Why it matters

A Massachusetts state court ruled that an insured’s failure to satisfy a CGL policy’s notice requirement does not excuse the insurer’s duty to defend absent a showing that the insurer suffered prejudice. Further, because the insurer breached its duty to defend and failed to participate in settlement discussions, the insurer was liable for a default judgment entered against its insured for several times the policy’s limit. By failing to defend its insured and to make a reasonable settlement offer when liability was reasonably clear, the insurer exposed itself to judgment of $2.6 million, well in excess of its small limit of liability ($50,000).

Detailed Discussion

A car mechanic, Joseph Boyle, with 28 years of experience agreed to help a friend who worked at an auto repair shop, C&N Corporation. With the truck on the lift, the C&N employee revved the engine and one of the tires exploded, causing Boyle serious injuries.

Boyle’s medical bills exceeded $106,000 and he lost earning capacity of another $256,000. C&N notified its insurance agent and insurer Zurich American Insurance Company of the accident. Although Zurich opened a file and assigned the accident a claim number, the insurer did little else over the next few years.

C&N became insolvent. An attorney for Boyle and his wife therefore contacted Zurich directly, and repeatedly, about coverage for their losses. Zurich did not respond. Zurich later concluded that the Boyles’ claim was covered under C&N’s policy and, having received copies of Boyle’s medical bills, concluded that C&N faced liability in excess of its $50,000 policy limit. Zurich, however, never communicated its conclusion to the Boyles or C&N, let alone made a reasonable settlement offer.

A default judgment was entered against C&N for more than $2.6 million. Because C&N could not pay the judgment, it assigned its rights against Zurich to the Boyles, who filed suit seeking to recover on the default judgment.

At trial, Zurich contended that it had no duty to defend because C&N breached its contractual obligation to “[i]mmediately send [Zurich] copies of any . . . summons or legal paper received concerning [a] claim or ‘suit.’” The insurance policy provided that Zurich had “no duty to provide coverage under this policy unless there has been full and complete compliance” with the notice of suit provision.

The court agreed with Zurich that C&N did not satisfy the notice condition, but ruled that the failure to satisfy the notice condition “does not automatically mean that Zurich had no duty to defend C&N once it learned of the lawsuit from the Boyles’ attorney.” Under Massachusetts law, an insurer is not excused from its duty to defend unless the lack of notice caused it to suffer actual prejudice.

Zurich had learned of the lawsuit from the Boyles’ lawyer, but chose to ignore that information. “Since C&N had previously told Zurich about Mr. Boyle’s injury and likely claim, when Zurich learned of the lawsuit . . . it had every reason to believe that C&N would want Zurich to defend it,” the court reasoned. “At that point, Zurich had to either step in and provide a defense, or at least contact C&N and confirm whether C&N wanted Zurich to defend the suit.” As Zurich had ample time to protect its interests, it could not establish actual prejudice as a result of C&N’s technical violation.

The court concluded that Zurich also breached its duty to C&N by negligently failing to settle the lawsuit within policy limits and therefore was liable for the excess portion of the judgment obtained by the Boyles plus post-judgment interest, a total of approximately $2.6 million.

To read the opinion in Boyle v. Zurich American Ins. Co., click here.