A California federal court recently dismissed breach of contract and bad faith claims based upon certain excess insurers’ failure to fund a purportedly reasonable settlement, holding that an excess judgment or settlement is a prerequisite to such a claim.  LensCrafters, Inc. v. Liberty Mut. Ins. Co., No. C 07-2853 SBA (N.D. Cal. Feb. 12, 2008).

In March 2002, a plaintiff filed a class action complaint against LensCrafters Inc., and several other entities alleging that LensCrafters disclosed private medical information in violation of the California Confidentiality of Medical Information Act.  The parties in this underlying action reached a settlement for an amount allegedly less than the total policy limits of LensCrafters’ excess carriers.

LensCrafters then requested that the excess carriers fund the settlement, which they refused to do.  LensCrafters then filed a suit requesting declaratory relief on May 31, 2007, later amending its complaint to add claims for breach of contract and bad faith based upon the excess carriers’ alleged failure to accept a reasonable settlement of the underlying action.  LensCrafters further alleged that it had sustained damages by the excess carriers’ refusal in an amount that could not then be determined.  The excess carriers moved to dismiss.

Citing the California Supreme Court’s decision in Hamilton v. Maryland Cas. Co., 41 P.3d 128 (Cal. 2002) (a claimant’s action against an insurer does not mature until a judgment in excess of the policy limits has been entered against the insured), the court held that plaintiff’s claim was unripe because no settlement or judgment in excess of the primary policy limits had yet been entered against LensCrafters since the parties were still in settlement negotiations.

The court further rejected LensCrafters’ theory that, even in the absence of a settlement or judgment, it had suffered damages, including the cost of continuing to defend the underlying action as a result of defendants’ refusal to settle.  In that regard, the court held that, pursuant to Federal Rule 9(g), special damages must be pled with specificity, a standard that is not satisfied by a non-specific allegation that a plaintiff has suffered damages of an unspecified type and amount.

Finally, the court also held that a ripe claim for breach of contract is a necessary element to assert a claim for bad faith.  Because LensCrafters had not set forth a ripe claim for breach of contract, its claim for bad faith was premature as well.