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.