On August 12, 2016, the Appeals Court affirmed an unfair claim practice judgment against American States Insurance Company (“American States”) totaling, with interest, costs, and attorney fees, a little over one million dollars.
The Appeals Court opinion denied American States’ appeal of a Superior Court decision finding American States liable to Daniel and Rachel McLaughlin (“McLaughlins”) for its failure to adequately investigate their claim and for its failure to “make a reasonable offer of settlement after liability of its insured became reasonably clear.”
The McLaughlins had claimed against an American States’ insured for the faulty drilling of a well for a home being built in Osterville. The McLaughlins had paid $185,000 for plantings at the new home and paid American States’ insured to drill a well to supply irrigation. When the plants died because of salt water from the well, the homeowners claimed $164,000 in damages against American States’ insured.
After approximately three years of attempting to obtain a settlement, the homeowners (the McLaughlins) sued American States’ insured as well as the general contractor and subcontractor who had hired American States’ insured.
After the contractor and the subcontractor each paid $50,000 to settle the McLaughlin’s claims against them, a jury trial against American States’ insured resulted in a judgment for the McLaughlins. Due to the existence of the prior settlement, however, the judgment was entered for zero dollars.
Notwithstanding their 2008 zero-dollar judgment, the McLaughlins pursued an unfair claim practice suit over the next six years against American States.
In 2014, after a seventeen-day jury-waived trial, a Superior Court judge found American States liable and awarded the McLaughlins over $900,000 in attorney’s fees and interest. The denial of American States’ appeal will add approximately $220,000 in additional interest to the Superior Court award.
$164,000 claim for dead shrubbery caused by well spewing salt water
In 2003, American States insured Shaun Harrington (“Mr. Harrington”), under a business owner’s policy. Mr. Harrington’s business was drilling wells on Cape Cod under the business name, All Cape Well Drilling.
In the spring of 2003, the McLaughlins hired Assurance Construction, Inc. (“Assurance”) as their general contractor . Assurance was charged with building a new home in Osterville on Cape Cod. The new home sat on a peninsula, surrounded on three sides by salt water bodies connected to Nantucket Sound.
The construction project included a substantial landscaping installation that required a multi-zone irrigation system that would require substantial amounts of water. To reduce water costs, the irrigation system was to be charged from a well rather than from the municipal water system.
Assurance subcontracted the installation of the irrigation system to Waterworks Irrigation, Inc. (“Waterworks”). Waterworks, in turn, subcontracted the actually drilling of the needed well to Mr. Harrington.
Mr. Harrington drilled the well in April, 2003. He ultimately drilled in the only location on site that his drilling rig would fit, approximately 110 feet from the shoreline.
After drilling the well, Mr. Harrington tested the water by tasting it. Satisfied the water tasted fresh and with the prospect that the well produced a volume of water adequate to meet the requirements of the irrigation system, Mr. Harrington considered his work complete and left the site.
After the well had been dug, the McLaughlins then had decorative and ornamental landscaping plantings installed in May and June of 2003, at a cost of approximately $185,000. In July and August, 2003, the plantings began to show signs of distress. In late August, after trying unsuccessfully to reverse the damage by adjusting the watering schedule, the McLaughlins learned that the damage to their new plantings had been caused by salt water. The salt water was produced by the well being pumped through the irrigation system.
American States’ claim handling leads to lawsuit
Once the cause of their loss had been identified, the McLaughlins and their insurance agent tried to reach a settlement with American States during the remainder of 2003 and in 2004. The Appeals Court decision outlined the tenor of the responses the McLaughlins and their agent received.
- The claim form submitted to American States by Mr. Harrington’s agent indicated that Mr. Harrington did not believe he was at fault.
- American States took a recorded statement from Mr. Harrington after the McLaughlins’ claim had been reported where Mr. Harrington’s only explanation for what happened to cause the transition of the well from fresh to salt water was that it was an “act of God.”
- When the McLaughlins’ insurance agent called in February 2004, to ask about the delay, the adjuster taking the call “adopted an aggressive and hostile approach toward the McLaughlins’ agent, to the extent that the agent asked to speak to his supervisor”. The adjuster refused to let the agent talk to his supervisor.
- When Rachel McLaughlin called the next day about the treatment of her agent and the delay in the claim, the same adjuster advised her that, in his view, Mr. Harrington was not liable for the damage because the well was pumping fresh water when Mr. Harrington completed his work and Mr. Harrington had no reason to believe it would eventually begin pumping salt water.
- The same adjuster advised her that American States would not be liable if the well pumped fresh water even for only one day.
- Also, the adjuster suggested that other causes might have led to the damage to the plantings, including an unusually harsh winter, and observed that he did not even have evidence that the plantings were dead.
- When Rachel McLaughlin requested an explanation of American States failure to send a field claims adjuster to the site, the adjuster advised her that American States had no intention of doing so.
- In May 2004, American States reassigned the file to an adjuster in Illinois and, as the Appeals Court observed, “[American States] claims investigation (such as it was) continued in like manner thereafter.”
- This new adjuster in June 2004, decided to deny the claim, but “[ American States’] attorney…did not advise the McLaughlins’ attorney of the denial.”
Suit to recover against American States’ insured results in no damages paid
After making no progress on settling their claim, the McLaughlins commenced a lawsuit in February 2006 in the Barnstable Superior Court, alleging negligence against Mr. Harrington, Waterworks, and Assurance. American States defended Mr. Harrington.
In June of 2008, shortly before trial, Waterworks and Assurance each settled with the McLaughlins for $50,000. The case against Mr. Harrington proceeded to trial, and a jury found Mr. Harrington liable, awarding $37,500 in damages.
However, Mr. Harrington’s counsel, appointed by American States, moved, under the Massachusetts joint tortfeasor statute, G. L. c. 231B, s 4, to offset the $100,000 settlement received by the McLaughlins from Assurance and Waterworks against the $37,500 judgment awarded them at trial.
This motion was allowed, and an amended judgment entered for the plaintiffs with an award of zero dollars.
The McLaughlins did appeal the zero-dollar award to the Appeals Court but their appeal was denied in 2010.
The McLaughlins win unfair claim practice suit against American States
In June of 2007, the McLaughlins had their attorney sent a demand letter under G. L. c. 93A and 176D to American States alleging that American States had engaged in unfair claim practices with regard to its handling of their claim against Mr. Harrington.
Not obtaining any relief, the McLaughlins then commenced their action against American States, claiming unfair insurance settlement practices in violation of G. L. cc. 93A and 176D.
After an eleven-day trial on liability, the judge concluded that American States had failed to conduct a prompt, thorough, and objective investigation and that American States had failed to make a reasonable offer of settlement for several years after Mr. Harrington’s liability had become reasonably clear.
The judge’s memorandum of decision on liability totaled eighty-one pages. Among the findings that the judge found American States liable for, including failing to investigate and make a settlement offer when liability was reasonably clear were:
- From his experience, Mr. Harrington was aware that wells on Cape Cod drilled close to sea water might turn from fresh to salt water, by means of a phenomenon known as “upconing.” In such circumstances, as fresh water is pumped out of the well, salt water is drawn in to replace it.
- Harrington was concerned about the possibility that upconing could eventually occur in the McLaughlins’ well, but he failed to advise Waterworks or the McLaughlins of the possibility of the well pumping out salt water.
- Prudent practice of well drillers on Cape Cod in 2003, in circumstances of wells drilled near salt water bodies, was to test the water produced by the well at regular intervals after drilling, but Mr. Harrington did not do so and did not advise Waterworks or the McLaughlins that they should.
- A well Mr. Harrington previously drilled in a seaside location not far from the McLaughlins’ property had turned to salt water after initially producing fresh water.
- Though local ordinances required him to obtain a municipal permit before drilling a well, Mr. Harrington did not apply for a permit. In addition, though State regulations required him to submit a well completion report to the Department of Environmental Management immediately which he did not do.
- When the adjuster handling the McLaughlins’ claim finally reviewed it with her supervisor, he advised several lines of investigation to pursue, including whether there is a way to prevent salt water infiltration of a well in close proximity to the sea, and whether Mr. Harrington had warned Waterworks or the McLaughlins about the risk of salt water infiltration.
- The supervisor also expressed his opinion that liability of American States’ insured, Mr. Harrington, was likely, and expressed his skepticism about Mr. Harrington’s insistence that the damage was an act of God, noting “God didn’t install the well.”
- On May 18, 2004, the independent adjuster submitted a report documenting damage to plants and his consultation with an experienced local nurseryman who confirmed that the damage had been caused by salt water produced by the well.
- The adjuster’s report advised that the local nurseryman offered to furnish an estimate of the cost of the damaged plants for a fee of $500, which he would waive if the McLaughlins purchased replacement plants from him. However, American States never responded to the independent adjuster’s request for authorization to have the nurseryman furnish a cost estimate.
Following an additional six-day jury-waived trial on damages, the judge wrote a forty-page memorandum finding that the McLaughlins were entitled to recover their reasonable attorney’s fees and expenses incurred in the prosecution of their claim against Mr. Harrington. The judge declined to award multiple damages, based on the violation of G. L. c. 93A. The judge also declined to award damages based on the McLaughlins’ loss of use of funds from the date liability became reasonably clear. Both parties filed cross appeals.
Appeals Court affirms trial judge finding of unfair claim practices by American States
American States appealed to the Appeals Court the Superior Court judge’s decision and awards.
In that appeal, American States argued the trial judge incorrectly determined it had failed to conduct a reasonable investigation of the McLaughlins’ claim, or had failed to make a reasonable offer of settlement after liability of its insured became reasonably clear.
On American States appeal the Appeals Court noted that taken together, G. L. c. 93A, § 2(a), and G. L. c. 176D, § 3(9)(f):
require an insurer . . . ‘promptly to put a fair and reasonable offer on the table when liability and damages become clear, either within the thirty-day period set forth in G. L. c. 93A, § 9(3), or as soon thereafter as liability and damages make themselves apparent.’
The judge’s hearing of the appeal found the evidence supported the trial judge’s finding American States liability was reasonably clear as of May, 2004.
Along with the other evidence of Mr. Harrington’s knowledge of the risk of drilling a well near the ocean, liability had become reasonably clear in May 2004, because American States’ independent adjuster submitted a report confirming that the McLaughlins’ plantings had been killed or damaged by salt water pumped through the irrigation system supplied by the well Mr. Harrington had drilled.
The judges further noted that American States had by that time substantiated invoices supplied by the McLaughlins totaling more than $66,000. Additionally, American States had by then in its possession a letter from a hydrologist friend of Mr. Harrington’s advising of the risk of salt water intrusion into wells drilled in close proximity to the sea, if the well were used continuously or over-pumped. American States had previously been advised by Mr. Harrington that the McLaughlins’ irrigation system was a multi-zone system that would water plantings on a large site, and therefore would be used heavily.
Moreover, American States knew that Mr. Harrington was aware from his own experience of the possibility that salt water could infiltrate the well, yet failed to advise Waterworks or the McLaughlins of the possibility of such contamination, or of the need to monitor water quality as water was pumped from the well over time.
Finally, the appellate judges ruled American States’ failure to consult an independent expert on the standard of care, or on the likely cause of salt water contamination of the McLaughlins’ well, rendered its unquestioning acceptance of Mr. Harrington’s denial of responsibility unreasonable and that “[a] reasonable objective insurer would have concluded by May 2004 that Mr. Harrington was liable to McLaughlin, at the very least for failure to warn.”
However, American States did not make a $50,000 settlement offer until some four years later, on June 6, 2008 (the Friday before the Monday on which the trial began). Then during trial, American States reduced its $50,000 settlement offer, to $10,000, on the day the negligence case was submitted to the jury.
The McLaughlins’ multiple damage appeal denied but panel grants further damages and appellate legal fees
On their appeal, the McLaughlins argued that the judge had been correct as far as he had gone on finding American States liable for unfair claim practices, but that the judge erred in refusing to award the McLaughlins multiple damages.
The Appeals Court denied this appeal affirming the trial judge’s specific finding that American States “did not act knowingly or wilfully in its failure to make a reasonable settlement offer.”
However, the Appeals Court did award the McLaughlins additional compensation by allowing their request for appellate legal fees and by allowing the McLaughlins loss of use damages.
In that decision, the Appeals Court noted the McLaughlins requested an award of their appellate attorney’s fees incurred in this appeal. The panel responded stating, “We agree that such an award is appropriate.” The court then allowed fourteen days for the McLaughlins to file with the court clerk a fee application and allowed American States fourteen days thereafter to respond.
In addition, the McLaughlins also argued in their cross appeal that they should also have been awarded an amount to compensate them for the loss of use of the funds American States should have offered in settlement once Mr. Harrington’s liability became clear.
The Appeals Court agreed stating that although the extent of Mr. Harrington’s ultimate liability was reduced by offset of settlement payments made by Waterworks and Assurance, those settlement offers were not made until the eve of trial and did not obviate the McLaughlins’ loss of use of the funds prior to that time. The panel then ruled:
Accordingly, the McLaughlins are entitled to recover loss of use damages ‘from the time when the claim should have been paid to the time that a settlement or judgment was paid’…
The final decision of the Appeals Court stated:
So much of the judgment as declined to award loss of use damages to the McLaughlins is reversed. In all other respects the judgment is affirmed. The case is remanded to the Superior Court for further proceedings consistent with this opinion.