The Supreme Judicial Court recently issued an opinion regarding the duties of an insurer that defends an insured under a reservation of rights where the insured enters into a settlement/assignment agreement, over the insurer’s objection, that results in a judgment in excess of the insurer’s policy limits.
In 2013, Matthew Padovano fatally struck David Szafarowicz with his SUV in the parking lot of a bar where, moments before, the two men had engaged in an altercation. Mr. Padovano’s vehicle was owned by his father and insured by Commerce Insurance Company.
Three separate suits arose as a result:
· Mr. Padovano was criminally prosecuted and ultimately pleaded guilty to a charge of voluntary manslaughter;
· Mr. Szafarowicz’s estate sued the Padovanos for wrongful death under a theory of gross negligence; and
· Commerce brought a declaratory judgment action against the Padovanos and the Estate of Mr. Szafarowicz seeking a declaration that Commerce had no obligation under its optional insurance coverage to indemnify the Padovanos for the damages arising from the fatal incident, on the grounds that the incident was not an accident, but caused by Mr. Padovano’s intentional conduct and therefore not covered by the policy’s optional bodily injury coverage.
Shortly before trial in the wrongful death case was scheduled to begin, the Estate and the Padovanos entered into a “settlement/assignment agreement” under which the Padovanos agreed that they were negligent in causing Mr. Szafarowicz’s injuries (Matthew for negligent operation of the car and his father for negligent entrustment of the vehicle to Matthew), and both agreed to assign to the Estate all their rights with respect to insurance coverage. The parties further agreed that damages would be determined by the court in a jury-waived proceeding. Commerce timely objected in writing to the proposed agreement, but the objections were overruled. A judge conducted a hearing and ultimately assessed the damages in the wrongful death action in the amount of $5,467,510 plus prejudgment interest in the amount of $2,201,744.
Thereafter, in a separate jury-waived trial, the declaratory judgment action was resolved in favor of Commerce, with a judge finding that Commerce had no duty to indemnify the Padovanos for any claims arising from the optional bodily injury coverage of the policy because the subject incident did not arise out of an accident covered by the policy, but rather Mr. Padovano’s intentional conduct.
As a result of the declaratory judgment, then, Commerce had no obligation to pay any amount of the judgment in the wrongful death action beyond the $20,000 compulsory bodily injury insurance. However, the terms of the policy obligated Commerce to pay postjudgment interest on the wrongful death judgment – which by the time of the SJC’s decision had accumulated to over $2,000,000, an amount far in excess of the policy’s $500,000 limit for optional bodily injury insurance.
On appeal, Commerce argued, inter alia, that it should not be held to the settlement/assignment agreement, or obligated to pay postjudgment interest on the wrongful death judgment, where its objection to the settlement/assignment agreement was registered but overruled and where there was a substantial risk of “underlitigation”[1] in the negotiation of the agreement.
The SJC held that “an insurer who defends a claim under a reservation of rights is bound by the amount of a judgment arising from a prejudgment settlement/assignment agreement where (1) the insurer is given notice of the settlement/assignment agreement and an opportunity to be heard by the court before judgment enters; (2) the insurer contests the judgment; and (3) the insured, after hearing, meets his or her burden of showing that the settlement is reasonable in amount.” Importantly, the SJC further held that a reasonable settlement amount may not exceed the limits of the insured’s potential insurance coverage, because the plaintiff may recover in damages no more than that from the insurer.
Accordingly, under the facts of this case, the SJC held that the settlement/assignment agreement between the Padovanos and the estate was per se unreasonable because the judgment arising from the agreement was greater than the limits of the Padovanos’ policy. The SJC therefore vacated the wrongful death judgment and remanded the matter to Superior Court for a hearing to determine a reasonable settlement amount under the circumstances of the case. The SJC further ruled that Commerce will be obligated to pay postjudgment interest on the new, reasonable judgment.
The SJC did note that in 2016 (too late to apply to the Szafarowicz case) the Legislature amended the language of the standard Massachusetts Auto Policy provision on postjudgment interest so that it now provides that interest will accrue only “on that part of a judgment or arbitration award that is within [the insurer’s] limits of liability which accrues after the judgment or award in any matter [it] defend[s].” Szafarowicz is still very important to the insurance industry because the most recent edition of the standard Commercial General Liability Coverage Form (CG 00 01 04 13) states, as to postjudgment interest, that the insurer will pay, above and beyond the stated policy limits “[a]ll interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid, offered to pay, or deposited in court the part of the judgment that is within the applicable limit of insurance.” The CGL language is quite similar to the language of the Standard Mass. Auto Policy prior to its amendment in 2016, and thus GL carriers remain exposed to payment of postjudgment interest on judgments in cases they defend even if they obtain a favorable declaration in a declaratory judgment action that there is in fact no indemnity obligation as to the basic judgment itself.
The SJC noted that in the future, where an insurer successfully challenges a settlement/assignment agreement before judgment enters, the procedure to follow will permit a judge who decides that the amount set forth in, or determined by the settlement/assignment agreement is not reasonable to decline to enter the judgment and invite the parties to renegotiate an agreement in a reasonable amount.
This will be a decision to follow for those of us with insurer clients, as the plaintiff has filed a motion for reconsideration with the SJC, seeking to have the court reconsider or modify its holding that in cases involving settlement/assignment agreements, an award of damages in excess of the policy limits is per se unreasonable on the grounds that the court’s holding disincentivizes settlement/assignment agreements and is inconsistent with Campione v. Wilson, 422 Mass. 185 (1996).
[1] The term “underlitigation” is a term of art in the insurance field, defined by the SJC in Szafarowicz as “a plaintiff's choice to plead and prove negligence rather than or in addition to intentional tort theories when, absent insurance
considerations, the plaintiff would either frame the case solely as an intentional tort claim or emphasize the intentional tort claim.”