Earlier this month, a Massachusetts Appellate Court affirmed a trial court’s award of bad faith damages in a case where it found the insurer’s approach to a claim to be “at best inattentive, if not incompetent.” Although the state appellate court in McLaughlin et al. v. American States Insurance Co. ultimately denied an award of multiple damages, its award of attorneys’ fees and costs, along with loss of use of funds damages, shows the limits of arguing no bad faith because the insured’s liability was not “reasonably clear” under Massachusetts’s bad faith statutes. The Court’s decision, even though unpublished, serves as yet another reminder of the importance for insurers to properly investigate claims and objectively analyze whether an insured’s liability is reasonably clear.

The underlying litigation arose out of a botched landscaping project on coastal property. The homeowners hired the insured subcontractor to install a well as part of the project. The homeowners claimed that the subcontractor was negligent for failing to take into account, or at least warn of, the possibility that the well may become inundated with seawater because of its proximity to the coast. The lack of freshwater caused damage to decorative and ornamental landscaping paintings that had also been installed. After the homeowners settled their claims against the two other defendants, the claims against the subcontractor went to trial, where he was found liable.

The homeowners (third party claimants) then filed suit against the subcontractor’s insurer for failure to conduct a reasonable investigation of their claim and failure to make a reasonable offer of settlement after liability of its insured (the subcontractor) became reasonably clear, in violation of the unfair claims handling and settlement practices of Massachusetts law.

Massachusetts’ claims settlement statute, G.L.c. 93A, §2(a) taken together with G.L.c. 176D, §3(9)(f), provides that an insurer is liable if it fails to promptly settle claims within the thirty-day period set forth in G.L. c. 93A, § 9(3) or as soon thereafter as liability and damages make themselves apparent. In practice, this caveat, i.e. when “liability has become reasonably clear,” protects insurers from paying out claims not yet substantiated in the underlying litigation. The insurer asserted that it was not liable for bad faith because liability was not “reasonably clear” when the claim was under investigation. According to the insurer, its determination was supported by the fact that although judgment was entered against the insured, the jury did not award any monetary damages. The insurer also claimed that liability was not reasonably clear because other defendants were named in the suit. The Court rejected both of these arguments holding that the term “reasonably clear” does not turn on whether the insured will eventually be liable for monetary damages, and is independent of how a jury will ultimately view the insured’s liability. In addition, the presence of other tortfeasors is not pertinent to the analysis and does not absolve an insurer of its statutory obligation to make an offer when liability of its insured is clear.

In addition to finding the insurer liable for unfair claims settlement practices, the Court also held the insurer failed to conduct a reasonable investigation under G. L. c. 176D, § 3(9)(d). The Court’s holding was primarily based on the fact that the insurer did not consult an expert in hydrology to independently assess the merits of the homeowners’ claims.

So what does this mean? Under the holding of McLaughlin, to avoid bad faith damages, insurers at a minimum must objectively assess their insureds’ liability and where they recognize the need for expert assistance in assessing their insured’s liability, engage an independent expert to assist them in making an independent or neutral assessment of the insured’s potential fault.