Thursday, August 6, 2009

U.S. District Court holds that insurer that did not control defense could not be liable for unfair claims settlement practices

In my last post I discussed the decision of the United States District Court for the District of Massachusetts in Mut. Ins. Co. v. Murphy, in which the court dismissed Judge Murphy's claim against the Boston Herald's insurer for unfair claims settlement practices. The reason for that decision was that the insurer did not have control over defense or settlement of the claims.

The Herald was insured under a "media insurance policy" issued by Mutual Insurance Co. for damages arising out of libel. The policy had a $50,000 self-insured retention (similar to a deductible). After the first $50,000, the Herald would continue to pay twenty percent of defense expenses up to $500,000.

Under the policy the Herald had s duty to retain its own counsel for the defense or settlement of a claim, although choice of counsel was subject to the approval of Mutual. The Herald was also obligated to advise Mutual of the likelihood of success or failure, provide an initial estimate of legal costs, and advise it of offers of settlement and other information pertinent to a claim. The Herald was also required to notify Mutual when it became clear that a claim was like to exceed $50,000, and regularly to update it as to expenses.

As to Mutual's obligations, the policy stated, "The company shall not be called upon to assume charge of the settlement, or the defense of any claim made, or suit brought, or proceeding instituted against the insured."

Under the policy Mutual had the right to associate with the Herald in defense and control of any claim which appears likely to involve payment by Mutual, in which event the Herald and Mutual were required to cooperate in defense or settlement of the claim; or, if Mutual was dissatisfied with the Herald's choice of counsel, to suggest replacement with new counsel to be jointly approved by Mutual and the Herald. No settlement could be made without Mutual's consent, but Mutual could not unreasonably deny consent. If judgment entered against the Herald and the Herald chose not to appeal, Mutual could appeal the judgment.

The court held that those policy clauses did not give Mutual control over defense or settlement sufficient to make it liable for unfair claims settlement practices.

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