Massachusetts SJC: E&O Insurers May Allow Insureds to Veto Settlement, But Settlement-Related Duties to Claimants Remain
The Massachusetts Supreme Judicial Court has held that consent-to-settle clauses in professional liability policies that give the insured absolute discretion regarding settlement do not inherently conflict with the state’s unfair insurance settlement practices statute, Mass. G.L. ch. 176D § 3(9)(f). Rawan v. Continental Casualty Company, 136 N.E.3d 327 (Mass. Dec. 16, 2019). The case had attracted considerable attention from amici concerned about potential disruption of the professional liability insurance market in Massachusetts if such consent-to-settle clauses were deemed impermissible.
In the underlying matter, an engineer under-designed beams in the Rawans’ home. After cracking was observed, and another engineer hired by the homeowners concluded that the design was deficient, the homeowners sued the engineer for professional negligence. The engineer tendered the claim to his insurer in late 2011. Early on, the engineer authorized a settlement offer of up to $100,000 to be paid from the policy. However, after some back and forth, the engineer resolved to take the matter to trial. The policy provided that the insurer could not “settle any claim without the informed consent” of the insured. The policy did not contain a “hammer clause” that the insurer could invoke if it felt the insured was unreasonably refusing to consent.
By May of 2013, the plaintiffs had increased their demand to $1.3 million, citing worsening damage to their home. The claim handler warned the engineer that, based on the information available, which by that point included an independently prepared report, the insured might lose at trial and there was a possibility that the judgment would “dwarf” the remaining policy limits. Both the claim handler and the insured’s appointed defense counsel recommended settlement “in the strongest terms” in the lead-up to the September 2014 trial. The insured consented only to a $35,000 offer, which was not accepted by the homeowners.
The homeowners prevailed at trial and were awarded $440,000, $300,000 of which was in excess of the remaining policy limits. The homeowners alleged that the insurer was liable for unfair insurance settlement practices under Mass. G.L. ch. 176D § 3(9)(f), for failure to settle when liability was reasonably clear. The insurer denied liability under ch. 176D on the ground that, among other things, the absolute consent-to-settle clause prevented it from authorizing settlement. The lower court granted the insurer’s motion for summary judgment.
The Supreme Judicial Court also held in favor of the insurer. The court held that there was no legislative intent behind ch. 176D § 3(9)(f) to prevent insurers from including absolute consent-to-settle clauses in professional liability policies. Agreeing with several amici, the court noted that such clauses are important to the professional liability marketplace. Many insureds would be disinclined to purchase optional professional liability insurance if they could not control the settlement process, because settlements can have major ramifications for a professional’s reputation.
Having concluded that absolute consent-to-settle clauses are permissible, the court nonetheless held that an insurer still has a “dual obligation” to act in good faith and be transparent towards both its insured and a third-party claimant, even if the insured can veto any settlement. Specifically, an insurer must still:
- make a thorough investigation of the facts;
- carefully attempt to determine the value of a claim;
- make a good faith effort to encourage its insured to settle for that amount; and
- not engage in any misleading, improper, or “extortionate” conduct towards the third-party claimant.
The court held that the insurer’s attempts to investigate the claim and encourage settlement satisfied (1) through (3). With respect to (4), the court held that the insurer was not liable because there was no causation. The court found that the record established that the insured would have refused to consent to any viable settlement offer for reasons unrelated to any of the insurer’s conduct that the plaintiffs claimed violated prong (4) above.
