A pair of automobile insurance decisions by the Supreme Judicial Court in December 1998 promises to reshape bodily injury cases in a number of ways. In Lazaris v. Metropolitan Property & Casualty Insurance Company, 428 Mass. 502 (1998), and Premier Insurance Company of Massachusetts v. Furtado, 428 Mass. 507 (1998), the Supreme Judicial Court completely dispatched the principles set forth in Thaler v. The American Ins. Co., 34 Mass. App. Ct. 639 (1993), and assured automobile insurers that they may, indeed, terminate their legal defense of their insureds after tendering the policy limits.

     A little history helps put these current events in perspective. In 1992 and 1993, the Appeals Court took up the mirror issues. The first of the two cases considered by that court was Aetna Casualty & Surety v. Sullivan, 33 Mass. App. Ct. 154 (1992). The central issue in the case was whether the insurer's duty to defend its insured was terminated by the tendering of the policy limits to the third party claimant. The insurer wisely sought a declaratory judgment on the questions, but received disheartening news from the court: Under the Fifth Edition policy then in existence, the duty to defend did not end with the payment of the policy limits. Indeed, the court ruled that the duty to defend under the policy continued until the matter had been settled or a judgment had been rendered, and after the policy limits had been paid to satisfy some or all of those obligations.

     In the following year, the Thaler case was considered. In Thaler the Appeals Court concluded that, if liability were undisputed, and the claimant's damages clearly exceeded the policy limits, it would be a violation of G.L. c. 93A for the insurer to insist upon a release before tendering the policy limits. The reasoning of the court was twofold: The court noted the duty imposed upon insurers by G.L. c. 176D, § 3(9)(f), which requires insurers to "effectuate prompt, fair and equitable settlements of claims" when liability is reasonably clear. Id. at 642. In addition, the court reasoned, under the Sullivan case, the duty to defend the insured did not end with the tender of the policy; the insured would still be entitled to continuing representation. Id.

     The Thaler court was apparently unmindful of the fact that between Sullivan and Thaler the insurance policy had been changed. Under the Sixth Edition policy approved by the Insurance Commissioner in January 1993, the language regarding the termination of legal representation after tender of the policy limits was amended. The new policy more clearly articulated the intent of the automobile insurers, to wit: The duty to defend ends with the tender of the policy limits.

     Thaler rather quickly made its mark. In many cases where the liability was undisputed, and the damages clearly exceeded the policy limits, the policy limits were paid out. Thaler was utilized in contexts outside of the automobile insurance arena, and was applied to other liability policies as well. A few insurers, however, chose to lay the groundwork for the reversal of Thaler. Choosing their cases carefully, the insurers denied Thaler payments. Cases which were "groomed" for appeals included those where there was some contest over liability or damages, as well as those in which liability was perfectly clear, and the damages did exceed the policy limits. Avoided, however, were the cases which had astronomical damages, which might expose the insurer to significant bad faith damages should the courts not reverse Thaler. Interestingly, at the same time, most insurers were not gambling on the Sixth Edition amendments. Instead, they continued to defend their insureds, even if they made policy limits payments under Thaler.

     A number of trial court decisions applied the Thaler principles. A common refrain in many of these cases was the argument by the insurance companies that Sullivan had provided the underpinning for Thaler, and that support had been removed by the insurance policy amendments in 1993. This argument was not persuasive. There were clarifications to the Thaler doctrine, but these focused, for example, on interpretations of the phrase "uncontested liability."
Indeed, the vitality of Thaler seemed strong as a few cases rose to the appellate courts on G.L. c. 93A issues. In Clegg v. Butler, 424 Mass. 413 (1997), the Supreme Judicial Court cited Thaler with approval when it discussed the duty of insurers to effectuate settlements pursuant to G.L. c. 176D, § 3(9)(f). Clegg at 419. The Supreme Judicial Court also appeared to affirm the rule of Thaler when it affirmed the award of G.L. c. 93A damages against an insurer which had demanded a release before tendering policy limits under circumstances when liability was undisputed and damages greatly exceeded the policy limits. Kapp v. Arbella Mutual Insurance Company, 426 Mass. 683 (1998).

     Ten months later, the Supreme Judicial Court reversed this apparent tide. The first of its two cases was Lazaris, which involved a disputed liability situation. In brief, the plaintiff was a pedestrian who was hit by Metropolitan's insured while crossing a street. The trial judge allowed summary judgment for the insurer, ruling that liability was not even reasonably clear, and that a good faith basis existed for disputing liability. The Supreme Judicial Court agreed with the judge's conclusion, and that affirmation could easily have provided a fitting end to the appeal. Nevertheless, the court, mindful of similar issues pending on the interpretation of G.L. c. 176D, § 3(9)(f), seized the opportunity to overrule Thaler.

    The key word in the court's analysis was "settlement." The court reasoned that a case could not be "settled" without a release. The court expressed its concern that, "On one side, the company may be sued for unfair settlement practices by a claimant disgruntled by the company's failure to pay, and, on the other side, the company may be sued by an insured disgruntled by the company's payment of the policy limit without obtaining a release. We do not construe G.L. c. 176D, § 3(9)(f), to place insurers in such a position." Hence, the end of the Thaler doctrine.

     The rationale for Lazaris was in some measure belied, however, by the Furtado decision, which was the next opinion of the court. Furtado concerned a demand by an insurer for releases of both of its insureds. The underlying accident was caused by the wife, who was operating the car owned by her husband, the insured. She was clearly at fault, having been intoxicated, and having pled guilty to two counts of motor vehicle homicide. The policy was for only $40,000, which was paid into court. The insurer denied liability under Thaler, but sought declaratory judgment that it could abandon the defense of the case after paying its policy limits. The trial court found a violation of G.L. c. 93A, § 2, but found no bad faith, and awarded the interest on the funds held in escrow, the actual damages, or the nominal damages under c. 93A

     The insurer had not challenged the Thaler rule in the Superior Court, and though the Supreme Judicial Court declined to "accept" the belated challenge, it nevertheless discussed the application of Thaler to the facts of the case. The court resolved generally that an insurer can avoid liability under G.L. c. 93A if it (1) "has a reasonable and good faith belief that it is not obliged to make a payment to a claimant" who is asserting a G.L. c. 93A violation; (2) asserts that point; and (3) offers to take active steps to resolve that dispute. Under these circumstances, the company will be relieved of bad faith liability, even if its interpretation of the law proves incorrect. Id. at 510, citing Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 14-15 (1987), and Gulezian v. Lincoln Ins. Co., 399 Mass. 606, 613 (1987). These cases should be compared to the case of DiMarzo v. American Mutual Insurance Company, 389 Mass. 85 (1983), in which the company's misinterpretation of the policy was found to be unreasonable and in bad faith. In DiMarzo, the insurer did not seek a declaratory judgment on its policy interpretation, and it ignored opinions from the Department of Insurance that were contrary to its position on the policy language.

     More important, however, the Furtado court affirmed the trial court's ruling that Premier had no continuing duty to defend its insured, after it paid its policy limits into court. This confirmation of the Sixth Edition policy language received, remarkably, not one word of discussion, though it potentially opens the flood gates for abandonment of the defense of insureds at the reasonable discretion of the insurer.

     The combined effect of these two decisions is greatly harmful to the interests of claimants and insureds. Injured third party claimants have lost access to prompt payments of insurance policy limits even when liability is undisputed and the damages exceed the policy limits. Insureds have lost the right to compel the insurance company to continue its defense of a claim. All of the options have been shifted to the insurance companies, which have been awarded wide discretion as to when to tender policy limits. In a manner, Thaler payments will still be made, but only when the insurance companies decide to do so. Neither the interests of the claimants nor of the insureds will govern the timing of the payments.

     What will the likely fallout be in terms of G.L. c. 93A and the duty to defend under the Sixth Edition policy? While a third party claimant can no longer demand policy limits without a release, other theories of damages for bad faith litigation practices are left in place. In those cases in which the insurer causes a judgment to be entered against its insured as a result of bad faith settlement practices, and the judgment exceeds the policy limits, the insurer will still face the prospect of multiple damages claims pursuant to the well-established principles set forth in DiMarzo. In addition, when a judgment has been entered against an insured, and the judgment resulted from the bad faith settlement practices (for example, a low-ball offer), the measure of damages will be the amount of the judgment itself, without regard to the limits of the insurance policy, pursuant to G.L. c. 93A, § 9, as amended by St. 1989, c. 580. Absent a judgment, an insurance company will be liable for actual damages, typically the loss of the use of money, which was caused by any of its bad faith settlement practices.

     One can reasonably expect the next wave of first party G.L. c. 93A litigation to focus on the question of whether policy limits were tendered in good faith when an insurer decides it no longer wishes to defend a case. Although the Sixth Edition policy language would seem to offer a green light to insurers who wish to avoid defense obligations in cases where the cost of litigation might easily exceed the policy limits, there is not yet a definitive guideline that they may do so. A duty to an insured may still exist. This duty was described in Thaler as follows:

While the policy in this case did not expressly provide that American [Insurance Co.] require a release from a claimant before payment of the policy limits, implicit in every contract between an insurer and the insured is a covenant of good faith and fair dealing. Murach v. Massachusetts Bonding & Ins. Co. 339 Mass. 184, 186-189 (1959). DiMarzo v. American Mut. Ins. Co., 389 Mass. 85, 97 (1983). In determining the scope of this obligation, the understanding or expectations of an objectively reasonable insured can be considered. Hazen Paper Co. v. Unitied States Fid. Guar. Co., 407 Mass. 689, 700 (1990). Aetna Cas. & Sur. Co. v. Sullivan, 33 Mass. App. Ct. at 156. Ordinarily, because the payment of policy limits to a claimant removes a potential incentive for a claimant to settle with an insured, an insured arguably might expect that an insurer's covenant of good faith and fair dealing would require the insurer to obtain a release before paying out the limits of the coverage purchased. See Murach v. Massachusetts Bonding & Ins. Co., 339 Mass. at 187 (good faith requires an insurer in deciding whether to settle or try a case to act as if no policy limits were applicable to the claim).