United States District Court holds that the reference proceeding statute is constitutional

I've been discussing in my last two posts Bearbones, Inc. d/b/a Morningside Bakery v. Peerless Indem. Ins. Co., 2016 WL 5928799 (D. Mass.) (unpublished), a federal court case alleging bad faith practices by an insurer, Peerless, before and during a reference proceeding.

The plaintiffs sought a declaration that the reference proceeding statute, Mass. Gen. Laws ch. 175 §99, ¶Twelvth, violates Article 11 of the Declaration of Rights of the Massachusetts Constitution, which guarantees the right "to obtain right and justice freely, and without being obliged to purchase it, completely, and without any denial, promptly, and without delay; conformably to the laws."  Specifically they alleged that the reference proceeding statute violates Article 11 because it requires that insureds pay for referees and because referees, rather than judges determine the amount of the loss. 

The court noted that the free access to courts clause of Article 11 "requires that all cases be decided by a judge, and that litigants need not 'purchase' access to justice."

Using logic that strikes me as disingenuous, the court held that, unlike a probate court matter in which the court appointed a parent coordinator with binding authority to resolve conflicts between divorcing parents, the reference proceeding did not take place over the objection of either party.  Rather, the plaintiffs made a business decision to purchase casualty insurance.  Pursuant to the policy both parties agreed to submit disputes over the amount of loss to a reference proceeding.

While it is true that parties can agree to alternative dispute resolution clauses in a contract, that is not quite what happened here.  Rather, the reference proceeding statute requires that disputes over the amount of loss under certain insurance policies must be determined by a reference proceeding.  That is why the requirement is in the property policies.  The parties are not allowed to negotiate over it. 

While it may be true that the plaintiffs did not have to purchase property insurance -- and that is probably not the case, as mortgages require property insurance -- it is not true that the parties included the reference proceeding clause by their own free will.

The court also notes in a footnote that the plaintiffs failed to allege that they incurred any costs in connection with the reference proceeding.  In their motion to amend the complaint they argued that the reference proceeding statute requires an insured to expend significant sums of money to pay for referees and that the plaintiffs paid over $30,000 in fees to the referees.  The court asserts that there were no supporting allegations in the supplemental complaint. 

That seems overly harsh to me.  The reference proceedings statute provides that of the three referees, the insureds will pay the fee of the first, the insurer will pay the fee of the second, and they will split the fee of the third.

The court then held that the "no purchase of justice" provision of Article 11 is to guarantee that "all litigants similarly situated may appeal to the courts both for relief and for defense under like conditions and with like protection and without discrimination."  A statute that "does not pertain to a suspect class, . . . involves a right . . . that is not fundamental, . . . and is rationally related to achieving its purpose . . . passes constitutional muster."

The court noted that the plaintiffs have not alleged that they are being treated differently than any other class of insureds under policies issued with the same mandatory language, or that they are part of a suspect class.  It also noted that free access to courts is not a fundamental right.  Therefore, the reference proceeding statute need only be rationally related to achieving its purpose.  The plaintiffs did not allege that the requirement of a reference proceeding is not rationally related to achieving the purpose of establishing a summary method of establishing the amount of loss.

I agree that the reference proceeding statute is rationally related to the purpose of having a summary method of establishing the amount of a property loss.  I nevertheless am trouble by the decision -- or perhaps by the earlier decision quoted by the court holding that access to courts is not a fundamental right.  If that's the case, then why is it part of the Massachusetts Declaration of Rights?  I'm not a constitutional law scholar, but it seems to me that the legislature should not be able to take away a right protected by the constitution.  Moreover, does this mean that the legislature can decide that parties to a tort case don't have  a right to a judicial hearing?  How about contract cases?  

Federal Court denies motion to amend complaint to add new allegations of bad faith settlement practices based on facts that did not exist when lawsuit was filed

In my last post I discussed Bearbones, Inc. d/b/a Morningside Bakery v. Peerless Indem. Ins. Co., 2016 WL 5928799 (D. Mass.) (unpublished), a property damage case in which the plaintiff insureds sued the insurer, Peerless, in federal court while a reference proceeding was pending.  After the reference proceeding the plaintiffs sought to file a supplemental complaint in the federal court case.

The proposed supplemental complaint alleged that during the reference proceeding Peerless engaged in various acts of trickery or deceit, including harassing the plaintiffs with requests for false stipulations which could result in them waiving their claims, and falsely claiming it never received written discovery from them. 

The court held that such actions would not represent a separate violation but a continued course of conduct that began before the lawsuit commenced.  On that ground the court denied the addition of the proposed additional count alleging such conduct.  

While I understand the logic that continuing conduct is not a separate violation, it seems to me that the plaintiffs should be allowed to amend their complaint to allege new facts in support of the allegations of bad faith settlement practices. 

US District Court holds that cross-examination is proper remedy for biased experts testifying on behalf of insurer

Morningside operated a bakery inside a commercial condominium unit owned by Amaral Enterprises.  On February 19, 2013, water from a burst pipe allegedly caused a $1.5 million loss at the bakery.  Morningside and Amaral filed a claim with their insurer, Peerless Insurance. That claim proceeded to a reference proceeding, an arbitration required by Mass. Gen. Laws ch. 175 §99, ¶Twelvth in certain property loss claims.

In the meantime, on February 6, 2015 the plaintiffs sued Peerless in federal court, seeking a declaratory judgment that Peerless is obligated to cover the losses, for breach of contract, and for unfair claims settlement practices in breach of Mass. Gen. Laws ch. 93A.

On July 6, 2015, the referees returned an award of about $93,000.  After the award the plaintiffs moved to file a supplemental complaint in the federal court action, alleging additional violations of ch. 93A.  Specifically, the plaintiffs alleged that they were subjected to unfair claims settlement practices because at the reference proceeding Peerless called two witnesses it claimed were experts, but who were neither independent or objective.  One was a certified public accountant who has worked for Peerless and its parent company, Liberty Mutual, her entire career.  The other was a CPA who was in a business partnership with the attorney representing Peerless.

The plaintiffs also alleged that Peerless refused to resolve their claim and engaged in various acts of trickery or deceit, including harassing them with requests for false stipulations which could result in the plaintiffs waiving their claims, and falsely claiming it never received written discovery from the plaintiff.

The plaintiffs also sought a declaration that the reference proceeding statute violates Article 11 of the Declaration of Rights of the Massachusetts Constitution, which guarantees the right "to obtain right and justice freely, and without being obliged to purchase it, completely, and without any denial, promptly, and without delay; conformably to the laws."  I will discuss the "trickery and deceit" allegations and the constitutional argument in future posts.  

In Bearbones, Inc. d/b/a Morningside Bakery v. Peerless Indem. Ins. Co., 2016 WL 5928799 (D. Mass.) (unpublished), the United States District Court for the District of Massachusetts addressed the motion of the plaintiffs to amend the complaint.  It held that the proposed supplemental complaint did not set forth sufficient facts to support an inference that Peerless acted in an unfair, fraudulent, or deceptive manner in relation to testimony by its experts.  "There is nothing improper (or even unusual) about a company eliciting testimony from an employee about a transaction or occurrence in issue, including testimony that draws on that employees particular area of expertise, such as accounting."  The court held that the proper remedy for potential bias is cross-examination.  Similarly, an expert may be impeached with respect to his or her financial interests in the case.