A recent decision of the Appeals Court of Massachusetts provides clear guidance as to the remedy afforded policyholders under the Massachusetts’ Consumer Protection Statute, G.L. c. 93A, for an insurer’s unwarranted refusal to pay reasonable attorneys fees incurred defending the policyholder against potential liability. In Northern Security Insurance Co., Inc. v. R.H. Realty Trust, 78 Mass. App. Ct. 691 (2011), the Appeals Court of Massachusetts affirmed a verdict in favor of a policyholder and its attorneys against its insurer, finding that the insurer’s refusal to pay reasonable attorneys’ fees to a private attorney hired by the insured, who refused the insurer’s representation conditioned upon a reservation of rights, constituted a violation of G.L. c. 93A.

Background

This dispute originally arose out of a claim brought against the policyholder, a real estate trust and owner of a residential property, by the lessees of the property alleging damages from their alleged exposure to mold. The trust timely notified its insurer, Northern Security, and sought a defense of the claim. Northern Security responded with a reservation of rights noting that the trust was covered for only one of several counts of the complaint. The trust rejected the insurer’s representation and retained its own attorney to defend the case. The trust and the attorney agreed on a rate of $225 per hour.

During the course of the defense of the case, the attorney submitted bills to the insurer for payment. The insurer delayed payment of the bills, and when it did pay, it paid the bills at the reduced rate of $150 per hour, which was the insurer’s panel rate. The attorney then sent the insurer a G.L. c. 93A demand letter seeking payment of the balance between $225 per hour and $150 per hour. The insurer denied this request and disputed the claimed Chapter 93A violation.

Trial Proceedings

After the underlying case had settled, the insurer brought suit against the insured and the attorney seeking a declaratory judgment that its decision to pay $150 per hour was reasonable. The insured and attorney counterclaimed, alleging breach of contract and a violation of G.L. c. 93A.

After hearing a motion on the pleadings, the motion judge ruled that $225 per hour was a “per se reasonable attorney fee” in the Boston-area legal market. In response to this ruling, the lawyer sent a second 93A letter to the insurer, offering to dismiss the counterclaim in exchange for the insurer’s agreement to pay the amount of the reasonable attorney fee. The insurer did not respond to this demand. The case then went to trial, where the trial judge held that the fair and reasonable hourly rate for services rendered by the attorney was actually $350 per hour. The trial judge also found that the insurer’s refusal to pay $225 per hour, which the insurer’s own claims manager, as well as the motion judge, had previously deemed to be reasonable, violated G.L. c. 93A, thus justifying an award of attorneys’ fees.

Appeal

The insurer appealed. On appeal, the court cited to the established Massachusetts rule that where an insurer seeks to defend an insured under a reservation of rights, and the insured is unwilling to do so, the insured may require the insurer to either relinquish its reservation of rights or relinquish its defense of the insured and reimburse the insured for its reasonable defense costs. Thus, the court concluded that the insured was within its rights to retain its own counsel, and that the evidence supported a $225-per-hour rate. The court recognized that the insured is entitled to have a reasonable fee paid based on market rates and not the insurer’s panel rates, which “may be at odds with an insured’s desire to pay more for legal representation in hope of minimizing legal expenses.” Further, the insurer’s delay of 14 months in payment of the undisputed attorney’s defense fees, despite acknowledging that it owed at least $150 per hour, warranted a finding of a G.L. c. 93A violation. In response to the insurer’s challenge relating to the award of $350 per hour, the court concluded that the proper fee was $225 per hour, which represented the insured’s agreed-upon rate and thus its actual damages. The case was remanded for a proper calculation of damages.  

Implications

While this decision does not alter existing precedent deeming the mere nonpayment of a debt to constitute a violation of G.L. c. 93A, the court clarified that nonpayment or a delay in payment coupled with additional misconduct may justify 93A liability. Specifically, the court cautioned against an insurer’s withholding of undisputed amounts and unreasonable delay in payment, particularly where undertaken to secure an advantageous financial outcome.