US Bankruptcy Court denies approval of settlement transferring claimant's rights against debtor's insurer to debtor; also, Florida insurance law is insane

On February 2011, David DeVeau was in a car accident in Florida in which Ashly Rierson suffered devastating injuries.  DeVeau was insured by Progressive Select Insurance Company, apparently under a Florida policy that did not include bodily injury coverage.  Rierson sued DeVeau in Florida.  Progressive defended the lawsuit under a reservation of rights.  A jury found in DeVeau's favor in 2018, but that verdict was vacated on appeal.  The case is scheduled for retrial in 2020.

Meanwhile, in 2011 Progressive had filed a declaratory judgment action in Florida seeking a declaration that it had no duty to defend or indemnify DeVeau. DeVeau asserted in that action that he had bodily injury coverage under the policy.  Progressive filed a motion under a Florida statute that permits an insurer that prevails in a coverage action to recover attorneys' fees and costs in equal amounts from the losing party and the losing party's attorney.

Let that sink in.  

In 2015, DeVeau and Progressive executed a stipulation and mutual release under which DeVeau released and discharged Progressive of all liability arising under the policy it issued to DeVeau, the declaratory judgment action, and the duty to defend DeVeau in the personal injury claim.  DeVeau withdrew his defense in the coverage action and assented to entry of declaratory judgment in favor or Progressive.

A few months later, DeVeau filed a Chapter 7 bankruptcy petition in Massachusetts.  Rierson filed an adversary proceeding asserting that her claim against DeVeau was not dischargeable in bankruptcy.
The bankruptcy trustee commenced an adversary proceeding to avoid or set aside the release against Progressive as a fraudulent conveyance.

The bankruptcy trustee then negotiated a settlement with Progressive, for which it sought approval from the Bankruptcy Court.  Under the agreement, within 30 days of DeVeau receiving a discharge in bankruptcy, Progressive would pay the bankruptcy estate $825,000 and the bankruptcy trustee would transfer to Progressive all right, title and interest in all Progressive insurance policies issued to DeVeau.  All claims against Progressive relating to DeVeau's Progressive policy, including Rierson's claims, would be permanently enjoined.

Unsurprisingly, Rierson objected to the motion to approve the settlement.

In In re DeVeau, 2019 WL 7000066 (Bankruptcy Court, D. Mass), the United States Bankruptcy Court for the District of Massachusetts denied the motion to approve the settlement.  It first examined whether it should approve the sale of the policy free of clear of any interest of Rierson. Rierson argued that the bankruptcy estate did not own DeVeau's interest in the policy because he had released all rights under the policy before he filed for bankruptcy.  The court agreed with that argument.

The court next analyzed the request for an injunction that would permanently enjoin Rierson from prosecuting any claim against Progressive  related to DeVeau's policy.  The court denied the request as it was predicated on a sale free and clear of liens.  As there could be no sale of property that did not belong to the bankruptcy estate, there could be no injunction.

Finally, the court held that the agreement was not reasonable because under it the injunction on claims against Progressive would immediately go into effect but DeVeau would receive payment from Progressive only if he received a discharge in bankruptcy.

2019 amendments to ISO forms

Many insurers use standard insurance forms and endorsements issued by the Insurance Services Office, or ISO, which is subsidiary of a company called Verisk Analytics.  ISO recently made several changes to its forms and endorsements.  The law firm of Saxe Doernberger & Pita has described the changes here. 

As summarized in the Saxe blog post, the changes expand who is an additional insured, especially in the context of construction defect and liquor liability claims.  They also affect waiver of subrogation clauses. 

US District Court for District of Massachusetts holds that exception to exclusion does not create coverage barred by a different exclusion

On February 19, 2019, an employee of Performance Trans, Inc. ("PTI") drove a tanker truck off the road in New York.  The truck overturned and spilled 4,300 gallons of gasoline and diesel fuel.

PTI undertook an emergency response action to clean up the spill.  It sought coverage for its costs in doing so from its insurer, General Star Indemnity Company.  General Star disclaimed coverage on the basis of a total pollution exclusion.

Utica Mutual Insurance Company provided malpractice insurance to PTI's insurance broker.  It agreed to reimburse PTI for the cleanup costs in exchange for an assignment of PTI's rights against General Star.  The case proceeded to a declaratory judgment action.

The General Star policy included a Special Hazards and Fluids Limitation endorsement, which excluded coverage for "the unloading of drilling fluids from any auto, mobile equipment, machinery or equipment, whether unloading is the result of movement of property by a mechanical device, an accident, a spill or otherwise."  The exclusion contained an exception for unloading of the fluids caused by the upset or overturn of an auto.

Utica and PTI argued that the exception to the exclusion indicated that General Star agreed to provide coverage for unloading caused by the upset or overturn of an auto.

In Performance Trans., Inc. v. General Star Indemnity Co., __ F.Supp. 3d __, 2019 WL 6307227 (D. Mass.), the United States District Court for the District of Massachusetts disagreed.  "An exception to an exclusion does not affirmatively create coverage."  Rather, an exception merely prevents the exclusion itself from applying in specified circumstances.  (In a footnote the court noted that by their plain meaning the total pollution exclusion of the policy and the Special Hazards and Fuel Limitation endorsement can coexist, so that the exception to the latter exclusion is not superfluous or illusory.)

SJC holds that insurer is not liable for bad faith litigation tactics if the bad faith did not cause damages

In my last post I discussed how in  Rawan v. Continental Casualty Company (no citation available yet) the SJC upheld the legality of consent-to-settle clauses. 

The plaintiffs in Rawan also alleged that Continental Casualty Insurance had violated Mass. Gen. Laws chs. 93A and 176D by its "persistent effort" to hide a report that supported their claim that the insured engineer, Kanayo Lala, had done faulty work, and by its misrepresentation of the applicable policy limits. 

The court noted that an insure has a duty to a third-party claimant not to engage in misleading, improper, or extortionate conduct or otherwise act in bad faith.  "We emphasize that the conduct at issue here, viewed in the light most favorable to the plaintiffs, is problematic to Continental's duty as an insurer to act in good faith, and we do not condone it."

Here, however, the court held, any bad faith by Continental did not cause any damages to the Rawans.  The delay in issuing the report made no difference with respect to Lala's refusal to settle. 

Continental had claimed to both Lala and the Rawans that the policy limits were $250,000/$500,000, when in fact they were twice that.  However, once it revealed the actual policy limits Lala did not change his position that he would not settle.  Continental tendered its policy limits to the plaintiffs after judgment, and Lala paid the excess judgment.  Therefore, the plaintiffs were not harmed by the initial incorrect representation of the limits. 

SJC holds that consent-to-settle clauses are legal and do not violate chs. 93A or 176D

When I was an insurance defense litigator -- an attorney hired by insurance companies to represent people who were covered by insurance who had been sued -- I was always thrilled to have the rare client who actually cared about the case in which I was representing them.  One of the biggest benefits that liability insurance provides is that if you cause an accident, your insurance takes care of it for you.  You might have to help with discovery responses, or show up to a deposition or (less likely) trial, but ultimately the insurer will pay whatever damages are assessed against you.  So for a lot of clients, while they might feel bad that someone was injured as a result of their carelessness (if that's what happened), the lawsuit itself does not particularly concern them. 

There were some exceptions.  Neighbors getting sued by neighbors, or the occasional client who was offended by being sued -- especially if they did not do anything wrong.  But almost across the board, professionals sued for malpractice are deeply invested in the outcome of the case against them, and for good reason.  A doctor found liable for not meeting the standard of care for doctors, or an accountant accused of causing their client to lose money because of their lack of skill -- claims like that affect the very livelihood of the professionals.

That is why many professional liability insurance policies have  consent-to-settle  clauses, under which the insured professional must give consent to any settlement.  This is very different from other policies, in which the insurer has complete discretion in settling a case, as long as it acts in good faith. 

Today the Supreme Judicial Court of Massachusetts affirmed the legality of consent-to-settle clauses.  In Rawan v. Continental Casualty Company (no citation available yet), homeowners Douglas and Kristen Rawan sued engineer Kanayo Lala for errors in calculating building loads and stresses in the structural members of their house.  Lala was insured by Continental Casualty Company.  He refused to consent to settle as recommended by Continental.  The Rawans then sued Continental for its failure to effectual a prompt, fair and equitable settlement as required by Mass. Gen. Laws ch. 176D §3(9)(f). 

The SJC held that consent-to-settle clauses do not violate ch. 176D as a matter of law, but that under the statute the insurer still has "residual duties" to a third-party claimant even when an insured refuses to settle. 

In the underling lawsuit, the Rawans sued Lala for professional negligence, among other causes of action.  An expert hired by insurance defense counsel agreed that Lala had made significant errors in his work on the house.  Lala refused to authorize a settlement in excess of $100,000.  Insurance defense counsel informed Lala that he could face a verdict vastly in excess of that amount and well over his policy limit.  Lala refused to engage in further settlement discussions. 

The case proceeded to trial.  A jury found against Lala and awarded damages of $400,000.  A 93A claim resulted in an additional damages. 

Continental issued to the plaintiffs a check of $141,435.98, which was the amount remaining on the policy limit after deducting the legal fees Lala had incurred in defending the claim.  Lala paid the plaintiffs the rest of the verdict.

The case against Continental then went forward and made its way to the SJC. 

The SJC held that consent-to-settle clauses do not violate chs. 176D and 93A.  The clauses predate the passage of the statutes, and the legislature did not prohibit them.  Public policy supports the right of professionals to purchase insurance with such clauses. Ch. 176D does not require insurers to settle claims; it requires them only to make good faith efforts to settle claims.  Although some policyholders will unreasonably withhold their consent to settle, those policyholders would probably not buy insurance at all if the policy did not include a consent-to-settle clause.  (This last rationale seems a little weak.) 

Although consent-to-settle clauses are legal, an insurer must act with good faith and transparency towards both the insured and the third-party claimant.  The SJC held that in the present case Continental did so.  It thoroughly investigated the underlying facts and informed Lala of the result of the investigation.  It encouraged Lala to settle and explained to him the weaknesses of his defense. 

The SJC discussed another interesting aspect of the case, which was that although Commerce might have acted with bad faith against the Rawans in some of its defense strategies, any such bad faith did not cause the Rawans to suffer any damages.  I will discuss that ruling in my next post.

Massachusetts enacts hands-free driving bill

Agency Checklists has a good summary of the bill, here.  One thing the article notes that I have not seen in more general news reports is that a third offense will result in an insurance surcharge.

OK Boomer confessions:  Until recently I had been using a Garmin GPS that sat nicely on my dashboard, except when it slid off into my lap.  When it died I switched to the GPS on my phone, which I put in my cup holder.  I believe that technically that will remain legal, but the passage of the bill has encouraged me to order one of those devises that will allow me to mount my phone in my vent so I'm not looking way down to see how far away my next turn is.

I love using the phone navigation system.  I am one of those people who rants about how terrible it is that our kids don't know how to read maps.  I still print out a map from Mapquest before I go anywhere, just in case.  (Yes, Mapquest.  Yes, I still use Hotmail for my main personal email account.)  

But my phone has taken me through neighborhoods within two miles of my house that I have never seen before.  Sorry to all the people who don't want riffraff like me driving down their leafy streets (especially while I'm looking down in the direction of my cup holder), but in addition to avoiding  traffic -- I love those new streets.  An entire world has been opened up to me. 

According to the new law we're not supposed to touch our phones.  But what about every time the screen gets covered with a question about whose WiFi you want to connect to, which happens approximately every minute in city driving?