U.S. Court of Appeals imputes knowledge of insurance agent or broker to insured

I have been discussing the case of Gargano v. Liberty Int'l Underwriters, Inc., in which the court held that under a claims-made policy a claim must be both made and reported during the policy period.

In my last post I discussed the plaintiff's argument that he should not be bound by the terms of the policies because he never received copies of them. As I discussed in my last post, the court rejected that argument.

The court also rejected the argument because the policy was delivered to the plaintiff's insurance agent or broker. "Under Massachusetts law, the agent's knowledge of the policy's terms is imputed to the insured in this circumstance."

Court of Appeals holds that insured is bound by terms of the policy even if the policy was never delivered to him

In my last post I discussed Gargano v. Liberty Int'l Underwriters, Inc., in which the plaintiff sought coverage under claims-made policies even though the underlying claim was not both made and reported in any single policy period.

The plaintiff argued that the companies should not be allowed to rely on the requirement that a claim be made and reported during a policy period to deny the claim because the insurers had never delivered copies of the policies to him. The court held, "[a]s a general matter 'neither delivery nor actual possession by the insured is essential to the making of an insurance contract unless the contract expressly sets out a requirement of delivery.'"

Stop the presses! SJC adopts pro rata allocation!

As I discussed here nearly a year ago the United States Court of Appeals certified to the SJC questions regarding allocation. Today the SJC issued its decision in Boston Gas Co. v. Century Indem. Co. The decision is not yet available from the on-line SJC docket. The Westlaw citation is 2009 WL 2184647.

In a nutshell

The court adopted pro rata time-on-the-risk allocation, thereby overthrowing ten years of attorneys and litigants using their best guess that Massachusetts is a joint and several liability state based on a couple of not-very-clear Massachusetts Appeals Court decisions. The court also held that the insured must pay only a proportionate share of a self-insured retention for each triggered policy period.

What pro rata and joint and several allocation mean

In pro rata allocation a long-term loss, such as environmental contamination, is allocated among all insurers who provided insurance covering the time the loss was occurring (or "triggered"), and the loss is frequently allocated to the insured for periods where it had no or insufficient insurance.

In joint and several allocation, one insurer must pay the entire loss up to its policy limit even if there were several insurers on the risk or a period of uninsurance.

The basis for the pro rata decision

The court based its decision on both the policy language at issue and on public policy. In my opinion allocation issues should not be based on policy language because when more than one insurer, or even more than one policy form issued by the same insurer in different years, is involved they may have different policy language which would compel different results; but one loss cannot be allocated in more than one way. Had the court based its decision only on the policy language, it would not be clear that pro rata allocation would apply to other cases.

However, the court also adopted pro rata allocation based on public policy reasons. It stated that joint and several allocation does not "solve the Allocation problem; it merely postpones it." That is only partially correct. In many jurisdictions that have adopted joint and several allocation, an insurer who initially pays the loss may bring a suit for equitable contribution against other insurers to have them contribute their pro rata share to the loss. However, under joint and several allocation there is no contribution from the insured and no suit for equitable contribution can be brought against the insured.

Adoption of time-on-the-risk allocation

The court also adopted the time-on-the-risk method of pro rata allocation. Under that method each insurer pays up to its policy limits in proportion to the number of years it was on the risk. If a loss occurred over ten years and one insurer provided coverage for five years, it would be responsible for fifty percent of the loss up to its policy limits.

The insured will bear its proportionate share of the loss

The court held that the insured will be allocated losses for periods where it was self-insured, uninsured, or insufficiently insured. The court did not address a scenario where an insured had insurance but that insurance is no longer available due to bankruptcy of the insurer, but based on its discussion regarding periods where no insurance was available the court would almost certainly hold the insured responsible for loss during that period.

The insured must pay only a proportionate share of its self-insured retention for each policy period

The court held that the insured must satisfy only a prorated amount of its self-insured retention for each triggered policy period, to be prorated on the same basis as the insurer's liability. "Thus, if the pollution in this case had occurred over the course of a decade, then one-tenth of the total cleanup cost would be apportioned to each policy year and Boston Gas would be responsible for one-tenth of its applicable self-insured retention for each year."

More later

That's it in a nutshell. I'll be out of the office for a while, so you'll be reading some posts about some less earth-shattering decisions. But I will come back to this decision and provide more analysis of it.

As usual, thanks to Mike Tracy of Rudolph Friedmann LLP for bringing this decision to my attention within minutes of it being issued.

Court of Appeals holds that there is no coverage under claims-made policies unless claims are both made and reported during policy period

In In Gargano v. Liberty Int'l Underwriters, Inc., the United States Court of Appeals for the First Circuit made the obvious ruling that there is no coverage under policies requiring that claims be made and reported during the policy period for a claim that was not both made and reported during the policy period.

The plaintiff was an attorney who had three consecutive claims-made professional liability policies running from September 1, 2004 to September 1, 2007.

The plaintiff was sued in March 2005 for enforcement of an attorney's lien on a worker's compensation claim. (Attorney's liens are filed by attorneys who work on contingency fee cases that are taken over by another attorney. It protects their right to a reasonable fee for the work they did by placing a lien on the attorney's fees eventually received by successor counsel.) He did not report the claim to his insurers until after judgment entered against him in July 2007.

The court held that there was no coverage under the first policy because the claim was not reported during the policy period. It held that there was no coverage under the third policy because the claim was not made during the policy period.

Why PIP claims are rarely litigated

In my last post I discussed the Salem District Court case of Genest v. Commerce Ins. Co., in which an insurer was held not to have violated Mass. Gen. Laws ch. 93A when it based its denial of a PIP claim on an IME report.

In that case it is worth noting that although 93A damages were denied, the insured was probably awarded attorney's fees pursuant the PIP statute itself. The statute grants attorney's fees if judgment against the insurer enters on a PIP claim.

That is crucial. The maximum actual damages under a PIP claim are $8,000. Very few lawyers are willing to litigate a claim of that size. On a contingency fee claim they simply cannot make back their investment of time, and on an hourly basis the client would end up losing money. The only way such a claim is worthwhile is if an award of attorney's fees is available.

However, under the PIP statute, an insurer can pay a PIP claim at any time up until judgment enters, even after trial has begun, and not have to pay attorney's fees. As Genest illustrates, an insurer can incorrectly refuse to pay a PIP claim without being liable for attorney's fees under 93A.

That is why PIP claims are rarely litigated.

Insurer did not violate 93A when it relied on IME to deny PIP claim

Massachusetts Lawyers Weekly recently reported on the case of Genest v. Commerce Ins. Co., a Salem District Court case in which an insurer was held not to have violated Mass. Gen. Laws ch. 93A when it failed to pay PIP benefits.

I was unable to obtain a copy of the decision online, so I am relying on the Lawyer's Weekly summary.

The insurer initially denied the plaintiff's $250 claim for PIP benefits, in reliance on an independent medical evaluation report.

The court held that in so doing the insurer did not violate Mass. Gen. Laws ch. 93A, even though judgment eventually entered against the insurer.

The court said, "where an insurance carrier has grounded its denial of a claim upon a legitimate defense and thereafter simply determines to pay a claim (in this case a nominal claim) within thirty (30) days of when the benefits are due and payable (in this instance within thirty (30) days of entry of any judgment), the plaintiff shall not be entitled to G.L. Ch. 93A relief."

Service of out of state defendants in a motor vehicle accident

In my last post I discussed Huggins v. Santos, in which the Massachusetts Appellate Division ruled that service on the insurance company of an out of state defendant is not proper.

In a footnote the court did state how an out of state defendant in a motor vehicle accident claim can be served: pursuant to Mass. Gen. Laws ch. 90 § 3C, service may be made upon the Massachusetts Registrar of Motor Vehicles and mailing a copy of the process by registered mail, return receipt requested, to the defendant.

Service of process on defendant's insurance company held insufficient

The Massachusetts Appellate Division held last month that service of process on a defendant in a motor vehicle accident cannot be made by serving the defendant's insurance company. (The Massachusetts Appellate Division hears appeals from the Massachusetts District Court. The decisions of the Appellate Division do not set precedent, and may be appealed the the Massachusetts Appeals Court.)

In Huggins v. Santos, decided on June 17, 2009, Huggins alleged he was injured by Santos in a car accident in Massachusetts in 2004. Santos allegedly lived out of state. The trial court judge allowed Huggins' motion for leave to make service upon Santos by serving Santos's insurance carrier.

After service on the insurer Santos answered the complaint, including an affirmative defense that service was not properly effected and was untimely. Santos then moved to dismiss the case on the grounds of improper service. The court eventually dismissed the action.

On appeal the Massachusetts Appellate Division upheld the dismissal. Huggins argued that Massachusetts Rule of Civil Procedure 4(e)(5) permits a judge to order any means of service on an out-of-state defendant. The court held that there is no authority allowing a defendant to be served through his or her insurance company. The court said, "To argue that such service was proper because the rule permits the court to order service by any means on an out-of-state defendant is to beg both the general question of its propriety and the specific question of whether the method ordered satisfied the very purposes of service of process: to insure a defendant's due process rights by providing notice and an opportunity to be heard."

Division of Insurance reports that car insurance rates have fallen 8 percent

According to this article in The Boston Globe the Divison of Insurance reports that car insurance rates have fallen eight percent since deregulation began a little more than a year ago.

The article suggested that this statistic be taken with a grain of salt, noting that the report came out just before the July 4th weekend, suggesting that the Commission was hoping it would not be closely scrutinized.