October 17, 2016–A Boston excavation contractor, P. Gioioso & Sons, Inc. (“Gioioso”) and its prior insurer, Liberty Mutual Insurance Company (“Liberty”), have filed cross-appeals after a Superior Court Business Litigation Session decision finding against Gioioso in its claims that Liberty had breached its insurance contract, violated the insurance contracts covenant of good faith, had engaged in unfair business practices, and breached its fiduciary duty to Gioioso.
Gioioso had sued Liberty after Liberty billed it a $112,097.00 retrospective premium for a jury verdict against Gioioso that Liberty settled over Gioioso’s objection on appeal and after Liberty had demanded a $2,200,000 annual letter of credit in the runoff of Gioioso’s high-deductible insurance program. Liberty Mutual filed its own appeal from the Superior Court’s denial of its claim for attorney fees for the costs of the lawsuit.
Gioioso’s business and insurance program.
Gioioso is a Boston construction firm that specializes in excavation work relating to water and sewerage systems. Its gross revenues for the years involved in its suit ranged between $35 million and $63 million annually.
Between 2001 and 2010, Gioioso purchased its general liability, workers’ compensation and automobile insurance policies from Liberty. The policies for the years 2001 to 2005 were retrospectively rated. From 2005 until 2010, the policies were high-deductible policies in which Gioioso paid the first $300,000.00 of each covered loss and Liberty provided coverage for all losses exceeding the deductible.
Under the high-deductible program put together by Gioioso’s broker, USI New England, a Goldman Sachs company, Gioioso agreed to enter into a Security Agreement that required Gioioso to provide annual letters of credit guaranteeing Liberty’s receipt of any deductibles and premiums due Liberty under the program.
After Gioioso changed carriers in 2010, Liberty advised Gioioso that the Security Agreement required the posting of annual letters of credit in amounts determined by Liberty until 2015.
In 2012, Gioioso received what, in its opinion, was an unreasonable demand for a $2.2 million letter of credit to secure payments under the runoff of its high-deductible program. Gioioso also received at approximately the same time, a separate retrospective premium bill from Liberty for $112,097.00. This bill arose out of a 2005 insured loss involving the flooding of a church in Dorchester that resulted in a lawsuit against Gioioso. After an adverse jury verdict in 2011, Liberty filed an appeal for Gioioso but, before the appeal was heard, Liberty withdrew the appeal and settled the lawsuit over Gioioso objections.
Claims and counterclaims between Gioioso and Liberty
Soon after being advised of Liberty’s claim for a large letter of credit and a retrospective premium on the church loss Gioioso had demanded Liberty appeal and not settle, Gioioso filed suit against Liberty in Suffolk Superior Court in a four-count lawsuit alleging:
- Breach of contract.
- Breach of the covenant of good faith and fair dealing.
- Violation of G. L. c. 93A, §11, the Unfair Business Practice Act; and.
- Breach of fiduciary duty.
Gioioso’s suit claimed Liberty had made an artificially inflated demand for a $2,200,000 letter of credit under Gioioso’s Security Agreement with Liberty. Gioioso alleged this financial obligation caused Gioioso to lose business and suffer economic loss. Gioioso also disputed the right of Liberty to bill it for a retrospective premium from the church lawsuit because Liberty had improperly controlled Gioioso’s defense in that case by dropping an appeal over Gioioso objection.
For its part, Liberty answered Gioioso’s complaint denying any liability and filing a two‑count counterclaim seeking a judgment against Gioioso for the amount due under the 2005 policy for the retrospective premium resulting from the 2005 church loss. The second count alleged that Liberty was due, under the terms of the Security Agreement in force, any attorney fees it incurred in defending Gioioso’s lawsuit and in prosecuting the counterclaim.
Liberty moves for summary judgment on Gioioso’s claims and its counterclaims
After some discovery, Liberty moved for summary judgment in its favor on all counts of Gioioso’s complaint and also for summary judgment in its favor on all counts of its counterclaim.
The Business Litigation Session’s judge’s summary judgment decision present some answers to questions of first impression involving retrospective rating plans and an insurer’s duty to appeal an adverse verdict, and establishing good faith in setting letter of credit amounts under high-deductible insurance programs.
The First Baptist Church Litigation and its appeal
The First Baptist Church of Dorchester is a 190‑year-old congregation. One Sunday night in August 2005 a water main burst and flooded the church’s basement with four feet of water. The church’s safe, containing records dating back to 1836, went through the floor after the flood caused floor supports to give way. Additionally, the flood ruined two brand new boilers along with the motor for the church’s organ. The church sued Gioioso for $350,000.00 in damages claiming that Gioioso’s work for the Boston Water and Sewer Commission had caused the water main to burst. (“First Baptist Litigation”).
Liberty defended Gioioso in the First Baptist Litigation. After a two‑week trial in May 2011, a Boston jury found Gioioso liable for the church’s loss and awarded $288,295.00 that with the mandatory interest on the award resulted in a judgment against Gioioso of $354,000.
Court’s ruling on additional premium owed for settlement made over Gioioso’s objection
Liberty did file a timely notice of appeal on Gioioso’s behalf from the jury award in the First Baptist Litigation.
However, while the appeal was pending, Liberty sent the claim file and trial record to an independent law firm, for an opinion on the likelihood for a successful appeal. The new firm advised that they only saw a 5% to 10% chance that Gioioso would win on appeal. Gioioso still insisted that the appeal be prosecuted to a conclusion but Liberty settled the First Baptist Litigation, while the appeal was pending, notwithstanding Gioioso’s objection.
As a result of the settlement of the First Baptist Litigation, Liberty billed Gioioso the additional $112,997.00 under Gioioso’ 2005 policy’s retrospective rating plan.
Liberty’s position before the court on summary judgment was that Gioioso’ insurance policy provided that Liberty “may at [its] discretion . . . settle any claim or suit…” and, therefore, contractually it had the right to settle the First Baptist Litigation.
Gioioso contrary position was that an insurer “owes a duty to appeal in all instances where it appears that substantial interests of the insured may be served.” The Supreme Judicial Court has endorsed this position in a 2001 decision.
In his summary judgment decision, the judge did find an insurer had a duty to appeal judgments against its insured, but that duty arises, “only if reasonable grounds exist to believe that the insured’s interest might be served by the appeal”.
The court went on to rule that Gioioso had to show that Liberty had breached its duty to appeal by identifying some material, prejudicial ruling in the case being appealed and explaining the basis for arguing that it was erroneous. The court found though that the summary judgment record contained nothing regarding any prejudicial error that suggested the existence of a potentially meritorious grounds for appeal.
As to Gioioso’s argument for the court to apply a standard that “If there is any likelihood whatsoever” for a successful appeal the insurer had the duty to appeal to protect the insured’s interests. However, the court found against Gioioso stating, “Summary judgment cannot be avoided by simply arguing that ‘any likelihood whatsoever’ of success requires that an appeal be pursued.
Based upon Gioioso being unable to show that any reasonable basis for a successful appeal had existed, the court found that “Gioioso breached its insurance contract by refusing to pay the additional amount due Liberty as a consequence of the payment of the First Baptist judgment.”
Decision by court on high-deductible policy letter of credit dispute
The court next turned to Gioioso’s claim that Liberty had breached the implied covenant of good faith and fair dealing in setting the letter of credit required under the high-deductible program for an allegedly exorbitant amount of $2,200,000.
The court acknowledged Liberty had an obligation to act in good faith in setting the amount of the letter of credit. However, the court found nothing in the summary judgment record that supports a reasonable inference that Liberty used its “discretion” as pretext to gain some advantage to which it was not entitled under the policies or the Security Agreement.
In fact, Liberty presented in support of its motion for summary judgment an actuary’s report stating that Liberty’s methodology for estimating future losses on Gioioso’s policies was standard in the insurance industry and the loss development factors that Liberty used were actually more beneficial to insureds than those used by other casualty insurers.
In response to the actuary’s report, Gioioso did offer two affidavits: One from an accountant, not an actuary, whose experience the court noted, focused on business valuation issue and not any experience with the insurance industry. Gioioso’s controller submitted the second affidavit.
The court found that neither of the affidavits Gioioso presented raised a factual issue that Liberty did not use a reasonable methodology generally accepted in the insurance industry to estimate the future payments due from Gioioso.
Thus, the court found that Liberty had not breached any express term of Gioioso’ insurance policies nor the Security Agreement when it exercised its discretion in determining the amount of estimated future payments due. The court then found the demand for a letter of letter of credit in that amount by Liberty did not breach any duty Liberty owed to Gioioso.
Unfair business practices claim and breach of fiduciary duty claim
Based on the court’s prior rulings on Gioioso’s counts for breach of contract and breach of the implied covenant of good faith and fair dealing, the court found that no unfair business practices claim in violation of G.L. c. 93A, applied.
Likewise, the court found that the relationship between Gioioso and Liberty, as it relates to the claims asserted in this case, was that of parties to a contract and not a fiduciary relationship. The court noted that the “relationship of insurer and policy holder does not entail a fiduciary duty, absent special circumstances of assertion, representation and reliance.”
The court pointed out that Gioioso was a company in the excavation business that generated substantial annual revenue. It had representation by a large, national firm of insurance brokers in selecting its insurance program with Liberty. With the assistance of its broker, Gioioso elected a high-deductible policy without any special circumstances of assertion, representation and reliance involving Liberty.
Accordingly, the court ruled against Gioioso on its Unfair business practices claim and breach of fiduciary duty claim
Liberty’s claim for attorney fees under Security Agreement denied
The Security Agreement that Gioioso had executed provided Gioioso:
will pay . . . any and all reasonable expenses, including without limitation, reasonable legal fees and expenses . . . which [Liberty] may incur in connection with (a) the exercise or enforcement of any of the rights or remedies of [Liberty] hereunder and/or (b) the failure of [Gioioso] to perform or observe any of the provisions hereof.”
As part of its motion for summary judgment on its counterclaim against Gioioso, Liberty sought under this provision attorney fees from Gioioso for the costs of defending against Gioioso’s lawsuit and for Liberty having to counterclaim for payment of the retrospective premium due Liberty.
The court ruled that the Security Agreement, drafted by Liberty, as part of the insurance contract would be strictly construed against Liberty and that the attorney fees provision did not state that Liberty was entitled to recover attorney’ fees incurred as a result of any dispute arising under Gioioso’s policies or the Security Agreement.
Instead the court found that the attorney fee provision only applied if Gioioso had failed to perform some obligation under the Security Agreement or, perhaps, had taken steps to prevent Liberty from drawing on a letter of credit posted under the Security Agreement.
Since Gioioso had provided letters of credit in the amount demanded by Liberty, including the $112,997.00 that Liberty asserted it was due under the 2004-2005 retrospectively rated policy and apparently paid all amounts due Liberty under the high-deductible policies as they had come due, the court found no breach of the Security Agreement and, therefore, no right for Liberty to receive an award for any attorney fees.
Accordingly, the court entered summary judgment for Liberty on all counts of Gioioso’s claims against Liberty and summary judgment for Gioioso on Liberty’s claim for attorney fees.