Massachusetts’ highest court on Monday rejected arguments that consent-to-settle clauses in professional malpractice insurance policies violate public policy.
The Supreme Judicial Court sided with CNA subsidiary Continental Casualty Co. in an engineering malpractice lawsuit brought against homeowners Douglas and Kristen Rawan against Kanayo Lala. The couple claimed that the carrier had violated a state law that requires insurers to make a prompt, fair and equitable settlement by including language in its policy language that required the policyholder’s consent before any settlement could be approved.
The high court said in its 7-0 decision that such consent-to-settle clauses were included in malpractice policies long before the state legislature adopted in 1979 the statute that allows claimants to file suits against insurers for refusing to settle.
The high court said the onus properly belongs to policyholders — not the insurer — if the policyholder obstinately refuses to settle a claim.
“Those unreasonable insureds can and should be held to account at trial and suffer the possibility of large, multiple damages awards,” the opinion says. “The claimant also is in no worse a position than he or she would have been if the professional had not purchased insurance. Such insureds, arguably, are the type who would not buy insurance in the first place if they could not control the decision to settle.”
The case has been widely anticipated by insurance litigators since the Supreme Judicial Court decided to bypass an intermediate appellate court and place and Rawan’s appeal directly onto its docket. The Massachusetts Defense Lawyers Council, American Property and Casualty Insurance Association and American Council of Engineering Companies of Massachusetts had intervened in the litigation.
The Rawans in 2005 hired Lala, a registered professional engineer, to design structural supports for their new home in Westborough. Lala underestimated the building loads and stresses, which caused the building to suffer “ongoing deterioration,” according to the couple’s attorney.
The Rawans filed suit in 2011 against Lara and Continental. They asked for more than $1.3 million, but Lara refused to offer more than $100,000, even after Continental told him he faced a potential seven-figure settlement.
A Superior Court jury found Lara liable for the Rawans’ claim and awarded $400,000 for damages, plus an additional $20,000 for violating the state law that requires prompt settlements. The judge increased that punitive award to $40,000.
Continental paid the plaintiffs $141,435.98 of that amount, which was what was left within its policy limit after paying defense costs. Lala paid the rest of the award out of his own pocket.
The Lalas then amended their complaint against Continental, alleging that the insurer had violated General Laws 93A and 176D, which require prompt settlements. The Superior Court granted summary judgment in favor of the insurer.
The high court affirmed that ruling. The court noted that professional liability insurance is voluntary and freedom of contract applies absent a legislative direction to the contrary. Such clauses also serve valuable purposes in the professional liability context, the court said.
But insurers cannot completely rely on consent-to-settle clauses. The high court said “negotiations must be conducted in good faith, and without negligence, …regardless of whether or not the insured eventually will consent.”
In an analysis of the case, insurance attorney Owen Gallagher of the ForbesGallagher law firm said the decision offers an important lesson to professionals who buy errors and omissions coverage. He said they “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.”
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