Williamson-Green v. Interstate Fire and Casualty Company (Lawyers Weekly No. 12-062-17)

MICHELLE WILLIAMSON-GREEN, as Administratrix of the Estate of James W. Williamson IV
James W. Williamson IV died from injuries sustained while he was inspecting a roof from a bucket lift that tipped over. His estate brought a wrongful death action against both the lift manufacturer and the company that had had rented out the lift, Equipment 4 Rent, Inc. (“E4R”). The jury found that the manufacturer and E4R were both negligent and awarded compensatory damages of $ 4.3 million. It also found that “E4R’s conduct was grossly negligent, willful, wanton, or reckless” and awarded additional punitive damages of $ 5.9 million, as allowed under G.L. c. 229, § 2. Interstate Fire and Casualty Company had insured E4R. It paid E4R’s share of the compensatory damages but refused to pay any part of the punitive damage award.
In this action Plaintiff claims that Interstate failed to settle the claims against E4R after its liability had become reasonably clear. She asserts one claim on behalf of Mr. Williamson’s estate and four claims as E4R’s assignee. The assigned claims allege that E4R’s damages include “being exposed to an uncovered punitive damages award that would have been avoided had Interstate settled the Underlying Action.”
Interstate has moved for judgment on the pleadings on the assigned claims. It argues that requiring an insurer to pay any part of a punitive damages award, even as consequential damages arising from the insurer’s failure to settle a meritorious claim, would be against public policy. The Court must DENY Interstate’s motion because Massachusetts law does not insulate an insurer from liability for damages incurred because its insured caused bodily injury, engaged in reckless or grossly negligent misconduct, or did both. The limitation on insurers’ liability sought by Interstate would be inconsistent with G.L. c. 175, § 47, cl. Sixth (b), which “codifies the entire public policy” of Massachusetts regarding the insurability of losses
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resulting from reckless misconduct. Andover Newton Theological Sch., Inc. v. Cont’l Cas. Co., 409 Mass. 350, 353 n.2 (1991).1
1. Insurers’ Liability for Failing to Settle Claims. Once an insured’s liability for a particular claim has become reasonably clear, the insurer has a duty under Massachusetts law to make a fair offer to settle the claim and to do so promptly. This duty is imposed on all insurers by statute. See G.L. c. 176D, § 3(9)(f); Hopkins v. Liberty Mut. Ins. Co., 434 Mass. 556, 566-567 (2001). In many cases it is also an implicit part of the insurer’s contractual obligations. When an insurance policy imposes a duty to defend on an insurer, that duty carries with it an implicit obligation “to make reasonable, prudent efforts to settle” the claims against the insured. Boyle v. Zurich American Ins. Co., 472 Mass. 649, 659 (2015); accord Murach v. Massachusetts Bonding & Ins. Co., 339 Mass. 184, 186-187 (1959) (duty to defend includes duty “to act in good faith” to settle claims). Thus, where liability has become reasonably clear, an insurer with a duty to defend also has a duty “to settle the case within the … policy limits when it had the opportunity to do so.” Medical Malpractice Joint Underwriting Ass’n of Massachusetts v. Goldberg, 425 Mass. 46, 60 n.33 (1997).
An insurer that violates its duty to make reasonable efforts to settle a claim may be sued in contract for breaching the insurance policy, in tort for negligently breaching its duty to settle, or for violating G.L. c. 93A by committing an unfair claims settlement practice in violation of G.L. c. 176D. See generally Boyle, supra, at 654-655 & 659 (contract claim); Hartford Cas. Ins. Co. v. New Hampshire Ins. Co., 417 Mass. 116, 120-121 (1994) (negligence claim); Rhodes v. AIG Domestic Claims,
1 Plaintiff did not argue that Interstate’s public policy argument cannot be squared with G.L. c. 175, § 47, cl. Sixth (b), as construed in Andover Newton. Nonetheless, the Court cannot ignore that statute and precedent in deciding whether an insurer may be held liable for punitive damages under Massachusetts law. Since “important public policy interests are implicated,” it is appropriate for the Court to “raise and resolve the issue sua sponte.” Long v. Wickett, 50 Mass. App. Ct. 380, 385 n.6 (2000); accord Quincy Trust Co. v. Taylor, 317 Mass. 195, 198 (1944) (“Where a court has once taken jurisdiction and has become responsible to the public for the exercise of its judicial power so as to do justice, it is sometimes the right and even the duty of the court to act in some particular sua sponte.”).
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Inc., 461 Mass. 486, 494 (2012) (claim under G.L. c. 93A, § 9); Silva v. Steadfast Ins. Co., 87 Mass. App. Ct. 800, 803-804 (2015) (claim under G.L. c. 93A, § 11).2
If an insurer breaches its duty to settle a claim, the insured party may recover from the insurer for “all losses” that were “foreseeable consequences” of the failure to settle, even if those losses exceed what is covered by the insurance policy. DiMarzo v. American Mut. Ins. Co., 389 Mass. 85, 101-102 (1983). For example, “[i]f the insurer violated the law in failing to settle for the policy limits, then the insurer will be liable to the insured for the damages exceeding the policy limit.” Gore v. Arbella Mut. Ins. Co., 77 Mass. App. Ct. 518, 526 (2010); accord Boyle, 472 Mass. at 654 & 660. The losses recoverable by the insured include all consequential damages caused by the insurer’s breach of its duty to settle; the insured’s recovery is not limited to compensatory damages awarded against it in the underlying tort action. See, e.g., Rivera v. Commerce Ins. Co., 84 Mass. App. Ct. 146, 149 (2013) (insurer liable for litigation expenses incurred by insured after breach of duty to settle).
This rule, that an insurer that breaches a duty to settle a claim is liable for all consequential damages suffered by its insured, applies whether the insurer is found liable for breach of contract or for engaging in unfair or deceptive conduct in violation of G.L. c. 93A. See Boyle, 472 Mass. at 659-660 & n.15 (breach of contract damages); Polaroid Corp. v. Travelers Indem. Co., 414 Mass. 747, 762-764 (1993) (breach of contract damages); DiMarzo, supra (c. 93A damages).3
2 Where the claimant is a private individual, an insurer that breaches its duty under c. 176D to settle claims is automatically liable under G.L. c. 93A, § 9. See Hopkins, 434 Mass. at 564-565. Where the claimant is itself engaged in trade or commerce, and thus must bring suit under G.L. c. 93A, § 11, such liability will only attach if the claimant can prove that the insurer’s settlement practices constituted “unfair or deceptive acts or practices” in violation of G.L. c. 93A, § 2. See Boyle, 472 Mass. at 661-662.
3 There is some uncertainty as to what damages are recoverable in tort for an insurer’s negligent failure to settle a claim. Although Hartford recognized the validity of such a claim, see 417 Mass. at 120-121 it remains an open question whether the “economic loss” rule bars recovery of damages under such a theory in the absence of personal injury or property damage. See Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387, 413 (2003).
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2. No Public Policy Exception for Reckless Misconduct. Plaintiff claims that Interstate failed to settle the underlying tort claims after E4R’s liability had become reasonably clear, that E4R would not have been ordered to pay punitive damages if Interstate had settled the case, and that as E4R’s assignee Plaintiff is therefore entitled to recover the $ 5.9 million punitive damage award as consequential damages for Interstate’s breach of its duty to settle the case. The amount of damages recoverable under the assigned claims is not affected by whether E4R has paid or is able to pay any or all of the punitive damage award. See Boyle, 472 Mass. at 660; DiMarzo, 389 Mass. at 95 n.9; Jenkins, 349 Mass. at 702-703.
Interstate argues that allowing an insured (or its assignee) to seek compensation for punitive damages imposed as a result of the insurer’s unreasonable failure to settle a claim “would defeat the socially useful purpose of punitive damages—to punish and deter—and would violate Massachusetts’ public policy prohibiting a party from obtaining indemnity for a punitive damages award.” It asks the Court to recognize a public policy exception to the rule that an insurer is liable for foreseeable damage caused by a breach of its duty to settle a claim against its insured. Specifically, Interstate argues that Plaintiff “should be precluded from recovering damages, as E4R’s assignee, to compensate E4R for the punitive damages imposed against it.”
The highest courts in California, Colorado, and New York, plus a federal appeals court applying Pennsylvania law, have adopted some version of the rule advocated by Interstate.4 These courts all held that allowing insureds to obtain
4 See PPG Industries, Inc. v. Transamerica Ins. Co., 975 P.2d 652, 658 & 654 (Cal. 1999) (holding “that an insured may not shift to its insurance company, and ultimately to the public, the payment of punitive damages awarded in the third party lawsuit against the insured as a result of the insured’s intentional, morally blameworthy behavior against the third party,” after explaining that punitive damages were awarded in underlying case based on insured’s “wanton and reckless conduct”); Lira v. Shelter Ins. Co., 913 P.2d 514, 516 (Colo. 1996) (“We hold that in an action by an insured against his insurer for bad faith failure to settle, the insured may not collect as compensatory damages the punitive damages awarded against him in the underlying lawsuit.”); Soto v. State Farm Ins. Co., 635 N.E.2d 1222, 1225 (N.Y. 1994) (“we hold that the punitive damages awarded against an insured in a civil suit are not a proper element of the compensatory damages recoverable in a suit against an insurer for a bad-faith refusal to settle”); Wolfe v. Allstate Property & Cas. Ins.
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compensation from their insurer for a punitive damage award that could have been avoided if the insurer had not breached its duty to settle the case would violate those State’s public policies against allowing insurers to indemnify for punitive damages.5
Interstate urges the Court to read a similar public policy exception into Massachusetts law. In response, Plaintiff argues that these four out-of-State decisions “are all distinguishable because the holdings in each are based on the clear law of their respective states that punitive damages are not insurable—a prohibition that Massachusetts does not have.”
The Court agrees with Plaintiff that Massachusetts law does not reflect any public policy against an insurer indemnifying its insured for punitive damages awarded in a wrongful death case based on a finding that reckless or grossly negligent conduct caused bodily injury and thus death.6
The common law rule in Massachusetts had long been that an insurance policy indemnifying an insured against liability due to an intentional wrong was void as against public policy. Sheehan v. Goriansky, 321 Mass. 200, 203 (1947) (collecting cases). But the Supreme Judicial Court held that liability arising from harm caused by reckless misconduct is insurable, and that there is not “any public policy against” a policy indemnifying an insured against liability for recklessness. Id. at 205.
Co., 790 F.3d 487, 492 (3d Cir. 2015) (“We predict that the Pennsylvania Supreme Court would conclude that, in an action by an insured against his insurer for bad faith, the insured may not collect as compensatory damages the punitive damages awarded against it in the underlying lawsuit.”).
5 PPG Industries, 975 P.2d at 658 (“To require Transamerica to make good the loss PPG incurred as punitive damages in the third party lawsuit would impose on Transamerica an obligation to indemnify, a violation of the [California] public policy against indemnification for punitive damages.”); Lira, 913 P.2d at (“To allow the petitioner in this case to recover compensatory damages which derive from his own wrongful conduct undercuts the public policy of [Colorado] against the insurability of punitive damages.”); Soto, 635 N.E.2d at 724 (New York’s “public policy clearly precludes indemnification for punitive damages”); Wolfe, 790 F.3d at 492 (“Our prediction is a logical extension of Pennsylvania’s policy regarding the uninsurability of punitive damages. It is *493 Pennsylvania’s longstanding rule that a claim for punitive damages against a tortfeasor who is personally guilty of outrageous and wanton misconduct is excluded from insurance coverage as a matter of law.”).
6 The Court therefore need not reach Plaintiff’s alternative argument that parts of the assigned claims would survive even if Massachusetts public policy barred any claim against Interstate for the punitive damages awarded against E4R.
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This common law rule has been modified and superseded by statute. See Andover Newton, 409 Mass. at 353 & n.2. The general insurance statute now provides “that no company may insure any person against legal liability for causing injury, other than bodily injury, by his deliberate or intentional crime or wrongdoing.” G.L. c. 175, § 47, cl. Sixth (b).
The claims against Interstate that were assigned to Plaintiff by E4R do not violate the public policy reflected in this statute for several reasons.
First, cl. Sixth (b) expressly permits insurers to cover all liability for misconduct causing “bodily injury,” even if that misconduct was undertaken deliberately or intentionally. See Andover Newton, 409 Mass. at 353. Punitive damages were assessed against E4R for causing bodily injury that resulted in death.
Second, this statute allows insurers to indemnify insureds for liability arising from grossly negligent or reckless misconduct, and thus would allow insurers to pay for punitive damages based on a defendant’s gross negligence or recklessness even if there was no special provision for damages arising from bodily injury. See id. at 352. The SJC has narrowly construed the statutory prohibition against insuring “deliberate or intentional” misconduct. “The fact that a wrongful act was committed intentionally … does not alone bar coverage. That bar arises only if an intentionally committed, wrongful act was also done deliberately or intentionally, in the sense that the actor knew that the act was wrongful.” Id. “In other words, Massachusetts law only proscribes coverage of acts committed with the specific intent to do something the law forbids.” Andover Newton Theological Sch., Inc. v. Cont’l Cas. Co., 930 F.2d 89, 92 n. 3 (1st Cir.1991). Reckless or grossly negligent conduct is not intentional wrongdoing in this sense. Cf. Manning v. Nobile, 411 Mass. 382, 387 (1991) (recklessness is “intentional conduct [that] involves a high degree of likelihood that substantial harm will result to another”); Aleo v. SLB Toys USA, Inc., 466 Mass. 398, 410 (2013) (gross negligence “is very great negligence, or the absence of slight diligence, or the want of even scant care”) (quoting Altman v. Aronson, 231 Mass. 588, 591-592 (1919)).
The SJC has stressed that cl. Sixth (b) “codifies the entire public policy of the Commonwealth that would bear on the insurability of losses caused by a reckless
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disregard of the lawfulness of conduct” and supersedes all common law on the subject. Andover Newton, 409 Mass. at 353 n.2.
Since G.L. c. 175, § 47, cl. Sixth (b), allows insurers to pay for punitive and other damages assessed due to reckless misconduct, and the SJC has construed this provision as stating the entire public policy of Massachusetts regarding this issue, the Court may not deem the claims assigned by E4R to plaintiff to be barred by public policy. The Court has no power to “read into the statute a provision which the Legislature did not see fit to put there, whether the omission came from inadvertence or of set purpose.” Provencal v. Commonwealth Health Ins. Connector Auth., 456 Mass. 506, 516 (2010), (quoting General Elec. Co. v. Department of Envtl. Protection, 429 Mass. 798, 803 (1999).
Nothing in Santos v. Lumbermens Mut. Cas. Co., 408 Mass. 70 (1990), is to the contrary. Santos holds that punitive damages imposed under the wrongful death act are not recoverable under the underinsured motorist provisions of each automobile insurance policy. Id. at 80-84. But the SJC carefully limited its holding to the underinsurance context, and stressed that it was not deciding “whether a tortfeasor’s insurer may be obliged to pay for punitive damages.” Id. at 84 n.17. In any case, whether an insurance policy covers punitive damages does not control the scope of the insurer’s liability for consequential damages if it mishandles settlement of a claim. If an insurance policy excludes coverage for punitive damages, that does not absolve an insurer from liability for all losses flowing from a breach of its duty to settle a claim, including for a foreseeable award of punitive damages against the insured. See Carpenter v. Automobile Club Interinsurance, 58 F.3d 1296, 1302-1303 (8th Cir. 1995) (applying Arkansas law).
Defendant’s motion for partial judgment on the pleadings is DENIED.
May 26, 2017
Kenneth W. Salinger
Justice of the Superior Court

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