There is an interesting new decision by the Massachusetts Appeals Court concerning the liability of insurers under Massachusetts law for wrongful failure to settle a claim. Under the Massachusetts rubric, an insurer has an obligation to make at least reasonable efforts to settle a claim against its insured once the insured’s liability has become reasonably clear, and the failure to have done so can expose the insurer to an award of multiple damages of as much as three times the amount of the judgment awarded against the insured in the underlying tort action. Overall, insurers sued on such claims typically argue some combination or variation of the following defenses: the disputed facts about the incident precluded liability from becoming reasonably clear, and therefore no duty to settle ever came into existence; the insurer’s investigation established that the insured was likely to prevail; and the amount offered in settlement, even though it did not resolve the claim, was sufficiently reasonable to preclude bad faith liability. Interestingly, over the years, decisions by the Commonwealth’s appellate courts have zeroed in on these defenses, fine tuning the circumstances in which they are useful and those in which they are not, in ways that, in my opinion, have made it harder to rely on any of those arguments. To be clear, they are all still valid defenses and defense strategies for insurers, but my point is simply that developments in this area of the law have reduced them from the proverbial “get out of jail free” cards for insurers facing such claims that they once were to fact intensive strategies that require subtlety in deploying them.
The new decision, Terry v. Hospitality Mutual Insurance Company, discusses each of these defenses, and applies very nuanced bases to reject them, with the Court then affirming the underlying multiple damages judgment against the insurer for having failed to settle the underlying action. What’s somewhat new, however, in the development of the doctrines in this area of the law, is the Court’s focus on and nuanced discussion of the insurer’s investigation into the claim, and the central role the Court’s criticism of that investigation plays in the Court’s holding. Massachusetts law imposes on insurers not just a duty to settle where liability is reasonably clear, but also a duty to reasonably investigate claims before making a settlement decision. For many years, the question of the propriety of the insurer’s investigation was but a poor stepchild to the question of whether the insurer had failed to settle where liability was reasonably clear – the courts and litigants focused on the latter in addressing whether liability should be imposed on the insurer for bad faith failure to settle, without much focus on whether the insurer’s investigation of the claim was appropriate.
Over the past few years, this has changed somewhat, as litigants and judges began focusing on the relationship between an insurer’s investigation of a claim and the insurer’s determination of whether to settle and how much to offer in settlement. In Terry, the Court closes the circle on this issue, with the duty to investigate serving as the key element in deciding whether to impose liability on the insurer for bad faith failure to settle. The Court found that the insurer’s investigation, upon which its settlement decisions were based, was not objective and was essentially self-serving; the Court found that the settlement offer made by the insurer, which was based upon that investigation, was, under that circumstance, unreasonable and gave rise to liability for bad faith failure to settle. It is hard not to conclude, when reading the opinion, that the Court would have found the exact same offer to have not been in bad faith if the preceding investigation, upon which the offer was premised, had not itself been conducted in bad faith.
Of interest, the Court goes to some length in its discussion to explain what constitutes a proper investigation and what instead constitutes an investigation that violates the insurer’s good faith claims handling obligations. The Court found that the insurer had breached its obligations with regard to investigation, leading to bad faith settlement decisions, because its investigation focused on disproving the insured’s liability rather than on an objective discovery into and evaluation of the events giving rise to the claim. The Court made clear that the former is a violation and supports liability for bad faith failure to settle where that deficient investigation is linked with an inappropriately low settlement offer, and that an insurer who wants to defend against a bad faith claim by citing its investigation and relying on the fact that its decisions were made in reliance on that investigation can only do so if its investigation was, in fact, an objective study of the circumstances of the claim.
There are two interesting and practical takeaways from the decision. The first is that any good plaintiff’s lawyer suing an insurer for bad faith failure to settle in Massachusetts will focus both his case and her discovery on the details of the insurer’s investigation, as a flawed investigation will now be an easy hook for arguing that the insurer did not act reasonably in its settlement decisions. The second is that insurers need to, and will eventually if they haven’t already, make it a best practice to document in their files an objective and evenhanded investigation into a claim, recording both the good and bad learned in the investigation in the file, and to clearly tie their settlement offers to the findings of that investigation. Many insurers already do objectively investigate claims, but even for those carriers, the decision is a reminder that not only do they have to do so, they also have to make sure that objectivity is reflected in their claim files.