Insurers are faced with a variety of rules, requirements and
other mandates concerning their business activities. Many of these
govern claims handling actions and practices, and numerous traps
abound for those making the important decisions. This article
discusses an unfortunate outcome, whereby a somewhat routine loss
resulted in penalties and sanctions for the insurer as a result of
the decisions that were made in handling an automobile liability
insurance claim.
Recently, the Massachusetts Court of Appeals took review of a
decision from the Middlesex Superior Court awarding a plaintiff
just over $1 million for an insurer's alleged actions in failing to
settle her bodily injury claim. The matter arose from an
out-of-state automobile accident in which the plaintiff was injured
when her car was struck by another individual's car. Three
passengers in the tortfeasor's vehicle were also injured, bringing
the total number of possible claimants to four.
The tortfeasor was insured under a policy that had been issued in
accordance with Massachusetts laws, and contained bodily injury
protection coverage of $20,000 per person/$40,000 per accident.
Following the accident, the plaintiff retained counsel, and her
attorney demanded that the tortfeasor's insurer tender its per
person limits of $20,000 in settlement of her bodily injury claim.
The insurer investigated the loss and determined the insured's
liability for the accident was reasonably clear, and received
information establishing the claim's value above the $20,000 policy
limits. The demand gave the insurer 30 days in which to pay the
policy limits in exchange for a release of liability in favor of
the insured. Several days after the 30-day time window passed, the
plaintiff filed suit against the insured tortfeasor for injuries
and losses arising out of the accident, and the insurer then
notified its insured that because of the potential value of the
claim, it was possible that an amount greater than the policy's
coverage limit could be awarded in the lawsuit.
The insurer was concerned about paying the full per person limit
to one claimant, and the possibility of leaving the insured exposed
to three additional claims with only $20,000 remaining within the
per accident limits. During the course of the litigation, the
insurer notified the plaintiff that it was attempting to determine
what claims the other three injured persons might have in order to
structure a possible global settlement. Some time later the insurer
discovered that two of the injured parties did not intend to pursue
bodily injury claims, and upon settling with the third claimant,
offered the $20,000 policy limits to the plaintiff so long as she
entered into an appropriate release agreement.
The plaintiff refused the offer, and instead settled with the
insured directly pursuant to an agreement in which the insured
would stipulate to a judgment in the amount of $450,000 with a
covenant not to execute upon the same (thus shielding him from any
personal liability), and assign the plaintiff all rights he may
have against his insurer for alleged unfair settlement practices.
The insurer was aware of the agreement and waived any claim against
the insured for non-cooperation. The plaintiff later individually,
and as assignee of the insured's rights, filed suit against the
insurer seeking damages pursuant to M.G.L. c. 93A. Following a
jury-waived trial the judge found for the plaintiff and awarded the
above-noted sum, consisting of $670,000 in compensatory and
multiple damages, interest and costs. (The award was upheld on
appeal, and the appeals court additionally ruled that certain of
the damages might need to be doubled. The case was remanded to
resolve this question.)
The appeals court refused to accept the insurer's position that
the loss demanded a global resolution, justifying the decision to
postpone settling the plaintiff's claim. The court additionally
noted that the plaintiff should have been better informed of the
ongoing investigation, and the insured kept abreast of the initial
demand when it was first made. In its defense, the insurer argued
that one could reasonably construe the plaintiff's actions as
subterfuge, and the time limit demand made to manufacture a bad
faith insurance claim. The court, though, accepted the plaintiff's
statement at face value that he had moved quickly for the purpose
of placing himself first in line before the other claimants
potentially exhausted the coverage.
This case underscores the precarious situation in which insurers
are often placed when presented with a demand for policy limits by
an injured party in a multi-claimant loss. When the evidence
indicates that the claim exceeds policy limits, the insurer might
want to seriously consider offering the limits of coverage (in
exchange for a release extinguishing all liability in favor of the
insurer, and insured -- its right) even when there may be other
potential claimants, depending on the facts of the particular
claim. The court in the subject case rejected the insurer's reason
for not timely extending the policy's coverage limits, which was
that it needed to determine the exposure on the other claims and
possibly divide the total coverage, in fairness to all claimants
and the insured. Though there was little discussion in the case
concerning the claims of the other injured parties, it does not
appear they had significant value and two of the claims were never
fully pursued. If those claims had been quickly presented with
values obviously exceeding or approaching policy limits the
situation would most certainly have changed, and the insurer would
have been allowed -- in fact, required -- to coordinate a division
of the coverage limits. The case makes one understand how a
seemingly reasonable decision -- and one likely made for what was
thought to be an appropriate course of action to protect all
parties' interests -- can have severe consequences if later
deemed
incorrect.
As a practice note, insurers should be advised that if the limits
of coverage are not going to be immediately extended and further
time is needed to investigate the claimant's settlement demand, it
is the safest bet to quickly inform the claimant of the need to
investigate and notify the insured of ongoing developments.
Another option available to an insurer when faced with a difficult
situation is to reject the policy limits demand, and offer an
option of indemnity to the insured for any damages that may later
be awarded over the policy limits. In the situation where questions
exist whether the settlement warrants payment of policy limits,
this presents a way for insurers to insulate themselves from
extracontractual liability down the road for the decision not to
pay the policy limits in settlement. By making this offer, the
insurer should not later be held responsible for damages (like
those stipulated to in a judgment between the injured party and
insured) as the insured would have no reasonable justification for
entering into an agreement for judgment given that he or she would
face no personal liability. This option remains available in those
circumstances where there are questions whether the claim's value
exceeds the limits of coverage, and the insurer is being pressured
to offer its policy limits to settle the claim.
Jon A. Halaby is an attorney practicing with The McCormack
Firm, LLC, mostly in the areas of automobile, tort, and
construction liability, subrogation, fraud and insurance coverage
matters. He has served as a panelist for Continuing Legal Education
seminars on automobile liability, premises liability, insurance bad
faith and wrongful death in Colorado and Massachusetts and is a
former officer of the Colorado Defense Lawyers Association. He
presently serves on the Insurance and Bad Faith Law Committee for
the Massachusetts Defense Lawyers Association.