The Supreme Judicial Court recently upheld a $2.25 million award against Zurich American Insurance Company (“Zurich”) for negligently failing to defend an insured policyholder against third-party beneficiaries/claimants.  This award does not include a separate settlement between Zurich and the claimants for $1.32 million for the underlying bodily injury claims.  What makes the decision in Boyle v. Zurich American Insurance Company, 472 Mass. 649 (2015) especially noteworthy is that the limits of the Zurich policy were only $50,000.   

In Boyle, Joseph Boyle was injured by an exploding tire in an automobile repair shop owned by his employer, C&N.  Joseph and his wife, Janice, filed a complaint against C&N, claiming bodily injury and loss of consortium.  C&N held a business automobile insurance policy issued by Zurich.  The policy required that C&N provide notice to Zurich of any suit brought against it.  C&N informed Zurich about Joseph’s injury but not the lawsuit brought against it.  The Boyles’ counsel eventually informed Zurich of the suit, but Zurich did not defend against it.  As a result, C&N defaulted and judgment by default entered in favor of the Boyles in the total amount of $2.25 million, including pre-and-post-judgment interest.          

The Boyles then brought suit against Zurich asserting their individual claims as third-party beneficiaries under the Zurich policy, as well as the claims of C&N for failing to defend it, which C&N had assigned to the Boyles.  The Boyles and Zurich settled the Boyles’ individual claims for $1.32 million, which arose from Zurich’s alleged failure to settle the Boyles’ personal injury action when liability had become reasonably clear.  

The Boyles’ assigned claim from C&N against Zurich ultimately went to a bench trial.  The judge determined that Zurich had committed a breach of its contractual duty to defend C&N and entered a judgment in the amount of $2.25 million.  In the Superior Court, the judge declined to award the Boyles (as C&N’s assignees) multiple damages, costs and attorneys’ fees under G.L. c. 93A.  The judge also subtracted from the Boyles’ damages (as assignees) the $1.32 million that Zurich had agreed to pay to settle the Boyles’ individual claims.  Both parties appealed the decision.    

On appeal, Zurich argued that its duty to defend C&N was not triggered at any time because C&N never informed Zurich of the Boyles’ lawsuit, never forwarded the complaint and related documents to Zurich, and never requested that Zurich provide a defense.  As support for this contention, Zurich pointed to the language in the Zurich policy stating that “Zurich would ‘ha[ve] no duty to provide coverage . . . unless there has been full compliance’ with specified obligations, including the obligation to ‘[i]mmediately send [Zurich] copies of any request, demand, order, notice, summons[,] or legal paper received concerning [a] claim or ‘suit.’”  Boyle, 472 Mass. at 655.   

The Supreme Judicial Court disagreed with Zurich’s arguments and concluded that the Superior Court judge did not err in his determination that Zurich committed a breach of its duty to defend C&N.  The Court stated: “In essence, as we have held in the line of cases proceeding from Johnson Controls, Inc. v. Bowes, 381 Mass. 278 (1980), an insured’s failure to comply with a notice obligation in an insurance policy does not relieve the insurer of its duties under that policy unless the insurer demonstrates that it suffered prejudice as a result of the breach.”  Boyle, 472 Mass. at 650-651.  The Court found Zurich had not shown such prejudice after reviewing the Superior Court judge’s uncontested findings of fact that: (1) When Zurich learned of the Boyles’ lawsuit, the hearing to assess damages had not yet taken place; (2) At that time, Zurich could have contacted C&N and arranged to enter an appearance on its behalf; (3) Zurich could have requested a postponement of the damages hearing and moved the have C&N’s default set aside; (4) Even after a judgment had entered, Zurich could have moved to set aside the judgment; and (5) Zurich still could have resolved the Boyles’ claim by offering to pay the policy limit of $50,000.00, which the lower court judge found the Boyles would have accepted.  

Also important, the Court found that the Boyles were separately entitled to their $1.32 million settlement with Zurich arising out of their third-party beneficiary claim because it was not duplicative of C&N’s failure to defend claim.  Thus, the Boyles were awarded $3.57 million on a claim which should have been worth at most, $50,000.

Ultimately, the Court found that Zurich’s failure to defend C&N on a $50,000 policy culminated in an award of damages that far exceeded that policy amount.  The Court stated that its decision was based on “crucial principles”, which “are intended, in part, to ensure that an insurer remains ‘responsive to its duty to act in good faith toward an insured.’”  Id. at 663-64.

This case highlights the pressure placed on insurance companies to defend their policyholders upon notice of a claim.  Notice need not necessarily arrive in the form of a served complaint on the policyholder, it could come from correspondence with the policyholder or the claimant’s counsel.  Further, if an insurer receives notice that a complaint has been filed or served, then it is obligated to defend against it regardless of the stage of the case, which also includes communicating with the claimant(s) or his/her/their attorney and making a reasonable effort to settle the claim.

If you have any questions about these insurance coverage issues or the duty to defend, we welcome you to contact us.