A federal appeals court upheld a $5.4 million judgment against a liquor liability insurer for allegedly mishandling the investigation of an incident where a 20-year-old exotic dancer was severely injured in an accident after being served alcohol.

In November 2010, Kailee Higgins was injured in a two-car crash after she left a nightclub while heavily intoxicated, although she was underage, according to Wednesday’s ruling by the 1st U.S. Circuit Court of Appeals in Boston in Capitol Specialty Insurance Corp. v. Kailee M. Higgins et al.

Ms. Higgins, who was unable to work and to support her younger sister after the accident, won a $1.8 million judgment against the club and its liquor liability insurer, Middleton, Wisconsin-based Capitol Specialty Insurance Corp.

The lower court then trebled the award to $5.4 million after concluding the insurer had failed to properly investigate the claim.

The insurer’s claims manager noted in a claims file that an investigating firm’s report indicated Ms. Higgins had not been drinking, according to the ruling.

“If Capitol had ‘used minimal effort and expense’ in investigating the claim, the district court reasoned it would have discovered the names and addresses of the employees working the night of the incident, learned about (the nightclub’s) policy of requiring dancers to encourage patrons to buy drinks for them, and discovered that there were other individuals serving alcohol that night besides the bartender,” said the ruling.

“The insurer had little reason from (the investigating firm’s) limited reports to exclude the possibility that Higgins obtained alcohol at the nightclub the night of the accident,” said the ruling.

Capitol had sought a declaration from the federal district court that the maximum amount available to Ms. Higgins would be $300,000 under its liquor liability policy.

“Capital should have known that information from other employees about the nightclub’s practices could offer important insight into the accuracy of the few statements (the investigating firm) had taken,” said the ruling.

“The trial judge’s finding that Capitol’s violations were ‘willful, knowing and in bad faith’ was amply supported,” said the appeals court in upholding the $5.4 million award.

The appeals panel did agree the prejudgment interest should have been based on the single damages award rather than the trebled damages award.

Attorneys in the case had no comment or could not be reached.

In December, a federal appeals court upheld a lower court and ruled a Hanover Insurance Group unit was not obligated to defend a club in a case where one of its patrons was involved in a fatal drunk driving incident because of a liquor liability exclusion in its policy.