Appeals Court Rules on Pre-Notice Defense Fees, Capping Defense Counsel’s Rates, Settlement Allocation
In a decision of significance on many hot-topic issues in coverage law, the Massachusetts Appeals Court decided Rass v. Travelers earlier this month. The court found that:
- an insurer has no obligation to pay pre-notice defense fees;
- an insurer may not cap defense counsel’s reasonable rates while reserving rights;
- the insured bears the burden of proof concerning allocation settlement amounts between covered and uncovered claims;
- the insurer acted in bad faith by offering a settlement contribution below the insured’s likely exposure and by conditioning its settlement offer on the insured waiving its right to seek attorneys’ fees or indemnification.
The claim involved the insured’s decision to cut the underlying plaintiff out of a food market and distribution business. The plaintiff alleged that in so doing, the insured engaged in trade libel and misappropriation of trade secrets.
The insured did not give notice to the insurer for three months, and when notified, Travelers agreed to defend under a reservation of rights that excluded coverage for the trade secrets claim. The insured rejected Travelers’ attempts to impose a rate limit on defense counsel. It later also rejected the insurer’s offer to contribute nominally to a settlement of the underlying case, because the insurer demanded that the insured waive its rights to additional indemnification from Travelers, beyond its offered contribution.
- The Insurer’s Right to Collect Pre-Notice Fees
The court cited the rule that late notice to an insurer does not relieve an insurer of its duty to defend, unless it can prove it was prejudiced by the delay. The appeals court, however, found that a majority of courts hold that an insurer cannot breach its duty to defend until it has received notice of the claim, and thus does not owe defense costs prior to receiving notice.
Whether the SJC will uphold this part of the decision is questionable, in light of its other decisions on notice and prejudice.
- Rates for Defense Counsel
The court found that the rate charged by defense counsel ($275 an hour) was reasonable and that it was unreasonable for the insurer to impose a lower rate on the basis that it could obtain a lower rate ($200 an hour) for the same kind of work.
- Allocation of Settlement
The court found that the insured, not the insurer, has the burden of proving that the settlement was reasonable. The trial court had allocated 80% of the underlying settlement to the covered claim. In so doing, the trial court looked at defense counsel’s analysis of the amount at risk and the analysis of the insured’s expert that the non-covered claim carried a 5% to 10% chance of a plaintiff’s verdict.
The appellate court found that the lower court correctly concluded the settlement was reasonable and its allocation between covered and uncovered claims was similarly reasonable.
- Bad Faith/Violations of c. 93A
The appeals court upheld the trial judge’s finding that Travelers’ conduct violated c. 93A. The trial judge found that Travelers, first, understood that the covered defamation claim created exposure for the insured, yet “offered a settlement contribution far below Rass’s likely exposure Second, that it conditioned its offer on the insured waiving a right to seek attorneys’ fees or further indemnification. Third, it forced the insured to litigate by stubbornly refusing to pay the hourly rate actually charged by defense counsel and instead insisted upon a lower rate.
Image Credit: Eduards Osis
Posted In: Uncategorized