In its recent decision in Rhodes v. AIG Domestic Claims, et al., 2012 Mass. LEXIS 28 (Mass. Feb. 10, 2012), the Supreme Judicial Court of Massachusetts, Massachusetts’ highest court, addressed how damages are to be awarded under Massachusetts’ General Law 93A, § 9 (Massachusetts’ consumer protection statute) for an insurer’s failure to effectuate a prompt, fair and equitable settlement with a claimant, both prior to and following a verdict in an underlying lawsuit.
The underlying matter in Rhodes involved an accident between a tractor-trailer leased and operated by the insured, GAF, and a passenger vehicle, causing catastrophic injuries to plaintiff and rendering her a paraplegic. GAF had $2 million in primary coverage through Zurich and $50 million in excess umbrella coverage through National Union. AIG Domestic Claims (“AIGDC”) was the entity tasked with handling the claim on behalf of National Union. Following an initial investigation, GAF’s third-party administrator advised Zurich and AIGDC in writing that liability was clear. After suit was filed, the same third-party administrator estimated the value of the case to be between $5 million and $10 million. A year later, after the driver of the truck plead guilty to a criminal charge relating to his operation of the vehicle, plaintiff made a settlement demand of $18.5 million, which was later reduced to $16.5 million.
Zurich tendered its $2 million limit to AIGDC. Six months prior to trial, AIGDC attended a meeting with defense counsel at which time it was advised that the average settlement value for comparable cases was $6.6 million and the average jury verdict was $9.6 million. Notwithstanding, just weeks later, an initial settlement offer was made to plaintiffs in the amount of $2 million, representing the value of the Zurich policy. The Rhodes court noted that following this initial settlement offer, AIGDC engaged in delay tactics to avoid mediating the case until just one month prior to trial. At the mediation, AIGDC offered $2.75 million, and later offered $3.5 million after plaintiffs countered at $15 million. The court noted that the AIGDC representative attended the mediation with authority to settle up to $3.75 million, but elected not to make such an offer, even as the damages analysis changed for the worse at the mediation. Instead, the AIGDC representative left the mediation one hour after making his offer of $3.5 million. The matter ultimately went to trial, on damages alone (GAF had stipulated to liability), and the jury returned with a verdict, which when combined with interest, totaled $11.3 million.
GAF immediately moved for a new trial and for an appeal. Shortly thereafter, plaintiffs sent demand letters to Zurich and AIGDC pursuant to G.L. c. 93A, alleging that the insurers had failed to effect a prompt and equitable settlement. This statute authorizes an individual to prosecute an action for unfair business practices, including violation of c. 176D, which is Massachusetts’ unfair insurance practices statute. C. 176D, § 3(9)(f) defines unfair claim settlement practices to include “[f]ailing to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.” AIGDC responded to plaintiffs’ demand letter one month later by offering to settle both the underlying matter and the c. 93A claim for $7 million, which included Zurich’s $2 million. Zurich separately responded to the plaintiffs by paying an amount just in excess of $2 million. Plaintiffs and AIGDC thereafter settled the underlying negligence claim for $8.965 million, but with plaintiffs maintaining their right to prosecute their c. 93A claim.
In a subsequent bench trial on the issue, a Massachusetts trial court found that AIGDC willfully and knowingly breached its duty to make a fair and reasonable offer prior to trial once liability and damages became reasonably clear, but that the evidence established that plaintiffs would not have accepted any such offer, and as such, damages were not available under c. 93A for AIGDC’s preverdict conduct. The court went on, however, to find that AIGDC engaged in postverdict misconduct by failing to effectuate a prompt and fair settlement after the verdict was returned. The court specifically found that AIGDC’s offer of $7 million was “not only unreasonable, but insulting.” The judge awarded plaintiffs loss of use damages for this violation in the amount of $448,250, calculated as the lost interest on the $8.965 million settlement from the date the matter should have settled to the date that it actually did settle.
The case was appealed to the Massachusetts Appeals Court, which held that plaintiffs should have been awarded damages for AIGDC’s preverdict conduct. On further appellate review, the Massachusetts Supreme Judicial Court (“SJC”) agreed that plaintiffs established a violation of c. 93A with respect to AIGDC’s pretrial conduct by showing that they suffered a loss due to AIGDC’s failure to make a timely, reasonable offer. Moreover, the SJC held that the lower court erred in considering whether plaintiffs would have accepted such an offer, since such is not a relevant consideration in finding a violation of the statute. Notwithstanding, the SJC held that it was not necessary to determine plaintiffs’ damages as a result of AIGDC’s pretrial conduct, since plaintiffs could not recover twice for AIGDC’s failure to effectuate a prompt and reasonable settlement. As such, the SJC focused solely on what damages were available to plaintiffs as a result of AIGDC’s postverdict conduct.
Toward this end, the SJC looked to the language of c. 93A § 9(3), which states that in the event of a violation, the “recovery shall be in the amount of actual damages or twenty-five dollars, whichever is greater; up to three but not less than two time such amount if the court finds that the use of employment of the act or practice was a willful or knowing violation … .” This language, reasoned the SJC, dictated that the damages available to plaintiffs were the actual value of the verdict, multiplied by no less than two since the lower court concluded that AIGDC’s conduct was willful and knowing. In other words, the lower court’s “loss of use” analysis, which awarded damages based on lost interest, was not an appropriate methodology for calculating c. 93A damages. Instead, the SJC concluded that plaintiffs should have been awarded $22 million, representing the underlying $11 million verdict multiplied by two.
In reaching its holding, the SJC rejected AIGDC’s arguments that damages under c. 93A should not be awarded since plaintiffs’ underlying tort injuries did not arise out of AIGDC’s claims handling conduct. In particular, the SJC rejected AIGDC’s arguments that the statute only applies in the first-party insurance context, or that the judgment against GAF did not arise out of the same transaction or occurrence as the c. 93A claim. The latter argument, explained the SJC, was a matter of form over substance and not relevant to recovery under the statute. The SJC further rejected AIGDC’s contention that the multiplied damages aspect of c. 93A was “grossly excessive” and thus violative of the Fourteenth Amendment. Such an argument, explained the court, ignored the fact that AIGDC’s conduct in failing to effect a prompt settlement despite the clear evidence of liability and damages was “sufficiently reprehensible” and that in any event, the ratio between compensatory damages and punitive damages was not excessive. The SJC, in passing, acknowledged that “$22 million in c. 93A damages is an enormous sum,” but that “the language and history of … c. 93A leave no option but to calculate the double damages award against AIGDC based on the amount of the underlying tort judgment.”
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