Massachusetts Supreme Judicial Court Ruling Affirms Consumer Protection and Insurance Bad Faith Remedies

by David White

On February 10, 2012, the Massachusetts Supreme Judicial Court issued an important and strongly pro-consumer decision in the case of Rhodes v. AIG Domestic Claims, Inc., 461 Mass. 486 (2012). The decision erased uncertainties created by the Appeals Court decision in the same case (78 Mass. App. Ct. 518 (2010), and it affirmed the strong damages remedies available for consumers who have been wronged by unfair claims practices by insurance companies.

Factual Background:  The Rhodes case arose from a serious motor vehicle accident which occurred in 2002.  The plaintiff was rear-ended by an 18-wheel tractor-trailer while stopped by a traffic detail for tree work over the roadway. The accident left the plaintiff paraplegic. She sustained past and future special damages over $3 million. Other plaintiffs in the injury lawsuit included her husband and children for loss of consortium claims.

By August 2003, the damages in the case was fully documented, including a day-in-the-life videotape.  The demand for settlement was forwarded to the two insurers: Zurich American Insurance Company, which provided the primary layer of $2 million in liability insurance, and to the claims administrator for the AIG affiliate, which provided an additional $50 million of coverage. (The insurer was National Union Fire Insurance Company of Pittsburgh, PA; its claims administrator was AIG Domestic Claims, Inc., formerly known as AIG Technical Services, Inc. They will simply be called AIGDC.)

Liability was clear and never contested. Outside adjustors and defense counsel reviewing the case believed the damages were likely to exceed $5 million. Regardless, no offers of settlement were forthcoming until August 2004, just weeks before trial, when the parties met at mediation. Then, despite authority to make a larger offer, the combined offer of settlement (which included Zurich, AIGDC, and a contribution from the insurer for the tree service company) was only $3.5 million. The offer was rejected.

Trial of the Underlying Tort Case: At trial, liability was stipulated. After the jury retired to deliberate, AIGDC raised the combined offer to $5 million, which was also rejected.  The jury found in favor of the plaintiffs in the amount of $9.4million, which, with interest, came to approximately $11.3 million.

After the post-trial motions were denied, AIGDC appealed. Plaintiffs countered with a demand pursuant to G.L. c. 93A and c. 176D. While the c. 93A case was pending, the claims in the underlying case were settled, and the appeal was dismissed.

Trial of the G.L. c. 93A Case:  The judge who presided over the c. 93A trial found that AIGDC had acted in bad faith, but limited damages to the loss of use of the money. The judge also limited the period that damages could be awarded, reasoning that the plaintiff would not likely have accepted a larger offer, even if made at the mediation. The judge did find that the appeal had been frivolous, but again only considered “loss of use of money” damages. He awarded a modest judgment, which included double damages for willful and knowing violations of G.L. c. 93A, § 9 and G.L. c. 176D, § 3(9)(f). Plaintiffs appealed.

The Appeals Court Rulings:  A divided Appeals Court affirmed the double damages award, but again limited damages to the loss of the use of the money. Despite the fact that the insurer had made no offer up to the month before trial, and despite the fact that the jury awarded over $9 million resulting in a judgment of $11.3 million, the court held that the minimal offer of $3.5 million cut off further damages prior to trial. On top of that, the court ruled that the damages would be limited to the loss of the use of the funds. The Appeals Court also affirmed the loss of use damages for the post-trial misconduct, agreeing that the appeal was without merit. But again, the court declined to utilize the judgment for the purposes of measuring damages, completely skipping over any analysis of the clear language of G.L. c. 93A, § 9(3). A vigorous dissent by Justice Berry identified the flaw in the court’s reasoning, which was the fact that the judgment should have been the amount multiplied for the calculation of damages.

The SJC Decision:  Fortunately, the SJC reversed. Affirming its earlier decisions in Hopkins v. Liberty Mutual Ins. Co.,  434 Mass. 556 (2001) and Bobick v. United States Fid. & Guar. Co., 349 Mass. 652 (2003), the court held that plaintiffs were not required to demonstrate that they would have accepted or rejected a settlement offer, if it had been made. Rather, the court stated, “[i]t has been and remains the rule that the plaintiffs need only prove that they suffered a loss, or an adverse consequence, due to the insurer’s failure to make a timely, reasonable offer; the plaintiffs need not speculate about what they would have done with a  hypothetical offer that the insurers might have, but in fact did not, make on a timely basis.”

The court then turned to the question of the measure of damages. The court reviewed the history of damages under G.L. c. 93A cases which had led to limitations to the loss of the use of money. These precedents were followed by the amendment to G.L. c. 93A, §§ 9 and 11 in 1989, which state “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 roundly rejected AIGDC’s argument that no violation caused the judgment, and therefore the amendment should not apply, noting that nothing in the statute itself distinguished between pre- and post-judgment violations, and that nothing in c. 93A, § 9 requires a causal relationship between the unfair practice and the underlying judgment itself. Precedent for using the judgment in a post-judgment misconduct case had already been established by the SJC in  R.W. Granger & Sons v. J & S Insulation, Inc., 345 Mass. 66 (2001).

The court brushed away AIGDC’s other arguments. AIGDC attempted to resurrect the state of the law as it existed prior to 1979, when privity was required and c. 93A afforded relief only in first party claims. That rule was abolished by legislative amendments in 1979, as recognized by Van Dyke v. St. Paul Fire & Marine Ins. Co., 338 Mass. 671, 674-675 (1983). The court also rejected the assertion that the judgment in the tort case was not the same and underlying transaction or occurrence and therefore could not be the basis for multiple damages. Again, there was ample precedent that a separate but related case can be considered the same and underlying transaction or occurrence.

Finally, the court dismissed AIGDC’s argument that a double damages award would be grossly excessive punitive damages. The court carefully considered the constitutional requirements governing punitive damages, and concluded without hesitation that the double damages in this case would not offend due process protections.

The court affirmed the trial court’s findings that the underlying insurer, Zurich, was not liable for violations of c. 93A.

The bottom line: The court held that the underlying judgment of $11.3 million should be the basis of the c. 93A judgment. “We recognize that $22 million in  c. 93A damages is an enormous sum, but the language and history of the 1989 amendment to c. 93A leave no option but to calculate the double damages award against AIGDC based on the amount of the underlying tort judgment.

Practice Pointer: Chapter 93A retains its force as a powerful inducement to settlement when liability, including fault and damages, are reasonably clear. A properly crafted c. 93A letter sent when the insurance company is violating c. 93A and c. 176D, should help spur settlement discussions. The letter also maximizes your client’s rights if the matter is tried and goes to judgment. While the better practice is to send the letter prior to trial, a letter post-judgment will still have effect if there is a frivolous appeal.

The Boston attorneys at Breakstone, White & Gluck are experienced at handling c. 93A claims. We look forward to the opportunity to assist referring counsel and clients with their c. 93A and c. 176D claims.

To read the full court decision, click here.