Rhodes v. AIG Domestic Claims, Inc.

• Decision Date: 10 February 2012
• Docket Number: SJC–10911.
• Parties: Marcia RHODES & others 1 v. AIG DOMESTIC CLAIMS, INC., & others.2
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

461 Mass. 486

961 N.E.2d 1067

Marcia RHODES & others 1

v.AIG DOMESTIC CLAIMS, INC., & others.2

SJC–10911.

Supreme Judicial Court of Massachusetts, Suffolk.

Submitted Oct. 6, 2011.Decided Feb. 10, 2012.

Margaret M. Pinkham & M. Frederick Pritzker, Boston (Daniel J. Brown with them) for the plaintiffs.

John P. Ryan (Anthony R. Zelle with him), Boston, for AIG Domestic Claims, Inc., & another.

Linda L. Morkan, of Connecticut (Gregory P. Varga with her) for Zurich American Insurance Company.Michael F. Aylward & Richard R. Eurich, Boston, for American Insurance Association, amicus curiae, submitted a brief.

Present: IRELAND, C.J., SPINA, CORDY, & BOTSFORD, JJ.

BOTSFORD, J.

The issues in this appeal relate to insurance claims settlement practices of a primary and an excess insurance carrier. Marcia Rhodes ³ received catastrophic injuries including permanent paraplegia when a tractor trailer hit the rear end of her car in January of 2002. She; her husband, Harold; and her daughter, Rebecca (collectively, plaintiffs or family) brought a tort action against, among others, the truck driver, his employer, and the company to which he was assigned by his employer, seeking damages for Marcia's injuries and loss of consortium on the part of Harold and Rebecca. At trial, which took place in September of 2004, the plaintiffs secured a judgment of approximately $11.3 million. The plaintiffs had made settlement demands on the primary and excess insurers of the company to whom the truck driver was assigned before the tort trial, but no settlement was forthcoming. Eight and one-half months after the jury's verdicts and while the defendants' appeals were pending, the insurers and the plaintiffs settled the tort action, and the appeals were withdrawn.

Before the settlement was reached in the tort action, the plaintiffs brought the present action against the two insurers under G.L. c. 93A, § 9, and G.L. c. 176D, § 3(9) ( f ), for failing to effect a prompt, fair, and equitable settlement of the plaintiffs' claims. Following a lengthy bench trial, a judge in the Superior Court determined that the primary insurer, Zurich American Insurance Company (Zurich), was not liable on the plaintiffs' claims of unfair settlement practices, but that the excess insurer, National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union), and more particularly its claims administrator, the defendant AIG Domestic Claims, Inc. (AIGDC),⁴ had engaged in wilful and knowing violations of G.L. c. 93A (c. 93A), and G.L. c. 176D (c. 176D), both before the trial in the tort action and after judgment entered in it. The judge, however, concluded that the plaintiffs could not recover for preverdict violations because they had not proved that the unfair or deceptive acts complained of before trial had caused them any “actual damages,” or injury. In connection with the postjudgment violation, the judge awarded damages—doubled because of the violation's wilful and knowing character—based on the plaintiffs' loss of use of the funds that they accepted in postjudgment settlement of their claims (i.e., interest on those funds).

The plaintiffs appealed to the Appeals Court. See Rhodes v. AIG Domestic Claims, Inc., 78 Mass.App.Ct. 299, 937 N.E.2d 471 (2010). Disagreeing with the trial judge, a divided panel of that court concluded that with respect to AIGDC's preverdict conduct in the tort action, “the causal link between AIGDC's unfair settlement practices and injury to the plaintiffs was sufficiently established” because AIGDC's conduct deprived the plaintiffs of “the opportunity to engage in a timely settlement process,” “compound[ed] their frustrations and fears,” and “exacerbat[ed] their losses.” Id. at 309, 310, 311, 937 N.E.2d 471. A majority of the panel further determined that the measure of damages for the preverdict violation should be the loss of use of the funds AIGDC had offered in settlement before the trial, reasoning that permitting insurers to limit their c. 93A and c. 176D liability to loss of use by making a reasonable, but tardy, offer was in keeping with c. 176D' s purpose of encouraging out-of-court settlements of insurance claims. ⁵ Id. at 312, 937 N.E.2d 471. The Appeals Court also awarded loss of use damages for AIGDC's postjudgment violation. Id. at 315, 937 N.E.2d 471.

The case is before us on the plaintiffs' application for further appellate review. We conclude that the damages the plaintiffs are entitled to recover under c. 93A, § 9, on account of the defendants' postjudgment violation of c. 93A, § 2, and c. 176D, § 3(9) ( f ), 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 verdicts. This conclusion makes it unnecessary to determine whether AIGDC's wilful and knowing violation of the applicable statutes before the verdicts in the tort case caused injury to the plaintiffs, because even if, as they argue, the plaintiffs did establish the requisite causal link between AIGDC's preverdict violations and injury and thereby are entitled to a multiple of the underlying tort judgment as damages, the plaintiffs may not recover that amount twice. We affirm the judge's determination that Zurich did not violate c. 93A and c. 176D, and is not liable to the plaintiffs.⁶

1. Background.⁷ a. The accident. There has never been a dispute that Marcia's accident was caused by the negligence of the truck driver, with no contributory negligence on her part. The force of the eighteen-wheel truck's crash into the back of Marcia's car fractured her spinal cord, rendering her paraplegic, and broke several of her ribs. Marcia was hospitalized from the day of the accident, January 9, 2002, until April 16, 2002, after undergoing spinal fusion surgery and two months of rehabilitation. Even after returning home, she could not move from her wheelchair to her bed or the toilet on her own. In May, 2002, she had emergency surgery to remove her gall bladder due to gangrene and spent another three weeks recovering in a hospital. In December, 2002, Marcia developed pressure sores and was bedridden for ten months, until October, 2003.

b. The tort action. Driver Logistic Services (DLS) had assigned Carlo Zalewski, its employee, to drive the truck involved in the accident for GAF Building Corp. (GAF). The truck was owned by Penske Truck Leasing Company (Penske) and leased to GAF. GAF held a $2 million primary automobile insurance policy with Zurich and a $50 million excess umbrella policy with National Union. AIGDC was National Union's claims administrator and managed the plaintiffs' excess insurance claim.

After investigation, on April 8, 2002, GAF's third-party claims administrator, Crawford & Company (Crawford), informed GAF, Zurich, and AIGDC in writing that Zalewski clearly was liable for Marcia's injuries and that his liability could be imputed to GAF. By July 3, 2002, GAF had determined that its policies with Zurich and National Union covered GAF, Zalewski, DLS, and Penske (collectively, GAF-insured defendants) for the accident.

On July 12, 2002, the plaintiffs filed their negligence action against the GAF-insured defendants in the Superior Court. On September 25, in a facsimile sent directly to David McIntosh, a claims director at Zurich, Crawford estimated the value of the case to be between $5 million and $10 million. ⁸ On November 21, Zalewski admitted to facts sufficient to support guilt on a criminal charge of operating negligently to endanger. Thereafter, on July 22, 2003, counsel for the plaintiffs made an oral settlement demand of $18.5 million. Approximately three weeks later, on August 13, the plaintiffs submitted a written settlement demand of $16.5 million.⁹

On December 19, 2003, the claims director for Zurich asked for approval before the end of the year to tender Zurich's $2 million policy limits to AIGDC as excess insurer, noting in her report that the probability of a plaintiffs' verdict was one hundred per cent, and there was no possibility of a comparative negligence reduction. After receiving authorization, the claims director orally tendered the limits to AIGDC in a telephone call on January 23, 2004. The AIGDC representative responded that he needed the tender in writing (despite knowing as early as November of 2003 that the tender would be made), and the tender of the Zurich policy was made formally in writing on March 29, 2004. No information was communicated to the family regarding this tender. Zurich continued to pay defense costs for the litigation ¹⁰ because AIGDC claimed that it had no defense obligation under its excess policy, but Zurich reserved the right to recover the defense costs from AIGDC. Nonetheless, AIGDC participated in the defense and hired the law firm of Campbell & Campbell in December, 2003, to serve as cocounsel for the GAF-insured defendants. In June, 2004, Campbell & Campbell took over as lead counsel.

On March 4, 2004, several GAF representatives met with their attorneys and a representative of AIGDC to discuss the results of jury verdict and settlement research. Among comparable automobile accident cases, mostly in Massachusetts, the average settlement was over $6.6 million, and the average verdict was over $9.6 million. Sometime between March 29, 2004, and the pretrial conference in the negligence action on April 1, 2004, the GAF-insured defendants made their first settlement offer to the family—Zurich's $2 million policy limits to settle the entire case. The plaintiffs' attorney thought the offer was wholly inadequate, and the family rejected it without making a counteroffer. Nevertheless, the plaintiffs agreed in mid-April to mediate the case. AIGDC did not want to mediate at that time, stating that it needed further discovery although discovery had closed more than six months before. The judge, however, did not accept AIGDC's...