In Rass Corporation v. The Travelers Companies, Inc., 2015-P-0358 (Mass. App. Ct. 2016), the Massachusetts Appeals Court reviewed a case brought by a sauce company, Rass, against its insurance carrier, Travelers, for breach of contractual duties to defend, indemnify, and settle an underlying action brought against Rass. The underlying action alleged Rass committed the torts of trade disparagement, misappropriation of trade secrets, and defamation. Rass’s insurance policy only provided coverage for the trade disparagement and defamation claims. It was uncontested on appeal that misappropriation of trade secrets was not covered under the policy, and therefore, Travelers had no duty to contribute or indemnify Rass for whatever portion of damages arose out of that claim.
Before trial in the underlying action, Rass’s attorney recommended a settlement range of $100,000 to $150,000 to settle all claims. During negotiations, Travelers offered to contribute $20,000 to the settlement on the condition that Rass waive its right to seek indemnification. Rass rejected the offer and settled the case for $175,000 without any contribution from Travelers. Rass then filed a complaint in Superior Court alleging Travelers had breached its contract and committed unfair and deceptive acts under chapter 93A.
When a partial-coverage lawsuit proceeds to a final judgment, the trial judge or jury determine the portion of damages allocated for each claim. The insurance company then must indemnify in the amount for each covered claim, while the defendant is left to pay the damages that arise from uncovered claims. Because Rass settled before going to trial, the Superior Court had determine Traveler’s obligation to indemnify by inquiring “how the parties to the settlement viewed the relative merits of the plaintiff’s claims at the time of the settlement and whether, if the insured settled without the carrier’s approval, the settlement amount was reasonable.” Windt, INSURANCE CLAIMS & DISPUTES § 6:31 (6th ed. 2013). Here, the Superior Court found that $140,000 of the $175,000 settlement arose from the covered claims. The Superior Court further found that Travelers had breached its contractual duties by failing to contribute $140,000 to the settlement and concluded that that failure constituted an unfair and unreasonable act in violation of chapter 93A. The Appeals Court affirmed the entirety of the trial court’s judgment, including the apportionment of settlement funds to the covered claim and the finding of a 93A violation.
The Massachusetts consumer protection statutes provide strong incentives for insurance companies to make a good-faith effort to settle claims when liability becomes reasonably clear. Failure to do so is an automatic violation of chapter 93A when the insured party is a private individual, and is evidence of a 93A violation when the insured is a business. When a lawsuit alleges both covered and uncovered claims against an insured, the insurance carrier need only defend, contribute, and indemnify the covered claims. But as Rass demonstrates, both types of claims are often so inherently intertwined that insurance companies should err on the side of caution when deciding how much they should offer to contribute to a settlement. An insurance company should conduct a thorough appraisal for each covered claim in light of the entire lawsuit and offer the requisite contribution therefrom.