Monday, December 16, 2019
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.