The Massachusetts Appeals Court has denied an insured’s appeal claiming Liberty Mutual had (i) acted in bad faith in settling an adverse jury verdict on appeal over the insured’s objection and (ii) in demanding an “excessive” letter of credit under the insured’s high-deductible liability policy program.
While denying the insured’s appeal, the appellate decision did, however, partially allow Liberty to collect from the insured attorney fees for defending the letter of credit portion of the insured’s suit.
Cross-appeals from Superior Court decision
The Appeals Court decision, P. Gioioso & Sons, Inc. (“Gioioso”) v. Liberty Mutual Insurance Company (“Liberty”), arose out of the cross-appeals filed by Gioioso, a Boston-based excavation contractor, and Liberty to an October 2016 Superior Court ruling. This Superior Court decision had found against Gioioso on its claims against Liberty but also found against Liberty’s claim for attorney fees in defending the suit and prosecuting a counterclaim against Gioioso.
Insured had retrospectively rated policies and a high-deductible liability program with Liberty
For the five years between 2001 and 2005, Liberty insured Goioso for liability arising out of its excavation work under policies providing for a retrospective rating of the premium based upon losses.
For the next five policy, beginning in 2005 and ending in 2010, Gioioso purchased annual high-deductible, occurrence-based insurance policies from Liberty for its liability exposures. Under the policies, Liberty defended and paid all claims for which Gioioso reimbursed Liberty up to the policies’ $300,000 deductible amount for the claims paid. However, as part of this high-deductible program, Liberty required Gioioso to post a “clean” and “irrevocable” letter of credit as security for its anticipated financial obligations under the policies.
The amount of the letter of credit was subject to an annual adjustment “in the sole discretion” of Liberty based upon Liberty’s estimate of the unpaid obligations under the policies.
The retrospective premium and demand for $2.2 million letter of credit
In 2007, the First Baptist Church (First Baptist) in the Dorchester section of Boston sued Gioioso in connection with excavating work Gioioso had performed near the church. Liberty assumed the defense and had its counsel try the case to a jury. The trial resulted in a jury verdict against Gioioso in the amount of $288,295.00 plus approximately $70,000.00 in prejudgment interest. Liberty filed a notice of appeal but then declined to prosecute the appeal, and instead settled the case.
Gioioso disputed $112,999 retrospective premium and Liberty requiring a $2,200,000 letter of credit for runoff liabilities
Under the 2004-2005 policy, Liberty claimed that Gioioso owed it $112,997.00 in retrospective premiums in connection with the First Baptist loss. Gioioso did not contest Liberty’s mathematical calculations for arriving at the retrospective premium owed. Instead, Gioioso argued it did not owe Liberty any money because Liberty settled the First Baptist loss over Gioioso’s objection should have pursued the appeal. Liberty, on the other hand, argues that under the relevant policy it had full discretion to settle the First Baptist case.
At approximately the same time, Liberty and Gioioso were disputing the validity of Liberty demanding a retrospective premium for the First Baptist loss, Gioioso was also disputing Liberty needing a $2,200,000.000 letter of credit to secure the runoff liabilities potentially due under Gioioso’s high-deductible insurance program with Liberty.
Lawsuit over alleged bad faith in demanding letter of credit and claiming retrospective premium after refusing to appeal
In 2012, Gioioso filed a Superior Court suit against Liberty. The suit claimed Liberty improperly inflated the amount of a letter of credit Gioioso had to post as security under the high-deductible liability insurance program Gioioso had had with Liberty. Gioioso claimed Liberty’s demand for this excessive security needlessly tied up Gioioso’s credit and breached the parties’ agreements and violated Massachusetts’ unfair business practices act, M. G. L. c. 93A.
Liberty answered Gioioso’s suit denying liability and counterclaiming for payment of $112,000.00 in outstanding retrospective premiums Gioioso had refused to pay for Liberty’s settlement of the First Baptist loss.
Liberty also counterclaimed for any attorney fees and expenses it incurred as a result of Gioioso’s lawsuit based upon the terms of the security agreement for Gioioso’s high-deductible liability program.
In 2016, A Superior Court motion judge entered summary judgment in Liberty’s favor on all claims except its claim for attorney’s fees. See Agency Checklists’ article of December 6, 2016, “Court Rules On Insurer’s Right To Withdraw Appeal Over Insured’s Objection.
Both Gioioso and Liberty appealed the Superior Court’s decision to the Appeals Court.
Appeals Court denies Gioioso’s appeal but allows Liberty attorney fees for defending suit
The Appeals Court found Gioioso failed to establish any triable issue over whether Liberty’s exercise of its discretion to determine the security amount was an unfair or deceptive practice in the business-to-business context of the agreement between Gioioso and Liberty.
The Court noted Gioioso began purchasing general liability, worker’s compensation, and automobile insurance policies from Liberty in 2001 but switched to high-deductible policies requiring the posting of collateral in late 2005.
As a condition for agreeing to the high-deductible program, Liberty required Gioioso to sign a security agreement where Gioioso agreed to furnish Liberty a “clean, irrevocable letter of credit.” Under the security agreement, Gioioso’s letter of credit was, “subject to upward or downward adjustment in amounts by Liberty Mutual at least annually.”
Liberty’s calculation of the security amount–by whatever method it saw fit–could not constitute a breach of the express contract between the parties
The Court cited two security agreement provision relating to Gioioso’s obligation to post a letter of credit that stated:
- “Liberty Mutual may, at its sole discretion, determine that the estimated amount of unpaid Obligations is greater than the amount of the existing letter of credit and, if so, Liberty Mutual shall have the option to require Policyholder to deliver…an additional letter of credit…”
- “It is expressly understood and agreed that the amount of collateral…may be adjusted at the sole discretion of Liberty Mutual to reflect then-current obligations. Policyholder agrees to provide Liberty Mutual with the referenced amounts and any required increases thereto by the Schedule date communicated by Liberty Mutual.”
The Court held Gioioso could not establish Liberty’s action in demanding the $2,200,000.00 letter of credit breached the parties’ agreement because: “Gioioso was twice informed of this discretion in the plain language of the contract … that Liberty’s calculation of the security amount–by whatever method it saw fit–could not constitute a breach of the express contract between the parties.”
The Court also ruled that Liberty’s broad discretion to set the amount of the security requirement was apparent from the plain language of the contract and any expectation harbored by Gioioso that Liberty would not exercise its discretion in such a way as to further its business interests would not have been a reasonable expectation.
Decision to settle had an intelligent and reasoned basis
Retrospective premium owed because Liberty’s settlement involved “common prudence” and an “intelligent decision”
Based on First Baptist settlement, Liberty claimed Gioioso owed it $112,997.00 in retrospective premium under Gioioso 2005 policy. Gioioso did not dispute Liberty’s calculation of the retrospective premium. Instead, it claimed it did owe Liberty any money because Liberty should have pursued the appeal of the First Baptist judgment.
The Court noted that under Massachusetts law, “Depending upon the reasonable likelihood of success on appeal, the insurer’s duty to defend may continue until an appeal has been disposed of.”
Gioioso claimed it had established a reasonable likelihood of success on appeal through:
- A letter from Gioioso’s lawyer, Douglas E. Sylvia, advocating for an appeal.
- An email from Gioioso’s trial lawyer, David R. Cain.
- A letter from Robert A. Curley, Jr., an attorney hired by Liberty to review the trial transcript and make recommendations.
In the Court’s opinion, however, these communications simply did not establish a “reasonable ground” existed for an appeal sufficient to overcome the policy language stating Liberty “may, at [its] discretion . . . settle any claim or suit [resulting from an occurrence].”
To the Appeals Court, the fair meaning of this language left settlement decisions entirely to the discretion of Liberty subject to Liberty acting in “good faith:” Good faith meaning Liberty “exercise[d] common prudence to discover the facts as to liability and damages upon which an intelligent decision may be based.”
Based on the case record, the Court held the uncontroverted evidence showed Liberty exercised “common prudence to vet the possibility of an appeal.” And to the Appeals Court, “its decision to settle had an intelligent and reasoned basis” precluding Gioioso’s claim to the contrary.
Liberty awarded attorney fees for defending Gioioso’s suit
After denying Gioioso’s appeal, the Court addressed Liberty’s cross-appeal from the Superior Court’s denial of its request for an award of attorney’s fees and expenses based on the security agreement’s term stating:
The Policyholder will pay to Liberty Mutual upon demand, any and all reasonable expenses, including without limitation, reasonable legal fees and expenses… and the fees and expenses of any experts…which Liberty Mutual may incur in connection with (a) the exercise or enforcement of any of the rights or remedies of Liberty Mutual hereunder and/or (b) the failure by Policyholder to perform or observe any of the provisions hereof.”
In the Appeals Court’s opinion, Liberty’s defense of Gioioso’s suit fell within this provision of the agreement requiring Gioioso to pay fees and expenses incurred “in connection with” the “exercise or enforcement of any of the rights or remedies of Liberty Mutual hereunder.”
Based on their reading of this provision of the security agreement, the Appeals Court judges hearing the appeal reversed the Superior Court decision denying Liberty any fees and expenses incurred in connection with its defense of Gioioso’s lawsuit. The judges, however, found Liberty had no right under the fee award provision of the security agreement for prosecuting its counterclaim for the retrospective premium due for the First Baptist litigation. Those attorney fees were incurred to enforce Liberty’s rights under 2005 insurance policy with Gioioso and not to enforce any rights Liberty had under Gioioso’s security agreement.
Attorney fee calculation remanded to Superior Court
The final order from the Appeals Court affirmed all the rulings against Gioioso and entered a new order reversing the decision denying Liberty litigation fees and expenses. The Court then remanded the case to the Superior Court for:
- calculation of reasonable legal fees and expenses incurred in connection with Liberty’s defense of this action;
- exclusive of fees and expenses incurred in connection with Liberty collecting its retrospective premium and fees and expenses incurred in connection with the appeal.
Pending application for further appellate review
On February 15, 2018, Gioioso applied for further appellate review with the Supreme Judicial Court.
As of this article, Liberty had not filed its opposition to Gioioso’s application for further appellate review. Under the Massachusetts Rules of Appellate Procedure, Liberty has twenty days from Gioioso’s filing date to file or until March 7, 2018. However, often a party will seek and obtain an extension for additional time to respond.
Agency checklists will update this article with the Supreme Judicial Court’s decision on Gioioso’s application.