By: Zachary Sullivan
In a recent decision, the Massachusetts Appeals Court held that a contractor was entitled to recover its costs of bringing a coverage suit against its insurer when the insurer acknowledged its duty to defend but failed to pay the contractor’s reasonable defense costs and reserved the right to recoup any fees it may pay toward the contractor’s defense. See John Moriarty & Assocs., Inc. v. Zurich Am. Ins. Co., No. 22-P-275, 2023 WL 2719362 (Mass. App. Ct. Mar. 31, 2023).
JMA, a general contractor, was an additional insured on a commercial general liability insurance policy Zurich issued. JMA’s claim for coverage on the Zurich policy arose from a work site injury. JMA retained two subcontracting companies: PJ Spillane and Triple G Scaffold Service Corp. (“Triple G”) to perform waterproofing and all scaffolding work, respectively.
During the project, a PJ Spillane employee fell and sued both JMA and Triple G for his resulting injuries. JMA pursued coverage under PJ Spillane’s commercial general liability policy that Zurich issued, and on which JMA was named an additional insured.
Zurich initially accepted JMA’s tender and agreed to both defend and indemnify JMA without any reservation of rights. Upon JMA’s request for Zurich to also defend and indemnify against Triple G’s claims against it, however, Zurich not only refused, it withdrew its prior acceptance for coverage of JMA, and instead issued a reservation of rights to JMA concerning the underlying claim. When Triple G later withdrew its demand to JMA for defense and indemnity, Zurich refused JMA’s request to rescind its reservation of rights. Zurich reiterated its coverage position, including an express reservation of “the right to recoup any amounts paid as defense expenses that can be attributable to liability that is not potentially covered, if allowed by law.”
Further, during this entire period, Zurich failed to pay invoices for legal services rendered to JMA in defense of the underlying personal injury claim. Due to Zurich’s reservation of the right to recoup costs of defense and its failure to pay in JMA’s defense, JMA spent eight months defending itself in the personal injury case. Over a year later, in February 2021, JMA sued Zurich, asserting claims for breach of contract, declaratory judgment and violation of the consumer protection statute based on Zurich’s failure to pay defense costs and its insistence that it had the potential right to recoup any defense costs it advanced.
After JMA filed its action, Zurich made payments to JMA in October and November of 2021 for legal expenses JMA previously incurred and filed a motion to dismiss JMA’s claims. The trial court granted Zurich’s motion to dismiss, finding that Zurich acknowledged its duty to defend, ultimately paid JMA’s defense costs, albeit belatedly, and that Zurich had properly reserved its rights. Consequently, the trial court dismissed JMA’s breach of contract, declaratory judgment, and consumer protection claims. The Court found that Zurich’s late payments to JMA fulfilled its duty to defend, that Zurich properly reserved its right to recoup those costs, and that JMA’s claim for indemnity was premature.
JMA appealed the decision, asserting that it properly had alleged its breach of contract claims, that Zurich’s late payments were a breach of the insurance agreement, that it properly stated a claim under the consumer protection law and that Zurich was liable to it for the costs associated with bringing the coverage action. The Appeals Court agreed with JMA’s position, stating:
[w]here Zurich insisted on proceeding subject to a reservation of rights, JMA was entitled to maintain control of its defense and to seek payment of its legal bills from Zurich. At that point, Zurich was required to reimburse JMA for reasonable attorney’s fees incurred by JMA’s chosen counsel… JMA alleged that Zurich failed to do so, thus prompting JMA’s initiation of this action. These allegations adequately set out a breach of contract claim premised on Zurich’s nonpayment of JMA’s defense costs.
The Court also emphasized that Zurich’s late payment of JMA’s defense costs – payments that Zurich made after JMA filed suit – were not a legitimate basis to defeat JMA’s motion to dismiss. Further, the Court found that Zurich’s untimely payments were a proper basis for a claim that Zurich violated the consumer protection statute. Where an insurer that admits it has a duty to defend but fails to perform its defense obligations, the insurer may be liable under M.G.L. 93A and M.G.L. 176D, because the conduct is a bad faith business practice for insurers. The court held that, “[t]he breach of the duty to defend is worse where the insurer acknowledges
that it has the duty to defend but then refuses to comply with that duty than where the insurer merely has a good faith disagreement about its duty to defend.”
The Appeals Court also explained that where an insurer acknowledges its duty to defend but fails to fulfil that obligation, its insured is entitled to recover the cost to prosecute the case against the insurer, as well as the costs for defending in the underlying action. This was, according to the Appeals Court, a “natural extension” of the Massachusetts Supreme Judicial Court’s decision in Preferred Mut. Ins. Co. v. Gamache, 426 Mass. 93 (1997). The Gamache decision addressed the policyholder’s right to recoup costs in establishing an insurer’s duty to defend.
Notably, the Court left open the question of whether Zurich’s assertion of the right to recoupment was legitimate. Other states are closely split on this issue, and this is an open question under Massachusetts law. For now, the Appeals Court remanded the case to the trial court for an initial determination, but this issue is likely to be presented to the appellate courts for determination.