Insurer’s Quick Investigation of Exotic Dancer’s Claim Costs it More Than $5.4 Million

In November 2010, Kailee M. Higgins downed 15 shots of tequila during her Saturday night shift as a dancer at Centerfolds II in Worcester, Mass. She was only 20 at the time.

Higgins texted a friend that she was “maadd drunk” and was stumbling when she left the nightclub, witnesses said. Nevertheless, a bouncer escorted her to her car, physically put her into the driver’s seat and handed over her car keys.

About 15 to 30 minutes later, Higgins was critically injured when her Cadillac collided with a sports utility vehicle driven by an off-duty police officer. Police reported that she had a blood-alcohol level of .15, nearly twice the legal limit. The crash put Higgins into a hospital and later rehabilitation, and also led to a decade-long court battle.

The litigation likely ended Friday when the First Circuit Court of Appeal in Boston upheld a $5.4 million award to Higgins against an insurance company that had acted in bad faith when investigating her claim. The appellate court, however, reduced by two-thirds the prejudgment interest ordered by the district court judge.

District Court Judge Timothy S. Hillman had tripled the amount of actual monetary damages — $1.8 million — because Capitol Specialty Insurance Corp. has “willfully and knowingly” violated a state law that requires insurers to investigate claims in good faith.

When the owner of Centerfolds learned about the crash, he obtained statements from the bartender on duty that night, the manager and a floor host who said no one had served alcohol to Higgins and no one had seen her drinking. The owner also said the club keeps a list of dancers who are under the legal drinking age of 21 to make sure they are not served alcohol.

Capitol’s claims administrator, Norfield Associates, reported that there was no indication that any of the dancers at the club had been drinking. Capitol closed the file.

But in February 2012, attorney John Donohue notified the insurer that his client has been served drinks even though employees at the club knew she was underage and had suffered significant damages as a result. He said he intended to enforce the club’s liability “to the fullest extent of the law.” The owners of Centerfolds had a $300,000 liquor liability policy and a $1 million general liability policy with Capitol.

Higgins sued PJD Entertainment, the owner of the club, and reached a settlement. The settlement stated that Higgins’ damages were $7.5 million, but exempted PJD for all but $50,000 of that amount. The night club’s owners assigned its claims against Capitol to Higgins.

Higgins filed a federal lawsuit against Capitol, seeking to collect the remaining $7.45 million. The district court refused to accept the damages as stated in the settlement, finding the agreement to be “collusive” as Capitol had played no part in it.

But Judge Hillman found that Capitol has failed to properly investigate the claim, causing Higgins $1.8 million in damages. He ordered Capitol to pay three times that amount because Capitol’s actions were willful. On top of that, the judge ordered Capitol to pay pre-judgment interest on the entire $5.4 million award.

The First Circuit found that the prejudgment interest should have been added only to the actual damages of $1.8 million. But the court affirmed the rest of the district court’s ruling.

The panel said in its published opinion that Capitol did not look beyond the “self-serving” statements of Centerfold’s employees and manager when deciding that Higgins had not been drinking. A more thorough review would have show that Higgins might have been drinking shots bought for her by customers in the private “Champagne Room” out of the view of the bartender, purchased from the “shot girls” who roamed the club. And while Centerfold’s owners said no drinks were served to underage drinkers, Hillman found in fact the club gave shots to each dancer at the start of their shift regardless of their age.

The appellate panel said Capitol shut down the investigation after interviewing only three people, each of whom had an “incentive to dissemble.” It did not reopen the investigation until after Higgins’ attorney gave notice that he intended to file suit. The insurer offered to settle the case at an amount slightly less than the $300,000 liquor liability limit only after an attorney advised that it faced a “seven-figure” exposure.

“We see no clear error as to the district court’s factual findings on this point: Capitol’s conduct was willful, knowing, and in bad faith,” the First Circuit said.