Avoiding liability for extracontractual damages and other punitive relief

Issue December 2010 By Jon A. Halaby

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

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.