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Apr 2016

In a matter of first impression for Massachusetts, on March 7, 2016, the Supreme Judicial Court (“SJC”) held that where two workers’ compensation policies issued by different companies each provide primary coverage for the same loss, an insured may not foreclose one insurer from obtaining equitable contribution from the other by tendering a claim to only one insurer (i.e., so-called “selective tender”). The case is Insurance Company of the State of Pennsylvania (ISOP) v. Great Northern Insurance Company (SJC-11897).

An employee of the insured, Progression, Inc., was severely injured in an automobile accident while traveling abroad on a business trip.  The insured had two worker’s compensation policies from two different insurers, the Insurance Company of the State of Pennsylvania (“ISOP”), which provided compulsory coverage, and Great Northern Insurance Company (“Great Northern”), which provided coverage for employees traveling abroad. Each policy provided primary coverage for the subject accident.  The employee timely notified the employer and pursued his claim, but the employer only gave notice of the claim to ISOP.  When ISOP learned of the Great Northern policy, it gave notice to Great Northern and sought contribution from Great Northern toward the employee’s comp claim.  Great Northern denied the “attempted tender” because Progression had only tendered the claim to ISOP and had not authorized ISOP to report or tender the claim to Great Northern.  When Great Northern denied the tender, ISOP sued Great Northern for equitable contribution in the U.S. District Court for the District of Massachusetts.  Great Northern initially prevailed on a motion for summary judgment, but ISOP appealed.  The case reached the SJC upon certification of a question of law by the U.S. Court of Appeals for the First Circuit.

The SJC first discussed and reaffirmed the doctrine of equitable subrogation in Massachusetts, pursuant to which an insurer who pays more than its share of the costs of defense and indemnity may require proportionate contribution from other coinsurers. Because it does not derive from contract, equitable contribution is a direct right of one insurer to pursue contribution from an alleged co-insurer, independent of the contract rights of the insured. The doctrine is designed to avoid the potentially unfair result where the company that pays first is left to cover the entire loss while a co-insurer escapes responsibility for payment of an equitable share of the claim. The doctrine recognizes that an insured who expects to be paid in full by one insurance company may have no incentive to ask the other insurance company covering the same risk to pay its share.

The SJC then discussed the “selective tender” exception to the doctrine of equitable subrogation (recognized in only a minority of other jurisdictions), which provides that where an insured has not tendered a claim to an insurer, that insurer is excused from its duty to contribute to a settlement of the claim. The underlying premise is that if an insured chose not to tender a claim to an insurer, the insurer has no obligation to defend or indemnify the insured with respect to that claim. The SJC held, however, that this premise is inconsistent with workers’ compensation insurance, which must be interpreted to comply with applicable statutes. Per statute, a workers’ compensation insurer is directly liable to an injured employee for the workers’ compensation benefits. Per statute, therefore, Great Northern’s obligation to defend and indemnify the claim was triggered by the notice given to Progression by its injured employee, regardless of whether Progression gave notice to Great Northern.  The SJC held that the language in Great Northern’s policy providing that its duty of coverage is contingent upon the employer providing notice of the injury is contrary to Massachusetts law governing worker’s compensation insurance and is therefore null and void.

In reaffirming the concept of equitable contribution and rejecting the selective tender defense, the SJC determined that the underlying premise of selective tender is inconsistent not only with Massachusetts workers’ compensation law, but also with Massachusetts law governing general liability insurance and public policy.  Under Massachusetts law, an insurer’s coverage obligation is triggered by notice regardless of the timing or the source of the notice. Late notice or the fact that notice was provided by a third party (instead of directly by the insured) will not preclude coverage unless the insurer is prejudiced. The SJC referenced its recent prior decision in Boyle v. Zurich Am. Ins. Co., 472 Mass 649 (2015), which held that where a third party notified the insurer of the complaint, the insured’s failure to give notice did not excuse the insurer from its duty to defend unless it could demonstrate that the insured’s breach of its notice obligation caused prejudice by depriving the insurer of the opportunity to mount an effective defense. The SJC ruled in the instant case, therefore, that in Massachusetts, an insured’s failure to tender a claim by giving timely notice does not relieve the insurer of responsibility for the claim, even if the failure were intentional, unless the insurance company was prejudiced by the untimeliness of the notice.

In this decision, the SJC reaffirmed its alignment with the majority of jurisdictions which recognize a direct right of equitable contribution between co-insurers and rejected soundly the “selective tender” rule.

 


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