Guide for Causes of Action for Bad Faith Claims

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Last Updated
July 20, 2021

M.G.L. ch. 176D:

M.G.L. ch. 176D, § 3(9), set forth the acts and omissions comprising “unfair claim settlement practice[s]” under § 3.Chapter 176D provides that an insurer will be liable when it “[f]ails to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies”[1]; “[f]ail[s] to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed”[2]; or “[m]isrepresent[s] pertinent facts or insurance policy provisions relating to coverages at issue.”[3] In addition, in circumstances where liability is reasonably clear, the insurance company must act to “effectuate prompt, fair and equitable settlements of claims.”[4] An insurer that fails to offer settlement of a claim for policy limits after determining that the insured is liable, in excess of policy limits, acts in bad faith.[5]

In 1994, the Supreme Judicial Court examined the scope of an insurer’s duty to its insured to settle third-party claims within policy limits and clearly stated that the insurer has a duty to act in good faith to its insured.[6] “An insurer is held to a standard of reasonable conduct in its defense of its insured,” and may be held liable for negligence in the defense.[7]“[T]he liability of an insurer with respect to its refusal or failure to settle a claim against its insured has traditionally been decided on the standard of whether the insurer exercised good faith judgment on the subject.”[8]“Good faith requires that any settlement decision be made without regard to the policy limits and that the insurer ‘exercise common prudence to discover the facts as to liability and damages upon which an intelligent decision may be based.’”[9] The standard of review for good faith is objective, and a “finding of bad faith in the settlement of a claim against an insured [is] warranted by evidence of what the practice of the industry was in similar circumstances and by expert testimony that the insurer violated sound claims practices. . . .”[10] “The net result of this analysis is that an insurer is liable for negligent in failing to settle a third-party claim within policy limits.”[11]


A.      Hartford Casualty Insurance Company v. New Hampshire Insurance Company

The Hartford case articulated the standard for negligence as: the test is not whether a reasonable insurer might have settled the case within the policy limits, but rather whether no reasonable insurer would have failed to settle the case within the policy limits.[12] This test requires the insured (or its excess insurer) to prove that the plaintiff in the underlying action would have settled the claim within the policy limits and that, assuming the insurer’s unlimited exposure (that is, viewing the question from the point of view of the insured), no reasonable insurer would have refused the settlement offer or would have refused to response to the offer.[13]


B.      Gore v. Arbella Mutual Insurance Company

In Gore v. Arbella Mutual Ins. Co., the Court of Appeals reviewed judgment entered for the claimant against an insurance company that failed to make a prompt offer of settlement when liability was reasonably clear. The insured settled with the claimant, stipulated to the entry of judgment against himself, and assigned his rights against the insurance company to the claimant. The Gore decision clarified several important facts about the insurer’s obligations and the calculations of damages: (1) that “an insurer has a duty . . . to respond to settlement offers within he policy limits by the deadline prescribed in the offer . . . provided that the time allotted for acceptance is reasonable.”[14] (2) If liability is reasonably clear, neither the conduct of the claimant nor the tactics of her attorney will be relevant to assessing whether the insurer complied with its duty to make a prompt, fair offer of settlement.[15] (3)In a case where the insured settles with the claimant and assigns her rights against the insurance company to the claimant as part of the settlement, a reasonable, non-collusive settlement amount, whether entered as stipulated judgment or not, may properly by considered the damages on the assigned claim, and may be doubled or trebled for a knowing or willful violation of the statute.[16]


C.      Rhodes v. AIG Domestic Claims, Inc.

In 2012, the SJC issued a decision in Rhodes v. AIG Domestic Claims, Inc., an important clarification of the calculation of damages when an insurer fails to effect a prompt, fair and equitable settlement pursuant to M.G.L. ch. 176D, § 3(9)(f). In Rhodes, the plaintiff was a victim of a trucking accident in which liability was clear and the injuries severe. The trucking company had primary coverage of $2 million and a $50 million excess policy. The primary carrier did not offer policy limits until two years after concluding that liability was clear. In subsequent pretrial negotiations, the excess carrier and plaintiff did not reach a settlement. Pretrial, the best offer by the excess carrier was $3.75 million. At trial, after the close of evidence, the excess carrier increased the offer to $6 million. The verdict was $9.412 million, and with statutory interest the total judgment was approximately $11.3 million.[17]

Post-trial, the primary carrier tendered policy limits plus interest within 90 days of the entry of judgment. The excess carrier did not settle the balance of the judgment until over eight months after the entry of judgment.[18] After a bench trial on the violation of Chapters 93A and 176D, the trial court concluded that the excess carrier had violated subsection 3(9)(f) and awarded loss of use damages, calculated as the interest on the final settlement amount between the date the court concluded the excess should have settled (about 90days post judgment) and the actual settlement date.[19] The court doubled the damages after finding that the insurer’s violation was willful and knowing.[20]


[1] 176D, § 3(9)(b).

[2] 176D, § 3(9)(e).

[3] 176D, § 3(9)(a).

[4] 176D, § 3(9)(f).

[5] Demarzov. American Mut. Ins. Co., 389 Mass. 85, 97 (1983).

[6] Hartford Casualty Ins. Co. v. New Hampshire Ins. Co., 417 Mass. 115 (1994); see also RLI Ins. Co. v. General Star Indem. Co., 997 F.Supp. 140,144-46 (D. Mass. 1998) (Keeton, J.) (discussing evaluation of standards). In Hartford, the SJC affirmed a judgment for the insurer, which had been sued by the excess carrier standing in the shoes of the insured, after the excess carrier had to pay $1.5 million on a judgment in excess of the $500,000 primary policy coverage. The dispute went to a jury, which gave a defense verdict. The excess carrier challenged the jury instructions, which the SJC held did not matter because the jury had found that the primary carrier was not negligent based on unchallenged instructions. The Court discussed at length the obligations of the insurer in dealing with third-party claims.

[7] 118.

[8] Id.

[9] 119.

[10] 119-20.

[11] Hartford,997 F.Supp. 140 at 120.

[12] Id.

[13] 121.

[14] Gore,77 Mass. App. Ct. 518 at 526.

[15] 529.

[16] 534-36.

[17] Rhodes v. AIG Domestic Claims, Inc., 461 Mass. 486, 489-94 (2012).

[18] 493.

[19] 494.

[20] Id.

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