Charting a Course to the Safe Harbor of Chapter 93A
Insurer Misses the Boat and Court Denies Summary Judgment in Claimant’s Unfair Settlement Practices Suit
A recent Massachusetts Superior Court ruling tells of a journey fraught with peril for a liability insurer trying to reach the safe harbor of Massachusetts General Laws Chapter 93A. This statute permits a judge to award double or treble damages if an insurer sued for unfair claims settlement practices refuses to settle when liability is reasonably clear. However, the statute shields a defendant from the threat of multiple damages if he or she makes a reasonable settlement offer in response to the plaintiff’s pre-suit demand letter.
In Boyle v. Zurich American Insurance Company, the insurer’s seemingly reasonable settlement offer fell short of the mark needed to win summary judgment. This case has important warnings for insurers seeking to rely on the safe harbor, as well as pitfalls to avoid when learning of a default against an insured.
This saga began when an employee at the insured garage asked the claimant to listen to the transmission of a truck on a lift. The employee revved the engine, and a tire exploded, injuring the claimant. Whether the garage’s liability on these facts was reasonably clear is a point the court did not consider, since liability was established by a default judgment.
The garage notified the insurer of the incident, and the insurer communicated with claimant’s counsel before suit was filed. However, the insurer claimed it did not get the required notice from the garage when the suit was filed (the claimant asserted that the garage did give this notice). As a result, the insurer did not defend, and the garage was defaulted. The claimant notified the insurer of the hearing to assess damages, but no one appeared for the garage, and judgment entered for an amount many times the insurer’s $50,000 policy limit.
The insurer responded with a late notice defense. (A safer course would have been to try to remove the default on the garage’s behalf, reserving its rights to deny coverage for lack of notice in the event that effort was unsuccessful. A court might otherwise conclude, as it did here, that the pertinent questions – whether there was a failure to notify, and if so, whether it prejudiced the insurer – were issues of fact not appropriate for summary judgment).
The Unfair Practices Claim
Also, after the default judgment against the garage, liability was of course reasonably clear, unless the insurer prevailed on its late notice defense. Over a year after the default judgment, the claimant sent a demand letter to the insurer, alleging unfair claim settlement practices and demanding that the insurer pay the full judgment (over $2.6 million) times three, plus attorney’s fees. Setting course for the safe harbor, the insurer responded to the demand with an offer of its policy limits plus interest on the policy limits from the date of the default judgment to the date of the offer.
The claimant filed suit, and the insurer moved for summary judgment in reliance on the safe harbor. Although the claimant did not have an assignment of rights from the insured, it had a right as a judgment creditor to apply the policy proceeds to the default judgment against the insured (subject to the late notice defense discussed above). It also had the right to pursue a chapter 93A claim asserting that the insurer’s failure to settle when liability was reasonably clear harmed it.
The Superior Court judge agreed with the insurer that its contractual duty to indemnify did not obligate it to pay the entire judgment, but only its policy limits. The judge also agreed with the insurer that the reasonableness of its settlement offer under chapter 93A depended on the amount the insurer was obligated to pay under the policy, plus interest from the time it should have paid it until the time it did. (However, multiple damages are calculated on the entire underlying judgment).
Nevertheless, the insurer was not entitled to summary judgment that its policy limits offer was reasonable as a matter of law, for two reasons. First, its indemnification obligations under the policy included its policy limits plus post-judgment interest on the full amount of the judgment in any suit it defended. “But we didn’t defend,” the insurer argued. The judge rejected this argument, ruling that the provision required the insurer to pay post-judgment interest when it breached its duty to defend. Therefore, according to the court, to obtain summary judgment on the grounds that it was entitled to the safe harbor for making an offer that was reasonable as a matter of law, the insurer’s offer would have had to include post-judgment interest on the entire judgment, not just on the policy limits (in this case, the difference was over $400,000).
Second, the judge held that the claimant might have a claim for the full amount of the excess judgment under a breach of contract theory, as a third-party beneficiary of the insurer’s contractual duty to defend the insurer. Here, the ruling may have drifted off course. Although there is appellate law suggesting that a claimant is an intended third-party beneficiary with respect to the duty to indemnify, the extension of this proposition to the duty to defend seems unwarranted. The benefit of the duty to indemnify, payment of all or part of a judgment, is intended to flow to a tort claimant. But the defense of a tort claim benefits the insured to the detriment of the claimant. If the defense is successful, the claimant recovers nothing. It is hard to see how the parties to a liability insurance policy intend a tort claimant to benefit from the duty to defend.
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