Automated Claims Reporting and Not So ‘Best Practices’ Result in Multi-Million Dollar Judgment Against Insurer
By Matthew Sweet, Esq. & Jennifer Sheehan, Esq.
A recent case from the Massachusetts Supreme Judicial Court may not represent a ground breaking change in insurance law, but it certainly provides some valuable lessons in best practices for claims handling. The practical result of the opinion in Boyle v. Zurich American Insurance Company, 472 Mass. 649 (2015), is that Zurich American Insurance Company was required to pay over $4 million in a case where the policy at issue had a limit of $50,000, and where there was no finding that the insurer had violated M.G.L. c. 93A.
I. The Claims against C&N.
Plaintiff Joseph Boyle was injured in March 2006 in an accident which occurred at an automobile repair shop operated by C&N Corporation. As a result of the accident, Mr. Boyle required surgery and incurred $106,000 in medical expenses. He claimed that he was unable to work for a year following the accident, and that he sustained permanent scarring and partial loss of function in his left arm and hand. His wife filed a claim for loss of consortium.
At the time of the accident, C&N carried a “business auto” insurance policy, issued by Zurich, which included liability coverage with a limit of $50,000. One of the owners of C&N reported Mr. Boyle’s accident to his broker, who in turn reported it to Zurich. During the course of 2006, Zurich investigated the accident and by October 2007, Zurich determined that C&N would be liable for Mr. Boyle’s injuries. In addition, by early 2008, Zurich had determined that Mr. Boyle’s injuries were covered by C&N’s policy. However, Zurich did not convey these determinations to C&N and did not attempt to settle the Boyles’ claims, perhaps because no suit had been filed. In February 2008, Zurich closed its file on the Boyles’ claims.
In August 2008, the Boyles filed suit against C&N, which by that time, was no longer operational and had been administratively dissolved. C&N did not inform its broker or Zurich that suit had been filed, did not forward the complaint or related documents to Zurich, and did not answer the complaint. A default was entered against C&N in January 2009 and thereafter, the Boyles moved for a default judgment. In September 2009, the Boyles’ counsel sent a one paragraph letter to Zurich’s general mailing address advising that the damages hearing had been scheduled and providing the docket number for the case. Later that month, the Boyles’ counsel sent another letter to Zurich to inform it that the damages hearing had been postponed until October 2009. The second letter also included the amount of Mr. Boyle’s medical expenses and enclosed copies of his medical bills. A Zurich clerk scanned both letters into the claim file. However, according to Zurich’s appellate counsel, it was Zurich’s policy at the time that documentation added to a closed case file was not directed to any particular individual for further handling. As such, no action was taken as a result of these letters.
The October 2009 damages hearing went forward without C&N or Zurich in attendance. The court awarded damages of $1.5 million to Mr. Boyle and $750,000 to Mrs. Boyle, as well as pre- and post-judgment interest. Final judgment was entered against C&N in January 2010.
II. The Claims against Zurich.
In June 2011, the Boyles sued Zurich directly, asserting that they were third-party beneficiaries of C&N’s policy with Zurich and that Zurich had violated c. 93A by failing to settle the Boyles’ claims against C&N. In September 2013, C&N was temporarily revived, at which time C&N assigned all of its rights against Zurich to the Boyles, including a claim that Zurich had breached its contractual duty to defend C&N in the Boyles’ prior suit.
Prior to trial, Zurich settled the Boyles’ individual claims for $1,324,357, which equaled the post-judgment interest that had accrued on the default judgment that the Boyles had obtained against C&N. A jury-waived trial went forward on C&N’s assigned claims. The Superior Court made detailed written findings and determined that Zurich’s duty to defend C&N had been triggered by the 2006 notice of Mr. Boyle’s injury as well as by the 2009 notice of the damages hearing, despite the fact that the 2006 notice was received before any suit had been filed, and the 2009 notice had never been reviewed by anyone at Zurich. Further, the court found that any reasonable insurer would have attempted to settle the Boyles’ claim by offering the policy limits by the time of the damages hearing. The court found Zurich’s failure to defend C&N was a breach of its contractual duty to defend and caused C&N to default, resulting in the $2,250,000 default judgment, plus interest. However, the court found no violation of c. 93A and did not award multiple damages.
III. The Supreme Judicial Court’s Decision.
Both parties appealed various aspects of the Superior Court order. Of note, Zurich argued on appeal that its duty to defend C&N had never been triggered because C&N had never notified Zurich of the Boyles’ suit and never requested that Zurich defend it. In addition, the Boyles appealed the Superior Court’s determination that Zurich had not violated M.G.L. c. 93A.
The SJC recognized long-standing Massachusetts law that insurers owe their insureds a broad duty to defend against any claims which could potentially be covered under the applicable policy. In addition, insurers also have a duty to their insureds to “effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.” Boyle v. Zurich, 472 Mass. 649 (2015), quoting M.G.L. c. 176D, § 3(9)(f) (internal quotations omitted). Zurich did not dispute that the subject policy provided for the defense of C&N, but argued that under the circumstances, Zurich was relieved of such a duty because C&N had failed to provide any notice or documentation of the Boyles’ suit as required under other provisions of the policy.
In its decision, the Court did not directly address the question of whether, under the circumstances of this case, the pre-suit notice of the accident and the 2009 notice of the damages hearing were sufficient to trigger Zurich’s duty to defend. Rather, the Court presumed that said duty had been triggered and focused on whether Zurich was excused from the duty because of the late notice of the suit, which came from a party other than the insured. Drawing on two key Massachusetts reach-and-apply cases, the Court concluded that Zurich could not disclaim its duty to defend C&N absent a showing that it had been prejudiced by C&N’s failures to comply with notice provisions. The Court agreed with the Superior Court that Zurich had not demonstrated the requisite prejudice which would excuse it from defending C&N. Further, in addition to finding that Zurich had breached its duty to defend C&N, the Court also found that by failing to make any “reasonable, prudent efforts to settle the Boyles’ suit,” Zurich breached its settlement duties. In so finding, the Court identified a number of possible actions that Zurich could have taken to protect C&N and resolve the matter, from the time it first learned of the accident in 2006 through the trial of the assigned claims.
As to the Superior Court’s finding that there was no c. 93A violation, the Court found that there was no clear error in said finding. The Superior Court had found that Zurich’s failure to defend C&N stemmed from its clerk’s decision that no action was needed upon receipt of the 2009 letters from the Boyles’ counsel, and, while “inadvertent” and “negligent,” it did not constitute an unfair or deceptive act. As to Zurich’s failure to settle C&N’s assigned claims, the Superior Court found that said failure was not made “in bad faith or based on any ulterior motive,” but was instead based on Zurich’s reading of the subject policy, which constituted “a plausible, although ultimately incorrect, interpretation” of the policy.
Despite finding no clear error in the Superior Court’s order on the c. 93A claim, the Court’s language suggests that, were it ruling de novo on that claim, it might have reached a different result. In particular, the SJC stated that while it was not disturbing the Superior Court’s ruling, it did “not share the view that Zurich’s position was ‘plausible’” regarding its duty to defend C&N and to settle the Boyles’ suit(s).
After reviewing the Superior Court’s damages assessments, the Court also ordered that over $1 million which had been deducted from the lower court’s damages award be reinstated. The result is that Zurich must pay the Boyles over $4 million, representing the amounts paid on their individual claims and the C&N claims, plus pre-and post-judgment interest - all on a claim which implicated an insurance policy with a $50,000 limit.
This case is a cautionary tale of the dangers of automated claims handling practices, like those that Zurich had in place in 2006 through at least 2009. In essence, the SJC believed that, at least in part, Zurich was placed on notice by the two brief letters sent to it by the Boyles’ counsel in 2009. Although it was undisputed that Zurich had no knowledge that suit had been filed, because those letters were sent to and received by Zurich, the SJC determined that they constituted adequate notice, even though they were never actually reviewed by anyone. And unfortunately, because of Zurich’s policy regarding closed claim files, no adjuster was even alerted to the fact that the letters had arrived. Thus, even in the absence of a showing that Zurich engaged in any unfair or deceptive conduct, the shortcomings in its document and claims handling processes resulted in a significant judgment against it which far exceeded the policy limits at issue. As many, if not all, insurers move toward a paperless claims environment, they should take care to have protocols in place to ensure that adjusters are on notice of all correspondence received in a matter, regardless of when it is received or if the matter is “closed” or not. In addition, insurers should be aware that even if they learn of a claim or suit from a party other than the insured, their duties to the insured could be implicated or triggered and they should take steps to investigate the claim. This investigation could include reaching out to the insured to determine if it knew of the claim and if it does, in fact, seek to trigger the insurer’s duties under the policy. Failure to do so could, as the Boyle case suggests, result in liability for the insurer which far exceeds the policy’s limits.
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