I am pleased to say that reason has prevailed in the First Circuit.
I am generally pretty sanguine about insurance coverage decisions (except on my own cases, of course). I might disagree with the outcomes, but . . . the vagaries of the court system, yada yada yada.
But every once in a great while I come across a decision that I have to read several times before I believe that my eyes aren't skipping over a "not" that would allow the decision to make sense. The decisions of the United States District Court for the District of Massachusetts in Berkley Nat'l Ins. Co. v. Granite Telecommunications LLC, 594 F. Supp.3d 233 (D. Mass. 2022) (Berkley I) and 617 F.Supp. 3d 77 (2022) (Berkley II) were such decisions.
THE UNDERLYING FACTS
The underlying facts, as described by the U.S. District Court in Berkley I, are straightforward. Granite Telecommunications operated at a building owned by Atlantic-Newport Realty. Sewage backed up into the building, resulting in underlying plaintiff Stephen Papsis suffering a serious infection. He sued. Granite and Atlantic-Newport sought coverage under a policy issued by Berkley National Insurance Company.
The Berkley policy had an exclusion for bodily injury "that would not have occurred, in whole or in part, but for . . . contact with . . . any fungi or bacteria on or within a building or structure."
Berkley undertook the defense and eventually proposed that settlement in the
Papsis lawsuit be jointly funded by Berkley and the insureds. The insureds' attorney sent an email to Berkley stating that Berkley had a
statutory obligation under Mass. Gen. Laws ch. 176D to cover the cost of
settlement, and threatened to sue Berkley if it did not agree to wholly
fund the settlement. Berkley agreed, but reserved its right to
subsequently deny coverage and seek reimbursement. Berkley paid the
settlement and sued the insureds in federal court for reimbursement.
BERKLEY I: U.S. DISTRICT COURT DENIES MOTION FOR JUDGMENT ON THE PLEADINGS BY THE DEFENDANT INSUREDS
In Berkley I, the District Court denied the insureds' motion for judgment on the pleadings. The court distinguished the facts from the facts in Medical Malpractice Joint Underwriting Ass'n of Mass. v. Goldberg, 425 Mass. 46 (1997), in which the SJC held that where an insurer had settled without informing the insured of the settlement or obtaining the consent of the insured to later seek reimbursement from it, the insurer had no right to seek reimbursement.
The District Court held that the situation before it was different, because the insureds had participated in the settlement discussions.
Then -- and I remember my eyes rolling so hard I thought they might get lost in my head when I read this decision when it came out two years ago (but also, I have nothing but admiration for the work of the attorney who obtained this decision for Berkley) -- the court continued, "More importantly, defendants' actions in coercing [yes, coercing] Berkley to pay the full settlement essentially left Berkley without the viable options that were available to [insurer] JUA in Goldberg" -- essentially, the option of asking the insured for an agreement that it would reimburse the insurer if the insurer's coverage position prevailed.
Here -- and get ready for a thousand tiny violins to play for the poor insurer -- "defendants attempted to foreclose those options to Berkley by threatening legal action if Berkley sought to pursue them. Indeed, defendants' counsel portentously [what a word] warned Berkley in an email that '[s]hould [it] fail to make settlement offers in line with defense counsel's recommendations and/or make unreasonable demands on the defendants to fund a portion of any settlement themselves, Berkley National will be risking significant exposure under ch. 176D.' In effect, defendants 'whipsawed' Berkley into exercising its only feasible option: paying the full settlement amount and maintaining its unilateral reservation of rights to seek reimbursement." The court concluded that it would be "fundamentally unfair" to strip the insurer facing such a predicament of any legal recourse.
Okay, deep breath.
Berkley had options. If it was convinced of its coverage position, it could have refused to defend the case, or it could have refused to settle until a declaratory judgment action on coverage was resolved. Or, it could have refused to settle unless the insureds agreed that if Berkley eventually won on coverage they would reimburse the settlement amount to Berkley. Keep in mind, if an insurer takes a plausible position on coverage that ultimately loses, it is not liable for breach of chs. 93A or 176D. So the only time an insurer will find itself in a difficult situation is when it refuses to settle on the basis of a coverage defense that is not plausible.
The idea that absolutely standard posturing by the insureds somehow placed Berkley in an untenable position is absurd.
BERKLEY II: U.S. DISTRICT COURT GRANTS SUMMARY JUDGMENT TO BERKLEY
In Berkley II, the court granted summary judgment to Berkley on the coverage issues and its claim for reimbursement. On coverage, the court held that the Papsis lawsuit fell within the policy's bacteria exclusion, so that Berkley had no duty to defend or indemnify the insureds in the that lawsuit.
Then, applying the theory of equitable restitution, the court held that the insureds should reasonably have expected Berkley to seek reimbursement from them pursuant to its reservation of rights. Again, "Berkley was effectively forced by defendants to pay for the cost of defending and settling the Papsis lawsuit because defendants threatened to sue Berkley if it did not do so."
FIRST CIRCUIT REVERSES, PROVING THAT THERE IS HOPE FOR THE WORLD
In Berkley Nat'l Ins. Co. v. Atlantic-Newport Realty LLC, __ F.4 __, 2024 WL 723978 (1st. Cir. 2024), the First Circuit reversed both District Court decisions. It held that Goldberg was not distinguishable. Reframing that case slightly differently than the District Court had done, the First Circuit noted that Goldberg held that an insurer can seek reimbursement of a settlement from an insured only (1) if the insured had agreed that the insurer may commit the insurer's own funds to a reasonable settlement with the right later to seek reimbursement from the insured; (2) the insured agreed to pay the settlement; or (3) the insurer had notified the insured of a reasonable settlement offer and given the insured an opportunity to accept the offer or to assume its own defense.
The First Circuit held that none of those circumstances were present. It rejected Berkley's argument that the presence of the insureds at settlement negotiations was sufficient to distinguish Goldberg. It also rejected Berkley's attempts to hold that a case discussing the rights of a disability insurer overturned Goldberg, a liability insurance case.
The First Circuit left open the possibility that under Massachusetts law if an insurer properly reserves its rights to seek reimbursement of defense costs, it may be able to seek such reimbursement after a finding that the insurer never had a duty to defend.
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