Massachusetts Appeals Court holds insurer acted in bad faith by conditioning contribution to settlement on waiver of insured's claims against it

I have been posting about Rass v. The Travelers Cos. Inc., __ N.E.3d __, 2016 WL 6636281 (Mass. App. Ct.).  The underlying plaintiff manufactured an Indian sauce that she had worked with the insured, Rass, to create.  Rass distributed the sauce to Trader Joe's.  When Rass decided to use a different manufacturer, it sent an email to Trader Joe's stating that the plaintiff might contact them directly for the sale of the sauce.  The insured wrote that such an action would be illegal.

 

The claimant sued for trade disparagement arising out of the contents of the email, and for misappropriation of trade secrets.  Rass hired counsel, Mishky, and later notified its insurer, Travelers, of the claim.  As I wrote here, the Appeals Court held that Travelers was not responsible for pre-notice defense costs.  Travelers also complained that Mishky's hourly fee was unreasonable. 

 

Settlement negotiations occurred on the eve of trial.  Travelers agreed to contribute to settlement if Rass would waive its right to dispute Mishky's hourly fee, or, later, if Rass would waive its right to seek indemnification for the rest of the settlement under the policy.  Rass refused, and settled the case for $175,000 with no contribution from Travelers.  Rass then sued Travelers.   

 

As I wrote in my previous post, Travelers asserted that there was no coverage for the trade disparagement claim.  The court disagreed.

 

There was, however, no coverage for the claim for misappropriation of trade secrets.  Travelers was obligated to pay only the portion of the settlement that could be attributed to the covered loss.  The Appeals Court affirmed the trial judge's allocation of eighty percent of the loss to the covered claim. 

 

The Appeals Court also affirmed the trial judge's finding that Travelers had breached Mass. Gen. Laws ch. 93A by engaging in unfair settlement tactics.  Travelers had acknowledged that it would be required to indemnify Rass for the claims arising from the email.  It should have been aware of the strength of that claim, but offered a settlement fair below Rass's likely exposure.

 

Travelers also attempted to condition its settlement on a waiver of Rass's right to seek attorney's fees or indemnification.  That was a violation of its duty to effectuate a fair and equitable settlement of claims in which liability had become reasonably clear. 

 

The court held that Travelers also violated the law by refusing to pay Mishky's reasonable hourly rates.   

 

Finally, the court affirmed the finding of the trial court that Travelers' actions were not willful or knowing, so that multiple damages would not be awarded. 

Massachusetts Appeals Court holds that coverage for trade disparagement includes disparagement of a person's ownership of a product

My last post was about  Rass v. The Travelers Cos. Inc., __ N.E.3d __, 2016 WL 6636281 (Mass. App. Ct.), in which the Massachusetts Appeals Court held that an insurer is not liable for pre-notice defense costs.

The underlying case concerned the sale of Indian sauce to Trader Joe’s.  Paul Jaggi had originally created the sauce.  Neera Tulshian worked with him to give the sauce a stable shelf life so it could be sold in jars without refrigeration.  Tulshian’s company, IAM, manufactured the sauces, and Jaggi’s companies, including Rass, distributed them to Trader Joe’s.

Jaggi decided to work with a different manufacturer.  He sent an email to Trader Joe's stating that they may be contacted by Tulshian directly for sale of the sauces.  Jaggi wrote that such a move would be illegal. 

Tulshian learned of that communication.  She sued for misappropriation of trade secrets, tortious interference with present and prospective economic advantage, and trade libel. 

One of the coverage issue before the Massachusetts Appeals Court was whether the trade disparagement claim was covered under the policy issued by Travelers to Rass.  The policy provided coverage for statements that "disparage a person's or organization's goods, products or services." 

Travelers argued that the email did not disparage any goods, products or services, but rather disparaged Tulshian herself, or her ownership of the sauces.  The court disagreed, holding that an objective and reasonable policyholder would expect the disparagement claim to be covered under the facts alleged. 

Massachusetts Appeals Court holds insurer not liable for pre-notice attorney's fees

While this headline might seem as though the court were stating the obvious, no appellate court in Massachusetts has ever clearly ruled on whether an insurer is responsible for attorney's fees incurred by the insured prior to notice to the insurer of the claim.  At least one federal decision held that an insurer is liable for such costs unless the insurer proves prejudice.  

 

In Rass v. The Travelers Cos. Inc., __ N.E.3d __, 2016 WL 6636281 (Mass. App. Ct.), the Massachusetts Appeals Court put the issue to rest.  It held that an insurer has no duty to pay for the defense costs incurred prior to notification of the claim. 

 

The reasons the court gave for its holding are sensible:  An insurer cannot be aware of a duty to defend until notice is given, and it cannot breach a duty of which it is unaware.  Prior to receiving notice an insurer is unable to control or minimize costs.  If an insurer were responsible for pre-notice costs an insured could delay providing notice so as to control its own defense for as long as possible. 

Introducing my updated website

Check it out here.

At last: A tv show about insurance adjusters and superheroes!

I cannot wait for Powerless, a new tv show about adjusting losses caused by superheroes. 

                                                                                                                                                                                    

FAIR Plan fined for impermissibly canceling homeowner's policies

Massachusetts Attorney General Maura Healey has announced that the Massachusetts Property Insurance Underwriting Association (FAIR Plan) has agreed to pay $350,000 to resolve allegations that it impermissibly cancelled homeowner's insurance policies between January 2010 and February 2014. 

 

The payment will be used to provide relief to homeowners who had to purchase more expensive insurance after their FAIR plan policies were cancelled.

 

Click here for a press release from the Attorney General's office with more information. 

US District Court for District of Massachusetts allows default judgment after defendant insured served by publication

After Juan Molina was killed in a construction site accident, his estate brought a wrongful death claim against multiple defendants including Santos Remodeling, Inc., a landscaping company. 

Santos was insured by Amguard Insurance Company.  The Amguard policy excludes bodily injury to an employee of the insured arising out of and in the course of employment. 

In a declaratory judgment action against Santos, Amguard alleged that Santos breached its duties under the policy because it never notified Amguard of Molina's death and has not cooperated in Amguard's defense of the claim.  Amguard alleged that is has been prejudiced by those failures both in its investigation of coverage and in its defense of the claim.

Molina's estate was also named as a defendant in the declaratory judgment action.  (Typically all parties to an underlying case should be parties in a dj action.)  The estate moved to dismiss for improper venue.  That motion was granted, so that the only remaining defendant was Santos.

Amguard's motion to serve Santos by publication was granted.  Amguard published a notice of the litigation in the local paper.  When Santos did not answer the complaint, Amguard moved for a default judgment.  That motion was allowed in Amguard Insurance Company v. Santos Remodeling, Inc., 2016 WL 424961 (D. Mass.) (unpublished). 

It's hard for me to understand why Molina's estate sought to be dismissed from the case instead of litigating on the merits.  Santos is likely judgment-proof, so any recovery against it must come from the insurer.   Maybe the estate felt that the insurer's facts were so strong, either on coverage or defense, that it was not worth fighting for coverage.  Maybe other defendants in the underlying matter have sufficient coverage that Molina's coverage is irrelevant.  (But if so, where are the carriers for the codefendants -- surely they would want to share liability with other defendants?) 

U.S. District Court denies insurer's request to remove arbitrator prior to arbitration award being issued

The following case is a straightforward decision on the law of arbitration, but it provides a glimpse into the world of reinsurance as well as the mergers, acquisitions, demergers and sales of insurance entities. 

John Hancock Life Insurance Company entered into an agreement with Employers Reassurance Corporation  by which John Hancock would transfer to Employers a percentage of its retention of liability under some of its policies.  The transfer agreement included an arbitration clause that provided that in the event of a dispute each party would appoint one arbitrator and those two arbitrators would select a third. 

John Hancock initiated arbitration to resolve a dispute regarding Employers' right to increase the reinsurance premiums charged under the agreement.  Employers selected Denis Loring as its appointed arbitrator.

John Hancock alleged that the appointment of Loring violated the agreement's prohibition on the appointment of arbitrators who were past or present employees of John Hancock or its affiliates because Loring had worked for one of its affiliates.  Employers asserted that the appointment was consistent with the agreement because Loring ceased working for the affiliate before it became affiliated with John Hancock, and the affiliate is no longer affiliated with John Hancock.  (The name of the affiliate is John Hancock Mutual Life Insurance Company -- not to be confused with John Hancock Life Insurance Company, the plaintiff in this case.) 

In John Hancock Life Insurance Company (U.S.A.) v. Employers Reassurance Corporation, 2016 WL 3460316 (D. Mass.) (unpublished), the United States District Court for the District of Massachusetts held that the Federal Arbitration Act does not authorize a court to remove an arbitrator before a final arbitration award has been issued.

A great insurance event (a month later)

Last month I was privileged to attend a fantastic networking event at the Insurance Library in Boston, where I caught up with scattered colleagues and met local giants in the insurance field including current and former commissioners of the Massachusetts Division of Insurance, the publisher of The Standard, a weekly insurance journal, long-time teachers of insurance certification classes, and others.  

Agency Checklists, one of my favorite blogs, posted about it here along with a description of some of the services offered by the Insurance Library.   

First Circuit certifies to SJC question of whether insurer must pay attorney's fees for insured's counterclaim

This case may signal a significant development in insurance coverage law -- so significant that it almost overshadows the overwhelming chutzpah of the underlying plaintiff.  (But, as they say, innocent until etc.)  (The traditional definition of chutzpah:  A man kills his parents, then throws himself on the mercy of the court because he is an orphan.) 

In Mount Vernon Fire Ins. Co. v. VisionAid, Inc., __ F.3d __, 2016 WL 3202961 (1st Cir.), the United States Court of Appeals for the First Circuit certified to the Supreme Judicial Court of Massachusetts the question of whether an insurer is required to litigate a counterclaim on behalf of an insured. 

Gary Sullivan sued his former employer, VisionAid, alleging that his termination was the product of illegal age discrimination. VisionAid's insurer, Mt. Vernon Fire Insurance Company, is defending VisionAid.

VisionAid asserts as a defense that it fired Sullivan because he misappropriated several hundred thousand dollars of corporate funds.  No real reason to italicize that, except:  He stole several hundred thousand dollars of corporate funds and then sued his employer for discrimination.  

Sullivan filed his age discrimination claim with the Massachusetts Commission Against Discrimination.  He initially demanded $400,000 to settle his claim.  He repeatedly reduced his demand until he was asking $5,000, before he eventually offered to walk away with no money at all if VisionAid would agree to sign a mutual release.  VisionAid refused to consent to a mutual release as it wanted to go after Sullivan for the allegedly stolen money. 

Sullivan voluntarily dismissed his MCAD claim.  A few months later he filed his claim for age discrimination and other causes of action in Massachusetts state court.  Mt. Vernon agreed to defend VisionAid "unless and until such time that it is determined that there is no coverage under the policy." 

VisionAid responded that it would exercise its right to choose its own attorney.  (When an insurer defends under a reservation of its right to later deny coverage, the insured can choose its own attorney.  That attorney is paid by the insurer.)  Mt. Vernon withdrew its reservation of rights and , because of this, indicated that the counsel it appointed would remain VisionAid's defense counsel.  It stated that it was not required to pay for the prosecution of VisionAid's counterclaim against Sullivan.  Mt. Vernon told VisionAid to hire (and pay for) its own lawyer if it wished to pursue the counterclaim.

Mt. Vernon then filed a suit for declaratory judgment seeking a decision on whether it was required to pay for the prosecution of VisionAid's proposed misappropriation counterclaim.  VisionAid counterclaimed that Mt. Vernon's duty to defend against Sullivan's lawsuit included the duty to prosecute the misappropriation counterclaim, and that VisionAid had the right to be represented by independent counsel for the entire Sullivan action at Mt. Vernon's expense.  VisionAid's theory was that the interests of it and Mt. Vernon were no longer aligned because Mt. Vernon had an interest in diminishing the value of the counterclaim or eliminating it because it was an impediment to settlement. 

The First Circuit certified to the SJC the following questions:

1.   Whether, and under what circumstances, an insurer may owe a duty to its insured to prosecute through insurance defense counsel the insured's counterclaims for damages where the insurance policy provides that the insurer has a "duty to defend any claim," i.e. "any proceeding initiated against the insured."

2.  Whether, and under what circumstances, an insurer may owe a duty to its insured to fund through insurance defense counsel the prosecution of the insured's counterclaims for damages, where the insurance contract requires the insurer to cover "defense costs" or the "reasonable and necessary legal fees and expenses incurred by [the insurer], or by any attorney designated by [the insurer] to defend [the insured], resulting from the investigation, adjustment, defense and appeal of a claim."

3.  Assuming the existence of a duty to prosecute the insured's counterclaims, in the event it is determined that an insurer has an interest in devaluing or otherwise impairing such counterclaim, does a conflict of interest arise that entitles the insured to control and/or appoint independent counsel to control the entire proceeding, including both the defense of any covered claims and the prosecution of the subject counterclaims?

Captive insurers

The American Bar Association has published a fascinating article on captive insurers and how some of them are used as vehicles for tax abuse.   

Massachusetts Appeals Court holds insurer did not breach settlement duty where trial verdict resulted in excess judgment

Elsa Villanueva was injured when she was struck by a car owned and operated by Valerie Troiano.  Troiano was insured by Commerce. 


Commerce determined that Villanueva was more than fifty percent at fault in the accident (and therefore under the Massachusetts comparative negligence law Troiano was not liable) because she had stepped out from between two parked cars into a traffic lane, not into a crosswalk, on a dark, rainy morning, wearing dark clothing.  It offered $5,000 to settle the claim.


Troiano was not cited for the accident.  Villanueva, who had no memory of the accident, sued Troiano.


Shortly before trial, after several attempts Commerce was able to obtain a statement from Manuel Martinez, the only witness to the accident.  He told the Commerce investigator that Troiano was driving too fast and left fhe scene of the accident.  He also stated that he could not identify the gender of the driver because it was at night and still dark.  Commerce's investigator indicated that Martinez was a friend of Villanueva. 


Also shortly before trial Commerce received a medical report indicating that Villanueva had a permanent injury from the accident.  Villanueva rejected Commerce's offer of a high-low arbitration with a low of $5,000 and a high of $100,000. 


After Martinez appeared for a deposition Commerce offered the policy limit of $100,000.  Villanueva rejected that offer as well.


At trial, the jury awarded $414,500 to Villanueva.  It determined that Villanueva's comparative negligence was thirty-five percent in the accident.  Commerce immediately paid the policy limit of $100,000.


Villanueva then sued Commerce for unfair claims settlement practices.  After trial the judge granted Commerce judgment as a matter of law on the grounds that Villanueva did not present any expert testimony that Commerce breached its statutory duty, and that, on the facts and the law as presented at trial a reasonable fact finder could not find that Commerce had breached its statutory duty. 


On appeal, Villanueva argued that as soon as Commerce learned that Martinez faulted Troiano for the accident liability was reasonably clear and Commerce was required to make a reasonable offer of settlement.  Commerce's initial offer of $5,000 was unreasonable.  Villanueva also argued that the Commerce's subsequent pretrial offer of the $100,000 policy limit demonstrated that it knew that liability exceeded the policy limit and that its prior $5,000 was unreasonable. 


In Villanueva v. Commerce Ins. Co., 89 Mass. App. Ct. 1124 (2016) (unpublished), the Massachusetts Appeals Court affirmed the dismissal of the case against Commerce.  It held that Commerce's belief that Troiano would win on the merits of the underlying claim because Villanueva was more than fifty percent at fault was reasonable. 


Villanueva argued that the fact that Commerce set a reserve at $100,000 showed that it knew that the case should settle for that amount.  The judge disagreed, noting testimony by a witness for Commerce that the reserve represents a worst-case scenario for the insurer and is based only on a damages assessment without taking liability defenses into account. 


The court also held that the amount of the jury award in the underlying claim did not compel a finding that Commerce acted unreasonably. 


The court also affirmed the holding of the trial court that expert testimony was required to establish that Commerce breached its duty.   It held that although expert testimony may not be required in every case asserting a breach of duty to settle claims, it was needed in the present case. 

Mass. Appeals Court finds title attorney liable to title insurance company

Stewart Title Guaranty Company, a title insurer, retained Attorney Robert Kelley to issue title insurance policies to owners and lenders in connection with real estate transactions.

Stewart sued Kelley for negligence and sought indemnity with respect to several  closings.  In Stewart Title Guaranty Co. v. Kelley, 89 Mass. App. Ct. 1121, 2016 WL 1741537 (unpublished), the Massachusetts Appeals Court held that Kelley was liable for breaching the standard of care at least with respect to two of those closings. 

In the first, Kelley issued a title insurance policy even though the property was encumbered by a prior mortgage and two attachments that were recorded in the Plymouth Country Registry of Deeds.  Kelley's defense was that he hired a reputable title examiner for the title review.  The court adopted Stewart's argument that "while a shortcoming in the performance of the examiner may create rights of Kelley against the examiner, the examiner's good reputation is not a defense to an action for negligence by Stewart against Kelley." 

(That discussion illustrates the fact that indemnity clauses in contracts by which title insurers retain attorneys to issue title policies have the effect of transferring risk from the title policy to the attorney's malpractice policy.) 

The court also held that expert testimony was not required on the issues of negligence, because the claimed legal malpractice was so gross or obvious that laypeople could rely on their common knowledge or experience to recognize it from the facts.

In another closing, Kelley mailed sufficient funds to close out a previous line of credit with Citizens Bank so that a different mortgage would be the senior mortgage on the property.  His file did not contain a standard letter instructing the lender to close the line of credit.   Citizens did not close out the line of credit and the borrower thereafter withdrew additional funds, resulting in a loss to Stewart. 

The court held that Kelley's failure to send the letter or to keep a copy of it deprived Stewart of the material it needed to establish that the credit line was  closed and thereby to extinguish the Citizens claim. The court again held that no expert testimony was necessary to prove negligence in that instance.

 

Court refuses to stay coverage or underlying lawsuit in Bill Cosby litigation

I posted here about the lawsuit filed by AIG, Bill Cosby's homeowner's insurer, seeking a declaration that it has no duty to defend him in the defamation suit against him alleging that he lied when he denied allegations of rape.

The AIG policies provide coverage for defamation, libel or slander, but exclude claims "arising out of any actual, alleged or threatened . . . sexual molestation, misconduct or harassment." 

As I predicted in my earlier post, Cosby sought to stall.  He  moved to dismiss on abstention grounds or, in the alternative, to stay the action pending resolution of the underlying litigation.  AIG  moved to stay the underlying litigation pending resolution of the coverage action.

In AIG Property & Casualty Co. v. Green, __ F. Supp. 3d __, 2015 WL 8779732 (D. Mass.), the United Stated District Court for the District of Massachusetts denied the motions of both parties. 

Cosby's abstention argument is that the federal court should abstain from exercising jurisdiction over the insurance action while the underlying action is proceeding.  The court rejected that argument because the abstention doctrine applies when the underlying action is in state court, but the underlying Cosby lawsuit is in the same federal court as the insurance lawsuit.  It rejected Cosby's argument that the doctrine should be extended to when the other action is pending in federal court. 

The court rejected Cosby's motion to stay because a determination of insurance coverage issues would not resolve any of the factual issues at stake in the underlying litigation.  The duty to defend is determined by allegations of the complaint, not by facts proven at trial.  Additionally, the coverage issue does not concern questions of facts that are disputed in the underlying case; the only question is whether the claims for defamation arise out of sexual misconduct. 

AIG moved to stay the underlying litigation until the insurance issue is resolved.  It argued that the underlying parties would not be prejudiced because the stay would be short and because the events alleged took place so long ago. 

The court rejected AIG's motion as "procedurally improper.  AIG may not request a stay of another action by filing its motion here, nor may it seek a stay of a case in which it is not a party."  Rather, AIG can only seek a stay of the underlying action by moving to intervene as a party in that action. 

The court also ruled that the facts that the insurance coverage suit can be resolved quickly and the events alleged in the underlying suit occurred long ago militate against, not for, staying the underlying litigation. 

In a later decision, the court held that a subsequently added plaintiff in the underlying litigation was a necessary but not indispensable party, so that her addition to that litigation did not destroy the court's diversity jurisdiction over the coverage litigation.  AIG Property Casualty Co. v. Green, __ F. Supp. 3d __, 2016 WL 1228571 (D. Mass.)

Superior Court holds condo owners' claim against another owner not barred by insurance provisions in condo documents

A fire caused damage to a condominium complex.  Owners of residential units in the complex alleged that the fire was started by another unit owner named Anthony Siracusa.  They sued him for damages. 

Siracusa moved for summary judgment, asserting that the other unit owners were barred from bringing suit against him.  He relied on two provisions of the condominium trust documents.  The first provided:  

Each unit owner is solely responsible to obtain his or her own insurance coverage in appropriate kinds and amounts to insure his or her unit, personal effects and contents, unit improvements and coverage for the Condominium Trust's deductible as well as insuring for liability and all such other coverages which said Unit Owner desires.

The second provision required that any insurance obtained by unit owners must waive the right of subrogation against other unit owners.

In Koch v. Siracusa, 2016 WL 872932 (Mass. Super.), a Superior Court judge disagreed that the provisions barred unit owners from bringing a claim against another unit owner.  

The court held that the first provision is a message to unit owners that failure to purchase insurance is at their own peril but does not foreclose their claims against other owners.

The court held that the requirement to waive subrogation if insurance is procured does not preclude unit owners from suing each other for losses that are not covered by insurance.  (Indeed, that is not what subrogation means.  Subrogation is means by which an innocent third party, such as an insurer, can recover from a tortfeasor for losses the third party paid.  The insurer stands in the shoes of the insured who has already been compensated.  That is not the situation in this case; the unit owners are merely bringing a claim for losses they have suffered, not standing in the shoes of someone else who suffered a loss who they in turn compensated.) 

US District Court holds that "insured contract" provision does not require insurer to defend third party absent request from insured that it do so

Ski resort Jiminy Peak purchased from Weigand Sports a ride called an Alpine Coaster.  The purchase and sale contract provided that that Wiegand would defend and indemnify Jiminy in lawsuits related to the Coaster. 

Six years after the Coaster was installed two minors were injured while riding it.  Weigand was insured by Navigators Specialty Insurance at that time. 

The Navigators policy provided that it would pay "those sums that [Weigand] becomes legally obligated to pay as damages" because of bodily injury, including damages it assumed in an "insured contract."   The policy defined insured contract as "[t]hat part of any other contract or agreement pertaining to [Wiegand's] business . . . under which [Wiegand] assume[d] the tort liability of another party to pay for 'bodily injury' . . . to a third person or organization."

In the case of an insured contract, Navigators would pay reasonable attorney fees and litigation expenses "incurred by or for a party other than in insured . . . deemed to be damaged because of 'bodily injury' . . . 'provided  . . .that the party's defense [had] also been assumed in the same 'insured contract'" and that the damages arose in a suit to which the insurance policy applied. 

Jiminy sought defense from Navigators.  Navigators argued that the insured contract provision only requires it to make payments to the insured, and only when the insured has actually requested payment.  It argued that even if Wiegand is found to owe Jiminy its defense costs, it would be up to Wiegand to determined whether it wishes to pay the amount or to make a claim to Navigators. 

In Jiminy Peak Mountain Resort, LLC v. Wiegand Sports, LLC, 2016 WL 1050260 (D. Mass.), the United States District Court for the District of Massachusetts agreed with Navigators.  It held that the insured contracts  provision indicated that "Navigators and Wiegand did not, in fact, intend that in a case like this one Navigators would have any direct obligations to Jiminy based on the Contract. . . . Any obligation upon Navigators to pay such costs will arise only after an insured, in this case Wiegand, makes a claim for payment and its only obligation will be to Wiegand." 

Superior Court holds no coverage for collapse of retaining wall

Plaintiffs Marc Levine and Ute Groening owned a house in Brookline.  The property behind theirs is at a higher elevation.  A 10 foot tall stone retaining wall sat on the property line for a century. 

A new owner purchased the rear property.  In order to level that property they installed a timber wall near the property line and backfilled the space with soil.  The plaintiffs alleged that the weight and pressure of the timber wall and additional soil overburdened the stone retaining wall, causing it to bow and crack.  They sought coverage from Merrimack Mutual Fire Insurance Company, their homeowner's insurer, for the loss.  Merrimack denied the claim.  The retaining wall subsequently collapsed entirely. 

In Levine v. Aljasa Realty LLC, 2016 WL 872903 (Mass. Super.), the Massachusetts Superior Court held that there was no coverage under the Merrimack policy.  Coverage B for "other structures" may have been initially triggered, but an exclusion for "loss involving collapse" applied.  Although there were exceptions to the exclusion, the exceptions did not apply to loss to a retaining wall "unless the loss is a direct result of the collapse of the building or any part of the building."   

US District Court holds no coverage for intentional torts, and insurer not estopped to deny coverage after insurance defense counsel states he will defend throughout course of action

Kenneth and Donna Kaplan were sued by their neighbors, William and Mary Costello.  The Costellos alleged ongoing harassment by the Kaplans in an attempt to enlarge their own yard at the Costellos' expense.  They alleged that the Kaplans filed five lawsuits involving the Costellos, initiated a number of complaints and appeals to town and state agencies, and wrote many aggressive emails about the matter to public officials and local media.  The Costellos sued for abuse of process, intentional infliction of emotional distress, and violation of the Massachusetts Civil Rights Act. 

The Kaplans had homeowner's insurance with Narragansett Bay Insurance Company.  Narragansett provided a defense.  It then filed a declaratory judgment action, asserting that it has no duty to defend or indemnify.

In Narragansett Bay Ins. Co. v. Kaplan, __ F. Supp. 3d __, 2015 WL 7295462 (D. Mass.), the United States District Court for the District of Massachusetts held that there is no coverage for bodily injury or property damage for two reasons.  First, that policy part has an exclusion for injuries "expected or intended" by an insured.  The elements of causes of action for abuse of process, intentional infliction of emotional distress, and the violation of the Massachusetts Civil Rights Act each include intentional acts.  Second, no bodily injury or property damage within the meaning of the policy was alleged. 

The policy also had a personal injury endorsement that covers five enumerated intentional torts.  They do not include the causes of action alleged by the Costellos. 

Although the court granted summary judgment to Narragansett on the duty to defend it oddly declined to do so on the duty to indemnify, on the ground that such a duty could not be determined until the underlying case is resolved.  The judge did note, "I observe at this point, however, that having determined there is no duty to defend, there is necessarily no demonstrated basis for a duty to indemnify."

The Kaplans had filed a counterclaim in the declaratory judgment action asserting that Narragansett was estopped from halting coverage even though it was defending under a reservation of rights. 

The Kaplans relied on a letter from insurance defense counsel stating that he would provide a defense "throughout the course of this action."  The court held that that letter was insufficient to create estoppel.  In the face of the reservation of rights letter the Kaplans could not have reasonably relied on the statement of counsel.  Nor was their reliance detrimental. 

The Kaplans have filed an appeal of the ruling. 

SJC rejects selective tender doctrine in worker's comp cases and generally

As I posted here,, last June the First Circuit certified to the SJC the question of whether, when an insured has two primary worker's compensation insurance policies that cover the same loss, the insured can opt to have one insurer cover the entire loss or if either insurer can insist that both share equitably in covering the loss. 

In Ins. Co. of Penn. v. Great Northern Ins. Co., __ Mass. __, 2015 WL 10428274 (March 7, 2016), the SJC has answered no.  Rather, "the insurance company that pays the loss has a right of equitable contribution to ensure that the coinsurer pays its fair share of the loss.  The employer of the injured employee may not prevent the insurance company that pays the loss from exercising its right of equitable contribution by intentionally giving notice of the injury only to that insurer." 

 Progression had two worker's comp policies.  ISOP provided compulsory worker's comp coverage.  Great Northern provided worker's comp coverage for employees traveling outside the United States and Canada.  Both policies provided primary coverage. The dispute between the insurers arose after an employee of Progression was injured while traveling abroad for work. 

Progression gave notice of the worker's comp claim only to ISOP and did not notify Great Northern.  ISOP later learned of the Great Northern policy and requested contribution.  Great Northern declined, stating that it had learned from Progression that Progression had intended to tender the claim only to ISOP and had not authorized ISOP to report or tender the claim to Great Northern.

Under the doctrine of equitable contribution, where multiple insurers provide coverage for a loss to an insured, an insurer who pays more than its fair share of costs of defense and indemnity may require a proportionate contribution from the coinsurers. 

Great Northern did not challenge the equitable contribution doctrine generally; it argued that it does not apply because Progression purposely tendered the claim only to ISOP.  Without using the term, Great Northern asked that the court adopt the selective tender exception to the doctrine of equitable contribution, allowing an insured to choose whether or not to excuse an insurer from its duty to contribute to a claim. 

The court rejected that argument with respect to worker's compensation insurance.  The worker's compensation statute requires that an employee injured in the course of employment "shall be paid compensation by the insurer."  Therefore, although the employer purchases insurance, the insurer is directly liable to the employee.  Under the statutory scheme, Great Northern's obligation to defend and indemnify the claim was triggered by the notice given to  Progression of its injured employee, regardless of whether or not Progression gave notice of the injury to Great Northern.  Therefore, the language in the insurance policy providing that its duty of coverage is contingent on the employer providing notice of the injury to it is contrary to Massachusetts law and null and void with respect to a Massachusetts employee. 

The court also held that the selective tender exception to the doctrine of equitable contribution does not accord with Massachusetts law governing general liability insurance.  Under Massachusetts law an insurer's coverage obligation is triggered by notice regardless of the timing or source of such notice; late notice or notice from a third party does not preclude coverage unless the insurer is prejudiced. 

As I have previously noted, the selective tender doctrine typically pertains more to the issue of pro rata versus joint and several allocation in a long tail loss.  In a joint and several allocation scheme, an insured may choose (or selectively tender to) one insurer, who will be on the risk up to its policy limit.  The insurer will then have the right of equitable contribution against other insurers on the risk, but cannot recover for periods when the insured had no insurer on the risk or when the insurer on the risk is no longer in business.  The SJC has firmly rejected joint and several liability in favor of pro rata contribution. 

SJC holds worker's compensation lien does not apply to damages allocated to pain and suffering

Robert DiCarlo and Bernard Martin were both injured in the course of their employment and received worker's compensation benefits from Twin City Insurance Company.  They subsequently settled third-party claims.  Those settlements included damages for pain and suffering. 

The insurer sought reimbursement for itsworker's comp payments, including reimbursement from the pain and suffering portions of the third-party settlements. 

In DiCarlo v. Suffolk Construction Co., Inc. __ N.E.3d __, 2015 WL 10045032 (Mass. 2016), the Supreme Judicial Court of Massachusetts has held that the worker's comp lien does not extend to damages allocated to an employee's pain and suffering.

The SJC based its decision on  interpretation of the word "injury" in Mass. Gen. Laws ch. 152, §15, the statute allowing worker's comp insurers to recover "the gross sum received in payment for the injury." 

Massachusetts Appeals Court affirms surcharge despite unrebutted testimony

Commerce Insurance Company imposed a surcharge against its insured following a motor vehicle accident.  The insured appealed to the Board of Appeal on Motor Vehicle Liability Policies and Bonds.

The insured testified that he was driving 35 mph, 60 to 70 feet behind another vehicle.  The driver of the other vehicle stopped and simultaneously activated the left directional.  The insured braked but rear-ended the stopped vehicle.  

The Board found that the totality of the evidence supported the presumption set out in 211 C.M.R. §74.04 that the operator of a vehicle shall be presumed to be more than 50% at fault when operating a vehicle which is in collision with the rear section of another vehicle. 

The Superior Court affirmed the decision of the Board, and the insured appealed to the Massachusetts Appeals Court.  In Markuns v. Commerce Ins. Co., 2016 WL 392987 (Mass. App. Ct.) (unpublished) the insured argued that the judge erred in not concluding that the Board should have credited his testimony because it was unrebutted.

The court disagreed, holding that the Board is not bound to accept unrebutted testimony. 

Drone insurance

New England Cable News covers the ins and outs of it in this story.

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U.S. District Court holds worker's comp carrier cannot intervene in third-party claim

Brian Goodrich brought a products liability case alleging that he was injured while using a machine in the course of his employment.  His worker's comp insurer, NorGuard, moved to intervene in the case, asserting that it has a subrogation interest in any potential damages recovered by Goodrich.

In Goodrich v. Cequent Performance Prods., Inc., 311 F.R.D. 22 (D. Mass. 2015), the United States District Court for the District of Massachusetts denied the motion to intervene. 


Fed. R. Civ. P. 24(a) allows a party to intervene if the party claims an interest relating to the property or transaction at issue.  However the rule has an exception if "existing parties adequately represent that interest." 




Mass. Gen. Laws ch. 152, §15 provides that sums recovered in a third-party claim where the worker's comp carrier has paid a claim for that same injury are for the benefit of the insurer up to the sum it paid.  The insurer has an opportunity to be heard on a motion for approval of any settlement of the claim. 


The statute also bars the insurer from bringing suit against a third party if the injured employee has already filed suit against that party. 

United States District Court holds that insurance agent is an independent contractor

Thomas Ruggiero, an insurance agent, sued America United Life Insurance Company (AUL) and its subsidiary OneAmerica Financial Partners, alleging that they had misclassified him as an independent contractor. 

Ruggiero signed a General Agent's contract with AUL in February 2009, with the intent of establishing an agency that would sell AUL products.   AUL lent Ruggiero money to assist him in developing his agency.
 

Under his contract with AUL Ruggiero was to recruit, train and supervise agents and brokers for AUL in Massachusetts without exclusive representation, and to solicit applications for AUL's insurance policies. 

AUL would pay Ruggiero commissions and service fees on policies and contracts serviced by Ruggiero or his agents or brokers, as well as allowances, writing commissions, bonuses, and services fees. 

The contract classified Ruggiero as an independent contractor, and required him to pay his own expenses for maintaining an office. 

Under the terms of the contract Ruggiero was not permitted to act as a general agent, agency manager, or hold a full time contract with another insurer, or to enter into an employment contract or agreement without the approval of AUL. 

During his relationship with AUL Ruggiero also maintained relationships with numerous other insurance companies.  He never asked AUL permission to do so, and AUL did not believe that by doing so Ruggiero violated his contract with it. 

Ruggiero recruited and trained approximately thirty agents during his contract term with AUL.  Those agents entered into contracts with AUL and other insurers, at Ruggiero's direction. 

After winding down his agency, Ruggiero sued AUL and OneAmerica, asserting that he had been misclassified as an independent contractor. 

In Ruggiero v. Am. United Life Ins. Co., __ F. Supp. 3d __, 2015 WL 5822622 (D. Mass.), the United States District Court for the District of Massachusetts held that Ruggiero was an independent contractor under all three prongs of the independent contractor test. 

The court first held that Ruggiero was "free from control and direction in connection with the performance of the service."  Other than general principles the contract did not prescribe how the work was to be performed, and left Ruggeiro discretion in running his agency.  Certain requirements that were placed on Ruggiero were mandated by regulations and therefore did not affect his employment status. 


The court then held that the service Ruggiero performed was outside the usual course of the business of AUL.  Sales of AUL's insurance products were outside of AUL's usual course of business because AUL did not itself sell the insurance and financial products it offers.  Instead, it provides the products through a national network of agents.  While sales of the products are essential to AUL's business, it is not in the business of selling them directly; it is in the business of determining which products to make available, structuring and drafting the policies, and investing the policy premiums.  Within the insurance industry there is a recognized division between producing the insurance product (the insurance carrier) and selling it (the insurance brokerage or agency). 


Similarly, Ruggiero's services in recruiting and training career agents and brokers were outside of AUL's usual course of business.  Ruggiero was acting in his own interest in doing so because he would receive a commission for the sales attributable to them.  Those services were in the interest of AUL only to the extent that they generated sales of AUL products, rather than products of other insurers. 


Finally, the court concluded that Ruggiero was customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.  Ruggiero was in the business of selling insurance products, and  sold the products of both AUL and other insurance companies. 

Thoughts on the upcoming Restatement of the Law of Liability Insurance

Last week I posted about the January 22 Insurance Law Symposium sponsored by the American College of Coverage and Extra-Contractual Counsel.  It was a great conference, with excellent panel discussions on emerging issues in coverage law and on ethical issues relating to the tripartite relationship. 

Several of the discussions were devoted to the Restatement of the Law of Liability Insurance, which is currently being completed.  Although I had been vaguely aware that the Restatement was in the works, it was fascinating to get the details. 

Restatements are books that provide guidance on a particular area of law.  They are published by the American Law Institute, and are highly regarded by judges.  Where an issue of law is undetermined in a particular state, judges will often turn to Restatements as at least a starting point (and not infrequently an end point) for their analysis.

Restatements provide general principals of law followed by comments that explain the principle more fully and give examples of how it is applied. 

One of the presenters at the conference, Kyle Logue of the University of Michigan Law School, is one of the two reporters for the Restatement of the Law of Liability Insurance.  That means that he is responsible for drafting, getting comments, redrafting, getting more comments, redrafting . . .  He discussed the history of the project and how the reporters make choices about the content of the Restatement.

When it is completed the Restatement will have four chapters:  Basic liability contract rules, management of potentially insured liability claims, general principals regarding the risks insured, and advanced contract issues.  The first three chapters are in close to final form.  The draft document is available on Westlaw (and maybe Lexis; I didn't quite catch it). 

By the end of Professor Logue's presentation I had the distinct idea that the existence of the Restatement will work in favor of insurers at the expense of insureds. 

The Restatement of the Law of Liability Insurance differs from other Restatements in an important manner: it sets forth principles that can easily be made inapplicable, without the intervention of legislation or judicial opinions.  And that action can be done in in response to the very principles set forth in the Restatement. 

According to Professor Logue, with the exception of rules with respect to contract interpretation and bad faith, any principle in the Restatement can be overcome by changing policy language. 

As an example, the Restatement provides that in long tail losses a pro rata time on the risk method of allocation should be used.  (A long tail loss is a loss, such as a hazardous waste site, that occurs over a number of years before being discovered.  Because of the length of the occurrence many annual insurance policies are triggered and the damages must be allocated among them.)  

While pro rata time on the risk allocation is the law in Massachusetts, many states use the all sums approach to allocation.  Pro rata allocation tends to favor insurers, because the insured is responsible for the percentage of loss allocated to periods of time when there is no coverage due to lost policies, insurers who have since gone out of business, or applicable exclusions in some policy years.  All sums allocation tends to favor insureds, because they can choose one insurer to bear the initial burden of paying the loss up to the policy limits; it is up that insurer to reallocate the loss among other insurers on the risk.

The reason the Restatement will benefit insurers at the expense of policy-holders is not because the particular allocation principle the drafters chose favors insurers; that's just an example of a split rule where the drafters chose one side.  The Restatement will benefit insurers because it provides that any rule it sets forth can be changed by new policy language.  So if a policy expressly states that an all sums method of allocation will be used, then the Restatement's principle of pro rata allocation will not apply.

Insurers, however, will not change policy language that favors them.  For example, they will not adopt policy language requiring all sums allocation. 

And, in general, it's insurers that write the policies.  ISO forms, standard forms used in many insurance policies, are developed by Verisk Analytics, a company that provides services to insurers, not policy-holders.

There is no ISO equivalent for policy-holders.  While some large entities can and do negotiate policy provisions with their insurers, such negotiations do not result in the issuance of standard forms used in many policies.  Smaller business and consumers very rarely negotiate terms.   

Insurers are repeat players in the industry and therefore have the incentive and the economic means to change policy terms that policy-holders simply do not have.  Homeowners insurers in Massachusetts probably adjusted tens of thousands of water dam claims last winter.  But each homeowner made only one claim.  An individual homeowner has no incentive to try to change policy terms that worked against him or her; new terms in a future policy will not affect the adjustment of a loss that has already happened.  But the insurance industry, in anticipation of more ice dam claims, has every reason, and the economic power, to change policy terms that don't favor it.

Therefore insurers will change the policy provisions where the Restatement principles favor the policy-holders, but the reverse is not true.  In time, the policy terms that the Restatement interprets in a manner that favors insurers will remain, while the policy terms that the Restatement interprets in a manner that favors policy-holders will be changed.

For that reason, regardless of whether the Restatement principles as written collectively favor insurers or policy-holders, or are overall neutral, the eventual net effect of the very existence of the Restatement will be to benefit insurers to the detriment of insureds. 

Insurance Law Symposium at Boston College on January 22, 2016

The American College of Coverage and Extra-Contractual Counsel (ACCEC) is sponsoring an Insurance Law Symposium at Boston College on Friday January 22, 2016.

Michael Aylward, one of the organizers, writes: 

It isn’t often that you can get cutting edge insurance CLE this close to home, much less a program with speakers from firms such as Covington & Burling, Jenner & Block, Perkins Coie and Wiley Rein.  This year’s symposium will feature panels discussing new trends in intellectual property claims; new coverages for cyberpiracy, the criminalization of D&O liability claims and ethical and bad faith problems arising out of the defense of disputed coverage claims.   A substantial portion of the program will also focus on the American Law Institute’s nascent Restatement of the Law of Liability Insurance, including presentations by one of the Restatement reporters and Justice Herb Wilkins, who is an Advisor to the Project.

The registration brochure, including the agenda, is here.  Note that online registration is not available.  The registration deadline is Friday, January 15, 2016.