Massachusetts is one of a handful of states that allow third party claimants to sue liability insurers for failing to promptly settle their claims. It is unique in allowing tort claimants to recover punitive damages in such cases. In the wake of the Supreme Judicial Court's ruling this week in Rhodes v. AIG Domestic Claims it is evident that the price of failing to settle claims in which liability is reasonably clear can be high indeed.
In 1989, the Massachusetts legislature amended two sections of the state Consumer Protection Act (G.L. c. 93A) to read: "For the purposes of this chapter, the amount of actual damages to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction or occurrence, regardless of the existence or nonexistence of insurance coverage available in payment of the claim."
As these amendments were prompted by a series of case in which 93A awards against first party insurers were based on the insured's lost interest on the amount owed, it has been unclear ever since whether this language was also meant to apply to claims against liability insurers, who may be subject to 93A liability in Massachusetts if they fail to make a reasonable offer of settlement in a case in which their insured's liability is reasonably clear. In such cases, should the doubled or trebled award be based on the damage caused by the insurer's delay in effectuating a settlement or did these statutory amendments mandate that the insurer's liability reflect the injuries suffered by the tort claimant as the result of the insured's actions?
Marcia Rhodes had become a paraplegic after her vehicle was rear-ended by an 18 wheel truck. The truck was owned by Penske and leased to GAF, which had a $2 million primary policy with Zurich and a $50 million excess policy with National Union. Nearly two years after the accident, a representative of Zurich asked for permission to offer its full policy limit. Even so, settlement discussions dragged on, due in part to the positions adopted by National Union.
After efforts at mediation collapsed, the case went to trial and resulted in a $7.4 million verdict against GAF. A few months later, the carriers $9.4 million to settle, leaving open their claimed 93A exposure for not settling once the liability of GAF had become reasonably clear.
In the ensuing bench trial, the Superior Court found Zurich blameless but concluded that National Union had failed to make a timely offer of settlement. Nevertheless, the Superior Court declined to award damages as the plaintiff had testified that he never would accepted anything less than $8 million, more than what the court had deemed to be a reasonable offer.
This finding was reversed by the Appeals Court of Massachusetts in 2010. Although the trial judge had declined to find c. 176D liability on the part of the insurer for its failure to make a reasonable offer of settlement until the very eve of trial, given testimony by the plaintiff that he never would have accepted anything less than $8 million anyway, the Appeals Court found that this testimony was not dispositive, declaring that, "The causal link between AIGDC's unfair settlement practices and injury to the plaintiffs was sufficiently established by showing that the insurer failed to initiate the settlement process once the merits of the plaintiffs' claims were clear, thus depriving the plaintiffs of the opportunity to engage in a timely settlement process, and thereby forcing them to pursue recovery through the courts."
The Appeals Court also awarded double damages based on AIGDC's initial failure to make a reasonable offer of settlement after the jury awarded $9.4 million to the plaintiff, rejecting the insurer's argument that the issues in the case and its grounds for appealing the verdict were so complex that the plaintiff should have been required to present expert testimony to support its extra-contractual argument. However, the court declined to base this doubled award on the $9 million settlement and limited the award to 1% for each of the five months in which AIGDC had delayed in settling post-verdict.
AIGDC appealed from these findings. The plaintiffs cross-appealed from the holding that they could only recover lost interest on the value of the settlement. Although the Supreme Judicial Court accepts very few requests for further appellate review, it took this case, setting the stage for a final clarification of the rules governing how damages should be awarded in such cases.
In its February 10, 2012 opinion, the SJC agreed that National Union had acted in bad faith in failing to settle the case before trial. The court refused to find that the insurer's failure to make a reasonable offer of settlement was excused by the apparent futility of such an offer, declaring that:
the plaintiffs need only prove that they suffered a loss, or an adverse consequence, due to the insurer's failure to make a timely, reasonable offer; the plaintiffs need not speculate about what they would have done with a hypothetical offer that the insurers might have, but in fact did not, make on a timely basis
Further, the SJC ruled that the Appeals Court had erred in refusing to give literal effect to the 1989 amendments to 93A, ruling that the double damages owed by AIGDC should be based on the multi-million dollar award rendered by the jury against GAF, not based on the loss of use of these settlement funds for a few months. The court rejected AIGDC's distinction between first and third party cases, declaring that 93A "does not require a causal relationship between the unfair practice and the underlying judgment itself; rather, the statutory causation requirement focuses on the relationship between the unfair practice and injury to the plaintiff." Similarly, the court rejected AIGDC's argument that the accident caused by its insured involved a different transaction or occurrence than that resulting in its 93A liability for failing to settle.
The court also declined to find that an award of damages in this manner exceed the due process standards for punitive damages awards enunciated by the U.S. Supreme Court in State Farm v. Campbell and other recent cases. The SJC questioned whether Campbell even applied to cases where judges issued awards (runaway judges are presumed not to be a concern) and declared that, in any event, the award in this case was two times the actual damages and therefore well within the Supreme Court's dicta concerning ratios. (This particular issue was highlighted in the amicus brief that our law firm filed on behalf of the American Insurance Association in support of AIGDC's position).
Although 93A claims have been a ubiquitous feature of insurance litigation in the Commonwealth of Massachusetts since the 1980s, cases such as Rhodes illustrate the extent to which the liabilities that insurers may face in such cases are not limited to coverage disputes with policyholders.
The SJC declined to impose liability on Zurich, however, declaring that it had acted properly in tendering its limits to the excess insurer once liability became clear. This holding was of interest since at least one judge had suggested at oral argument that Zurich had an independent duty to offer its limits directly to the plaintiffs and could not merely tender to the excess insurer. In this case, however, the SJC took note of the grievous injuries suffered by Rhodes and opined that Zurich's primary limit was clearly not enough to effect a complete settlement.
In the wake of Rhodes, liability insurers face heightened risk if they dare to take severe injury cases to trial. While the SJC has doubtless acted with the best of intentions in creating such severe penalties for failing to settle, it is unclear whether the Court has thought through the long-term consequences of its ruling on the insurance marketplace or the cost of such rulings to policyholders, both in terms of increased costs of insurance and sums that insureds may now be forced to pay through self-insured retentions, deductibles and retro-rated premiums.