Supreme Judicial Court, Feb. 10, 2012
Facts: In January 2002, plaintiff Marcia Rhodes was rear-ended by a truck driver, which caused her catastrophic injuries and left her paraplegic. She, along with her husband and daughter, sued the truck driver, the truck driver’s employer, and the company to which the truck driver was assigned by his employer seeking damages for Marcia’s injuries and her family’s loss of consortium.
This case involves the insurer for the company to which the truck driver was assigned, Zurich American Insurance Company (Zurich), and the claims administrator for its excess insurance, AIG Domestic Claims (AIGDC). Despite knowing by July 2002 that the plaintiff’s claims were worth between $5 million and $10 million, that those claims were covered by the Zurich (and by extension AIGDC) policies, and that liability under the policies was virtually guaranteed, AIGDC proceeded to engage in conduct that delayed settlement. This conduct included making inadequate settlement offers and delaying mediation under the guise of performing further discovery where further discovery was not necessary.
Just before trial, the defendants stipulated to liability, leaving the only issue to be that of damages. After trial, and after accounting for settlement amounts from other parties, the court entered judgment for $11.3 million for the plaintiffs. The defendants appealed.
In settlement negotiations after the trial, AIGDC offered the plaintiffs $7 million. Approximately six months later, the parties settled the negligence claim for about $9 million.
Procedural History: In April 2005, the plaintiffs brought suit against Zurich and AIGDC under Massachusetts General Law c. 93A § 9 alleging failure to effectuate a prompt and equitable settlement of the plaintiffs’ accident claims, a violation of M.G.L. c. 176D § 3(9)(f). The plaintiffs’ claims applied to both pretrial and post-trial negotiations.
The trial court found that Zurich did not violate c. 176D § 3(9)(f), but that AIGDC did. The judge determined that with regard to both pretrial and post-trial negotiations, AIGDC willfully and knowingly breached its duty to make a prompt settlement offer once liability and damages were reasonably clear. The judge determined that the failure to settle pretrial did not cause any harm to the plaintiffs, but that the failure to settle post-trial did cause harm, and therefore awarded damages based on the loss of use of the post-trial settlement amount.
The plaintiffs appealed, challenging the finding that AIGDC’s pretrial conduct did not cause it harm and challenging the judge’s calculation of damages. In response to the appeal, AIGDC did not contest the findings that it violated c. 176D § 3(9)(f) and c. 93A § 9.
The appeals court found that AIGDC’s pretrial conduct did cause harm to the plaintiffs and also determined that the proper measure of damages was loss of use of the settlement funds, and therefore awarded damages based on the amount AIGDC offered in settlement before the trial. In regard to the post-trial violation, the appeals court again awarded loss of use damages.
Issue #1: Did AIGDC’s pretrial conduct cause harm to the plaintiffs?
Yes. The trial court judge concluded that, though AIGDC had failed to make a reasonable settlement offer, the plaintiffs would have rejected a reasonable settlement, and that AIGDC’s failure to make such an offer therefore did not harm the plaintiffs. However, this is not the correct standard, as there is no burden on the part of the plaintiffs to speculate about what they would have done with a settlement offer. Rather, they need only prove they suffered some loss or adverse consequence. While the court concluded that it was reasonable for the appeals court to find that there was such a loss, the court determined that it need not decide the exact nature of that loss, as it was not necessary to determine damages.
Issue #2: What is the proper measure of damages to be awarded for a willful violation of c. 93A § 9?
The court noted a 1989 amendment to c. 93A §§ 9 and 11, which was intended to increase potential penalties for insurers who engage in unfair claim settlement practices. Based on the amended language, the court determined that the proper measure of damages for a willful or knowing violation of c. 93A, where that violation stems from an event that has given rise to a judgment in favor the plaintiff, is a multiple (between two and three times) of the amount of that judgment. Therefore, the trial court and the appeals court erred when they determined that the measure of damages was the loss of use of the settlement funds. While the loss of the use of the settlement funds did form the basis for the harm to the plaintiffs under c. 93A, the measure of damages came not from the loss of use but from the judgment for the underlying event, because the violation of c. 93A was willful and knowing. Therefore, the court concluded that the proper measure of damages for the c. 93A violation was twice the amount of the award for the underlying tort violation, which in this case resulted in an award of $22 million.
Issue #3: Was the award of a multiple of the underlying tort judgment a grossly excessive award of punitive damages in violation of the Fourteenth Amendment?
No. The court determined that the guideposts created by the United States Supreme Court to measure punitive damages for constitutionality was directed at jury verdicts and not judicially applied statutory damage provisions. Further, even if the guideposts did apply, an award of damages only two times the amount of the underlying judgment is well within those guideposts.
Issue # 4: May the plaintiffs receive punitive damages as well as compensatory damages for loss of use of the funds and the frustrations of litigation?
No. The statute clearly provides for either actual damages or, in the case of knowing and willful violations, two to three times the amount of the underlying judgment, but not both.
Conclusion: To show that settlement negotiations violated M.G.L. c. 93A, a plaintiff need not prove it would have actually accepted the settlement, only that the settlement negotiations resulted in some harm. Further, if the c. 93A violation is knowing and willful, and there was a favorable judgment for the plaintiff for the underlying event, the measure of damages is two to three times the judgment for the underlying event. Such an award is not unconstitutional. (AE)