Wednesday, October 23, 2019

More on Szafarowicz

In my last post I discussed Commerce Ins. Co. v. Szafarowicz, __ N.E.3d __, 2019 WL 4774348 (Mass.), a case in which the SJC upheld the legitimacy of settlement/assignment agreements, but only to the extent that the settlement is reasonable including in light of the available insurance coverage.

A settlement/assignment agreement generally consists of three parts:

1.  The plaintiff and insured defendant agree to a settlement amount.
2.  The plaintiff agrees not to enforce the agreement against the defendant but only against the defendant's insurer.
3.  The defendant assigns his or her own rights against the insurer to the plaintiff.

Unsurprisingly, this case has received a lot of attention. Dennis Wall, a Florida attorney who writes the Claims and Bad Faith Law Blog, posted about it here.    

In his post Dennis asked me, if I understand him correctly, to comment on the courage of the insurer, Commerce, and its attorneys in holding fast in fighting what could have been a multi-million dollar loss far exceeding the policy limit.

In reading the case the first thing that jumped out at me was that the attorneys for all the parties seem to have done a stellar job of protecting and advocating for their client’s interests -- and the trial court and SJC made decisions that showed a broad understanding of the competing interests.  I wrote about how the parties' interests overlapped and diverged in my last post.

As far as the positions that Commerce took, Dennis seems to be implying that there may have been a lot of pressure on Commerce to settle the claim because of the settlement in the underlying case in which both sides agreed that the insured driver had been negligent, and that the damages vastly exceeded the policy limit.

To understand why Commerce resisted the settlement, we need to acknowledge that the primary purpose of the settlement agreement was to get insurance coverage for the loss.  If the insured driver, Matthew Padavano, intentionally struck David Szafarowicz with his vehicle, resulting in David's death, there was no coverage under the policy.  There seemed to be plenty of evidence that Matthew did act intentionally and eventually the trial court so found in the declaratory judgment action.  The settlement agreement providing that  Matthew had acted negligently was an effort to protect the assets of Matthew and his family and to provide insurance funds to David's survivors.  It was not proof, or even evidence, of negligence as opposed to an intentional action.  

The only reason that the case was complicated was because of the weird quirk of the insurance policy that required Commerce to pay interest on the entire amount of the underlying multimillion dollar judgment.  That clause exists to encourage settlements -- but there are times when an insurer is justified in holding firm even in the face of the high risk of a big price tag when it does so.  The policy exclusion for intentional acts -- insurance doesn't pay damages when a policyholder murders someone, for example, which the declaratory judgment trial court found is what happened here -- exists for very good reasons.  I'm terribly sorry for David's family, who have suffered an unimaginable loss.  But insurance simply cannot cover murder, and I applaud Commerce for holding firm on that, despite the fact that ultimately the company would have saved money if it had simply settled the case. 

Wednesday, October 16, 2019

SJC upholds settlement/assignment agreement between plaintiff and insured tortfeasor, but holds that a settlement amount that exceeds the policy limit is per se unreasonable

In Commerce Ins. Co. v. Szafarowicz, __ N.E.3d __, 2019 WL 4774348 (Mass.), after  David Szafarowicz and Matthew Padovano argued at a bar,  Matthew drove a vehicle that struck and killed David.  Matthew's father Stephen owned the vehicle.   Commerce insured it. The policy limits were $20,000 in compulsory coverage and $480,000 in optional coverage.

Matthew pleaded guilty to voluntary manslaughter.  David’s mother brought a wrongful death action against the Padovanos in Superior Court, claiming that David’s death was caused by Matthew’s gross negligence in operating a motor vehicle that was negligently entrusted to him by Stephen. 

Commerce acknowledged its duty to defend.  It acknowledged its duty to indemnify up to the $20,000 compulsory limit.  It reserved its rights to deny a duty to indemnify under the  $480,000 optional coverage if it was determined that David’s death was caused by Matthew’s intentional act and was therefore not an “accident” that was covered by the optional portion of the policy.  It then filed a declaratory judgment action on that issue. 

Thus, the stage was set.

To understand this case you have to understand how the interests of the three parties (the Padovanos, David's estate, and Commerce Insurance) were in conflict and how they overlapped.

The conflict arose because the optional portion of the Commerce auto policy does not cover intentional injuries.  Commerce’s theory was that Matthew had intentionally hit David, so that there was no optional coverage for the loss.  It appropriately agreed to defend  the Padovanos while reserving its right to deny a duty to indemnify (in other words, to refuse to pay a judgment or settlement because of a determination that the loss is not covered under the policy).

The Padovanos and David’s estate would both benefit from a finding that the accident had been a result of negligence and was not intentional.   That way David's estate would recover, but Commerce rather than the Padovanos would pay the judgment.   Commerce’s interest was in a finding that Matthew had acted intentionally, so that it would not have to pay the judgment.

Commerce filed motions to intervene in the wrongful death trial and to stay the trial until after the dispute over insurance coverage was resolved.  Although it lost those motions, the trial court ruled that after the wrongful death trial Commerce could seek a determination about whether the issue in the wrongful death trial that related to coverage – whether Matthew’s actions had been negligent or intentional – had been fairly litigated and, if not, to relitigate it. 

The Padovanos and David’s estate countered by entering into an three-part agreement.  First, the parties stipulated that Matthew’s actions had been negligent (rather than intentional).  Second, in what was perhaps a move to prevent a ruling that the settlement was unreasonable, they agreed that the wrongful death damages would be determined by a judge.  Third, David’s estate agreed to release the Padovanos and that it would collect damages only from Commerce.   

The judge found damages in the millions of dollars, many times the $500,000 policy limit.

Now Commerce was in a particularly difficult situation, because of a policy term (as required by Massachusetts law) that provided that Commerce was liable for post-judgment interest on the entire judgment, not just the policy limit.  The verdict was so high that the annual interest would exceed the policy limit.  The only way Commerce could avoid the interest would be to pay the policy limit, but that would mean that it was giving up its argument that there was no coverage under the policy because Matthew had acted intentionally.

The court noted that the interest policy provision, which is set by state law, has been revised so that under current auto policies the insurer is only required to pay post-judgment interest on an amount of a judgment up to the policy limit. But that revision did not apply to Commerce in this case. 

Commerce tried to limit interest by offering to put the policy limit in a separate fund, but the court denied that motion. 

In the meantime, the trial court ruled that for the purposes of the coverage dispute, Matthew’s actions had been intentional.  But that still did not get Commerce out of the interest payments on the entire amount of the damages found by the court in the wrongful death action. 

The SJC revisited the reasonableness of the settlement agreement for the purposes of insurance coverage.  The first part of the agreement, in which the parties stipulated that Matthew’s actions had been negligent and not intentional, had already been held by the trial court not to apply to Commerce.  The SJC examined the second part of the agreement – that the damages would be determined by a trial court judge.  The SJC held that that part of the agreement was per se unreasonable, because the trial court’s damages assessment exceeded the insurer’s liability limit.  It remanded the case for a reasonableness hearing to determine what would have been reasonable under the circumstances (with a strong implication that the only reasonable amount would be the policy limit).  The court held that Commerce would have to pay retroactive interest only on that amount. 

Finally, the court held that in future cases, a judge who finds that a settlement/assignment agreement is not reasonable should “invite” the parties to renegotiate an agreement to an amount that “might’ prove reasonable. 

One takeaway from this case is that while Massachusetts courts will continue to uphold settlement/assignment agreements, the settlement amounts in those agreements had better be within the applicable insurance policy limit.  Of course, that does not limit the ability of the parties to a tort case to request that the court determine the amount of damages – as long as the settlement agreement provides that the upper limit of damages is the policy limit.

But it is worth noting that there will be times when it is not in the interests of the parties to settle within the policy limits.  In this case it seems quite clear that Commerce's reservation of rights and refusal to settle was reasonable, given the strong evidence that Matthew's actions had been intentional.   But there are times when the plaintiff wants to preserve the possibility of an excess judgment -- a judgment over the policy limit.  That could happen when a policyholder has sufficient assets to pay an excess judgment.  It can also happen when an insurer has arguably acted in bad faith in not protecting its policyholder from an excess judgment by settling the case.  In that situationion the insurer can be liable to the policyholder under Mass. Gen. Laws ch. 93A for the excess amount, and for treble damages.  In the past, a policyholder has been able to settle the claim for the excess judgment amount in exchange for a release against the policyholder and an assignment of rights against the insurer.  In Szafarowicz the court does not address what a reasonable settlement would be in that situation. 

Tuesday, August 6, 2019

US District Court denies summary judgment to first insurer sued by second insurer for violating ch. 93A by seeking defense and indemnity from second insurer's policyholder

Joyce Richards sued MacDougalls' Cape Code Marine Services to recover for personal injuries she alleged she suffered while working as an employee of Boston Yacht Service (BYS) at MacDougalls' boatyard, where BYS leased an office. 

MacDougalls was insured by Atlantic Specialty Insurance Company.  BYS was insured by Quincy Mutual Fire Insurance Company. 

At Atlantic's direction, MacDougalls requested that BYS and Quincy defend and indemnify it against Richards' claims.  Quincy refused, in part on the ground that the indemnity provision of the lease between MacDougalls and BYS was void and unenforceable. 

At Atlantic's direction, MacDougalls filed a third-party complaint against BYS and Quincy.  Quincy filed a counterclaim, alleging that McDougalls violated Mass. Gen. Laws ch. 93A by asserting groundless indemnification and defense claims that relied on the unenforceable and void indemnity provision of the lease.  The Massachusetts Superior Court entered summary judgment in favor of Quincy on MacDougalls' claims. 

Quincy subsequently filed a new lawsuit against Atlantic, in which it sought to recover under Mass. Gen. Laws ch. 93A s. 11 litigation costs that it had incurred in the Richards litigation.  (It filed a new lawsuit because Atlantic was not a party to the Richards litigation.)  Quincy served discovery requests.  Rather than engaging in the discovery process, Atlantic told Quincy that it intended to move for summary judgment.  Quincy moved to compel discovery, and Atlantic moved for summary judgment. 

In Quincy Mutual Fire Ins. Co. v. Atlantic Specialty Ins. Co., 2019 WL 3409980 (D. Mass.), the United States District Court for the District of Massachusetts denied Atlantic's motion for summary judgment.

Atlantic argued that the parties were insurers who never had a business relationship necessary for a claim under ch. 93A §11.  The court rejected that argument, noting that ch. 93A allows actions where an individual or company is injured a a result of an insurer's unfair or deceptive behavior, regardless of whether the plaintiff is the named insured on the policy at issue. 

Atlantic argued that no commercial relationship between two parties exists where the only contact between the parties occurs in the context of litigation.  The court noted that there is an exception to that rule; "an insurance company may be liable for litigation expenses that flow from its failure to conduct a reasonable investigation and effectuate a prompt, fair, and equitable settlement once its liability has become clear."  The court noted that Quincy's complaint was principally based on Atlantic's failure to comply with its statutory obligations before it filed the third-party complaint in the Richards litigation. 

Atlantic argued that statements and conduct of attorneys are immune to ch. 93A liability.  The court held that the immunity doctrine may not apply to Atlantic's failure to carry out a proper investigation before directing its insured to file the third-party complaint. 

In the discovery dispute, Atlantic argued that Quincy's discovery requests sought information subject to the attorney-client and work product privileges.  The court held that those privileges did not apply to the extent that Atlantic was defending itself on the basis that it had reasonably relied on the advice of counsel when it instructed MacDougalls to seek defense and indemnity from BYS.

Practice note:  the judge drafting the decision made clear that she was annoyed by Atlantic's failure to answer discovery, and that the decision could have come out differently on some of the issues if the full facts had been before her.  In short: refuse to answer discovery at your own risk. 

Saturday, August 3, 2019

Insurance defense attorney describes her own tornado loss

Tricia Murray, an insurance defense attorney with ForbesGallagher, owns property on Cape Cod that suffered fallen trees in a recent tornado.  Luckily the damage was only to the trees and the yard, and the people, pets, and house itself were not harmed.  In her article at the wonderful blog Agency Checklists about dealing with the aftermath, one of the things she discusses is how even she, an experienced insurance litigator, did not really know what was covered and what was not covered under her homeowner's policy.  (She learned that tree damage that does not affect her house is not covered under her policy.) 

That has been my experience as well; after every minor water infiltration into my house from a bad storm or fender bender to my parked car I have to read my policy to figure out what is or is not covered.  The advantage of being an insurance litigator in my own life is not so much that I can make a better argument about coverage than anyone else, as that I can speak to adjusters with an air of polite confidence when I know that they are wrong about coverage. 

Thursday, August 1, 2019

Massachusetts Appeals Court holds that verdict against insured does not make liability or damages reasonably clear until appeal is resolved

Surabian Realty Co. and Maja Hospitality Corporation sued Central One Federal Credit Union and two of its officers, David L'Ecuyer and Craig Madonia in connection with a failed attempt to obtain a commercial loan to develop a hotel on property in Shrewsbury.  A jury returned a verdict in favor of the plaintiffs, and the trial judge ruled in favor of the defendants on ch. 93A claims. Both sides appealed.

While the appeals were pending the plaintiffs sent a 93A demand letter to CUMIS, the insurer for Central One and its officers, demanding that it settle the claims against L'Ecuyer (but not the other two parties).  CUMIS responded that the appeal rendered liability unclear, and declined to pay the judgment against L'Ecuyer.  The plaintiffs then sued CUMIS.  Subsequently the trial court decisions in the underlying case were affirmed.

In Surabian Realty Co., Inc. v. CUNA Mutual Group, 95 Mass. App. Ct. 1118, 2019 WL 2591286 (unpublished), the Massachusetts Appeals Court held that the cross-appeal injected uncertainty as to L'Ecuyer's liability and the amount of damages, so that CUMIS did not act in bad faith in refusing to settle.  In particular the court noted that the memorandum of the trial judge on the 93A claim in the underlying case made clear that the judge disagreed with the determination of the jury.  In addition, CUMIS was relying on the advice of counsel in declining to settle. 

Tuesday, July 30, 2019

US District Court For District of Massachusetts holds that auto exclusion in pedicab's general liability policy excludes injuries caused by car hitting insured's customers in a pedicab

Laura Gentry Reagan and her husband Robert Reagan hired a pedicab that was licensed and registered to Boston Rickshaw and operated by its employee Dennis Suozzi.  During the ride, Suozzi allegedly changed lanes without looking or signaling.  That caused a vehicle to hit the rear of the pedicab, injuring the Reagans.  They sued Suozzi and Boston Rickshaw.

Atain Specialty Insurance provided general liability insurance to Boston Rickshaw.  It denied a duty to defend or indemnify on the basis of an exclusion for bodily injury "arising out of . . . any auto . . . whether or not owned, maintained, used, rented, leased, hired, loaned, borrowed or entrusted to others or provided by another to any insured." 

In Atain Specialty Insurance Co. v. Boston Rickshaw LLC, __ F.3d __, 2019 WL 2766980 (D. Mass.), the United States District Court for the District of Massachusetts first dismissed the argument that the declaratory judgment action was not yet ripe because the underlying lawsuit had not yet resolved, as the declaratory judgment action raised the issue of the duty to defend as well as the duty to indemnify.   

The court then addressed the first part of the auto exclusion, excluding coverage for body injury "arising out of . . . any auto."  It cited the usual definitions for "arising out of," a phrase which "must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause," etc.  It held that the exclusion "therefore, appears to apply to the Reagans' alleged injuries, because the injuries arose directly of the operation of the automobile, and would not have occurred but for the collision."

The Reagans argued that taking the exclusion as a whole, it applies only to autos under the control of the insured, and does not include the auto that struck the pedicab. The court held that such an interpretation was contradicted by the plain meaning of the policy interpreted by the rules of grammar.

Finally, the Reagans argued that a reasonable insured that operates pedicabs would not expect the auto exclusion to apply to autos outside of their control or use, or to autos that strike pedicabs.  The court responded to that argument in part by pointing out that it is commonplace for insureds to have separate automobile and general liability policies.  I find that comment troubling.  After all, insureds who don't own or use automobiles generally don't have automobile policies, but that doesn't mean that their customers or visitors can't get hit by cars in a variety of circumstances under which the insured could be found liable. 

That led me to wonder whether a standard homeowner's policy, which I know excludes coverage generally for motor vehicle accidents, would exclude coverage if an unknown person drove a car through the wall of a house (and then drove away).  The standard ISO homeowner's policy form (a form used by many insurers) does not exclude coverage in those circumstances:

·       The property damage coverage (covering damage to the house itself) excludes coverage to motor vehicles themselves, but does not exclude coverage for damage to the house caused by a motor vehicle. 

·       The liability coverage (covering claims against the homeowner brought by an injured person) excludes "motor vehicle liability," which is defined in the policy as liability arising out the ownership or use of the vehicle by an insured. 

It's worthwhile to note that the exclusion interpreted in the case is also not a standard exclusion (or at least is not in the first general liability ISO form that I grabbed).  I’m not going to speculate about the insurance policy negotiations of a company whose business involves being a part of traffic, or whether that company has an auto policy that is providing coverage.