently notified Planet Bingo of the settlement, demanded that Planet Bingo pay the full amount, and indicated that it was going to file a lawsuit.

Planet Bingo immediately notified Burlington of the claim, but Burlington denied coverage on the ground that the fire did not occur in the policy's "coverage territory." The policy defined "coverage territory" in multiple ways. In Clause A, the policy defined it as "The United States of America ... , Puerto Rico and Canada." In Clause C, the policy expanded the "coverage territory" to anywhere in the world if "the insured's responsibility to pay damages is determined in a 'suit' on the merits, in the territory described" -- i.e., the United States or Canada.

In the ensuing coverage litigation, the trial court granted Burlington's motion for judgment on the pleadings on the grounds that there was no coverage or duty to defend because the fire did not take place in and no suit had yet been filed in the United States or Canada. The trial court also determined that, because there was no coverage, Burlington could not liable for bad faith.

The Court of Appeal reversed. Unsurprisingly, the Court of Appeal held that a fire occurring in the United Kingdom did not satisfy Clause A of the policy. As to Clause C, the Court of Appeal agreed with Burlington "that there was no coverage because a suit had not been filed in the United States or Canada." Notably, however, the Court of Appeal held "[t]here was at least a potential for future coverage." That is, "[e]ven though no suit had yet been filed in the United States or Canada, it was not impossible that one might be filed later."

Although Burlington dismissed this possibility as "irrelevant," the Court of Appeal held that the "potential for future coverage is relevant to whether Planet Bingo can state a cause of action for bad faith." After all, an insurer acts in bad faith when it "not only breaches its policy contract but also breaches its implied covenant to deal fairly and in good faith with its insured." Jordan v. Allstate Ins. Co., 148 Cal. App. 4th 1062, 1071-72 (2007). Insurers often argue that absent a viable claim for policy benefits, insureds cannot maintain a bad faith claim. The Court of Appeal in Planet Bingo rejected this bright-line rule.

Quoting Waller v. Truck Insurance Exchange, Inc., 11 Cal. 4th 1, 36 (1995), the Court of Appeal observed "i[t] is clear that if there is no potential for coverage ... , there can be no action for breach of the implied covenant of good faith and fair dealing because the covenant is based on the contractual relationship between the insured and the insurer." Although "there was no coverage under the policy yet, as no suit had yet been filed, there was a potential for coverage in the future." That "potential was sufficient to make Burlington's investigation and other claims-handling activities subject to the implied covenant of good faith and fair dealing." Accordingly, The Court of Appeal held that the trial court's conclusion -- i.e., that, because there was no coverage, Burlington could not be liable for bad faith -- was in error.

The conclusion reached in Planet Bingo is notable because it recognizes that bad faith liability can arise before coverage or the insurer's duty to defend. For example, a delayed investigation that allows evidence to be destroyed, a substandard or unreasonable investigation, or a failure to communicate critical information to the insured could support a bad faith claim as long as there is some "potential" for coverage in the future. This conclusion is consistent with prior California decision recognizing the possibility of bad faith liability for consequential damages resulting from improper claims handling. See Murray v. State Farm Fire & Cas. Co., 219 Cal. App. 3d 58, 65-66 (1990). In short, if an insurer engages in poor claims-handling to the detriment of its insured, it can and should be liable for the harm that results. This is true even if policy benefits are not -- or never become -- due.