In Boyle v. Zurich American Insurance Company, SJC-11791 (Sept. 14, 2015), the Supreme Judicial Court (SJC) affirmed an award of $2,250,000 plus interest against an insurer for failing to defend its insured on a $50,000 policy and for failing to make reasonable efforts to settle the suit.  What is remarkable is that the large amount of the award came despite the SJC’s rejection of claims under the Massachusetts Unfair and Deceptive Practices Act (Chapter 93A, § 11), which permits the trebling of damages and award of attorneys’ fees.  Instead, the court found that the award was warranted based upon the insurer’s failure to defend its insured prior to the entry of a default judgment and its failure to settle the suit within the policy limits.  The award (to the third party claimant through an assignment from the policyholder) was in addition to $ 1,324,357 which the insurer paid to resolve the third party claimant’s suit against it for failure to settle, an amount that the court concluded could not be deducted from the $2,250,000 award.  The Boyle decision is instructive for all insurers whose policies may be governed by Massachusetts law.

Underlying Bodily Injury Claim and Trial Court Holding

Joseph Boyle was injured by an exploding tire in an automobile repair shop operated by C&N Corporation (“C&N”).  Mr. Boyle and his wife, together the “Boyles,” sued C&N for bodily injury and loss of consortium.

C&N held a “business auto” insurance policy that required it to provide notice to its insurer (the “Insurer”) immediately of any suit brought against it. The coverage limit of C&N’s policy (the “Policy”) was $50,000.  While C&N notified the Insurer of the injury, C&N never provided notice of the Boyles’ suit.  

C&N defaulted on the Boyles’ complaint against it and a judgment of $2,250,000 was entered against C&N.  Prior to the damages hearing on the Boyles’ claim, the Boyles’ attorney notified the Insurer of the proceeding, but a clerk in the Insurer’s office neglected to take any action.  

After obtaining the $2,250,000 default judgment, the Boyles sued the Insurer for violation of Chapter 93A for failing to settle their claims against C&N.  The Boyles also obtained an assignment of C&N’s right against the Insurer and sued the Insurer on C&N’s behalf for breach of the contractual duty to defend C&N in the underlying litigation and violation of Chapter 93A for failing to effectuate a prompt settlement with plaintiffs.  The Insurer ultimately settled the Boyles’ individual claims for approximately $1.3 million – a sum equal to the amount of post-judgment interest that had accrued on the default judgment – and the Boyles proceeded with the claims made on behalf of C&N.

The trial court held that the insurer had breached its duty to defend C&N.  It also found that any reasonable insurer would have attempted, by the time of the damages hearing on the Boyles’ claims against C&N, to settle the Boyles’ claims by tendering the Policy’s limit of $50,000.  The court also held that, if the Insurer had tendered the Policy’s limits, the Boyles would have accepted that amount as a settlement of their claims.  As a result of these findings, the court held that the Insurer was liable for the entire amount of the default judgment - $2,250,000.^[1]

SJC Affirms Award of $2,250,000 Against Insurer

In Massachusetts, “a liability insurer owes a broad duty to defend its insured against any claims that create a potential for indemnity.”  Boyle, SJC-11791 at *10 (citing Doe v. Liberty Mut. Ins. Co., 423 Mass. 366, 368 (1996).  The Insurer argued that it had no duty to defend C&N because C&N failed to comply with the Policy by promptly providing notice of the Boyles’ complaint.  Specifically, the Policy stated that the Insured would “ha[ve] no duty to provide coverage . . .  unless there has been full compliance” with specified obligations, including the obligation to “[i]mmediately send [the Insurer] copies of any request, demand, order, notice, summons[,] or legal paper received concerning [a] claim or ‘suit.’”  

The SJC rejected the Insurer’s argument, relying on G.L. c 175, § 112, which states that “an insurance company shall not deny insurance coverage to an insured because of failure of an insured to seasonably notify an insurance company of an occurrence . . . unless the insurance company has been prejudiced thereby.”  Applying these principles, the SJC upheld the trial court’s holding that the Insurer did not establish that it had been prejudiced by C&N’s failure to notify it of the Boyles’ claims.  Having found that the Insurer therefore breached its duty to defend, the SJC then found that a breach of the duty to defend “can support claims in contract, in tort, and under G.L. c. 93A” and that, “closely tied” to the duty to defend is an insurer’s obligation to “effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”  Boyle, SJC-11791 at *10.    The authority relied upon by the SJC, however, is the statute governing 93A, § 9 claims, which the court found not to apply to C&N’s claim against the Insurer.  The SJC however approved the damages assessed against the Insurer by using the standard for a 93A claim.  Id. at 5.

SJC Affirms Rejection of Chapter 93A Claims

The Boyles, as assignees of C&N, alleged two violations of Chapter 93A.  The first violation allegedly occurred when the Insurer failed to defend C&N in the underlying litigation.  The SJC upheld the trial court’s determination that the Insurer did not violate Chapter 93A, § 11 because the Insurer’s failure to defend C&N against the Boyles’ suit stemmed largely from the Insurer’s clerk’s “unfortunate decision” to take no action upon receiving letters informing it of the damages hearing.  The SJC concluded that this type of ordinary negligence does not rise to a level sufficient to warrant punishment under Chapter 93A, § 2, which is the standard for a § 11 claim.

Prior to the trial on the Boyles’ claims as assignees of C&N’s claims, the Insurer offered to settle the claims for the policy limit of $50,000.  The Boyles alleged that this de minimis offer constituted a second violation Chapter 93A, § 11 because it was unreasonable.  The trial court rejected this theory and its holding was affirmed by the SJC.  The SJC agreed with the trial court that, while the Insurer may have misappreciated its liability, the Insurer’s actions represented a “negligent miscalculation, rather than conduct involving dishonesty, fraud, deceit or misrepresentation.”  Id. at *24.

Takeaways

In sum, the most important take away from the Boyle decision is that a breach of the duty to defend – even where not made in bad faith – can subject an insurer to damages well beyond the policy limit.  Consequently, insureds are likely to rely on Boyle in pressing insurers to accept the duty to defend, even where there are sound reasons not to and the insurer acts in good faith.  

_{¹  The trial court also held that the $2,250,000 damages award was offset by its settlement with the Boyles for $1.3 million.  This portion of the trial court’s opinion was overturned by the SJC for reasons that are not discussed at length in this note.}