On Monday, December 16, 2019, the Supreme Judicial Court decided the question of whether the consent-to-settle clauses commonly found in professional liability policies violated the unfair claim practice provision of M.G.L. c. 176D, § 3 (9) (f).
In the case before the court, Rawan et al. v. Continental Casualty Company, the consent-to-settle clause only stated that the insurer “will not settle any claim without the informed consent of [the insured].” After a recalcitrant insured refused to authorize any reasonable settlement as recommended by the insurer, a jury found the insured liable for an excess verdict of $570,000 over the policy limit applicable after the deduction of the legal defense costs.
The judgment creditor sued the carrier, arguing that the consent-to-settle clause the carrier relied upon to refuse settlement in this case of clear liability violated G. L. c. 176D, § 3 (9) (f). General Laws c. 176D, § 3 (9), regulates the insurance business and lists in § 3 (9) certain acts as “unfair claim settlement practices” that can trigger liability under M.G.L. c. 93A, § 9, for an insurer to pay up to treble damages and attorney fees. The statutory provision in question made a liability insurer liable to a third-party claimant under § 3 (9) (f) if it failed “effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”
In a thirty-eight-page decision exhaustively discussing the history of the statute and the purposes of consent-to-settle clauses, the court concluded that consent-to-settle clauses do not violate M.G.L. c. 176D, § 3 (9) (f) as a matter of law. However, the court also held that notwithstanding that a consent-to-settle clause may not violate this law, an insurer relying upon a consent-to-settle clause still did owe some duties to a third-party claimant under G. L. c. 176D,
Why consent-to-settle clauses are important in professional liability policies
Ordinarily, liability policies, such as automobile, homeowners, or commercial generally liability policies have a provision that the insurer “may make such investigation and settlement of any claim or suit as it deems expedient” and do not contain consent-to-settle clauses.
To professionals, consent-to-settle clauses many times are of overriding importance because the settlement of an underlying claim may adversely affect the professional’s reputation and standing in their profession. As a result, they may “oppose settlement in many cases, even where the potential liability and the proposed settlement are well within policy limits.”
To the court, consent-to-settle clauses serve important purposes in encouraging professionals to purchase errors and omission insurance to protects clients and customers. For the professional, these clauses offer them the option to defend their professional reputations. Thus, these clauses offer important incentives for the purchase of professional liability policies with such clauses.
The hyphenated words and the statutory numbering may obscure the importance of this question for professional liability policies and the professional who buy such policies. However, the importance of consent-to-settle clauses for professional liability insurance spurred the American Council of Engineering, The Professional Liability Foundation, The Boston Bar Association, The American Property and Casualty, and The Massachusetts Defense Lawyers Association to submit friend of the court briefs to the Supreme Judicial Court on the issue.
Facts giving rise to the initial professional liability claim
In 2005, Douglas and Kristen Rawan (the Rawans) hired Kanayo Lala (Mr. Lala), a registered professional engineer, to design structural members for their new home in Westborough. Mr. Lala signed and stamped a construction control agreement with the town of Westborough. In preparing his design, Mr. Lala significantly underestimated the building loads and stresses in his calculations.
During the house’s construction, Mr. Lala filed eleven control reports with the town’s building commissioner certifying that the project complied with the State building code. These certifications were false because the design and construction did not comply with the code.
After the home’s construction was completed, its beams and joists began to crack, and the Rawans learned Mr. Lala had made errors in his calculations of the house’s structure.
In August 2011, the Rawans commenced an action against Mr. Lala in Superior Court for professional negligence, negligent supervision, breach of contract, breach of the covenant of good faith and fair dealing, breach of the implied warranty of fitness, and violations of G. L. c. 93A. The Rawans’ claims against Mr. Lala relied on the professional opinion of a structural engineer they hired, who reviewed Mr. Lala’s work.
Continental Casualty’s professional liability policy and its clauses
At the time of the underlying acts of negligence and at the time of the lawsuit, Continental insured Mr. Lala under a professional liability policy (policy). Although Continental initially misrepresented that the applicable policy had a $250,000 liability limit, eventually, it agreed that the correct policy had a $500,000 liability. The policy also had a defense-within-limits claims expense provision and a consent-to-settle clause that provided Continental “will not settle any claim without the informed consent of [Mr. Lala].’
The policy had no “hammer clause” that would make the insured liable for any award in excess of any settlement amount recommended by the insurer that the insured refused to authorize.
The worst example of improper engineering seen in 45 years of engineering
In January 2012, Continental took over the defense of the Rawans’ lawsuit against Mr. Lala.
The Rawans’ consulting engineer, met with Continental’s claim handler in April 2012 to discuss and review Mr. Lala’s work. He told the claim handler that he questioned “all of the loading that was used in Mr. Lala’s initial computations,” and stated that Mr. Lala’s “revised computations illustrate a complete lack of understanding of structural design.”
Subsequently, Continental’s claim handler e-mailed to defense counsel stating, “I think we could agree that the case may be six figures,” and suggested pursuing mediation. Counsel responded that “[t]here is [zero] chance at settling this [case] for under $100,000.”
In a subsequent email to Continental’s claim handler summarizing his review of Mr. Lala’s engineering work, the Rawans’ engineer concluded that “this was the worst example of improper engineering that I have seen in my 45 years of professional practice.” He also identified in this email multiple structural design errors and concluded that the home lacked the proper professional structural engineering required by the State building code and the town.
Continental’s claim handler also suggested engaging a third-party engineer to review Mr. Lala’s engineering work and Rawans’ engineer’s assessment with the hope of “reach[ing] an accord.”
The third-party engineer selected agreed with the Rawans’ engineer’s conclusions and concerns about the structural adequacy of the Rawans’ house. His opinion was “Bottom line; I found the same serious design errors as [Rawans’ engineer] and some additional ones as well as overstresses in the repaired beams that [he]did not get involved with.”
The suit against Continental stayed pending trial on the Rawans’ clam against Mr. Lala
In October 2012, the Rawans wrote a demand letter to Continental under G. L. c. 93A, alleging that Continental violated G. L. c. 176D, § 3 (9) (f), when it failed to effectuate a prompt, fair, and equitable settlement of the Rawans’ claim against Mr. Lala despite his clear liability At this time, the Rawans were demanding damages of $272,890.
After not receiving a firm offer to their 93A demand letter, the Rawans then moved to amend their complaint, adding Continental as a defendant, and alleging that it engaged in bad faith settlement practices, thus violating G. L. cc. 93A and 176D. The court allowed the Rawans’ motion to amend but stayed further proceedings against Continental until the case against Mr. Lala concluded.
Mr. Lala remains obstinate on any more settlement offers
In November 2012, Mr. Lala consented to a settlement offer to the plaintiffs of $100,000 to be paid from the policy. Mr. Lala’s attorney extended the offer to the Rawans’ counsel on November 29, 2012.
In January 2013, the Rawans’ counsel wrote to Continental, representing that the Rawans no longer wished to settle and intended to take the matter to trial. Mr. Lala thereupon withdrew his authorization for any settlement offers. In May 2012, the Rawans upped their demand to $1,324,390, based on the worsening condition of their home. Mr. Lala advised Continental through his counsel that he would ot authorize a settlement offer in response to that demand.
In June 2013, a Continental claim consultant wrote to Mr. Lala explaining the coverage for the Rawans’ claims against Mr. Lala under the policy. He advised Mr. Lala that the policy provided a limit on liability of $500,000 for each claim and $1 million for all claims made during the applicable policy year but that that the limit applied to both the claim and claim expenses, such as attorney’s fees. Finally, he advised that in the event of an excess judgment, Mr. Lala would be responsible for any excess of the remaining policy limits.
Mr. Lala refuses to consent to any settlement offers in response to the Rawans’ demand.
In March 2014, Counsel representing Mr. Lala sent him an e-mail message to Mr. Lala in which he addressed the real possibility of a verdict at trial in excess of the remaining limits of the policy. The attorney sketched some dire possibilities:
“If the Rawans succeed in convincing the jury of their claims, and the jury awards them all the money they seek, you could face a verdict of $1.324 million, tripled under Chapter 93A to nearly $4 million, and face paying the Rawans’ attorneys’ fees, likely into the hundreds of thousands of dollars. Any judgment will also carry a statutory interest rate of 12% from the date of filing suit in September 2011. Nearly three years later in 2014, that will add approximately 36% in interest on top of the judgment and attorneys’ fees. Given these factors, any significant judgment against you will dwarf your insurance limits, leaving your personal assets exposed for the Rawans to pursue to satisfy the excess judgment…With the stakes as high as they are given the alleged damages, the 93A issue, and the relatively low insurance available to cover a judgment against you, it would make sense to explore settlement in order to avoid the potential exposure of your personal assets.”.
In response, Mr. Lala stated a jury should decide the issue, and that he would not initiate any further settlement offers.
In July 2014, Mr. Lala’s counsel again raised the real possibility of an excess verdict against him with Mr. Lala. Mr. Lala, however, was still not willing to authorize a settlement offer, despite the risk.
In September, counsel for Mr. Lala recommended re-engaging in settlement discussions before trial in September 2014. Co-counsel for Mr. Lala, “recommend[ed] in the strongest terms” that Mr. Lala authorize his attorneys to contact the Rawans’ counsel to determine whether a settlement could be reached within the remaining limits of the policy. Mr. Lala refused to authorize his attorneys appointed by Continental to do so.
On the eve of trial, Mr. Lala relented and authorized an offer of $35,000. When the Rawans rejected the offer and countered with a demand for $900,000, Mr. Lala instructed his attorneys to proceed with the trial and not to pursue settlement negotiations any further.
Trial verdict and reduced policy indemnity payment with 70% paid for legal fees
The case was tried in September 2014. The jury found that Mr. Lala was negligent in his design of the home and awarded the Rawans $400,000 in damages. In an advisory verdict, the jury also awarded the Rawans $20,000 in damages for violations of G. L. c. 93A. After reviewing the jury’s verdict, the trial judge ruled that Mr. Lala’s violations of G. L. c. 93A and doubled the 93A award to $40,000.
With interest and attorney fees, the final judgment the Rawans recovered against Mr. Lala totaled $710,546.
Beside consent-to-settle clauses, another common provision in professional liability policies is defense-within-in-limits coverage. Under this provision, claim expenses including legal defense costs, are set off against the policy’s indemnity.
Insureds can usually purchase defense outside limits as an endorsement or higher indemnity limits. In Mr. Lala’s case, his policy had defense costs within his $500,000 indemnity limit.
On June 8, 2015, when Continental tendered its coverage, the Rawans only received $141,435.98. The original $500,000 indemnity limit would not have paid all the Rawans’ judgment, but it would have covered much of it. However, the legal fees Continental deducted under the policy’s defense-within-limits provision totaled $350,564.02, or just over seventy percent of Mr. Lala’s policy limit.
The unpaid remainder of the judgment, $569,110.02, was Mr. Lala’s personal responsibility based on references in the court’s decision. This liability accrues interest at the rate of one (1%) per month until paid.
Superior Court rules Continental had the right to honor consent-to-settle policy clause
Following the verdict in their favor, the Superior Court lifted the stay of proceedings on the Rawans’ suit against Continental for unfair claim practices.
The Rawans and Continental cross-moved for summary judgment on the issue of whether by failing to effectuate a settlement where Mr. Lala’s liability was reasonably clear Continental had violated G. L. c. 176D, § 3 (9) (f).
The Superior Court judge hearing the cross-motions granted Continental’s motion for summary judgment. The judge’s ruling was that “the consent-to-settle clause in Mr. Lala’s policy limited Continental’s ability to engage in further settlement practices with the Rawans once Mr. Lala refused to give Continental consent to settle the claims against him.”
The Rawans appealed the Superior Court decision to the Appeals Court. The Supreme Judicial Court identified the case as presenting an important issue and took the Rawans’ appeal directly on their own motion, bypassing the Appeals Court.
Rulings of the Supreme Judicial Court on consent-to-settle clauses
Before the court, the Rawans argued that consent-to-settle provisions are prohibited in professional liability policies because they conflict with the language in G. L. c. 176D, § 3 (9) (f), which provides that the failure “to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear” is an unfair claims settlement practice.
The gist of their argument was that an insurer’s obligation to make a settlement offer once liability has become reasonably clear is inconsistent with consent-to-settle clauses that eliminate an insurer’s unilateral ability to settle a claim once it has made such a determination.
The Supreme Judicial Court, however, found in this statute “no legislative intent to preclude consent-to-settle clauses in professional liability policies.” The court’s reasoning was that:
- Professional liability insurance is voluntary and not mandatory.
- Freedom of contract applies here absent a legislative direction to the contrary.
- Consent-to-settle clauses in professional liability policies predate the right of third parties adversely affected by unfair claim practices by an insurer to sue that insurer.
- There has been no legislative action to prohibit consent-to-settle clauses.
- Consent-to-settle clauses also serve valuable purposes in the professional liability context
Based on these factors, the court ruled it would “not infer legislative intent to prohibit consent-to-settle policies because there may exist tension between consent-to-settle clauses and an insurer’s obligation under § 3 (9) (f) to effectuate a reasonable settlement once liability has been clearly established.”
Consent-to-settle clause reliance by an insurer still subject to the unfair claim practice statute
Notwithstanding their ruling that insurers could rely upon consent-to-settle clauses in refusing to settle a case in which liability is reasonably clear, the Supreme Judicial Court advised that this reliance has limits.
The court noted that the fact they ruled that consent-to-settle clauses did not violate public policy did not mean that an insurer honoring a consent-to-settle clause did not have other duties under G. L. c. 176D. The consent-to-settle clause does not completely shield an insurer from unfair settlement practice claims.
The court cited the fact that although “It is common practice for an insurer to conduct settlement negotiations in advance of obtaining the insured’s final consent to the agreement. These negotiations must be conducted in good faith, and without negligence, …regardless of whether or not the insured eventually will consent.”
The court then ruled that whether an insurer has complied with this dual obligation to honor the consent-to-settle clause and to conduct anticipatory settlement negotiation properly is “a factual one. Whether an insurer satisfies this dual obligation is measured in terms of the insurer’s good faith efforts and transparency toward both its insured and a third-party claimant.”
These efforts would include according to the court:
- A thorough investigation of the facts.
- A careful attempt to determine the value of a claim.
- Good faith efforts to convince the insured to settle for such an amount, and
- The absence of misleading, improper, or “extortionate” conduct towards the third-party claimant.
The lesson of the Rawan decision
In this case, the insured had reduced his liability limit the following year to $250,000. That liability limit would not have paid any indemnity and would not even have paid for the defense of the case against him to judgment.
To the author, the greatest lesson of this case is that professionals buying errors and omission coverage, should listen to their trusted insurance advisers, and buy liability limits two to three times larger than they imagine they might need. Then, preferably, buy additional defense outside limits coverage to augment their liability limit.