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Jan 2012

Peter Kober represented Vermont Mutual Insurance Company in a case that was recently decided by the First Circuit Court of Appeals.  The First Circuit held that Vermont Mutual had not breached its duty to defend an insured (under a homeowner’s policy) who was involved in a barroom brawl and subsequently was the subject of a claim for personal injuries suffered during that brawl.  The insured was also under investigation for criminal prosecution.  The insurer received notice of the claim and tried to investigate under a reservation of rights, but was stymied in its investigation because the witnesses refused to be interviewed.   The insured then settled the civil claim on his own, essentially so he could avoid any possible prosecution.  The insured insisted the insurer pay the settlement or waive the “voluntary payment” exclusion, which the insurer refused to do, largely, albeit not exclusively, on the basis that the injuries to the claimant were “expected or intended from the standpoint of the insured.”  The insurer brought an action for declaratory judgment in federal district court, seeking a determination that it had no obligation to pay the settlement or the insured’s legal fees incurred in settling the claim (as well as bringing the criminal matter to a conclusion).


 At trial, the jury determined that the injuries sustained by the claimant were not “expected or intended”, and that the amount of the settlement – $425,000.00 – had been “reasonable”, but also found that the settlement had been “prejudicial” to the insurer and was therefore barred by the “voluntary payment” exclusion.  The insured subsequently argued that the jury’s finding that the injuries were not “expected or intended” meant that the insurer had breached its duty to “defend” the claim, i.e., to “negotiate” (and pay) the claim, and that the insurer’s actions constituted bad faith.  The district court rejected both claims and held that the insurer had no duty to defend (in the sense of providing counsel to assist the insured) relative to a “claim”, as opposed to a “suit”. The Court further held that the insurer’s conduct in investigating the claim had been reasonable and its declining to pay the settlement reached by the insured did not violate any obligation the insurer had under the applicable CGL policy. (Note that once a third-party claim has been asserted against an insured, even though there may be no obligation on the part of the insurer to appoint counsel to “defend” the insured relative to the claim, the insurer does have the duty and the right to reasonably investigate the claim; to explain its reasons for not accepting an offer to settle the claim; and to attempt to settle the claim if liability on the part of the insured appears to be “reasonably clear”). See M.G.L. c. 176D, sec. 3(9).


The First Circuit declined to address the issue of whether there was any duty to “defend” a “claim”, and affirmed the district court’s finding that the insurer had not breached any duty to “defend” (assuming such a duty actually existed).  The court found no such breach, given the relatively short amount of time that elapsed between the date of the insurer’s receipt of notice of the claim and the date of the actual settlement and the relatively insufficient amount of information that was made available during its investigation, such that the insurer had no obligation to “negotiate” under the circumstances.


The case is Vermont Mutual Ins. Co. v. Maguire, 2011 U.S. App. LEXIS 22024.

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