Between the Lines

A Discussion of Case Law and Statutory Law Affecting Commercial Lines of Insurance


Court Finds an Unfair and Deceptive Practice When an Insurer Uses its Investigation to Confirm a Predetermined and Inadequately Supported Conclusion, Rather than Conduct an Objective Analysis.

image credit: C Thomas

Massachusetts General Laws Chapter 176D states that it is an unfair claim settlement practice for an insurer to “refus[e] to pay claims without conducting a reasonable investigation based upon all available information.”  In Continental Western Insurance Company, Inc. v. Preferred Mutual Insurance Company, United States District Court for the District of Massachusetts No. 3:14-cv-14226-MGM, the court recently found that an insurer violated this provision, and therefore committed an unfair and deceptive act or practice in violation of Massachusetts General Laws Chapter 93A, when it used its investigation of a liability claim to confirm a coverage conclusion that the court found to be predetermined and biased.

The suit was brought by the insurer of a commercial property that was damaged by fire during a renovation project, as subrogee of the property owner, against the liability insurer of a master plumber who was potentially responsible for the fire loss.  The master plumber’s liability insurer hired counsel to represent him in advance of a possible suit.  At the fire scene, and later in a recorded statement taken by an independent adjuster, the policyholder referred to a journeyman plumber as his partner (although he also described his business as a sole proprietorship) and stated that they had agreed to split the profits equally.  Defense counsel was present for both of these statements, and reported them to the liability insurer.

The policy was issued to the policyholder as a sole proprietor, and the liability insurer reserved its rights on the ground that the policy did not insure a partnership.  The liability insurer hired coverage counsel, who informed the insured that the policy required him to submit to an examination under oath (more on this below).  After this examination, coverage counsel reported that the evidence supporting a partnership was thin.  The policyholder had signed the contract for the work as an individual, took out the permits in his own name, considered the journeyman a part-time employee, and was in control of the journeyman’s work.  Further, the policyholder had testified, correctly according to coverage counsel, that Massachusetts regulations prohibited a master plumber from partnering with a journeyman.

According to the court, the claims handler, having already concluded that the policyholder had done the work as a partner, provided coverage counsel with defense counsel’s report of the fire scene conversation and recorded statement in an effort to persuade him to change his view.  Coverage counsel continued to have reservations about pursuing the partnership issue.  After being twice asked by the claims handler to reconsider, coverage counsel advised that a jury could credit the insurer’s position as to partnership at trial and the insurer was entitled to file for declaratory judgment.  At a second examination under oath, the policyholder asserted that he had not used the word “partner” in a legal sense, but the insurer did not credit this explanation.

The liability insurer then notified the policyholder it was rescinding the policy, and filed an action for declaratory judgment to confirm the rescission on the grounds that the policyholder had misrepresented in the policy application that he was a sole proprietor.  There were conference calls between the insurer and coverage counsel to discuss the decision to rescind, and to review the declaratory judgment complaint and rescission letter, but the court found that there was no meaningful discussion or debate during these calls.

The court concluded that this “outcome-determinative” investigation was unfair and deceptive and violated Chapter 93A.  The court also concluded that the liability insurer showed unjustified hostility toward the policyholder, and unfairly considered his age (the policyholder was 84) in its decision to pursue rescission and declaratory judgment.  In addition, the court concluded that it was unfair and deceptive to tell the insured that he was required to submit to an examination under oath, since only the policy’s property coverage section, and not the liability coverage at issue, contained that requirement.  Finally, the court concluded that defense counsel had improperly disclosed to the claims handler information adverse to the policyholder with respect to coverage, and that the liability insurer should then have split the file between defense and coverage and assigned a different claims handler to the coverage file.

The court rejected the liability’s insurer defense that it rescinded the policy based on the advice of coverage counsel, stating that “the advice and independence of counsel in this case was tainted, selectively parsed, and directed” by the claims handler.  The court continued: “Generally, there may be little or no recognizable merit to a claim of independent legal review when there exists a longstanding business relationship between the company and private counsel; any such determination requires, however, a case by case analysis.”

This is a rather harsh view of the relationship between insurers and their coverage counsel.  Indeed, coverage counsel in this case repeatedly recommended against the course the claims handler clearly wanted to pursue, although his resistance was eventually worn down.  Further, there was some evidence supporting the conclusion that the arrangement between the policyholder and the journeyman plumber was a partnership.  Beyond the use of the word “partner,” the policyholder stated that he and the journeyman had agreed to split the profits equally (it also appears that the trade name used by the insured may have been composed of the initials of the last names of the two plumbers).  Nevertheless, in the eyes of the court, the insurer jumped to a conclusion and never fairly weighed the evidence on both sides.

The decision also takes a harsh view of defense counsel’s conduct.  The nature of the insured business is a basic fact relevant to the defense, and it is unclear whether defense counsel even had reason to know that it might be pertinent to a coverage issue.

The case is still pending in the District Court for a determination on damages, and the last word may not yet have been spoken.  Nevertheless, it provides a useful warning to insurers to keep an open mind until the coverage investigation is concluded, and to defense counsel to be sensitive to the potential for conflicts between the interests of the insured they are defending and the insurance company that hired them.

About the Author

Harvey Nosowitz – Counsel

Harvey helps clients with commercial litigation, in particular insurance coverage, personal injury and products liability cases.

Please contact him with any questions:
(617) 621-6555.

Posted In: Claims Handling and Settlement

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