I have litigated, arbitrated and advised on coverage and bad faith disputes from the U.K. to Guam and in every or practically every American jurisdiction in-between. (If you add in reinsurance claims I have worked on, you can add a couple more continents to the list).
Coverage itself, because it’s basically at heart a contract based inquiry, is reasonably consistent – to at least some extent – from one jurisdiction to the next. But bad faith, when an insurer has to settle and what are the penalties for failing to settle when it was required vary greatly from one state to the next. And so I am not surprised when I get, as I often do, inquiries from insurers and lawyers located elsewhere concerning exactly what an insurer’s duty is in Massachusetts with regard to the obligation to settle claims.
I thought, as sort of a public service, I would share my sort of “cheat sheet” that I often pass along on the basic outlines of these obligations in Massachusetts. It basically sums up, without cites and in more neutral terms, what I typically describe as the law on these issues in requests for conclusions of law, motions for summary judgment or other court filings.
So with that introduction, here are the key highlights of the duty of an insurer to settle claims in Massachusetts, and the liabilities that can run with breaching it:
• Massachusetts General Laws Chapter 93A, applied in tandem with Chapter 176D (which bars unfair insurance practices) requires insurers to act reasonably with regard to settlement of claims.
• An insurance company commits an unfair claim settlement practice if it “[f]ail[s] to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.” Chapter 176D, § 3(9) (f). Someone who is injured by a violation of that provision is entitled to bring an action to recover for the violation under Massachusetts General Laws Chapter 93A, § 9. If there is a finding in such an action that the insurer failed to effectuate a prompt, fair, and equitable settlement causing injury, the plaintiff is entitled to the greater of actual damages or statutory damages of twenty-five dollars. However, if the judge finds the insurer’s action was willful or knowing, the judge must grant double or treble damages.
• When an insured’s liability becomes reasonably clear, an insurer has a duty to settle a case.
• An insurer’s duty to settle arises only once liability has become reasonably clear, and the term liability, for these purposes, encompasses both fault and damages. As long as either the insured’s responsibility for the accident at issue or the claimant’s damages remains in dispute, an insurer has no duty to settle or to even make a settlement offer.
• Liability is not reasonably clear where a tort defendant possesses a valid defense; where an insurer has a plausible legal or factual position that there is no covered liability, even one that ultimately turns out to be mistaken or unsuccessful; or where an insurer relies on independent advice from an expert witness suggesting a reasonable prospect of success at trial. When an insurer sincerely, reasonably and legitimately views the question of liability as a toss of the coin, liability is not reasonably clear.
• Under these standards, technically, an insurer is not obligated to settle a claim, and cannot be liable under Chapter 93A for failing to settle a claim, unless liability has become reasonably clear. If liability is not reasonably clear, an insurer is not required to settle the case
• Technically, even after liability becomes reasonably clear and a duty to settle arises, the insurer is still allowed to negotiate reasonably and will not violate Chapter 93A if it does so but the case still does not settle. An insurer’s obligation to exercise good faith does not require it to roll over and play dead vis-a-vis the claimants; nor does the looming of an excess judgment debar an insurer from employing conventional negotiating stratagems in good faith. Massachusetts law recognizes that negotiation is an art, not a science. In practice, however, if the court ruling on a Chapter 93A action believes the insurer’s offers were too low, too slow or otherwise unreasonable in comparison to the demands or the claim itself, a court will likely find a violation of Chapter 93A, if liability had in fact become reasonably clear.
• Generally, damages imposed for a violation of Chapter 93A are actual damages, or either double or treble actual damages if a court determines that the violation was willful or knowing. Where a judgment has been entered against the insured, however, the damages awarded under Chapter 93A can be significantly higher. Under Massachusetts law, if an insurer commits a willful or knowing Chapter 93A violation that finds its roots in an event or a transaction that has given rise to a judgment in favor of a claimant, then the damages for the Chapter 93A violation are calculated by multiplying the amount of that judgment.
• After a verdict has entered against the insured, an insurer must reasonably consider the likelihood of success on appeal in deciding whether to pay the verdict or instead appeal. The reasonableness of the insurer’s settlement offers at that point must be evaluated in comparison to the strength or weakness of the appeal. An insurer’s duty to settle a case does not end with the judgment, unless the insurer promptly pays the judgment. When the insurer causes a notice of appeal to be filed, the insurer continues to have a duty to settle what is now the appellate litigation. While the standard under Chapter 176D, § 3(9)(f) still applies after judgment-the insurer must still provide a prompt and fair offer of settlement once liability has become reasonably clear-the existence of the judgment should change the insurer’s evaluation of what constitutes a fair offer and whether liability has become reasonably clear.