In a recent case the Supreme Judicial Court for the Commonwealth of Massachusetts (“SJC”) ruled that an insurer found to have engaged in unfair settlement practices must pay damages of $22.6 million based on “willful and knowing” failures to effect a “prompt, fair and reasonable” settlement of a very serious personal injury claim as to which liability and damages were reasonably clear at an early date. The $22.6 million, the amount due from the insurer, is two times the jury verdict and judgment of $11.3 million in the underlying tort trial. The opinion, in practical terms, mandates that the insurer pay the plaintiff three times, once for the serious injuries and twice more for unfairness as to claim settlement as to those injuries. That seemingly harsh result follows from a literal reading of the Massachusetts statute governing the facts found. In the decision the SJC follows the controlling legislative language literally, acknowledges that the result is harsh, and refuses to invent or impose a different outcome.
Prior to the SJC Opinion, the trial court and Appeals Courts each held after detailed consideration of the same facts that the damages due from the insurer were measurable as the loss of use of money during the time between when the fair offer should have been made until the later date when actually made. The very different result in the SJC Opinion is the multiplication, by two, of the trial judgment amount of $11.3 million in “actual damages” awarded for the underlying tort injury. That rule as to damages in this context is described in the SJC Opinion as mandated by the 1989 legislative amendment to Chapter 93A, the Massachusetts statute prohibiting unfair and deceptive acts in trade or commerce. Chapter 93A expressly applies to unfair practices by insurers in the settlement of claims. The 1989 amendment of Chapter 93A relates to statutory liability for “willful or knowing” unfair settlement practices by insurers in settlement of claims in Massachusetts. In 1989, the Legislature specifically amended c. 93A, §§ 9 and 11, with respect to the calculation of damages for unfair claims practices. The 1989 amendment, c. 93A, § 9 (3), contains the following directive relating to calculation of multiple damages liability of culpable insurers:
[I]f the court finds for the petitioner [sc.] in the civil action alleging unfair claims settlement practices by the insurer], recovery shall be in the amount of actual damages or twenty-five dollars, whichever is greater; or up to three but not less than two times such amount if the court finds that the use or employment of the act or practice was a willful or knowing violation of [c. 93A, § 2] . . . For the purposes of this chapter, the amount of actual damages to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction or occurrence, regardless of the existence or nonexistence of insurance coverage available in payment of the claim.
The recent SJC decision holds that the language of that 1989 amendment requires that if an insurer defendant commits a willful or knowing Chapter 93A violation that “finds its roots in an event or a transaction” that has given rise to a judgment in favor of a plaintiff against an insured, the damages due for the willful and knowing unfair settlement practice by the insurer of that insured will be calculated by multiplying the amount of the judgment in the underlying case involving the claim by the victim. Damages in this instance under the statute are two or three times the verdict or judgment amount as to the underlying injury caused by an insured. On this point, the SJC wrote “[w]here, as here, the statutory text is clear, ‘[w]e are not free simply to add language to a statute for the purpose of “interpret[ing] [the statute] according to [the Legislature’s] perceived objectives.’”
The SJC Opinion ends with a related point: “The [Massachusetts] Legislature may wish to consider expanding the range of permissible punitive damages to be awarded for knowing or willful violations of the statute to include more than single, but less than double, damages; or developing a special measure of punitive damages to be applied in unfair claim settlement practice cases brought under c. 176D, § 3(9), and c. 93A that is different from the measure used in other types of c. 93A actions.
The SJC declined to adopt any rule less harsh than the measure of damages rule mandated by the statute. The trial court avoided that outcome because it found there were multiple initial unfair settlement practices by the insurer prior to trial followed by a fair offer which the plaintiff rejected before trial. The import of that sequence for the trial court was that the rejection of the fair offer before trial terminated any right to damages against the insurer based on prior in time unfairness. The rejection (“I do not accept this fair offer”) ended the potential liability of the insurer by breaking the chain of injury causation. The trial court separately found, however, a second or new sequence of unfairness by the insurer starting after the trial verdict. As to that, the trial court computed as the damages due from the insurer the value of loss of the use of funds for the five month duration of the post-trial unfairness. That loss, calculated as $448,250, was the interest on the principal amount of the fair settlement during the five months it was withheld and until the time the fair offer was made.
The SJC ruling here is arguably the product of a perfect storm unfavorable to the insurer arising from convergence of several established doctrines. First, while it seems reasonable that a legislature will demand an insurer to be fair to its own insureds, an obligation of insurer fairness as to the adversary of its insured, the tort victim, is less obvious but was legislatively mandated in Massachusetts since 1989 and was therefore clearly known to this insurer. In most other transactions the law allows the market alone to police the fairness of one party adverse to another. An unreasonable “low ball” bidding buyer usually does not succeed in buying the goods, and is thereby “punished” by the market. Under Chapter 93A unfairness is identified by a trial, not by the marketplace. Secondly, unfairness like any other event occurs at a specific date. Usually in law the timing of an event determines the causation and amount of damages. Under Chapter 93A willful unfairness by an insurer at any point in time will be measured by the same calculation, two or three times the underlying judgment amount. That result can seem arbitrary. Unfairness in the eyes of one person early in the life of a claim will often look to another a lot like savvy negotiation. Unfairness at a much later stage is also difficult to identify. Settlement negotiations often involve numerous participants, each with differing objectives and varying points of view as to past or present issues, not all of which are transparent or entirely rational, even in retrospect. Human errors in evaluations or calculations often mar the process, as can ill-will and lawful strategic purposes. In this instance but not in other business relations the law attempts to retrospectively dissect and evaluate the conduct and motives of one economic adversary as to another.
The core topic in any fair settlement dispute involves the insurer’s assessment of injuries and litigation outcomes. Those by definition involve unpredictable events and non-rational rules of thumb. There are no fixed or precise values for pain and suffering or for loss of companionship in any given case. The trial court opinion in this case shows for example that the tort victim’s lawyers at various dates “demanded” in sequence, $18.5 million, $16.5, $15.5 and $19.5 because of changes in their pretrial view of facts or events. That these demands were “unreasonably high” did not relieve the insurer of its duty to be fair. For the victim, the calculated out of pocket damages, including future medical treatment, were $2.817 million. Based on that, a defense offer of $6 million at the close of trial evidence was judicially determined to be low but reasonable, and was refused. A similar post-verdict offer was not reasonable, however, because the verdict was $11.3 million. Jury verdicts however are always somewhat imprecise. What juries did in past cases tells one a rough dollar figure, but does not explain fully how or why a specific verdict number was reached in a given case. Jurors for separate valuable policy reasons are strictly protected from post-trial interviews or contacts by trial counsel in order to preserve the confidentiality of jury deliberations. Any retrospective assessment of what is reasonable or fair in a given case will at best include nonconfirmable assumptions and estimates.
Statutory damages against unfair to insurers very likely are more accurate if proportional to actual harm caused. That is more likely if the damages include the time value of money. That value is a crucial element, always relevant to both sides in settlement negotiations. The amount of a jury verdict, higher or lower than expected, does not, by contrast, necessarily correlate to unfairness or not.
Deviations from expectations caused by the uncertainties of any trial provide a constant and systemic motivation for all parties to settle any litigation. That fact, however, does not make those variables knowable or rationally assessed even in hindsight. Imposition of penalty damages for “unfairness” following a verdict and based on the verdict amount as a result inevitably involves some degree of circular or self-proving logic. If the eventual jury verdict is far lower than was expected, a deliberate “low-ball” offer by an insurer just before the trial may in hindsight appear to be very close to fair, and possibly generous, prescient, lawful, or indeed brilliant, only with the benefit of hindsight.
As the SJC opinion makes clear, a new effort to address these issues will require new legislation. That legislation may want to start by separating the standards, rules, and penalties applicable to an insurer based on its obligations to insureds from their separate obligations, if any, owed to the adversaries of their insureds, the tort victims and the lawyers for those victims.
Unfairness, when clearly detected, possibly will be punished more rationally if the punishment is measured by actual in fact causation of economic or other compensable harm, the measure employed and required in most other areas of the law. A continued fresh departure from common law concepts invites a new scheme based on identified and rational purposes, clear and compelling evidence, and a logical set or rules able to be enforced by predictable and proportional damages and penalties. Absent new legislation, insurers in Massachusetts who are found to engage in willful and knowing unfair conduct in settlement practices as to insureds or as to non-insured tort victims presently face mandatory multiples of the damages verdict or judgment found after trial of the underlying claim by the victim.