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.