Pair of Appeals Court decisions leave questions on 93A damages analysis

Issue February 2011 By David White


Recently, the Massachusetts Appeals Court ruled in favor of plaintiffs in two significant M.G.L. c. 93A cases, but followed divergent damages analyses.

In the first case, Gore v. Arbella Mutual Insurance Company, 77 Mass. App. Ct. 518 (2010), the court found a stipulated judgment to have the same weight as a court-entered judgment, and it applied the clear language of M.G.L. c. 93A, § 9(3), which provides that "the amount of actual damages to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction or occurrence, regardless of the existence or nonexistence of insurance coverage available in payment of the claim."

In the other recent decision, Rhodes v. AIG Domestic Claims, Inc., 78 Mass. Ap. Ct 299 (2010), despite the existence of an underlying judgment, the court chose a different method of calculating damages.

Gore v. Arbella

Gore arose out of an automobile accident where the plaintiff (Dattilo) was seriously injured, but the defendant, insured by Arbella Mutual Insurance Company, had insurance limits of only $20,000 per person/$40,000 per accident. Despite her significant injuries, Dattilo proposed to settle for the $20,000 policy limit with a full release. Arbella did not respond to the proposal for a full five months, and also failed to communicate the demand to its insured.

Taking the silence as a rejection of the proposal, Dattilo filed suit and sent demands to Arbella pursuant to c. 93A and c. 176D. The personal injury action was resolved by a stipulated judgment of $450,000. Although Arbella paid its $20,000, Dattilo took an assignment of the defendant's 93A/176D claims against Arbella, and filed suit on both her own 93A/176D claims and those assigned by the defendant.

The rulings by the Superior Court at the jury-waived trial were largely favorable to the plaintiff. The court found that the stipulated judgment was not collusive; that Arbella had violated 93A and 176D with regard to the demands made by Dattilo; that Arbella had violated 93A and 176D when it failed to notify its insured about the settlement demand for the policy limits and to settle within those limits; and that the violations of 93A and 176D by Arbella were willful and knowing.

The court awarded damages of over $1 million, which were calculated by adding $40,000 for the amount Arbella delayed offering ($20,000 as compensatory damages for the direct claim, doubled); $430,000 (the $450,000 judgment amount minus the $20,000 insurance limit, as compensatory damages for the assigned claim, not doubled); $200,000 in attorney's fees, doubled; over $300,000 in prejudgment interest, not doubled; plus over $23,000 in costs. Both parties appealed.

The Appeals Court affirmed the lower court in all of its rulings, except its damage award on the assigned claim, where it agreed with the plaintiff that the $430,000 award was subject to multiplication. More specifically, the Appeals Court found that the stipulated judgment reached in the underlying matter was a judgment for the purposes of G.L. c. 93A, § 9(3).

Accordingly, the court found that the $450,000 stipulated judgment should be considered the multiplicand in calculating damages on the assigned claim and remanded the matter for further proceedings to determine whether that amount should be doubled or tripled. On Dec. 23, 2010, the Supreme Judicial Court denied further appellate review.

Rhodes v. AIG

Just a few months after the Appeals Court issued its decision in Gore, a different Appeals Court panel took a deviating view of damages in a similar 93A case that was arguably even stronger for the plaintiff. The Rhodes case arose from an extremely serious motor vehicle accident where Marcia Rhodes, the plaintiff, was rear-ended by a tractor-trailer, left paraplegic and had documented past and future special damages of nearly $3 million. Rhodes, along with her husband and daughter, filed suit in July 2002.

By August 2003, plaintiffs' counsel had fully documented the damages, provided a day-in-the-life videotape, and made a $16.5 million demand for settlement. The demand was forwarded to Zurich American Insurance Company, which provided the primary layer of $2 million in liability insurance to the trucking company, and to the AIG affiliate, AIGDC, which provided an additional $50 million of coverage.

Despite the fact that the third-party administrator retained by the defendant found clear liability and estimated the damages as likely exceeding $5 million, no offers of settlement were forthcoming until August 2004, which was a year after the demand had been issued and just weeks before trial, when the parties met at mediation. Then, the combined offer of settlement was only $3.5 million, and was rejected.

At trial, liability was stipulated. Prior to the verdict, AIGDC raised the combined offer to $6 million, which was also rejected. The jury found in favor of the plaintiffs in the amount of $9.412 million, which, with interest, exceeded $11 million. AIGDC appealed.

While the appeal was pending, the plaintiffs sent Zurich and AIGDC a 93A letter demanding a reasonable settlement within 30 days. In response, Zurich paid its entire policy limits plus a share of the pre-trial interest, but AIGDC failed to act until the plaintiffs actually filed their 93A action. At that point, AIGDC paid nearly $9 million to settle the personal injury claim. The plaintiffs did not release AIGDC from the 93A and 176D claims as part of the settlement.

In the trial of the 93A case, the Superior Court judge found that AIGDC had committed knowing and willful violations of 93A and 176D by failing to effectuate prompt settlement once liability became reasonably clear.

However, he also found that the pre-trial settlement offer of $3.5 million was within the reasonable offer range, albeit at the low end, and that the plaintiffs would have rejected any offer less than $8 million, thus, as he ruled, the plaintiffs suffered no actual damages as a result of AIGDC's pre-trial misconduct. The judge further found that AIGDC's post-verdict offer of $7 million was insulting and unreasonable, thus violating 93A/176D. The judge then awarded the plaintiffs only loss of use damages from the date of the judgment until the matter was ultimately settled, which amount was doubled for AIGDC's
willful and knowing misconduct. Both parties appealed.

The Appeals Court affirmed the lower court's finding of pre- and post-trial misconduct by AIGDC, reversed the trial judge's denial of damages for AIGDC's pre-trial misconduct, and held that even where a plaintiff testifies that he would have rejected an offer within the range of reasonable offers, such evidence would not alleviate the insurer's obligation to make a reasonable settlement offer.

However, the Appeals Court determined that the plaintiffs' damages should not simply be measured by the judgment obtained in the underlying action, as the plaintiffs urged. Rather, the proper measure of damages in a case such as this where the plaintiffs did reject a reasonable settlement offer should be the loss of use of the proceeds between the time the insurer breached its duty to make a reasonable settlement offer and the date a reasonable settlement offer was made but rejected. Moreover, the Appeals Court held that such amount is subject to multiplication, if the insurer's delay is willful and knowing as AIGDC's was.

Justice Janice M. Berry dissented in part, disagreeing with the analysis of the majority that the August 2004 offer was reasonable and on how damages should be calculated. To the latter point, she agreed with the plaintiffs and opined that the jury's verdict should have formed the basis of the calculation of the c. 93A damages, not loss of use principles.

As of this writing, the plaintiffs' petition for further appellate review in Rhodes is pending before the Supreme Judicial Court.

Questions and concerns raised by the decisions

Despite a record of years of bad faith claims handling, the majority in Rhodes framed a damage calculation that was limited to just a few months in the pre-trial period, and for the eight-month post-trial period.

Arguably, the court ignored both the statutory mandate in G.L. c. 93A, § 9(3) requiring that the damages be based upon the judgment amount, and case precedent supporting damages based upon the judgment amount such as Gore and R.W. Granger & Sons, Inc. v. J & S Insulation, Inc. , 435 Mass. 66 (2001), where the Supreme Judicial Court affirmed damages against an insurer that were a multiple of the underlying judgment against its insured. The SJC should grant the FAR in Rhodes and clarify whether that decision can be harmonized with Gore and Granger.

If the damage analysis in Rhodes is not overturned, then one of the concerns created by the decision is whether insurers will now perceive a new way to minimize bad faith damages. Under the Appeals Court ruling in Rhodes, an insurer needs only to make a marginally good faith offer just before trial, no matter how long its bad faith has been ongoing and no matter how outrageous its conduct, and its damages will be limited to the loss of the use of the money on the lowball offer. Under this scenario, the purposes of our strong consumer protection statutes may be seriously undercut.