Why it matters

In a significant victory for policyholders, Massachusetts’ highest court ruled that an insured had a valid unfair trade practices claim against an insurer for breaching its duty to defend – even though the insurer subsequently reimbursed the insured for its defense costs. Facing claims for cleanup of contamination from a state environmental regulator, the insured tendered the claims to its insurer for defense. The insurer denied the claims, and the policyholder sued, alleging breach of contract and violation of the state’s unfair trade practices statute. The trial court found the insurer had breached its duty to defend. The insurer thereafter reimbursed the insured for costs it had incurred in defending the claims. The insurer then argued that its payment mooted the insured’s unfair trade practices claim. The state’s highest court disagreed, holding that the unfair trade practices statute was intended to be a deterrent. Allowing insurers to engage in improper conduct knowing they could avoid statutory liability as long as they ultimately reimbursed policyholders for expenses, the court opined, would be contrary to the statute’s intent.

Detailed Discussion

Auto Flat Car Crushers operates a Massachusetts-based vehicle crushing service. In February 2004, Auto Flat was hired to remove 600 vehicles from a salvage yard, a process that included detaching the cars’ fuel tanks and emptying the contents into drums.

Later that year, Auto Flat received a letter from the state’s Department of Environmental Protection (DEP) informing Auto Flat that a release of hazardous materials had occurred during the job. The letter required Auto Flat to take remedial actions.

Auto Flat maintained a garage insurance policy with Hanover Insurance Company, and sought defense and indemnification for DEP’s claims. Hanover denied coverage based on a pollution exclusion and other asserted defenses. Auto Flat then sued, seeking a declaration that Hanover had a duty to defend and indemnify and had breached its duties. Auto Flat later amended its complaint to add a claim under Massachusetts G.L. c. 93A, Section 11, the state’s unfair trade practices statute, based on Hanover’s refusal to defend the DEP claims.

The trial court granted partial summary judgment on Auto Flat’s duty to defend claim. Thereafter, Hanover sent the insured a check for expenses plus accrued interest (six years after the initial request for coverage). Auto Flat accepted the payment without prejudice to pursue its Section 11 claim.

The trial court then granted summary judgment to Hanover on the breach of contract and indemnification claims, finding that Auto Flat had been made whole by Hanover’s payment. However, the court did allow Auto Flat’s Section 11 claim to move forward. Hanover appealed, arguing that, by paying Auto Flat’s damages, interest, and legal expenses, Auto Flat had no actual damages, which are required for recovery under Section 11.

The Massachusetts Supreme Judicial Court first looked to the statute itself. “To be successful, a plaintiff bringing a claim under Section 11 must establish (1) that the defendant engaged in an unfair method of competition or committed an unfair or deceptive act or practice, as defined by [the statute or regulations]; (2) a loss of money or property suffered as a result; and (3) a causal connection between the loss suffered and the defendant’s unfair or deceptive method, act, or practice.”

Focusing on the only disputed element – the second requirement – the court determined that the statute does not require a showing of uncompensated loss. A concrete monetary or property loss is necessary to support a Section 11 claim, the court wrote, but “the plain language of Section 11 and cases interpreting it, as well as the policy underlying [the statute], make clear that a plaintiff who can establish that it has sustained such concrete monetary or property loss will have satisfied the actual damages element of Section 11, without having to prove that the loss remains uncompensated.”

Acceptance of payment may affect the continued viability of a plaintiff’s contract claims, the court acknowledged, but “[e]ven if the amount tendered represents the full amount recoverable as actual damages under [the statute], as Auto Flat concedes is the case here, that alone does not preclude a claim under the statute.”

“Where a plaintiff can demonstrate that it has suffered actual damages, i.e., a concrete loss of money or property, Section 11 does not impose a further requirement that the plaintiff establish outstanding uncompensated loss,” the court concluded. The compensation already paid by Hanover can be treated as an offset against any additional damages awarded rather than as a bar to recovery, the court added, citing to similar decisions from California and Illinois.

The court emphasized the policy behind the statute, which was “intended to deter misconduct while providing a remedy for those who have suffered a specific harm as a result of a defendant’s prohibited conduct.” Barring claims because of reimbursement would undercut the deterrent purpose of the statute, the court opined. “Under Hanover’s interpretation, Section 11 would lose its force; insurers would be free to engage in dilatory conduct, arguably in violation of the [statute], with the knowledge that, so long as they ultimately reimbursed claimants for their resulting expenses, statutory liability could be avoided.”

The court also rejected Hanover’s contention that Section 11 requires an actual judgment to establish the amount of damages incurred. The statutory language provides that, in certain circumstances, a judgment may constitute an appropriate basis for multiplication of damages as a penalty, the court explained, but the absence of a judgment does not preclude recovery under the statute.

To read the opinion in Auto Flat Car Crushers, Inc. v. Hanover Insurance Co., click here.