Posts tagged "Insurance"

Philadelphia Indemnity Insurance Company v. National Union Fire Insurance Company of Pittsburgh, PA (Lawyers Weekly No. 12-083-17)

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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 2016-00045 BLS1
PHILADELPHIA INDEMNITY INSURANCE COMPANY
vs.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA
MEMORANDUM OF DECISION AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
Plaintiff Philadelphia Indemnity Insurance Company (PIIC) and defendant National Union Fire Insurance Company (National Union) each issued insurance policies to North Suffolk Mental Health Associated, Inc. (North Suffolk). PIIC issued a Commercial General Liability (CGL) policy; and National Union issued a Workers’ Compensation and General Liability (Workers’ Comp.) policy. In a case filed in the Middlesex Superior Court in 2011, captioned Estate of Stephanie Moulton v. Nicholas Puopolo, et al. (the Underlying Action), the plaintiff estate brought suit against eighteen directors of North Suffolk (the Director Defendants) asserting claims arising out of the work related death of Ms. Moulton, a North Suffolk employee. The Director Defendants tendered the claim to both PIIC and National Union. PIIC defended the claim (under a reservation of right) and National Union declined coverage. The Director Defendants’ motion to dismiss the Underlying Action was eventually allowed, after appeal to the Supreme Judicial Court (SJC). See Estate of Moulton v. Puopolo, 467 Mass. 478 (2014) (Moulton). In this action, PIIC has filed suit against National Union asserting claims for
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declaratory judgment and equitable subordination and seeking to recover the cost of its successful defense of the Underlying Action. The case is now before the court on the parties’ cross-motions for summary judgment. For the reasons that follow, National Union’s motion is ALLOWED, and PIIC’s motion is DENIED.
ADDITIONAL FACTS
The following additional facts are undisputed.
Ms. Moulton was an employee of North Suffolk, a charitable corporation that provides mental health and rehabilitation services. She was assaulted and killed by a patient while performing her job. As explained in Moulton, her estate (the Estate) filed the Underlying Action against the directors of North Suffolk and others. It alleged claims for willful, wanton, reckless, malicious and grossly negligent conduct and, also, as to the Director Defendants, breach of fiduciary duty. The complaint alleged that the Director Defendants “effectuated” policies and failed to “effectuate” other policies that caused Ms. Moulton’s death. Id. at 480. They “moved to dismiss the complaint chiefly on the grounds that, with respect to the wrongful death action, they are immune from suit, as Ms. Moulton’s employer, under the exclusive remedy provision, G.L.c. 152, § 24 of the Workers’ Compensation Act (act), and, with respect to the breach of fiduciary duty claim, they owed Moulton no such duty.” Id. The Superior Court denied the motion to dismiss; the director defendants sought interlocutory review under the doctrine of present execution; and the case was transferred to the SJC.
As relevant to this case, the SJC found that: “The complaint, fairly read, alleges that the Director Defendants, acting qua directors rather than in any other capacity, set and enforced misguided and wrongful corporate policies that resulted in Mouton’s death while in the course of
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her employment. There is no allegation that the directors undertook any action without a formal board meeting or vote, . . . to the extent that the complaint alleges that Moulton’s death arose from the adoption of or failure to adopt corporate policies, it alleges conduct by the charitable corporation that could have been occasioned only by the vote of its directors acting collectively as a board.” Id. at 488-489. It then held that, “we conclude that the director defendants were Moulton’s employer for purposes of the exclusivity provision of the act. As Moulton’s employer, the director defendants are therefore immune from suit for workplace injuries due to actions taken by the board.” Id. at 490-491.1
The Worker’s Comp. Policy
The National Union Workers’ Comp. policy was in effect when the Moulton claim was asserted. It is a standard form of Worker’s Comp. policy issued in Massachusetts. It has two coverage parts. Part One provides for payment of any benefits “required of you by the workers compensation law;” and that National Union has “the right and duty to defend at our expense any claim, proceeding or suit against you for benefits payable by this insurance. . . . We have no duty to defend a claim, proceeding or suit that is not covered by this insurance.”
Part Two provides Employers’ Liability Insurance. As explained by the SJC in HDH Corporation v. Atlantic Charter Ins. Co., 425 Mass. 433, (1997) (Atlantic Charter), the seminal decision addressing the coverage provided under a workers’ compensation policy, discussed at greater length infra: “Part Two, the employers’ liability portion of the insurance policy, is intended to provide coverage in the rare circumstance in which an employee who has affirmatively opted out [of the workers’ compensation benefits system at the time of hire] brings a tort action for personal injuries.” Id. at 439 n.11.
1 The SJC also held that, “as Moulton’s employer, the director defendants, acting as a board, had no fiduciary duty to her.” Id. at 493.
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The declarations page of the Workers’ Comp. policy identifies North Suffolk as the named insured. There are no policy provisions or endorsements that broaden the definition of named insured to include directors, officers, or employees.
DISCUSSION
PIIC first argues that since, in Moulton, the SJC held that “the director defendants were Moulton’s employer for purposes of the exclusivity provision of the act,” they might also be insureds under the Workers’ Comp. policy, even though the policy terms do not extend coverage to them; or, at least, there is a “possibility” that they would be held to be insureds in a declaratory judgment action addressing coverage issues under the Workers’ Comp. policy. PIIC next argues that there then also exists a “possibility” that the claims asserted by the Estate in the Underlying Action were covered under either Part One or Part Two of the Workers’ Comp. policy coverage provisions. PIIC then goes on to cite Billings v. Commerce Ins. Co., 458 Mass. 194, 200-201 (2010) for the long established principle that: “In order for the duty of defense to arise, the underlying complaint need only show through general allegations, a possibility that the liability claim falls within the insurance coverage.” (Emphasis supplied.) According to PIIC, given this possibility of coverage, National Union had a duty to defend the Director Defendants in the Underlying Action.
The court finds it doubtful that the SJC’s holding that, under the “so-called exclusivity provision of the act,” the directors of a corporation cannot be sued for work place injuries in the Superior Court, when they were alleged to have done nothing more than vote on corporate policies, could be interpreted to mean that the directors were additional insureds under a workers’ compensation policy. However, the court declines to address that argument. This is
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because the SJC’s decision in Atlantic Charter clearly establishes that National Union’s Workers’ Comp. policy did not provide coverage for the claims asserted by the Estate in the Underlying Action.
Claims Asserted under Part One of the Workers’ Comp. Policy
In Atlantic Charter, an employee sued its former employer HDH Corporation (HDH) for personal injuries arising from her allegedly wrongful termination; her husband also asserted claims for loss of consortium. HDH tendered the claim to its workers’ compensation carrier, Atlantic Charter, which declined coverage. The case went to arbitration and the plaintiff employee recovered. HDH then sued Atlantic Charter, claiming coverage under Part One of the policy. The SJC explained the extent of coverage provided under Part One of a workers’ compensation policy as follows:
The terms of Part One of the policy clearly limit defense and indemnity of the employer to claims for benefits required by the workers’ compensation statute. However, the employee brought a civil action seeking monetary damages, and made no claim for workers’ compensation benefits. Indeed, no matter what the allegations of the complaint, as a matter of law, workers’ compensation benefits cannot be recovered by instituting a civil action. A claim for benefits must be brought before the department and adjudicated through the statutorily prescribed workers’ compensation system. See Neff v. Commissioner of the Dep’t of Indus. Accs., 421 Mass. 70, 74 (1995) (describing procedural course for the adjudication of workers’ compensation dispute through the Department of Industrial Accidents). See also Alecks’ Case, 301 Mass. 403, 404 (1938) (under the workers’ compensation statute, an employee “acquires a right to compensation for personal injury as provided in that act, to be enforced by claim against the insurer filed with the Industrial Accident Board…. [T]he policy of the act is to deprive [the employee] of all right of action in tort against his employer for damages for an injury within the scope of the [workers’] compensation act”).
The record demonstrates that a claim for benefits was never initiated by the employee, as mandated by G.L. c. 152, § 10. Accordingly, Atlantic is correct that it had no duty to defend the civil action because the complaint did not state a claim that could result in liability which Atlantic would be obligated to pay under any reasonable interpretation of Part One of the policy. See, e.g., Jimmy’s Diner, Inc. v. Liquor Liab. Joint Underwriting Ass’n of Mass., 410 Mass. 61, 65 (1991).
425 Mass. at 433.
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In Atlantic Charter, the SJC also explained the important public policy considerations underlying the legislation that it was interpreting:
Public policy also supports our decision. The fundamental purpose of the workers’ compensation system is to make funds more readily available to injured employees. Accordingly, the Commonwealth requires all employers to provide workers’ compensation benefits to their employees. See G.L. c. 152, § 25A. As amici point out, the cost of mandatory workers’ compensation insurance is a significant aspect of the business climate of the Commonwealth. Recent legislative reforms have sought to lower the insurance rates employers must pay to provide the security of workers’ compensation benefits to their employees. See St.1991, c. 398. Requiring workers’ compensation insurers to defend civil actions outside the workers’ compensation system would represent an unwarranted expansion of coverage historically understood as provided under this mandatory form of insurance, a result which would increase insurance costs for employers, and could gut the legislative scheme for workers’ compensation. See, e.g., La Jolla Beach & Tennis Club, Inc., supra at 44, 36 Cal.Rptr.2d 100, 884 P.2d 1048.
Id. at 440.
In the present case, Moulton’s estate made no claim to recover workers’ compensation benefits2; indeed, it did not sue North Suffolk, but rather its directors, in an obvious and unsuccessful attempt to recover damages and not the benefits provided under the act.3 PIIC’s argument that the SJC’s decision in Moulton overruled the express holding in Atlantic Charter that Part One of a workers’ compensation policy only provides coverage for workers’
2 The workers’ compensation act has long been held to provide the exclusive remedy by which the estate of deceased employee can recover from his employer. See McDonnell v. Berkshire St. Ry. Co., 243 Mass. 94, 95
(1922) (“The employer who is insured under the workmen’s compensation act is relieved of all
statutory liability, including that for death of an employee under the employers’ liability act”);
Cozzo v. Atlantic Refining Co., 299 Mass. 260, 262 (1938) (“Nor can an action at law be
maintained against such employer [i.e., one who is insured under the workers’ compensation law] to recover for the death of an employee resulting from such injury [i.e., one arising out of and in
the course of his employment],” citing G. L. c. 152, 68); Ferriter v. Daniel O’Connell’s Sons,
Inc., 381 Mass. at 528 (“We acknowledge that G. L. c. 152, 1[4] and 68, bar a deceased
employee’s dependents from recovering under G. L. c. 229, 2 and 2B, for loss of consortium,
as against an employer covered by G. L. c. 152”).
3 In Peerless Ins. Co. v. Hartford Ins. Co., 48 Mass. App. Ct. 561 (2000), decided shortly after Atlantic Charter, the Appeals Court addressed a coverage dispute between an employer’s general liability insurer and its workers’ compensation insurer very much like the dispute presented by this case. There the estate of a deceased employee sued the employer. The workers compensation carrier denied coverage and the general liability carrier defended the claim. The Appeals Court held that because the estate could not bring a claim against the employer for workers compensation benefits or for wrongful death, the workers’ compensation carrier had no duty to defend and no obligations to the general liability carrier.
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compensation benefits, and those benefits can only be claimed in the Department of Industrial Accidents, simply does not parse. In holding that the Estate could not bring an action against the Director Defendants based on allegations that they had voted to adopt corporate policies that allegedly contributed to Ms. Moulton’s death, the SJC was clearly not expanding the coverage provided by workers’ compensation policies. It was also not seeking to “gut” the public policy considerations underlying the statutory scheme, which were intended to reduce the costs of this mandatory insurance coverage, by saddling workers compensation insurers with potential additional costs unrelated to the employee benefits mandated by the act. Indeed, in Moulton, the SJC was not addressing insurance at all. It was only concerned with whether the Director Defendants were subject to suit at common law by an injured employee.
In a somewhat round about argument, PIIC suggests that the Appeals Court’s decision in Norfolk & Dedham Mutual Fire Ins. Co. v. Cleary Consultants, Inc., 81 Mass. App. Ct. 40 (2011) (Norfolk & Dedham) supports its position. In furtherance of its arguments that the claims asserted in the Underlying Action were not covered, National Union quoted the following sentence from Atlantic Charter: “Indeed, no matter what the allegations of the complaint, as a matter of law, workers’ compensation benefits cannot be recovered by instituting a civil action.” 425 Mass. at 439. PIIC argues that in Norfolk & Dedham, the Appeals Court noted that an insurer that provided coverage for slander, libel, and invasion of privacy could not disclaim coverage just because these common law claims were asserted together with claims for sexual harassment before the Massachusetts Commission Against Discrimination (MCAD). In fact, in that case, the Appeals Court held that those claims could be asserted as part of a claim for sexual harassment, because they are compensable under an award for emotional distress. The Court did go on to comment that even if the claims were “viewed as a misguided effort to adjudicate
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claims of slander and invasion of privacy in an improper forum, that would not affect Norfolk’s duty to defend. An insurer’s obligation to defend is not limited to valid claims; it extends even to claims potentially dismissible for lack of subject matter jurisdiction.” 81 Mass. App. Ct. at 48-49. This comment, of course, has no bearing on the statutory scheme for workers’ compensation benefits, in which a workers compensation policy insures only those benefits provided by the act, benefits that can only be awarded by the Department of Industrial Accidents. Obviously, a covered claim filed in the wrong court still gives rise to a duty to defend. An insurer could not disclaim a duty to defend because a plaintiff mistakenly filed an action in federal court, when there was no federal jurisdiction, but the policy covered the injury alleged in the complaint. A worker’s compensation insurer does not have a duty to defend a claim filed in Superior Court for damages that are expressly not covered under the workers’ compensation system.
Claims Asserted under Part Two of the Workers’ Comp. Policy
At oral argument, PIIC acknowledged that its principle argument that the “possibility” of coverage existed and this triggered National Union’s duty to defend was based on Part One of the coverage provisions. It nonetheless also asserted that a duty to defend arose under Part Two. Here, PIIC does not argue that Moulton overturned that part of Atlantic Charter in which the SJC stated that: “Part Two, the employers’ liability portion of the insurance policy, is intended to provide coverage in the rare circumstance in which an employee who has affirmatively opted out brings a tort action for personal injuries.” Rather, PIIC argues that the Estate’s amended complaint “included claims for funeral expenses, as well as for wrongful death and pain and suffering without reference to the Wrongful Death Act, and did not indicate whether Moulton’s parents were dependent upon her for financial support. Those claims arguably fell within the
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scope of claims subject to G.L. c. 152, §§ 33, 31 and/or 32, respectively, but were presumably intended to circumnavigate the Workers’ Compensation statute entirely and therefore [because there was no allegation that Moulton had waived her rights to workers’ compensation benefits] left open the question whether Moulton had preserved her common law rights in lieu of accepting Worker’s Compensation benefits.” In consequence, until it could be established that Ms. Moulton had not affirmatively opted out of workers’ compensation coverage when she began work at North Suffolk, the possibility that claims asserted in the amended complaint were covered by the Workers’ Comp. policy existed.
However, in Moulton, the SJC summarily dismissed the suggestion that an employer/defendant had to assert non-waiver of workers’ compensation benefits as an affirmative defense. It explained that the statute (G.L. c. 152, § 24) expressly provides that the employee “shall be held to have waived his right of action at common law,” if he does not provide a written notice that he is claiming his right to opt out at the beginning of his employment. Therefore, non-waiver is not an affirmative defense, but rather it is the plaintiff that must allege in the complaint that the “right to payment under the act” was waived. 467 Mass. at 484 n. 12. This was not pled in the Estate’s amended complaint (nor could it be,) and therefore the complaint alleged no facts even suggesting a claim covered by workers’ compensation insurance. “When the allegations in the underlying complaint lie expressly outside the policy coverage and its purpose, the insurer is relieved of the duty to investigate and defend the claimant.” Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass 387, 394-395 (2003) (Internal citations and quotations omitted.)
Moreover, the issue now before the court is not whether the Estate stated a cause of action against the Director Defendants that could possibly survive a motion to dismiss. This is a
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coverage case between two insurers. PIIC issued a comprehensive general liability policy to its insured, North Suffolk. It is claiming a right to equitable subrogation or contribution from National Union in its capacity as North Suffolk’s workers’ compensation carrier. Its rights to recover against National Union are no greater than North Suffolk’s rights to demand that National Union defend the Underlying Action. Clearly, North Suffolk could not demand coverage based on the absence of an allegation that Ms. Moulton had affirmatively opted out of her rights for workers’ compensation benefits, knowing full well that she had not.
ORDER
For the foregoing reasons, National Union’s motion for summary judgment is ALLOWED and PIIC’s moiton for summary judgment is DENIED. Final judgment shall enter dismissing the complaint.
_______________________
Mitchell H. Kaplan Justice of the Superior Court
Dated: June, 13 2017

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Posted by Stephen Sandberg - July 3, 2017 at 10:06 pm

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McEvoy v. Savings Bank Life Insurance Co. of Massachusetts (Lawyers Weekly No. 12-084-17)

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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 2017-1961 BLS1
LESLIE V. McEVOY, individually and on behalf of a class of similarly situated persons,
vs.
SAVINGS BANK LIFE INSUARNCE CO. OF MASSACHUSETTS
MEMORANDUM OF DECISION AND ORDER PLAINTIFF’S MOTION FOR A PRELIMINARY INJUNCTION
The plaintiff Leslie V. McEvoy alleges that she holds a participating whole life insurance policy issued by the defendant Savings Bank Life Insurance Co. (SBLI).1 In this action, she seeks to enjoin all SBLI’s policyholders from voting on a proposed conversion of SBLI from a stock life insurance company to a mutual life insurance company. The case came before the court on June 27, 2017 on the plaintiff’s motion for a preliminary injunction enjoining the vote until additional disclosures concerning the plan of conversion demanded by her were made to SBLI’s other 480,000 policyholders. In her complaint, the plaintiff alleges that the vote on the plan of conversion is to occur at a Special Meeting of policyholders scheduled for that purpose on June 28, 2017. It appears, however, that voting has actually been underway for weeks. While the meeting was scheduled for 11:00 AM on June 28, 2017, and policyholders present at the meeting who had not previously voted could vote at that time, voting opened on May 19, 2017 and could be accomplished by mail, phone call, or on the internet, so long as the votes were
1 It appears that the plaintiff owns two policies, each in the face amount of $ 1,000, although was is pledged to a division of the State of New Hampshire.
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received in time to be counted by the time of the meeting. As a result, the majority of votes cast in this election may well have been received by SBLI management before the annual meeting. In consequence, from a practical perspective a motion brought before the court on the afternoon of June 27th to preliminarily enjoin the vote that was to be completed and tallied the following morning was not timely.
The proposed conversion of SBLI into a mutual insurance company calls for the SBLI shareholders, 30 Massachusetts banks or banks that had acquired Massachusetts banks, to receive $ 57.3 million in return for their shares in SBLI. This sum is to be financed through the issuance of Surplus Notes. While SBLI and its financial advisers have been working for some time on the sale of these Surplus Note to certain financial institutions, at oral argument the court was informed that the closing on that transaction was still two or three weeks away. In theory, therefore, the court could still issue a mandatory preliminary injunction voiding the vote, which would of course preclude any possibility that SBLI could issue the Surplus Notes on the schedule now contemplated, and ordering that revised informational materials be sent to policyholders and a new vote undertaken. The court declines to enter such an extraordinary order and, accordingly, DENIES the motion for a preliminary injunction.
Generally, it is this court’s practice to issue a comprehensive memorandum of decision when addressing a motion for preliminary relief in a case of this nature. However, in this case it appears that speed is more important than a carefully crafted explanation of the court’s reasoning, so that the plaintiff may consider any other opportunities for the relief she requested. Accordingly, what follows is a summary statement of court’s reasoning.
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DISCUSSION
Background
The history of how Louis D. Brandeis originally devised and promoted the establishment of SBLI and it then came to be reorganized on multiple occasions by the Massachusetts Legislature is set out in prior decisions, including Goldstein v. Savings Bank Life Ins. Co. of Massachusetts, 435 Mass. 760 (2002) and, on remand, the Superior Court’s decision on Cross-Motions for Summary Judgment dated July 3, 2008 (Gants, J.) (Goldstein). Its unique status as the only life insurance company previously required to conform to both G.L. c. 175 and G.L. c. 178A has been noted by the SJC. Id. at 770. Indeed, the conflicts inherent in an entity that owes obligations to shareholders and policyholders has been the catalyst for much prior litigation. It appears that more recent events have increased the shareholder banks’ desire to liquidate their interests in SBLI. First, they no longer sell a material number of SBLI policies or annuity contracts and therefore no longer have a business interest in the insurer. More critically, recent adoption of the so-called Basel III capital rules increased the risk weighting for non-publicly traded equity securities owned by banks, like the shares of SBLI, from 100% to 400%. In consequence, SBLI’s bank shareholders must increase the capital held against their investment in SBLI by a factor of four.
Following meetings with financial, actuarial and legal advisors, the plan to convert SBLI to a mutual insurance company wholly owned by its policyholders by having SBLI purchase all shares was adopted by the interested parties as the most expedient means for the shareholders to exit, while permitting SBLI to continue to serve the purpose for which it was founded–providing
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secure, low-cost life insurance. The plan was unanimously approved by SBLI’s nine member board of directors. While these directors are elected by the shareholder banks, five of the members are independent. The shareholders then voted to approve the conversion. The plan also had to be approved by the three member Policyholders Advisory Board (PAB), a statutorily mandated body established by the Legislature in connection with a 2010 reorganization of SBLI, whose mission is to protect the interests of policyholders and promote SBLI’s purpose. The current chair of the PAB is a former Massachusetts Commissioner of Insurance. The PAB unanimously approved the plan of conversion in October, 2016, and, following its review of a fairness opinion prepared by the actuarial firm Milliman, Inc. that opined that the conversion was fair to policyholders on an actuarial basis, once again in January, 2017. The plan of conversion still, however, required the approval of the Commissioner of Insurance. See G.L. c. 175, § 19D(2). After nearly four months of review, by letter dated May 25, 2017, the Commissioner also approved the plan, subject to conditions not relevant to the pending motion. Among the findings that the Commissioner was required to make in order to approve the conversion is that the plan is “not prejudicial to the policyholders of such company or to the insuring public.” Id.
With respect to this finding, the Commissioner noted that SBLI management was of the view that participating policyholders and the shareholders have an interest in SBLI’s surplus, while the staff of the Division of Insurance is of the view that only the shareholders have an interest in the surplus. The $ 57.3 million to be paid to the shareholders represented an amount substantially less than the percentage of the surplus that SBLI attributed to the shareholders.
Of particular note to the pending motion, the Commissioner observed that the annual costs of the interest to be paid on the $ 57.3 million of Surplus Notes, plus the creation of reserves necessary to repay the Notes on maturity (something in the nature of a sinking fund), exceeds the
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amount of the dividends currently being paid to shareholders. However, because of the new Basel III requirements, pursuant to which the bank shareholders will have to increase their capital in respect of the shares by a multiple of four, their cost of holding SBLI shares will also increase by a factor of four. In consequence, shareholder dividends could be expected to increase by the same factor, an amount which would not violate statutory limitations on dividends that shareholder owned life insurance companies may issue. At that point, the amount of annual dividends paid to the banks would substantially exceed the interest and reserve expenses associated with the new Surplus Notes.
The last step in the plan of conversion is a vote to approve the plan of conversion by the policyholders; a majority of policyholders who vote is required for approval. According to the Chair of the PAB, the Commissioner reviewed and approved the disclosures sent to the policyholders soliciting their votes for the plan of conversion (hereafter referred to as the Notice).
Analysis of the Claims
It is important to note that the issue before the court on this motion for a preliminary injunction is not whether the plan of conversion is good, bad, or indifferent, as it affects the interests of policyholders, including those that have participating policies and receive annual dividends, as well as those that hold policies that do not provide a right to annual dividends. Rather, the question is whether any disclosures in the Notice are materially misleading, either by what they say or omit to say. It is also notable that the plaintiff’s complaint does not allege a breach of fiduciary duty by SBLI Board or the PAB. This case, as presently pled, is solely about the nature of the disclosures.
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The parties have not provided the court with any case that addresses the standard to apply in assessing the disclosures that should be made to policyholders when a stock insurance company is converted to a mutual company. The parties have both relied on a Superior Court decision—Silverman v. Liberty Mut. Ins. Co., 13 Mass. L.Rptr. 303 (2001) (Gants, J.)—to define the standard. That case, however, addressed the demutualization of an insurance company. In consequence, in that situation the policyholders clearly owned all of surplus and held voting rights, both of which they would be conceding in a demutualization. This case presents the reverse situation, further complicated by the unique structure of SBLI. Policyholders will be acquiring all voting rights and full ownership of any surplus available for distribution to equity holders on liquidation. The policyholders will obviously not receive any cash in this transaction, nor will they be required to pay for the shares that will be acquired by SBLI, although the value of the entity which they will then own will certainly be affected by the amount paid to the departing shareholders. Nonetheless, Silverman provides a useful guide. There Justice Gants wrote:
A mutual insurer has a duty to provide its policyholders with full and honest disclosure of material facts relating to a transaction that requires policyholder approval. .. .An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . . The standard contemplates a showing of substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information available.” (Internal citations and quotations omitted.)
It is, perhaps, worthy to note that this description of the law of disclosure was borrowed from securities cases in which the person receiving the disclosure was truly an investor primarily concerned with a monetary return on the investment. Here, the recipients of the information are policyholders who purchased a life insurance policy (or annuity contract) specifically designed to
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be low cost and secure, in the sense that if a claim was made for insurance benefits or redemption it would be paid. Only those policyholders that owned participating policies had any expectation of dividends (which would be modest), and no expectation that SBLI would ever be liquidated and the policyholder receive some part of surplus.
With these standards in mind, the court turns to the areas of disclosure in the information sent to policyholders soliciting their votes (hereafter the Notice) that the plaintiff alleges were materially misleading.
The NOLs
The plaintiff’s first claim of “egregiously” misleading disclosure involves so-called NOLs. SBLI has $ 219 million in Net Operating Losses (NOLs) that could be used to offset future profits of the company for federal income tax purposes. SBLI management’s financial forecast assumes that SBLI will be in a position to begin making use of these NOLs, subject to certain restrictions, in 2021. The Notice discloses that: “If the Internal Revenue Service . . . determines that the Conversion constitutes a change of control . . . SBLI’s ability to utilize these NOLs will be limited.” The Notice went on to explain that SBLI believes that the Conversion would not constitute a change in control, but the IRS might take a different position. The Notice fairly disclosed the value of the NOLs to SBLI and that the conversion places them at risk. The Notice appropriately takes no position on the likelihood of IRS audit in the years 2021 and subsequent when SBLI hopes to begin to be able to make use of the NOLs or the ultimate outcome of any dispute with the IRS concerning “change of control” and how that would limit SBLI’s to use the NOLs to offset taxable income. It appears that the plaintiff’s real argument as it relates to the NOLs is not the disclosure, but rather whether the conversion is too risky because this contingent asset might be forfeit. That risk is, however, is sufficiently disclosed.
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The Piper Jaffray Fairness Opinion
The plan of conversion calls for the shareholders to receive $ 500 for each Class A share (the voting shares, of which there are only one for each shareholder) and $ 128 for each Class B share. As part of the conversion process, the shareholders received a fairness opinion from the investment banking firm Piper Jaffray to the effect that the plan was fair to shareholders. The Piper Jaffray opinion was not included in the Notice sent to the policyholders. The Notice provided a copy of the Milliman opinion, which addresses the fairness of the conversion to the policyholders from an actuarial point of view.
The plaintiff argues that the failure to include the Piper Jaffray opinion was materially misleading because Piper Jaffray arrived at a number of values for a Class B share, one of which was based on a discounted cash flow analysis that yielded share values of $ 85.10 to $ 92.87. However, another version of the cash flow analysis provided values of $ 174.64 to $ 191.30. Under the Piper Jaffray analyses any changes in operational results that result in changes in cash flow produce very substantial changes in projected share values because Piper Jaffray was using discount rates of 14% to 18% based on a capital asset pricing model which was undoubtedly affected by the SBLI’s modest size, as well as the completely illiquid nature of a share of SBLI stock. This court questions whether a discounted cash flow analysis of after-tax cash flows theoretically available to equity holders of SBLI is particularly useful to a shareholder or a policyholder.2 However, from a policyholder’s perspective it would have little to do with a
2 Piper Jaffray noted that the illiquidity of an investment in SBLI “is the result of SBLI’s unique ownership structure, in which ownership is restricted to Massachusetts-chartered savings banks and acquirers thereof. Based on academic research, institutional studies, market, examples of discounts on illiquid securities, and Piper Jaffray’s professional experience, Piper Jaffray has applied an illiquidity discount of 30%, and such discount is incorporated in the numerical results for all of the valuation methodologies enumerated below.”
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policyholder’s principal concerns: will SBLI be able to pay any claims, issue a dividend if the policy is participating, or redeem the policy if it is a whole life policy.
According to SBLI, the Commissioner recommended against inclusion of the Piper Jaffray opinion in the Notice. The court can understand why. While a shareholder bank voting in favor of the plan of conversion must have support for its decision, because it has fiduciary obligations to its own shareholders, it is unclear how this information will materially assist a policyholder in addressing the impact of the conversion on policyholders’ interests. The PAB withheld its final approval of the plan until it received an opinion from Milliman, one of the largest actuarial firms in the world, that the conversion was fair to policyholders from an actuarial point of view.
The Costs of the Surplus Note
The plaintiff complains about a failure to disclose the costs to SBLI of the Surplus Notes. Frankly, the court does not fully understand the plaintiff’s argument in this respect. The Notice includes pro formas that assume completion of the conversion and clearly show that $ 57.3 million of Surplus Notes will be issued and that they will bear interest at 6% a year, which is a rate in excess of that which management asserts it will have to offer to sell the Notes. The pro formas also reflect approximately $ 6.5 million of transaction related expenses. It is self-evident that the Notes will have to be repaid on maturity.
The court does believe that the Notice could have been more clear in comparing the annual cost associated with the debt service on the Notes and the creation of a reserve (similar to a sinking fund) to repay the Notes on maturity with the current amount of the dividends being paid to the shareholders, which is much less. The assumption that makes the conversion
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attractive to policyholders, and was important to the Commissioner, is that the SBLI Board, which is controlled by the shareholders, will vote to increase the dividends as a consequence of the very substantial increased capital requirements that the banks will incur with respect to their SBLI shares as a result of Basel III. It seems that this is the most relevant information that a policyholder, at least a participating policyholder hoping for dividends, would want. The court believes that this could have been more clearly stated in the Notice, but does not find what is stated materially misleading.
The Dilution of Participating Shareholders Interest in Surplus
The plaintiff argues that the Notice should disclose that participating policyholders will suffer dilution of their dividend rights. The court finds that this argument is simply in error. There is nothing in the conversion that will transform non-participating policies into policies that will be entitled to dividends.
The Quoted Passage from Goldstein
The plaintiff argues that it was misleading to quote a passage from Goldstein which reads: “this Court declares as a matter of law that the precise percentage of original surplus that is attributable to stockholder equity is 37.5 percent.” The quote is found in that part of the Notice that describes SBLI’s historic method of accounting for its surplus following a 1992 reorganization. There, the Notice explains that beginning with the 2001 financial statements, the amount of surplus attributable to the shareholders has been based on the assumption that the shareholders’ interest in the surplus following the 1992 reorganization was 37.5% or approximately $ 39.5 million. The Notice comments that this assumption was “affirmed” by that
11
statement from the Goldstein opinion quoted above. The use of the word “affirmed” is perhaps a bit much, but it is not materially misleading. Moreover, the plaintiff has not argued that $ 57.3 million is more than the shareholders’ interest in the surplus. For its part, the Division of Insurance believes that the shareholders would be entitled to all of the surplus if SBLI liquidated. Arguably, a plan of conversion that allowed the shareholders to withdraw all of their ownership in the surplus on the sale of their shares to SBLI would be fair from a monetary point of view.
Miscellaneous
The plaintiff makes a number of arguments that appear to assert mismanagement of SBLI. Whether those complaints are valid cannot inform the question of whether the Notice is materially misleading. If the conversion succeeds, the policyholders will have voting control over SBLI and can replace management.
* * *
In sum, the court finds that the plaintiff is not likely to succeed on the merits of her claim that: “The Notice prominently and falsely states to Policyholders that ‘the premiums, benefits, values, guarantees and dividend rights of your insurance policies or annuity contracts WILL NOT be reduced, changed, or affected in any way as a result of the Conversion.’” It appears to this court that this statement read in the context of the entire Notice is not materially misleading. The policies will not be affected. The policyholder claims will be superior to claims made under the Surplus Notes. Dividend rights afforded participating policyholders are also not directly affected, although undoubtedly indirectly affected by the future profitability of SBLI, but as to that, the expenses and risks associated with the issuance of the Notes are generally disclosed.
12
Irreparable Injury
To succeed on a motion for a preliminary injunction, the moving party bears the burden of showing: (1) a likelihood of success on the merits of its claim; (2) that it will suffer irreparable harm if injunctive relief is not granted; and (3) that its harm, if injunctive relief is denied, outweighs any harm that would be suffered by the party enjoined, if the injunction issued. See Boston Police Patrolmen’s Ass’n, Inc. v. Police Dept. of Boston, 446 Mass. 46, 49-50 (2006); Packaging Indus. Group. Inc. v. Cheney, 380 Mass. 609, 616-617 (1980).
In this case, weighing the harm that would be inflicted on not only SBLI, but also potentially on all of the 480,000 other policyholders of SBLI, if the injunction issues, against plaintiff’s alleged harm, suggests to the court that it would be highly improvident to enter an injunction effectively delaying this transaction for an indefinite period, if not putting the entire conversion at risk. The court does not yet know whether the policyholders voted to approve the plan of conversion. If they did not, the motion is moot. If they did, the costs of vacating the results of the vote, revising the Notice, and beginning the process anew could be enormous. In addition to which, further delay could well increase the interest rates required to place the Surplus Notes in the current environment of generally rising interest rates (the Federal Reserve Bank increased rates again only two weeks ago). Potentially, an injunction could make institutional investors now interested in buying the Notes wary.
It appears to the court, that most purchasers of SBLI policies are primarily concerned with the premium cost and security of their policies, rather than their interest in SBLI’s surplus in the unlikely event of SBLI’s liquidation. Eliminating the bank shareholders, who are not policyholders and no longer market SBLI policies or annuity contracts, but nonetheless have
13
voting control over SBLI and fiduciary duties to their own constituencies will be beneficial to policyholders. SBLI could then be managed exclusively for the benefit of the policyholders that will own it. The court cannot help but note that the only plaintiff in this case owns only two $ 1,000 policies, one of which she pledged. Given the nature of the allegedly misleading statements about which the plaintiff complains and the potential of undoing this transaction that most policyholders may well find favorable (even if the Piper Jaffray opinion were attached to the Notice), or, at least, making it far more costly, the court declines to enter the extraordinary relief requested.
Moreover, the underlying theme of the plaintiff’s complaint is that this conversion was intended to unfairly further the interests of the shareholders at the expense of the policyholders. While there is no claim for breach of fiduciary duty against the SBLI Board asserted, that is the underlying subtext. All of the shareholders who will be receiving cash for their shares are Massachusetts banks or acquirers of Massachusetts banks. If the conversion results in the unlawful transfer of value from the policyholders to the shareholders, there are other claims that could, at least in theory, be asserted.
The court finds that the potential harm that would arise from the entry of a preliminary injunction undoing the vote and undoubtedly the issuance of the Surplus Notes outweighs the potential irreparable harm that would result from its entry.
14
ORDER
For the foregoing reasons, the plaintiff’s motion for a preliminary injunction is DENIED.
____________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: June 30, 2017

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Posted by Stephen Sandberg - July 3, 2017 at 6:32 pm

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Mount Vernon Fire Insurance Company v. Visionaid, Inc. (Lawyers Weekly No. 10-108-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

SJC-12142

MOUNT VERNON FIRE INSURANCE COMPANY  vs.  VISIONAID, INC.[1]

Suffolk.     December 5, 2016. – June 22, 2017.

Present:  Gants, C.J., Lenk, Hines, Gaziano, Lowy, Budd, & Cypher, JJ.

Insurance, Insurer’s obligation to defend.

Certification of questions of law to the Supreme Judicial Court by the United States Court of Appeals for the First Circuit.

Kenneth R. Berman (Heather B. Repicky also present) for the defendant.

James J. Duane, III (Scarlett M. Rajbanshi also present) for the plaintiff.

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Posted by Stephen Sandberg - June 22, 2017 at 5:46 pm

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Chamberland v. Arbella Mutual Insurance Company (Lawyers Weekly No. 11-077-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

16-P-861                                        Appeals Court

HEATHER CHAMBERLAND  vs.  ARBELLA MUTUAL INSURANCE COMPANY.

No. 16-P-861.

Bristol.     February 1, 2017. – June 9, 2017.

Present:  Carhart, Massing, & Henry, JJ.[1]

Insurance, Underinsured motorist, Arbitration.  Contract, Insurance, Arbitration.  Waiver.  Collateral Estoppel.  Judgment, Preclusive effect.  Arbitration.  Practice, Civil, Summary judgment, Waiver.

Civil action commenced in the Superior Court Department on March 4, 2015.

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Posted by Stephen Sandberg - June 12, 2017 at 6:04 pm

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Chamberland v. Arbella Mutual Insurance Company (Lawyers Weekly No. 11-077-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

16-P-861                                        Appeals Court

HEATHER CHAMBERLAND  vs.  ARBELLA MUTUAL INSURANCE COMPANY.

No. 16-P-861.

Bristol.     February 1, 2017. – June 9, 2017.

Present:  Carhart, Massing, & Henry, JJ.[1]

Insurance, Underinsured motorist, Arbitration.  Contract, Insurance, Arbitration.  Waiver.  Collateral Estoppel.  Judgment, Preclusive effect.  Arbitration.  Practice, Civil, Summary judgment, Waiver.

Civil action commenced in the Superior Court Department on March 4, 2015.

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Posted by Stephen Sandberg - June 9, 2017 at 10:07 pm

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Nguyen v. Arbella Insurance Group (Lawyers Weekly No. 11-064-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

16-P-834                                        Appeals Court

VINCENT NGUYEN  vs.  ARBELLA INSURANCE GROUP.[1]

No. 16-P-834.

Middlesex.     February 16, 2017. – May 23, 2017.

Present:  Kafker, C.J., Wolohojian, & Sacks, JJ.

Insurance, Insurer’s obligation to defend, Defense of proceedings against insured, Homeowner’s insurance, Business exclusion.  Contract, Insurance.  Practice, Civil, Summary judgment.

Civil action commenced in the Superior Court Department on April 11, 2014.

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Posted by Stephen Sandberg - May 23, 2017 at 3:04 pm

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The Hanover Insurance Group, Inc. v. Raw Seafoods, Inc. (Lawyers Weekly No. 11-048-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

15-P-1554                                       Appeals Court

THE HANOVER INSURANCE GROUP, INC.  vs.  RAW SEAFOODS, INC.

No. 15-P-1554.

Suffolk.     September 16, 2016. – April 26, 2017.

Present:  Agnes, Neyman, & Henry, JJ.

Insurance, General liability insurance, Coverage.  Words, “Occurrence.”

Civil action commenced in the Superior Court Department on September 21, 2012.

The case was heard by Christine M. Roach, J., on motions for summary judgment.

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Posted by Stephen Sandberg - April 27, 2017 at 11:41 pm

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Liberty Mutual Insurance Co. v. Peoples Best Care Chiropractic and Rehabilitation, Inc., et al. (Lawyers Weekly No. 12-047-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1684CV01239-BLS2
____________________
LIBERTY MUTUAL INS. CO.
v.
PEOPLES BEST CARE CHIROPRACTIC AND REHABILITATION, INC.; PLEASANT VALLEY CHIROPRACTIC LLC; and RAGHUBINDER BAJWA, M.D., P.C.
____________________
MEMORANDUM AND ORDER ALLOWING PLAINTIFF’S
MOTION FOR SUMMARY JUDGMENT
This lawsuit concerns the rates that Liberty Mutual Insurance Company pays to chiropractic clinics under Personal Injury Protection (“PIP”) benefit provisions in personal automobile insurance policies. Liberty seeks a declaration that an Illinois court’s final judgment that approved the settlement of a nationwide class action regarding these rates is entitled to full faith and credit in Massachusetts and binds the three Defendants, who did not opt out of the Illinois proceeding and therefore are members of the plaintiff class in that case. Defendant Raghubinder Bajwa, M.D., P.C., was defaulted for failing to answer the complaint. Defendants Peoples Best Chiropractic and Rehabilitation, Inc. (“PBC”) and Pleasant Valley Chiropractic LLC (“PVC”) (collectively, the remaining “Defendants”) oppose Liberty’s request and assert counterclaims seeking to bar Liberty from implementing the settlement.
The Court concludes that Liberty is entitled to summary judgment in its favor on all claims. With respect to Liberty’s affirmative claim, the Court concludes that there is an actual controversy between the parties and that the Illinois final order and judgment is entitled to full faith and credit in Massachusetts courts. In addition, Liberty is entitled to judgment as a matter of law on Defendants’ counterclaims. Defendants sought leave to conduct certain discovery before the Court decided Liberty’s summary judgment motion. The Court denies this request because none of the discovery sought by Defendants concerns any factual issue relevant to whether Liberty is entitled to summary judgment.
1. Factual Background. Liberty was the defendant in a multi-state class action filed in Illinois state court to challenge the way Liberty determines what rates it will pay to chiropractors and other medical care providers under the no-fault PIP
– 2 –
provisions of personal automobile insurance policies. The Illinois case was captioned Leonon Chiropractic Clinic, P.C. v. Liberty Mutual Insurance Company and docketed as Illinois Circuit Court for St. Clair County, no. 14-L-52.
Liberty compares billed charges for medical treatment to a database of charges that Liberty believes are for similar services provided in the same geographic area. Since 2011 Liberty has done so using data maintained by a non-profit company called FAIR Health, Inc. Liberty generally refuses to pay rates any higher than the 80th percentile of similar charges according to the FAIR Health data. The plaintiffs in the Illinois case claimed that this practice was unlawful.
The parties to the Illinois lawsuit entered into a Stipulation of Settlement in October 2014 that would resolve all claims on behalf of a proposed class. The “settlement class” included subclasses of policyholders, claimants, and medical providers in thirty-eight states, including Massachusetts. The provider subclass consisted of medical care providers that provided PIP-covered treatment from June 25, 2008, through October 31, 2014, and had their requests for reimbursement reduced by Liberty as a result of its use of a computerized database.
The essence of the proposed settlement was that the parties agreed to the method that Liberty would use to determine the reasonableness of charges for covered treatment during the five years after October 31, 2014. The settlement agreement provided that, if the class were certified and the settlement were approved, then the class members would stipulate that Liberty’s determination of the reasonableness of charges for future claims during this five-year period using the agreed-upon method would be lawful, release all claims arising from payments by Liberty made on or before October 31, 2014, and agree not to sue Liberty to contest its determination of the reasonableness of future charges using the agreed-upon method.
After the Illinois court preliminarily approved the settlement, a court-approved notice was sent to each potential class member, including PBC and PVC. This notice was sent to Defendants at the same addresses they used when billing Liberty; it is undisputed that the notice was sent to the correct addresses. Defendants had the opportunity to opt out of the proposed class, but they did not do so.
– 3 –
At the final settlement hearing, Attorney Brian McNiff (who now represents PBV and PVC in this case) objected to the settlement on the grounds that it was unfair to Massachusetts class members. The Illinois court overruled all objections, certified the proposed class, and approved the settlement in February 2015. That decision was affirmed on appeal in February 2016.
2. Actual Controversy. There is an actual controversy between the parties regarding the enforceability of the Illinois final order that can be resolved by declaring the rights of the parties in accord with G.L. c. 231A.
Since the Illinois class action settlement was approved in February 2015, Defendants have brought more than thirty lawsuits against Liberty in Massachusetts district courts in which Defendants have challenged Liberty’s payment of less than the full face amount of a PIP charge. Liberty contends that such claims are barred by the covenant not to sue in the Illinois class action settlement, and that the final order by the Illinois court is enforceable in Massachusetts under the Full Faith and Credit clause of the United States Constitution. Defendants contend that the final order approving the Illinois class action settlement is not enforceable in Massachusetts and that they are not bound by it.
The fact that Defendants have no pending lawsuits against Liberty does not put an end to the actual controversy regarding whether the Illinois final order is valid and enforceable against Massachusetts class members like the Defendants. Cf. St. George Greek Orthodox Cathedral of Western Mass., Inc. v. Fire Dept. of Springfield, 462 Mass. 120, 124 (2012) (actual controversy existed as to validity of city ordinance regarding automatic fire alarm systems, even if city had not commenced any enforcement action against plaintiff).
Defendants are continuing to provide chiropractic services and thus are quite likely to continue seeking reimbursement from Liberty under PIP benefits provided to Massachusetts drivers. It is evident that Defendants will continue to dispute whether Liberty is entitled to determine the reasonableness of Defendants’ charges using the method that Defendants and all other class members stipulated to in the Illinois proceeding. Indeed, Defendants own counterclaims in this action—in which they claim that Liberty violates Massachusetts law if it complies with the terms of
– 4 –
the Illinois final order—confirm that there remains a live, actual controversy between the parties.
3. Full Faith and Credit. The undisputed facts show that the Illinois final order and judgment is entitled to full faith and credit in Massachusetts courts and that Defendants, as members of the plaintiff class in the Illinois proceeding, are bound by that order and by the covenant not to sue Liberty.1
“[T]he full faith and credit clause of the United States Constitution, art. IV, § 1, requires Massachusetts courts to recognize a final judgment obtained in another State as long as the judgment-rendering State possessed personal jurisdiction over the parties and jurisdiction over the subject matter of the action in which the judgment was rendered.” Bishins v. Richard B. Mateer, P.A., 61 Mass. App. Ct. 423, 428 (2004). “The Constitution’s Full Faith and Credit Clause is implemented by the Federal Full Faith and Credit Statute, 28 U.S.C. § 1738.” Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 80 (1984). Under that statute, “a judgment entered in a class action, like any other judgment entered in a state judicial proceeding, is presumptively entitled to full faith and credit” in every other court in the United States. Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 374 (1996).
3.1. Due Process and Personal Jurisdiction. Defendants’ assertion that it would violate due process for them to be bound by the Illinois final order is without merit. A state court may bind an absent plaintiff in a class action “even if he or she lacks minimum contacts with the forum, so long as basic due process protections are provided.” Moelis v. Berkshire Life Ins. Co., 451 Mass. 483, 486-487 (2008). Due process is satisfied so long as members of a plaintiff class are given notice of the proceeding, an opportunity to opt out of the class, and “an opportunity to be heard and participate in the litigation, whether in person or through counsel.” Philips Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985).
1 At oral argument Liberty waived the portion of its prayer for relief seeking a declaration that the Illinois final order enjoins Defendants from bringing lawsuits in Massachusetts or elsewhere. It is not at all clear that “a state-court injunction barring a party from maintaining litigation in another State” must be enforced under the Full Faith and Credit Clause. See Baker v. General Motors Corp., 522 U.S. 222, 235-236 & n.9 (1998). But, as Liberty recognized by waiving this prayer for relief, the Court can resolve the current controversy between the parties without reaching that issue.
– 5 –
The record shows, and the Illinois appellate court found, that all of these due process requirements were satisfied in this case. Both Defendants were given notice of the lawsuit and of the proposed class action settlement. Defendants were told they could opt out of the class, and took no action to do so. They were represented by class counsel. The Illinois court expressly found that the class members received adequate representation. And Defendants had the opportunity to lodge an objection to the proposed settlement, by themselves or through counsel of their choice. Nothing more was required to satisfy due process.
Defendants received adequate notice of the class action. Service of the notice by first class mail to Defendants’ correct address was sufficient because it was “reasonably calculated” to inform Defendants of the pending class action and proposed settlement, and of their opportunity to raise objections. Town of Andover v. State Financial Svcs., Inc., 432 Mass. 571, 574-575 (2000), quoting Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950); accord Phillips Petroleum, 472 U.S. at 812-814 (notice to members of putative class of plaintiffs by first class mail with opportunity to opt out satisfies due process). Liberty is not required to present direct evidence that Defendants in fact received the notice. Id.
Defendants’ complaint that the Illinois court nullified certain opt-out requests by Massachusetts medical providers and their assertion that the court barred Defendants from seeking legal advice from their own lawyers mischaracterizes what actually happened in the Illinois proceeding. In its final order and judgment, the Illinois found that three Massachusetts law firms, including the firm that now represents Defendants in this action, had sent “materially false and misleading” descriptions of the proposed class action settlement to medical providers in Massachusetts. As a remedy, the court invalidated the roughly 500 opt-out notices that had been submitted by Massachusetts providers and ordered that those providers be provided with a curative notice regarding the proposed settlement and given additional time to decide whether they still wished to opt out. Roughly 300 providers who received the curative notice again opted out. None of that affected Defendants, because they had never opted out in the first place. The Illinois court also barred the lawyers from reiterating the substance of any of the particular
– 6 –
statements that the court specifically found to be false or misleading. Nothing in the Illinois order barred Defendants from speaking with their attorneys, however. Defendants’ assertion that their lawyers were subject to a complete gag order and not allowed to speak with their clients is incorrect.
3.2. Consistency with Massachusetts Law. Defendants’ assertion that the Illinois judgment violates Massachusetts law and therefore is not entitled to full faith and credit in Massachusetts is also without merit.
First, the Illinois settlement does not rewrite the standard Massachusetts Automobile Insurance Policy and thus did not have to be approved by the Massachusetts Commissioner of Insurance. The standard policy provides that PIP benefits include payment of “all reasonable expenses incurred as a result of the accident for necessary medical, surgical, x-ray and dental services.” This coverage is mandated by statute. See G.L. c. 90, § 34A (definition of “personal injury protection”) and § 34M (mandating PIP benefits). An insurer providing PIP benefits is not required to pay whatever amount a medical provider chooses to bill; only reasonable expenses need be paid. Columbia Chiropractic Group, Inc. v. Trust Ins. Co., 430 Mass. 60, 64 (1999); accord Boston Medical Ctr. Corp. v. Secretary of Exec. Office of Health and Human Svcs., 463 Mass. 447, 456-457 (2012) (statute requiring Medicaid program to reimburse hospitals’ “reasonable” costs does not mandate reimbursement of actual but unreasonable costs).
Nothing in the settlement agreement approved in the Illinois judgment modifies Liberty’s obligation under the standard policy to pay “reasonable expenses.” To the contrary, the approved settlement merely reflects an agreement as to how Liberty may go about determining whether payment requests by medical providers are reasonable or not. Nothing in the standard policy or the underlying statute bars an auto insurer and a single medical provider from reaching agreement as to what range of rates both sides consider to be reasonable for purposes of paying PIP benefits. The mere fact that the Illinois judgment resolved a class action, rather than a dispute with a single medical provider, is immaterial.
Second, the stipulation of settlement approved by the Illinois court does not appear to violate G.L. c. 176D, § 3A. The settlement provides that Liberty may
– 7 –
determine what constitutes a reasonable charge for a covered treatment using any of several different methods, including by paying “the amount authorized by a written PPN or PPO agreement to which the Medical Provider is a party.” The Court agrees with Defendants that, if this provision allowed Liberty to take advantage of low rates that some preferred provider network or organization had negotiated with some insurer other than Liberty, then it would violate § 3A. In relevant part, that statute bars insurers from setting “the price to be paid to any health care facility or provider by reference to the price paid, or the average of prices paid, to that health care facility or provider under a contract or contracts with any other nonprofit hospital service corporation, medical service corporation, insurance company, health maintenance organization or preferred provider arrangement. G.L. c. 176D, § 3A, clause (iii). But the Court construes this provision only as allowing Liberty to hold a medical provider to rates set in a contract between Liberty and a PPN or PPO in which the medical provider is a member. Construed in this manner, the provision does not violate § 3A.
4. Disposition of Counterclaims. The rulings above also dispose of Defendants’ three counterclaims.
In Count I, Defendants claim that the Illinois settlement violates G.L. c. 176D, § 3A, because it allows Liberty to force medical providers to accept payment based on prices paid under contracts with insurers other than Liberty. As explained above, the Court construes the disputed settlement provision only as allowing Liberty to hold medical providers to rates established in contracts to which Liberty is a party. This claim therefore fails as a matter of law.
In Count II, Defendants claim that the Illinois settlement has the effect of rewriting the standard Massachusetts Automobile Insurance Policy and therefore, under G.L. c. 175, § 113A, cannot take effect in Massachusetts unless and until it is reviewed and approved by the Commissioner of Insurance. As discussed above, Defendants mischaracterize the Illinois settlement. The agreement approved by the Illinois court regarding what rates are reasonable does not rewrite the standard policy provision requiring that as part of any PIP benefits Liberty must pay reasonable medical expenses. This claim also fails as a matter of law.
– 8 –
Finally, in Count III Defendants allege that Liberty violated the Illinois final order “by asserting that it is the provider whose participation in the Class Settlement controls the payment of future benefits.” The Illinois class action was brought on behalf of medical providers. The settlement approved by the Illinois court was a settlement in which Liberty and all participating medical providers (including Defendants) agreed what payment levels would be deemed “reasonable” under PIP benefit provisions in automobile policies. The settlement class approved by the Illinois court included a policyholder subclass, a claimant subclass, and a provider subclass. All members of the provider subclass, including Defendants, are bound by the settlement agreement. Liberty has not violated the Illinois court’s order by accurately explaining what that order provided. This claim also has no merit as a matter of law.
ORDER
Plaintiff’s motion for summary judgment is ALLOWED. Final judgment shall enter dismissing Defendants’ counterclaims with prejudice and also declaring that: (1) the Final Order and Judgment entered in Lebanon Chiropractic LLC v. Liberty Mutual Ins. Co., Illinois Circuit Court for St. Clair County, civil action no. 14-L-521, is entitled to full faith and credit in the courts of the Commonwealth of Massachusetts; and (2) Defendants Peoples Best Care Chiropractic and Rehabilitation, Inc., Pleasant Valley Chiropractic LLC, and Raghubinder Bajwa, M.D., P.C., are bound by the terms of the Lebanon Chiropractic Final Order and Judgment.
April 7, 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

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Posted by Stephen Sandberg - April 27, 2017 at 8:06 pm

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Caira v. Zurich American Insurance Co. (Lawyers Weekly No. 11-045-17)

Posted by Stephen Sandberg - April 21, 2017 at 5:25 pm

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Holyoke Mutual Insurance Company in Salem, et al. v. Vibram USA, Inc. (Lawyers Weekly No. 12-031-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 15-2321 BLS1
HOLYOKE MUTUAL INSURANCE COMPANY IN SALEM and MARYLAND CASUALTY COMPANY
vs.
VIBRAM USA, INC.
MEMORANDUM OF DECISION AND ORDER
ON CROSS-MOTIONS FOR SUMMARY JUDGMENT ON RECOUPMENT AND RECOVERY OF DEFENSE COSTS
INTRODUCTION
This action arises out of a coverage dispute between the plaintiff insurance companies, Holyoke Mutual Insurance Company in Salem (Holyoke)1 and Maryland Casualty Company (Maryland) (individually an Insurer, and collectively the Insurers), and the defendant, Vibram USA, Inc. (Vibram). Each of the insurers issued commercial general liability policies to Vibram (or its affiliate) (the Policies).2 An action was filed against Vibram in the United States District Court for the Western District of Washington at Tacoma captioned: Tefere Abebe Bikila, and others, v. Vibram, case no. 3:15-cv-05082-RBL (the Underlying Action). Vibram asserted coverage under the Policies and tendered defense of the Underlying Action to the Insurers. The
1 Holyoke has been replaced as a plaintiff in this action by its successor, Country Mutual Insurance Company. For consistency, the court will continue to refer to it as Holyoke in this Memorandum of Decision and Order.
2 Holyoke issued policies to Vibram for several years, while Maryland issued policies to an affiliate of Vibram,Vibram Five Fingers, LLC. It is not necessary to distinguish between Vibram and its affiliate for the purposes of this motion, and the court will refer to them collectively as Vibram. Additionally, for purposes of this motion the relevant policy language in all of the policies is identical, and is it also unnecessary to distinguish among policy years. The court will therefore simply refer to the Holyoke and Maryland policies collectively as the Policies.
2
Insurers each sent a “reservation of rights” letter to Vibram in which they agreed to provide its defense to the claims asserted in the Underlying Action, but also maintained that coverage did not exist under the Policies and reserved their rights to bring a declaratory judgment action and seek reimbursement for defense costs advanced. The Insurers then filed this declaratory judgment action seeking a declaration that the claims asserted against Vibram in the Underlying Action are not covered under the Policies; Vibram counterclaimed for a declaration that they are. In a Memorandum of Decision and Order on Cross-Motions for Summary Judgment and Partial Summary Judgment originally issued on August 17, 2016 (the Decision), this court held that the Policies do not provide coverage for the claims asserted against Vibram in the Underlying Action and, accordingly, there is no duty to defend.
The case is now before the court on cross-motions for summary judgment addressing the issues of recoupment of defense costs advanced or, conversely, recovery of defense costs incurred before the court rendered the Decision but left unpaid—issues of first impression in Massachusetts. The Insurers contend that since the claims asserted in the Underlying Action were not insured under the Policies, they are entitled to recoup the defense costs that they previously paid Vibram. Vibram, in turn, maintains that it is entitled to recover defense costs already incurred, but still unpaid, as of the date the Decision issued. For the reasons that follow, each party’s motion is allowed, in part, and denied, in part.
ADDITIONAL BACKGROUND
None of the facts necessary to resolve these cross-motions are in dispute.
3
Because the Insurers sent reservation of rights letters to Vibram, Vibram exercised its right to control its defense of the Underlying Action and retained its own counsel.3 Vibram’s counsel kept the Insurers informed concerning the status of the Underlying Action and forwarded copies of pleadings to them. By August 17, 2016, the date the Decision issued, Vibram had sent the Insurers invoices for defense costs totaling $ 1,272,212.57 and the Insurers had collectively reimbursed Vibram $ 667,901.71—$ 472,216.80 from Holyoke and $ 195,684.91 from Maryland. Vibram last received a payment from the Insurers on July 18, 2016. Neither Insurer informed Vibram why it did not pay the full amount of the invoices.4
As relevant to the issues raised by the pending motions, the Policies provide that the Insurers “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies. We have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for personal and advertising injury’ to which this insurance does not apply.” The Policies also state that the Insurers “will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .”
DISCUSSION
Recoupment
In Metro. Life Ins. Co. v. Cotter, 464 Mass. 623 (2013) (Cotter), the Supreme Judicial Court (SJC) was called upon to decide if a disability insurer could recoup from its insured benefit
3 See, e.g., Northern Sec. Ins. Co. Inc. v. Another 1, 78 Mass. App. Ct. 691, 694-695 (2011).
4 At oral argument, counsel for the Insurers stated that invoices were still being processed for payment when the Decision issued, and the Insurers elected to withhold payment.
4
payments made under a reservation of rights after a court determined that the insured’s benefits claim was not covered. In considering that claim for recoupment, the SJC noted that, with respect to liability policies:
We have not addressed whether an insurer may seek reimbursement for the costs of a defense undertaken pursuant to a unilateral reservation of rights. We note that other jurisdictions are split as to the validity of such claims. See Perdue Farms, Inc. v. Travelers Cas. & Sur. Co., 448 F.3d 252, 258 (4th Cir.2006), and cases cited (“jurisdictions differ on the soundness of an insurer’s right to reimbursement of defense costs”).
Based on the theory that insurers are in the business of analyzing and allocating risk, and thus in a better position to do so, courts in some jurisdictions have declined to allow liability insurers to bring reimbursement claims for the costs of defense. See Texas Ass’n of Counties County Gov’t Risk Mgt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex.2000). See, e.g., Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45–47 (Tex.2008) ( “imposing an extra-contractual reimbursement obligation places the insured in a highly untenable position”); United States Fid. v.United States Sports Specialty, 270 P.3d 464, 470–471 (Utah 2012) (“The right of an insurer to recover reimbursement from its insured distorts the allocation of risk unless it has been specifically bargained for”).
Id. at 641 n.21. This question is squarely before this court in this case.
While acknowledging that there are divergent views on the right of recoupment in cases such as this, in which a court has entered a declaratory judgment that none of the claims alleged in the complaint are covered under the Policies, the Insurers maintain that the majority of jurisdictions permit recoupment. Perhaps, the most frequently cited case for the proposition that defense costs advanced under a reservation of rights may be recovered is Buss v. Superior Court, 16 Cal. 4th 35 (Cal.App. 1997). In a more recent decision, the California Supreme Court reaffirmed its holding in Buss with the following comments:
As Buss explained, the duty to defend, and the extent of that duty, are rooted in basic contract principles. The insured pays for, and can reasonably expect, a defense against third party claims that are potentially covered by its policy, but no more. Conversely, the insurer does not bargain to assume the cost of defense of claims that are not even potentially covered. To shift these costs to the insured does not upset the contractual
5
arrangement between the parties. Thus, where the insurer, acting under a reservation of rights, has prophylactically financed the defense of claims as to which it owed no duty of defense, it is entitled to restitution. Otherwise, the insured, who did not bargain for a defense of noncovered claims, would receive a windfall and would be unjustly enriched.
. . .
As Buss further noted, “[n]ot only is it good law that the insurer may seek reimbursement for defense costs as to the claims that are not even potentially covered, but it also makes good sense. Without a right of reimbursement, an insurer might be tempted to refuse to defend an action in any part — especially an action with many claims that are not even potentially covered and only a few that are — lest the insurer give, and the insured get, more than they agreed. With such a right, the insurer would not be so tempted, knowing that, if defense of the claims that are not even potentially covered should necessitate any additional costs, it would be able to seek reimbursement.”
Though these comments were made in the context of “mixed” actions [including covered and uncovered claims], they apply equally here. An insurer facing unsettled law concerning its policies’ potential coverage of the third party’s claims should not be forced either to deny a defense outright, and risk a bad faith suit by the insured, or to provide a defense where it owes none without any recourse against the insured for costs thus expended. The insurer should be free, in an abundance of caution, to afford the insured a defense under a reservation of rights, with the understanding that reimbursement is available if it is later established, as a matter of law, that no duty to defend ever arose.
Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 655 (Cal.App. 2005) (Internal citations and quotations omitted). In this case, the Insurers make the same arguments that the California Supreme Court describes in Scottsdale.
Vibram, however, points the court to a recent, unreported decision of the United States District Court in Massachusetts that reaches an opposite conclusion: Welch Foods Inc. v. Nat’l Union Fire Ins. Co., No. 09-12087-RWZ 2011 WL 576600 (D. Mass. Feb. 9, 2011). In that case, like this one, the District Court found that claims in an underlying action were not covered by the liability policy and then addressed the insurer’s claim for recoupment of defense costs paid under a reservation of rights. The District Court acknowledged the holding and reasoning of Buss, but rejected the California Supreme Court’s opinion in favor of a more recent decision by the
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Pennsylvania Supreme Court, American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2 A.3d 526 (2010) (Jerry’s), which appears to be the most frequently cited case by those courts that have recently held that under these circumstances there is no right to recoup.
In Jerry’s, the Pennsylvania Supreme Court began with an exhaustive review of the competing lines of cases permitting and rejecting claims for recoupment of defense costs by liability insurers. Id. at 536-537. It then reflected on the very broad duty to defend (broader than the duty to indemnify) that exists under Pennsylvania, a duty that it describes in very much the same way as Massachusetts appellate courts describe the duty that liability carriers owe their insureds under Massachusetts law. See Id. at 540-541, compare Decision at 5-6. The Court then found that the answer to the question before it: is the insurer entitled to recover defense costs advanced before it obtained a declaratory judgment of no coverage, lay in the language of the policy itself:
We agree with Insured that whether a complaint raises a claim against an insured that is potentially covered is a question to be answered by the insurer in the first instance, upon receiving notice of the complaint by the insured. Although the question of whether the claim is covered (and therefore triggers the insurer’s duty to defend) may be difficult, it is the insurer’s duty to make that decision. See Shoshone First Bank, 2 P.3d at 516 (holding that the insurer must make the decision about whether there is a duty to defend). Insurers are in the business of making this decision. The insurer’s duty to defend exists until the claim is confined to a recovery that the policy does not cover. . . .Where a claim potentially may become one which is within the scope of the policy, the insurance company’s refusal to defend at the outset of the controversy is a decision it makes at its own peril. . . .
In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment. See Shoshone, 2 P.3d at 510 (stating that where an insurer believes there is no coverage, it should deny a defense at the beginning). This would allow the insured to control its own defense without breaching its contractual obligation to be defended by the insurer. If, on the other hand, the insurer is uncertain about coverage, then it should provide a defense and seek declaratory judgment about coverage. Id.
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In a declaratory judgment action to determine whether a claim is covered, the court resolves the question of coverage. . . . The court’s role in the declaratory judgment action is to resolve the question of coverage to eliminate uncertainty. If the insurer is successful in the declaratory judgment action, it is relieved of the continuing obligation to defend. The court’s resolution of the question of coverage does not, however, retroactively eliminate the insurer’s duty to defend the insured during the period of uncertainty.
. . .
An examination of the insurance contract between the parties reveals that under the policy, [the Insurer] was obliged to pay damages because of bodily injury, and had the “right and duty to defend the insured against any ‘suit’ seeking those damages.” . . . . The policy further provided that it had no duty to defend the insured against any suit seeking damages for bodily injury to which the insurance does not apply. Pursuant to the contractual language, therefore, [the Insurer] had the right and the duty to defend covered claims for bodily injury against Insured, and no duty to defend non-covered claims.
It was not immediately apparent whether the claim against Insured for bodily injury was or was not covered. It was immediately apparent, however, that the claim might potentially be covered. . . . Facing uncertainty about coverage, [the Insurer] appropriately activated its right and met its duty to defend under the policy when it was presented with a claim that may or may not have been covered. At the same time, [the Insurer] appropriately exercised its right to seek a declaration that it had no duty to defend.
The trial court’s subsequent declaratory judgment determination that the claim was not covered relieved [the Insurer] of having to defend the case going forward, but did not somehow nullify its initial determination that the claim was potentially covered. . . .
We therefore reject [the Insurer’s] attempt to define its duty to defend based on the outcome of the declaratory judgment action. The broad duty to defend that exists in Pennsylvania encourages insurance companies to construe their insurance contract broadly and to defend all actions where there is any potential coverage. . . .
Where the insurance contract is silent about the insurer’s right to reimbursement of defense costs, permitting reimbursement for costs the insurer spent exercising its right and duty to defend potentially covered claims prior to a court’s determination of coverage would be inconsistent with Pennsylvania law. It would amount to a retroactive erosion of the broad duty to defend in Pennsylvania by making the right and duty to defend contingent upon a court’s determination that a complaint alleged covered claims, and would therefore narrow Pennsylvania’s long-standing view that the duty to defend is broader than the duty to indemnify.
. . .
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Moreover, [the Insurer’s] contractual obligation to pay for the defense arose as a consequence of the rules of contract interpretation. It is undisputed that the policy did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurer] attempts to assert in this case, the right to reimbursement, is not a right to which it is entitled based on the policy
Id. at 541-544.
This court, like the District Court in Welch, finds that the Pennsylvania Supreme Court’s decision in Jerry’s comports with Massachusetts law. In Massachusetts, the insurer’s duty to defend arises when the underlying complaint “show[s] only a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.” Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 319 (1983). Even in cases in which the insurer may believe that coverage is unlikely under the terms of the policy, it has financial incentives to provide a defense. If it is determined in a separate action brought by the insured (or the insurer) that coverage existed, the insurer will be responsible for paying the insured’s costs of establishing a right to a defense, even if the denial of coverage was made in good faith. See Hanover Ins. Co. v. Golden, 436 Mass. 584, 588 (Mass. 2002). Of course, a bad faith refusal to provide a defense could constitute a violation of chapter 93A and expose the insurer to multiple damages. See Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7 (Mass. 1989) and Boyle v. Zurich American Ins. Co., 472 Mass. 649, 661 (2015). In consequence, when in doubt, an insurer has an economically sound and self-interested reason to provide a defense under a reservation of right until the coverage issue can be resolved.
With those basic tenets of Massachusetts law in mind, we turn to the language of the contracts that define the parties’ rights and obligations, in this case the Policies. See, e.g., Hakim v. Massachusetts Insurers’ Insolvency Fund, 424 Mass. 275, 280 (1997) (“The interpretation of
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an insurance contract is no different from the interpretation of any other contract, and we must construe the words of the policy in their usual and ordinary sense.”) There is simply nothing in the Policies that provides a right to recoup defense costs that the Insurers have advanced because they concluded that it was in their economic interest to do so. The court rejects the argument relied upon in Buss and its progeny that to deny recovery of defense costs will give insureds more than they bargained for, i.e., partial payment for the cost of defending claims that were not covered by the policies that they purchased. The court finds the reasoning of Jerry’s more persuasive: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make.” Jerry’s, 2 A.3d at 543.
In this case, if the Insurers had refused to provide a defense, they would have incurred no liability to Vibram because the claims in the Underlying Action were not within the coverage provided. However, they determined in the exercise of their considered judgment that it was better to provide a defense and file an action for declaratory judgment. “It is undisputed that the [the Policies] did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurers] attempt[] to assert in this case, the right to reimbursement, is not a right to which [they are] entitled based on the [Policies].” Id. at 544. Knowing that there is a risk that they would decide to provide a defense in cases in which they were uncertain as to whether a claim was covered because the claim was novel or the law unclear, the Insurers could have addressed the right of recoupment in their Policies; they didn’t. The court ought not insert a policy provision that the parties did not agree upon.
In Jerry’s, the Pennsylvania Court addressed two other arguments advanced by the Insured in this case. First, a reservation of rights letter cannot create additional rights for the
10
Insurer not found in the contract. “[P]ermitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.” Id. and cases there cited. The court finds this reasoning consistent with existing Massachusetts precedent.
In Joint Underwriting Ass’n v. Goldberg, 425 Mass. 46 (1997), the insurer defended its insured under a reservation of rights. After a jury returned an adverse verdict against the insured in the underlying action and while appeals were pending, the insurer settled the underlying action. It then sought reimbursement for the cost of the settlement. The SJC held that even if the claims asserted against its insured in the underlying action were not covered, the insurer had no right to recover. The reservation of rights letter did not provide a right of recovery, it only permitted the insurer to defend without waiving its right to deny an obligation to cover an adverse judgment. While the insured’s personal counsel had urged the insurer to settle, no agreement was ever reached that the insured would reimburse the insurer. The SJC noted that the insurer had settled the claims to protect its own interests, as it was concerned about liability under chapter 93A that could, in theory, treble damages, if its refusal to settle were found unreasonable. As the insurer had no contractual right to reimbursement, it had no basis to demand it.
The instant case obviously does not involve a claim to recover an amount paid by an insurer in settlement of a claim, but Goldberg does stand for the general proposition that when an insurer provides payments that benefit the insured, but also avoid a perceived risk of exposure to even greater loss to the insurer, the reservation of rights letter does not support a claim for reimbursement. A right to reimbursement must be found in a contract.
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In Jerry’s, the Pennsylvania Supreme Court also rejected the insurer’s claim that it was entitled to recoupment under a theory of unjust enrichment. 2 A.2d at 545. In this case, the Insurers point to the SJC’s decision in Cotter and the careful consideration that the SJC gave to the disability insurer’s argument that it could recover benefit payments under an equitable claim for restitution. Although, in Cotter, the SJC rejected the disability insurer’s claim, the Insurers argue that liability policies are different and the Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) supports their right of recovery.5
In Cotter, the SJC addressed the insurer’s equitable claim as follows:
“A quasi contract or a contract implied in law is an obligation created by law ‘for reasons of justice, without any expression of assent and sometimes even against a clear expression of dissent.’ ” Salamon v. Terra, 394 Mass. 857, 859 (1985), quoting 1 A. Corbin, Contracts § 19 (1963). “Restitution is an equitable remedy by which a person who has been unjustly enriched at the expense of another is required to repay the injured party.” Keller v. O’Brien, 425 Mass. 774, 778 (1997), citing Salamon v. Terra, supra. “The fact that a person has benefited from another ‘is not of itself sufficient to require the other to make restitution therefor.’ … Restitution is appropriate ‘only if the circumstances of its receipt or retention are such that, as between the two persons, it is unjust for [one] to retain it.’ ” Keller v. O’Brien, supra, quoting Restatement of Restitution § 1 comment c (1937), and citing National Shawmut Bank v. Fidelity Mut. Life Ins. Co., 318 Mass. 142, 146 (1945).
A determination of unjust enrichment is one in which “[c]onsiderations of equity and morality play a large part.” Salamon v. Terra, supra. A plaintiff asserting a claim for unjust enrichment must establish not only that the defendant received a benefit, but also that such a benefit was unjust, “a quality that turns on the reasonable expectations of the parties.” Global Investors Agent Corp. v. National Fire Ins. Co., 76 Mass.App.Ct. 812, 826 (2010), quoting Community Builders, Inc. v. Indian Motorcycle Assocs., Inc., 44 Mass.App.Ct. 537, 560 (1998). “The injustice of the enrichment or detriment in quasi-contract equates with the defeat of someone’s reasonable expectations.” Salamon v. Terra, supra. The party seeking restitution has the burden of proving its entitlement thereto. J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 796 (1986); Hayeck Bldg. & Realty Co. v. Turcotte, 361 Mass. 785, 789 (1972), citing Andre v. Maguire, 305 Mass. 515, 516 (1940).
5 In Cotter, the SJC appeared to adopt the principles set out in Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) and found that Goldberg did not preclude the possibility that an insurer could recover payments made under a reservation of right, but as explained below held that the insurer must still prove that retention of the payments would be unjust.
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We have allowed claims for restitution in circumstances involving fraud, bad faith, violation of a trust, or breach of a duty; in “business torts” such as unfair competition and claims for infringement of trademark or copyright; and in some circumstances, as here, in disputes arising from quasicontractual relations. See Keller v. O’Brien, supra at 778–779. In order to prevail on its claim for reimbursement of disability insurance benefits it paid to Cotter under a reservation of rights, MetLife must establish not only that Cotter received a benefit, which is not disputed, but also that such a benefit was unjust.
Cotter, 464 Mass. at 644. The court found that Cotter’s retention of the disability benefit payments was not unjust.
Clearly, the facts of Cotter, in which the insurer sought to recover benefit payments made to an individual, were more compelling for the insured than those of the present case, which involves a commercial dispute between an insurer and a large company. Nonetheless, liability policies are also sold to individuals (e.g., auto and homeowners policies) and small family businesses, as well as to manufacturing companies like Vibram. In order to prove that it is unjust for an insured to retain defense costs advanced in respect of a third-party claim under a reservation of rights, an insurer must do more than prove that a court ultimately held that the claims were uncovered. Otherwise, the insurer is, in effect, using equitable principles to insert a reimbursement provision into the liability policy that does not exist. If a policy holder demands coverage of a third-party claim that is clearly not covered under the policy, the insurer can reject it. If a policy holder engaged in misrepresentations or other wrongful conduct (for example, acting in concert with a third-party claimant to make an uncovered claim appear covered), retention of defense costs might well be “unjust.” However, a good faith demand for a defense under a liability policy, which the insurer decides is likely enough to be valid that it will tender a defense under a reservation of rights, does not make retention of those defense costs unjust. Claims of unjust enrichment ought not be used to imply rights that the parties have not included
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in the written contract that defines their relationship and covers the subject matter in dispute. See Kennedy v. B.A. Gardetto, Inc. 306 Mass. 212 (1940).
Recovery of Unpaid Defense Costs
Vibram seeks to recover expenses for defense of the Underlying Action incurred up to the date that the court held that the claims asserted in the Underlying Action were not covered by the Policies. It argues that in all cases in which a defense is provided under a reservation of rights, the duty to defend continues “until a declaratory judgment of no coverage is entered and that it does not retroactively disappear, even if no coverage is found.” Vibram asserts that Metropolitan Property & Casualty Ins. Co. v. Morrison, 460 Mass.352 (2011) (Morrison) established this principle. The court disagrees. Rather, Morrison teaches that the duty to defend ends when there is no longer any chance that the facts alleged in an underlying action can support a covered claim. That will often, but certainly not always, be when a declaratory judgment resolves a coverage dispute.
Morrison involved claims allegedly covered by a homeowner’s insurance policy. Briefly stated, the policy holders’ son (covered under the policy) had injured a police officer while resisting arrest. The son pled guilty to various criminal charges, and the police officer filed suit against the son alleging negligent and reckless conduct. The insurer, Metropolitan, disclaimed any obligation to provide indemnity or a defense, but did bring a declaratory judgment action seeking to establish no coverage. The son did not answer the police officer’s complaint, and a default judgment entered against him in the underlying personal injury action. On appeal, the coverage issue turned on (1) an interpretation of a policy provision that excluded coverage for
14
bodily injury resulting from intentional and criminal acts and (2) whether the entry of a default judgment in the underlying personal injury action, before a judgment of no coverage entered in the declaratory judgment action, established that the police officer’s injury was the result of negligence, as alleged in the complaint, and therefore a covered claim.
The SJC began by restating the well-established principle that the “insurer’s duty to defend is independent from, and broader than, its duty to indemnify.” Id. at 351. It then went on to explain that “the duty to defend is determined based on the facts alleged in the complaint, and on facts known or readily knowable by the insurer . . . . However, when the allegations in the underlying complaint lie expressly outside the policy coverage and its purpose, the insurer is relieved of the duty to investigate or defend the claimant.” Id. (internal quotations and citations omitted). Or, stated somewhat differently, when the allegations of the complaint do not “roughly sketch a claim covered by a liability policy,” there is no duty to defend. Id.
In support of its position, Vibram quotes the following statement from Morrison: “‘a declaratory judgment of no coverage, either by summary judgment or after trial, does not retroactively relieve the primary insurer of the duty to defend; it only relieves the insurer of the obligation to continue to defend after the declaration.’ 14 G. Couch, Insurance, supra at s. 200: 48, at 200-65 to 200-66.” Id. at 352. Vibram, however, omits the very next sentence in the opinion: “Where material facts as to the duty to indemnify are in dispute, an insurer has a duty to defend until the insurer establishes that no potential for coverage exists. Id. at 200-21.” Id. In other words, where it can be established that there is no coverage under the policy because there are no material facts necessary to determine the coverage issue in dispute, or because, even assuming all of the allegations in the underlying complaint are true, no coverage exists, there is no duty to defend. Indeed, in Morrison, the SJC remanded the case to the Superior Court to
15
determine whether Metropolitan owed its insured “a duty to defend at the time of the default judgment.” The SJC instructed the trial judge to determine whether by that point the facts establishing no coverage were already known and undisputed. Clearly, the SJC was teaching that this was the time at which the duty to defend terminated, even if Metropolitan did not obtain its declaratory judgment until later.
Moreover, the rationale underlying the decision in Jerry’s, and other similar cases, would be impaired if a duty to defend arose whenever an insured asserted a disputed right to coverage. In those cases, the courts held that the insurer had no right to recoup defense costs when a declaratory judgment entered that established that a third-party complaint did not assert a covered claim, because it was initially up to the insurer to decide whether to, in effect, hedge its bets and provide a defense when it was unsure of coverage: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment.” Jerry’s, 3 A.2d at 542. If an insurer is bound to provide a defense whenever there is any chance that a policy might be interpreted to provide coverage, because of a dispute about policy terms not alleged facts, the predicate for following the principle outlined in Jerry’s is missing.
The court has found a single case in which a court ruled that a dispute concerning a question of law, resolved in favor of the insured, could nonetheless give rise to a duty to defend. In Hugo Boss Fashions, Inc. v. Federal Ins. Co., 252 F.3d 608 (2001), the insurer rejected its insured’s claims of coverage for a trademark infringement case filed against it and declined to provide a defense. The insured brought a declaratory judgment action seeking to establish
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coverage and, while it was pending, settled the underlying trademark suit. The coverage case preceded to trial before a jury, which returned a verdict for the insured, both as to coverage and a duty to defend, and judgment entered for the insured. On appeal, the Second Circuit Court of Appeals reversed the District Court’s judgment that the trademark suit was a covered claim. It held that the policy was unambiguous, as the term “trademarked slogans” had a specific meaning and, in consequence, the policy did not cover the underlying claim.
In a split decision the Court of Appeals, nonetheless, found a duty to defend. It held that “there are situations in which a legal uncertainty as to insurance coverage gives rise to (an at least temporary) duty to defend.” Id. at 622. (Emphasis in original) The majority explained that there was sufficient “legal uncertainty (what does “trademarked slogan” mean)” to require the insurer “to undertake a defense of Hugo Boss until the uncertainty surrounding the term was resolved.” Id. In other words, although it concluded that the term “trademarked slogan” had only one reasonable meaning, the possibility that a court might find it ambiguous gave rise to a duty to defend.
Justice Sotomayor (then an associate justice of the Second Circuit) dissented from this latter holding. She concluded that the majority’s discussion of the duty to defend “finds no basis in New York law.” Id. at 626. She went on to explain that:
The majority errs in confusing two types of uncertainty. The first is cognizable under New York law, the second is not. The first concerns the period during which the underlying action is pending when the insurer must defend the insured against any allegations that, if proven, would result in indemnification. This type of uncertainty is a well-established element of New York insurance law and is unquestioned here. The majority attempts to read a second category of “uncertainty” into New York law, however, concerning how a court might rule on the scope of policy terms. No such “uncertainty” is recognized under New York law apart from that arising from an “ambiguous” policy term.
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Id. at 627. Anticipating to some extent the reasoning that the Pennsylvania Supreme Court adopted in Jerry’s, Justice Sotomayor’s dissent went on to point out:
In order to determine its duties under a policy, insurers are, as a matter of course, called upon to survey the relevant law and scrutinize the language of the policy to judge whether its terms are unambiguous. Insurers may err in their judgment concerning the unambiguity of a policy term but are given strong incentives to decide these questions correctly. If they do not, they can be forced to defend a costly coverage action or, if the finding of unambiguity was so far off the mark that “no reasonable [insurance] carrier would, under the given facts, be expected to assert it,” Sukup v. State, 227 N.E.2d 842, 844 (N.Y. 1967), insurers can face even greater liabilities for breaching their duty of good faith.
All of this assumes that we entrust insurers with the initial decision concerning whether policy terms are unambiguous. In the case of a policy that uses a legal term of art, this inquiry requires a determination of whether that term of art is unambiguous. . . . And yet, the majority wants to deny Federal the opportunity to reach the same conclusion we have reached. It is difficult to understand why we should discourage Federal or any other insurer from making such determinations that are, in any case, subject to review and even sanction if erroneous.
Id. at 628-629 (Emphasis supplied).
Turning to the present case, first, this court’s coverage Decision did not turn on whether some term of art used in the Policies was potentially ambiguous. The precise question before the court: would a liability policy providing coverage for an Advertising Injury cover a claim based on the unauthorized use of a famous person’s name to sell a product, in this case a shoe, had not previously been decided in Massachusetts, or very many other courts. However, this court’s Decision did not turn on whether any particular term of art used in the Policies was potentially ambiguous, but rather applied legal precedent to the interpretation of a series of policy provisions.
Additionally, the reasoning of Justice Sotomayer’s dissent appears far more compelling with respect to the issues raised here than the majority opinion. In the first instance, it is for the insurer to decide whether any of the allegations in the complaint, if proved, could support a claim
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covered by the policy. If it declines to provide a defense, it faces potential liabilities that will likely exceed the cost of the defense. However, if it elects not to defend the third-party claim, and its decision was correct as a matter of law, how could there ever have been a duty to defend?
The case now before the court does provide an additional confounding fact. The Insurers initially did agree to advance defense costs, but had not paid all outstanding invoices when the Declaratory Judgment of no coverage issued. Whether the insurer stopped paying because it became more convinced of the validity of its coverage position or because it was just slow in processing invoices does not appear to raise a disputed issue of fact material to this case. The relevant question is whether having initially agreed to pay for Vibram’s defense, while prosecuting this declaratory judgment action, the Insurers are bound to continue to advance defense costs until this case is resolved. On the record before this court, it concludes that they are not.
While not perfectly analogous, the court notes that in Herbert A Sullivan, Inc. v. Utica Mutual Ins. Co., 439 Mass. 387, 395 (2003), the insurer initially provided a defense to its insured under a general liability policy because one count of a multicount complaint alleged negligence. However, after the plaintiff in the underlying action amended its complaint and eliminated the negligence count, the insurer no longer had a duty to defend. The court finds that there is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind, even while the declaratory judgment action is still pending.
The court can envision cases in which an insured may have relied on the insurer’s initial decision and adopted a course of action in responding to the third-party claim such that it would suffer damage if the insurer discontinued the defense before the declaratory judgment action was resolved. For example, this might arise in situations in which the insurer is not only advancing
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defense costs but actively providing the defense. However, this is not such a case. Upon receipt of the reservation of rights letter, Vibram exercised its right to retain its counsel of choice and to control its own defense, which given the amount of fees generated in a rather brief time was robust. There are no facts in the summary judgment record suggesting that the Insurers should be equitably estopped from discontinuing the advancement of defense costs, if the Policies permit them to do so. The court finds that, on these facts, the Insurers were permitted to change their mind with respect to advancing defense costs, as they were under no contractual obligation to pay them. The insured has neither a contractual or equitable claim for payment of unpaid costs of defense incurred up to the date the Decision issued.6
ORDER
For the foregoing reasons, the Insurers’ motion for summary judgment is DENIED, to the extent that it seeks to establish a right to recoup defense costs previously advanced,and otherwise ALLOWED; and Vibram’s motion for summary judgment is DENIED, to the extent it seeks to establish a right to recover any additional defense costs from the Insurers, and otherwise ALLOWED. Final judgment shall enter dismissing the counterclaims and declaring that the plaintiff insurance companies do not have a duty to defend the defendant Vibram in the
6 Vibram argues that the provision in the Policies that states “[the Insurers] will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .” requires payment of all defense costs through the date the Decision issued. Clearly, this policy term only provides that when the Insurers defend a claim they have to pay all costs that they incur. Presumably, when an insured receives a reservation of rights letter and elects to control its own defense, that provision requires reimbursement of all defense expenses incurred by the insured, at least all reasonable expenses. But, it does not create an independent duty to defend a claim, or pay for the defense of a claim, that the Insurers have decided not to defend. The duty to defend is determined under other policy provisions.
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Underlying Action or indemnify it for any loss sustained in respect thereto. No party shall recover damages, and each party shall bear its own costs.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 20, 2017

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Posted by Stephen Sandberg - April 6, 2017 at 5:20 am

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