In the first of my two posts in this series discussing lessons I have learned over the past thirty years of practice as to how to avoid incurring Chapter 93A liability as a result of claims handling or settlement decisions, I discussed the centrality of the factual record of the claims handling and the necessity of a narrow focus in defending against a Chapter 93A claim. In my third post in this series, I am addressing the significance of the insurer’s investigation of a claim in potentially exposing it to Chapter 93A liability for failing to timely settle a claim or failing to offer the right amount in trying to settle a claim.

Historically, almost all cases imposing Chapter 93A liability on insurers in Massachusetts have centered on the insurer’s statutory obligation to settle once liability has become reasonably clear. Long buried in the background of such cases, however, has been the insurer’s simultaneous statutory obligation to reasonably investigate claims before making settlement decisions. While for years, a bad faith case against an insurer who failed to settle a tort action against its insured would proceed forward with plaintiff’s counsel focused on developing evidence to prove that liability had become reasonably clear but the insurer had still not settled the tort case against the insured, plaintiff’s counsel would often at the same time ignore – or simply not be cognizant of – the additional argument open to the plaintiff that this had occurred because the insurer had not properly investigated the claim against the insured. In other words, plaintiff’s counsel could have, but typically did not, argue that the insurer had failed to properly investigate the claim, that this had caused the insurer to undervalue the claim or overstate its defensibility, and had led to a failure to settle. This thesis has always been open to plaintiffs’ counsel in such cases, but plaintiffs typically did not pursue it – at least as a primary, front and center aspect of their Chapter 93A cases against insurers – and courts, probably for exactly that reason, did not focus on it or extensively develop doctrines governing such claims.

In recent years, though, this has begun to change, in a way that poses significant risks for insurers unless they start to pay very close attention to areas of claims handling that, historically and for many but not all companies, have been left to the discretion of defense counsel assigned to defend an insured. In the two cases I began discussing at the outset of this series of posts, you see two distinct approaches to the relationship between the insurer and the insured’s defense counsel: in one, you see the insurer and defense counsel cooperating to ensure that any areas of concern about liability or damages issues in the tort suit are addressed, even if the insurer has to invest in experts, and in the other, you see the insurer and defense counsel deciding to forego that activity and corresponding investment. Without even reading the cases, I am sure you know which one of these two scenarios led to the court finding a violation of Chapter 93A and imposing multiple damages on the insurer (hint for the people in the back of the room: it was the second one). These aspects of investigation relate to the manner in which defense counsel and the insurer invest in understanding the loss and, in response to that understanding, thereafter make settlement decisions. At this point in time, developments in the case law make clear that an insurer must work with defense counsel to invest in that undertaking, and will be at a severe disadvantage in defending against a Chapter 93A suit if the record shows that the insurer should have, but did not, do so.

We are, however, in my opinion, in the relatively early stages of courts focusing closely on the investigation done by the insurer and defense counsel in evaluating the propriety of an insurer’s settlement decisions. The question for me at this point is exactly what is the scope of investigation that is required. One can always investigate a claim further, but eventually one reaches a point of diminishing returns in terms of the extent of any increased enlightenment from the investment in doing so. Personally, I don’t believe the case law yet tells an insurer at what point in that continuum it is safe, without possibly violating Chapter 93A, to cease further investigation.

Instead, at this point, my advice to insurers is that decisions as to the scope of the investigation require a reasonableness analysis: does it appear that further investigation is likely to affect settlement decisions sufficiently to warrant the cost? If it does, then the safest path in terms of being prepared to defend against a future Chapter 93A claim is to engage in that investigation, and if it does not, then it is fair to believe that, in a future Chapter 93A claim, the reasonableness of the investigation is unlikely to be faulted by the court.

If this sounds a bit amorphous, that is intentional, as it is a perfect lead in to my next and final post in this series on avoiding Chapter 93A liability, which is the importance of playing the silence between the notes or, in other words, why advising an insurer on claims handling and settlement issues is a bit like jazz.