$22 Million Awarded for Bad Faith Claims Settlement Practices in Massachusetts – Rhoades v. AIG Domestic Claims, Inc.
A recent decision from the Massachusetts Supreme Court highlights the serious, and potentially expensive, pitfalls of failing to settle significant injury cases, where liability is not disputed. Rhodes v. AIG Domestic Claims, Inc., SJC 10911 arose from a serious motor vehicle accident that left the plaintiff, Marcia Rhodes, paraplegic and with documented past and future special damages of nearly $3 million.
Rhodes, her husband and daughter, filed suit in July 2002. By August 2003, plaintiffs’ counsel had fully documented the damages, provided a day-in-the-life videotape, and made a $16.5 million demand for settlement. The demand was forwarded to Zurich American Insurance Company (“Zurich”), which provided the primary layer of $2 million in liability insurance, and to AIG Domestic Claims, Inc. (“AIGDC”), which provided an additional $50 million of coverage.
Despite the fact that liability was clear and damages were expected to exceed $5 million, no offers of settlement were extended until a year after the demand had been issued. Indeed, AIGDC’s first pre-trial offer was not extended until just weeks before trial, during mediation. AIGDC’s top offer of $3.5 million was rejected and the case proceeded to trial where liability was stipulated. AIGDC increased its offer to $6 million during trial. Plaintiffs rejected that offer and a verdict of $9.412 million (with interest over $11 million) ultimately entered in their favor. AIGDC appealed.
While the appeal was pending, plaintiffs sent Zurich and AIGDC a demand letter under Mass.Gen.Laws c. 93A demanding a reasonable settlement within 30 days. In response, Zurich paid its entire policy limits plus a share of the pre-trial interest. AIGDC took no action. Plaintiffs commenced an action under Mass.Gen.Laws c. 93A and 176D on the basis of bad faith insurance practices. Once plaintiffs filed their 93A action, AIGDC paid almost $9 million to settle the personal injury claim. Plaintiffs did not release AIGDC from the 93A and 176D claims as part of the settlement.
In the trial of the bad faith case, the Massachusetts’ Superior Court found that AIGDC had committed knowing and willful violations of 93A and 176D by failing to effectuate prompt settlement once liability became reasonably clear. The court went on to find that AIGDC’s pre-trial settlement offer of $3.5 million was within the reasonable offer range, that the plaintiffs would have rejected any offer less than $8 million, and therefore they suffered no actual damages as a result of AIGDC’s pre-trial misconduct. With respect to AIGDC’s post-verdict conduct, on the other hand, the court found that AIGDC’s initial offer of $7 million was insulting and unreasonable, thus violating 93A/176D and awarded plaintiffs loss of use damages (i.e. interest) from the date of the judgment until the matter was ultimately settled. That amount was doubled for AIGDC’s willful and knowing misconduct. Both parties appealed.
The Appeals Court affirmed the lower court’s finding of pre- and post-trial misconduct by AIGDC, reversed the trial court’s denial of damages for AIGDC’s pre-trial misconduct, and held that even where a plaintiff testifies that she would have rejected an offer within the range of reasonable offers, such evidence would not alleviate the insurer’s obligation to make a reasonable settlement offer. The Appeals Court went on to find that the proper measure of damages (where the plaintiff has rejected a reasonable settlement offer) is the loss of use of the proceeds between the time the insurer breached its duty to make a reasonable settlement offer and the date a reasonable settlement offer was made but rejected. The Appeals Court also held that such amount is subject to multiplication, if the insurer’s delay is willful and knowing as AIGDC’s was. Both parties appealed.
The Massachusetts Supreme Court reversed, in part, holding that the damages plaintiffs were entitled to recover under 93A, on account of the AIGDC’s post-judgment violation of 93A and 176D must be based on the underlying judgment in the plaintiffs’ tort action, and not the loss of use of the sum ultimately included in AIGDC’s late-tendered settlement offer months after the jury’s verdict. As is relevant here, the text of 93A provides:
[I]f the court finds for the petitioner, recovery shall be in the amount of actual damages … or up to three but not less than two times such amount if the court finds that the use of employment of the act or practice was a willful or knowing violation of [c. 93A, § 2]…. For the purposes of this chapter, the amount of actual damages to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction or occurrence….
The Court reasoned that the plain language of 93A required it to award as 93A damages, double the amount of the judgment entered in favor of the plaintiffs on their underlying negligence claims, or $22 million. Notably, the Court concluded by acknowledging that this award was an “enormous sum” and hinted that the Legislature may wish to consider expanding the range of permissible punitive damages to be awarded for knowing or willful violations of the statue to include more than single, but less than double damages; or to develop a special measure of punitive damages applicable to unfair claim settlement practice cases brought under 176D and 93A.