Supreme Judicial Court decision limits the scope of an insured’s assignment of rights against their carrier
The Commerce Insurance Company has won a case in the Supreme Judicial Court that avoided it possibly having to pay over $2 million in post-judgment interest on a policy that ultimately only had $20,000.00 in bodily injury coverage. The decision also established important legal limitations on assignments of rights with agreed excess damages (“settlement/assignment”) by insureds being defended under a reservation of rights by their carrier.
The case, Commerce Insurance Company v. Szafarowicz, decided October 1, 2019, had a complex set of facts that does not often arise. However, when the situation does occur, it can result in an insurer having substantial exposure to post-judgment interest on a very low limit policy. The decision in favor of Commerce benefits all liability insurers because the Supreme Judicial Court in their decision limited settlement/assignment damages to a reasonable amount that cannot exceed the policy limit.
Bar dispute leads to first-degree murder by motor vehicle charge
On August 3, 2013, Matthew Padovano and his girlfriend were at the Captain’s Lounge bar in Leominster. After they got into a dispute with another patron, David Szafarowicz, and his sister. The Captain’s Lounge staff got between the parties and asked them all to leave separately.
Mr. Padovano and his girlfriend went out a side door to their car, which was parked nearby. Mr. Szafarowicz left through the front door and walked to the parking area in front of the Captain’s Lounge where he had parked his motorcycle.
Mr. Padovano and his girlfriend walked down the street to Mr. Padovano’s Jeep Commander. Instead of turning left to avoid any further contact with Mr. Szafarowicz, Mr. Padovano turned right and headed back to the area of the bar, where Mr. Szafarowicz was starting up his motorcycle. Mr. Padovano slowed down as he approached Mr. Szafarowicz, but that it was not clear whether he was slowing down for a car that was pulling out or because he wanted to interact again with Mr. Szafarowicz.
At this point, Mr. Szafarowicz got off his motorcycle and walked to the front of Mr. Padovano’s Jeep with his arms out and his palms up, “as if to say what do you want now?”
At that point, Mr. Padovano stepped on the gas. The vehicle hit Mr. Szafarowicz, who became lodged underneath it and was dragged 40 to 50 feet down Main Street. Mr. Padovano drove off. After driving off, Mr. Padovano hid his Jeep in a garage bay he rented in Leominster.
By the time an ambulance had arrived at the lounge’s parking lot, Mr. Szafarowicz had died from his injuries that included multiple skull fractures, a broken left arm, and a broken left leg.
The police arrested Mr. Padovano a couple of days later after police recognized him from a surveillance video at the scene.
After his arrest, a grand jury indicted Mr. Padovano for first-degree murder. Mr. Padovano spent seven hundred days in jail, awaiting the disposition of his indictment. On July 10, 2015, he entered a plea of guilty to the lesser charge of voluntary manslaughter with a sentence to state prison of not less than fifteen or more than twenty years to serve.
The Wrongful death suit based on Mr. Padovano’s “gross negligence”
The mother of Mr. Szafarowicz, Justina Szafarowicz became the special representative of her son’s estate and brought a wrongful death action against Mr. Padovanos in Worcester Superior Court. She claimed that her son’s death had been caused by Mr. Padovano’s “gross negligence in operating a motor vehicle that was negligently entrusted to him by Steven.”
Ms. Szafarowicz sued both Mr. Padovano and the father on this theory of liability.
The Commerce Insurance policy covered Mr. Padovano and Steven with compulsory bodily injury liability insurance of $20,000.00 per person and by the optional liability insurance for an additional $480,000.00 per person, for a total available indemnity coverage of $500,000.00. The Padovanos duly reported the suit to Commerce and Commerce acknowledged that it had a duty to defend the Padovanos under its standard policy provision that stated:
“We [(Commerce)] have the right to defend any lawsuit brought against anyone covered under this policy for damages which might be payable under this policy. We also have a duty to defend any such lawsuit, even if it is without merit, but our duty to defend ends when we tender, or pay to any claimant or to a court of competent jurisdiction, with the court’s permission, the maximum limits of coverage under this policy. We may end our duty to defend at any time during the course of the lawsuit, by tendering, or paying the maximum limits of coverage under the policy, without the need for a judgment or settlement of the lawsuit or a release by the claimant.”
Based upon the statutory provisions applicable to Commerce’s compulsory bodily liability coverage, Commerce acknowledged its duty to pay the $20,000.00 in compulsory insurance, notwithstanding the allegations that Mr. Padovano had acted intentionally. However, Commerce issued a reservation of rights to the Padovanos regarding the additional optional insurance based upon its claim that there was a coverage issue because Commerce believed Mr. Padovano had acted intentionally and, therefore, Mr. Szafarowicz’ injuries and death had not resulted from an accident.
On January 21, 2014, Commerce brought a declaratory judgment against the Padovanos and Mr. Szafarowicz’ estate requesting that a legal declaration that Commerce had no legal duty under the optional insurance provisions of its policy to indemnify the Padovanos for any liability in the wrongful death action.
Commerce denied intervention in wrongful death suit
On April 21, 2016, three weeks before the wrongful death trial was scheduled to begin; Commerce filed an emergency motion to intervene in the suit.
Commerce was prompted to intervene in the action because the estate’s attorney, according to Commerce, would present as evidence in the trial that Mr. Padovano had returned in his vehicle to the bar’s parking lot and when he was frightened by unknown persons who came from the bar with knives. When he accelerated to escape them, he did not see Mr. Szafarowicz before he ran over him.
Commerce argued it needed to be a part of the trial because the estate and the Padovanos had a common interest in selecting and presenting just those facts related to gross negligence. If the jury only heard that evidence and not all the evidence of intentional conduct that emerged during the criminal proceedings, Commerce would be unfairly prejudiced. A jury verdict in the wrongful death trial could bind Commerce in its declaratory judgment even though it had not participated in that trial.
In denying the motion the judge found that the Padovanos would be “severely compromised” in their ability to defend themselves if their insurer was committed to actively participate in the trial and offer evidence that Mr. Padovano intentionally struck Mr. Szafarowicz. The judge also noted that Commerce’s participation obviously would alert the jury to the possible existence of insurance coverage, which might make the jury more prone to make an award based upon sympathy rather than the facts.
Court gives Commerce the right to contest a collusive trial of the wrongful death claim
The judge, however, ruled that a jury verdict finding that Mr. Padovano’s actions were grossly negligent but not intentional would not automatically bind Commerce.
The judge advised that Commerce as “[An] insurer should be able to bring a post-tort trial declaratory judgment where ‘the judge’ would first determine as a legal matter whether the issue which was resolved in the tort trial and which determines insurance coverage was fairly litigated in the tort trial. If the judge ruled that it was fairly litigated, there would be no re-litigation of the issue under a declaratory judgment action, effectively determining that action or if the judge would determine that it was not fairly litigated then the insurer would be permitted to relitigate the matter.” This procedure that the Supreme Judicial Court affirmed clarified the procedure for insurers to contest collusive or underlitigated settlement/assignments by an insured.
After the denial of its motion to intervene, Commerce moved to stay the wrongful death case, pending the resolution of its declaratory judgment action. The judge denied this motion and rescheduled the trial of the wrongful death suit against the Padovanos.
Assignment of rights against Commerce and a $7 million judgment accruing postjudgment interest at the rate of 12% ($920 thousand per year)
Before the rescheduled trial of the wrongful death claim commenced, the estate and the Padovanos entered into agreements to settle the wrongful death suit.
Under the agreements, Mr. Padovano agreed he was “grossly negligent in causing Mr. Szafarowicz’ injuries, and his father admitted liability for negligent entrustment of the vehicle. The parties then agreed that a judge would determine the damages in a jury-waived trial. The estate also agreed that it would not seek to collect or enforce any judgment against the Padovanos beyond the amount payable under their insurance policy. The Padovanos also further agreed that they would assign all of their rights to their insurance coverage and cooperate with the estate in litigation related to the insurance coverage.
Although Commerce objected to the proposed settlements, the court overruled Commerce’s objections and conducted a hearing to assess damages in the wrongful death action.
On December 28, 2016, the judge ordered the entry of judgment in favor of the estate for $5,617,510.00, less $150,000.00 paid by the bar, Kona Enterprises in settlement of the claim against it for liquor liability for negligence or failure to protect its patrons. The final net judgment with prejudgment interest of $2,201,744.41 was $7,669,254.41.
Commerce filed a notice of appeal on its denial of its motion to stay, and on February 15, 2017, paid the estate the $20,000.00 limit of its compulsory bodily injury coverage. On April 21, 2017, filed a motion to deposit in the court the policy limits of its optional bodily injury coverage of $480,000.00, plus already accrued postjudgment interest based upon a court rule.
The Commerce motion to deposit the funds attempted to stop the accrual of postjudgment interest, which under the Massachusetts statutes regarding such interest accrues at 12% per year. In this case, based upon the judgment the monthly interest accruing on the judgment was $76,692.54, or $920,310.53 per annum.
Post-judgment interest accrued on the full judgment even though only compulsory coverage applied
Commerce’s obligation to pay postjudgment interest arose from the provision in the policy that stated:
“Commerce] will pay, in addition to the limits shown for Compulsory and Optional Bodily Injury to Others…[i]nterest that accrues after judgment is entered in any suit we defend. We will not pay interest that accrues after we have offered to pay up to the limits you selected.”
The judge denied it because under a prior Supreme Judicial Court case involving a somewhat similar situation, where the Supreme Judicial Court had held that to stop the accrual of postjudgment interest the insurer had to make an “unconditional offer of payment for the full policy limit, plus the accrued postjudgment interest.” In Commerce’s case, the offer to deposit the optional liability limit was not unconditional since Commerce proposed to seek its return if it was successful in the declaratory judgment action.
Commerce wins a declaratory judgment but may owe $2.5 million in postjudgment interest
Commerce petitioned for leave to file an interlocutory appeal on the denial of its motions for a stay, the denial of its request to file the policy limit to stop the accrual of interest, and the denial of its objections to the settlement and assignment of rights agreement between the estate and the Padovanos. A single justice of the Appeals Court allowed Commerce’s petition, concluding that the issue “presents extraordinary circumstances warranting an interlocutory appeal.” The Supreme Judicial Court ordered the appeals transferred to that court for hearing.
On February 21, 2019, after a jury-waived trial and while the appeals were pending, a Superior Court judge ruled that Commerce has no duty to indemnify the Padovanos for any claims arising from the optional bodily injury coverage of its automobile policy because Matthew Padovano had “decided to hit the accelerator of the vehicle knowing to a substantial certainty that the vehicle would strike David Szafarowicz,” and therefore Mr. Szafarowicz’ “injuries and death did not arise out of an accident under the policy.”
As a result of that declaratory judgment, Commerce has no obligation to pay any amount of the $7.7 million judgment in the wrongful death action beyond the $20,000 it already paid under its compulsory bodily injury coverage. However, under the terms of the policy stated above, Commerce still must pay postjudgment interest on the judgment. Since the judgment entered in December of 2016, the postjudgment interest totaled well over $2.5 million.
Court denies two out of Commerce’s three appeal points
Commerce’s first assignment of error claimed that the Superior Court should have allowed its motions to stay the proceedings of the wrongful death suit action until its parallel declaratory judgment action resolved the issue of coverage.
Although, by the time the Supreme Judicial Court heard this part of the appeal, the motion to stay had become moot based on the finding in favor of Commerce on the declaratory judgment. Still, a decision finding that courts should stay tort suits pending the results of a declaratory judgment suit over coverage would have constituted a big win for insurers. However, it was not to be.
The court ruled that the Superior Court had not abused his discretion in denying the motion for a stay under the circumstances of this case.
Commerce’s second assignment of error claimed that the Superior Court judge hearing its motion to deposit funds into the court to stop the accrual of interest had abused his discretion. On this claim of error, Commerce tried to distinguish a prior Supreme Judicial Court decision that undermined Commerce’s position. In that case, the court had held that to toll the accrual of interest; the insurer “was required to make an unconditional offer to pay the policy limits to terminate its express obligation to pay postjudgment interest.”
The court found that Commerce had made a conditional offer, and therefore the deposit of funds, if allowed, would not have stopped the accrual of interest under those circumstances.
Court rules settlement/assignment agreements cannot exceed contested coverage limit
The third issue the court dealt with whether Commerce, while liable for postjudgment interest, might challenge the validity or amount of that judgment, where the trial court had overruled its objection to the settlement agreement and where there was a substantial risk of “underlitigation” in the negotiation of that agreement.
Commerce contended that it should not bound by the settlement/assignment agreements executed by the estate and the Padovanos, which provided that
- the insured defendants agreed to admit liability for negligence, to have the amount of damages determined by the judge at an assessment of damages hearing, and to assign all rights arising from their insurance coverage to the plaintiff; and
- the plaintiff agreed to release the defendants from all liability arising from the incident.
The court found that the parties’ stipulation of negligence did not bind Commerce. Indeed, the court noted that the judge who granted Commerce declaratory judgment made a de novo determination that Mr. Szafarowicz death arose from an intentional act, not an accident.
However, the court also noted that here Commerce recognized its duty to defend, and paid the compulsory bodily injury coverage of $20,000, it owed a duty under its policy to pay “[i]nterest that accrues after judgment.” But, the court expressed their concern over whether Commerce was bound to pay the interest on the judgment arising from the settlement. That liability, the court pointed out, to pay postjudgment interest would “well exceed $2 million, far more than the $480,000 limit of liability for optional bodily injury coverage under the policy, which [Commerce] has no obligation to pay following the declaratory judgment.”
After discussing the balancing of the risks and benefits of such settlement/agreements, the court concluded that an insurer who defends a claim under a reservation of rights will be bound by the amount of a judgment arising from a prejudgment settlement/assignment agreement where
(1) the insurer is given notice of the settlement/assignment agreement and an opportunity to be heard by the court before judgment enters;
(2) the insurer contests the judgment; and
(3) the insured, after hearing, meets his or her burden of showing that the settlement is reasonable in amount.
The court also made an important ruling limiting the damages for which an insurer that contests coverage may be liable under a settlement/ assignment agreement:
Because the consequence of a settlement/assignment agreement is that the plaintiff may collect damages only from the insurer, having released the insured defendants from personal liability, a reasonable settlement amount may not exceed the limits of the insured’s potential insurance coverage, because the plaintiff may recover in damages no more than that from the insurer. (Emphasis added).
In Commerce’s case, the court concluded that it had preserved its right to be heard on the question of whether the amount of the settlement was reasonable.
In an important ruling for Commerce, the court found that:
Where the amount of the judgment arising from the settlement/assignment agreements was greater than $500,000, the limits of the insured’s combined mandatory and optional bodily injury coverage, we conclude that the amount obtained through the settlement is per se unreasonable.
The court then vacated the $7 million judgment remanded the case to the Superior Court to determine what would have been a reasonable settlement amount under the circumstances, and to enter a new judgment in that amount. The court also advised the Superior Court that postjudgment interest should accrue from the date of the original judgment, December 29, 2016, on the judgment amount that the court deems reasonable.
Supreme Judicial Court’s order of remand
The court then entered their final order on this extraordinary appeal:
Conclusion. The orders denying Commerce’s motions to stay the wrongful death action and denying Commerce’s rule 67 motion are affirmed. The entry of judgment in the wrongful death action is vacated, and the matter is remanded for a reasonableness hearing to be conducted in a manner consistent with this opinion.