Failure to Provide a Defense Has Dire Consequences in Massachusetts Even Without a Finding of Bad Faith
Boyle v. Zurich American Insurance Company, 36 N.E.3d 1229, 472 Mass. 649 (2015). The Massachusetts Supreme Judicial Court (“SJC”) followed the well-established notice-prejudice rule in Massachusetts, reiterating that an insurer relying on a breach of the timely notice condition by an insured to avoid its duty to defend must identify the precise manner in which its interests were prejudiced. Having affirmed the trial court’s determination that the insurer failed to meet this standard and therefore breached its duty to defend, the SJC ruled that the insurer was responsible for the entire $2,250,000 judgment entered against its insured in the suit that the insurer failed to defend. Notably, the SJC overturned the trial court’s determination that the insurer should receive a credit for $1,324,357 that it previously paid to settle direct claims made by the underlying plaintiffs against the insurer. The SJC ruled that direct claims made by underlying plaintiffs arising from an insurer’s breach of a policy are separate and distinct from an insured’s claims for breach of the duty to defend and the consequential damages arising therefrom.
This case was not all bad news for insurers. Rather, in its decision, the SJC reaffirmed that insurers do not expose themselves to multiple damages under Massachusetts’s bad faith statute (G.L. ch. 93A) by making negligent coverage and settlement decisions. The SJC upheld the trial court’s determination that the insurer did not violate Chapter 93A, § 11 because the Insurer’s failure to defend its insured against the underlying plaintiffs’ suit stemmed largely from the insurer’s clerk’s “unfortunate decision” to take no action upon receiving letters informing it of a hearing in damages following the insured’s default. The SJC agreed with the trial court that the insurer’s actions represented a “negligent miscalculation, rather than conduct involving dishonesty, fraud, deceit or misrepresentation.”
This case exemplifies the disastrous consequences, even without bad faith liability, of failing to provide a defense in Massachusetts as the insurer in this case was ultimately responsible for $3,574,357 on a policy with $50,000 limits.