Summary
finding that insurer not liable for pre-notice defense costs under Massachusetts law
Summary of this case from Erie Ins. Exchange v. Virgin Islands EnterprisesOpinion
CIVIL ACTION NO. 98-CV-10831-GAO.
September 28, 2001
MEMORANDUM ORDER
The defendant has moved this court to grant summary judgment in its favor. The plaintiffs, Managed Health Care Systems, Inc. ("MHCS") and Michael Ingoldsby, claim that St. Paul Fire Marine Insurance Company ("St. Paul"), their liability insurance company, must reimburse them for a year's worth of defense costs which they incurred in a lawsuit filed against them by a former MHCS employee. St. Paul has moved for summary judgment, arguing that since it had no notice of the suit during that year, it has no obligation to pay the plaintiff's defense costs attributable to that period.
A. Summary of Facts
These facts are not in dispute. On February 27, 1996, Donald Foster, a former MHCS employee filed a complaint against Ingoldsby and MHCS in the Massachusetts Superior Court. The complaint alleged that Ingoldsby and MHCS had committed various wrongs against Foster when they terminated his employment with MHCS. Ingoldsby and MHCS defended against these claims and incurred over $200,000 in attorney's fees as a result. St. Paul had issued liability insurance to MHCS through a series of six MHCS Professional Office Package policies. The plaintiffs did not notify St. Paul that they were in litigation against Foster and they made no claim at the time that any policy issued by St. Paul provided coverage for the Foster suit.
About a year later, on February 1, 1997, Foster filed an amended complaint adding some new claims. Ingoldsby and MHCS notified St. Paul of the amended complaint, and requested that St. Paul assume the defense. After reviewing Foster's claim against MHCS and Ingoldsby, St. Paul determined that it had no obligation to reimburse them for costs incurred before the defense was tendered, but it agreed to defend against the claims Foster asserted in his amended complaint.
B. St. Paul's Obligation to Pay Pre-Tender Costs
An insured's failure to give its liability insurance company timely notice of a claim against it does not automatically excuse the insurance company from its contractual obligations. Johnson Controls, Inc. v. Bowes, 409 N.E.2d 185, 188 (Mass. 1980). Instead, in order for the insurance company to be relieved of its obligations under the policy, it must "prove both that the notice provision was in fact breached and that the breach resulted in prejudice to its position." Id. The Supreme Judicial Court reasoned that this was a fair approach to notice provisions because where "the insurance company's interests have not been harmed by a late notice, . . . the reason behind the notice condition in the policy is lacking, and it follows neither logic nor fairness to relieve the insurance company of its obligations under the policy in such a situation." Id. at 187-88. See also Darcy v. Hartford Ins. Co., 554 N.E.2d 28, 31 (Mass. 1990) (holding that failure to give timely notice "is not an independently sufficient basis for an insurer to disclaim liability. Rather, the insurer must prove that its interests have been prejudiced by the insured's failure . . . .").
St. Paul does not argue that the plaintiffs' one year delay in notice relieves it of any obligation to indemnify the Foster suit. It accepted the tendered defense of the amended complaint. Rather, the present suit focuses solely on the costs MHCS and Ingoldsby incurred in the year that the plaintiffs defended the suit on their own without telling St. Paul about it. The overall approach suggested by Johnson Controls remains applicable.
The Supreme Judicial Court's holding in Augat, Inc. v. Liberty Mut. Ins. Co., 571 N.E.2d 357 (Mass. 1991) is also instructive. In Augat, the insured entered into a consent judgment which obliged it to contribute to the clean-up costs of a contaminated site. Id. at 359-60. After agreeing to the consent judgment, the insured then requested reimbursement from its insurer for the clean-up costs. Id. at 358-59. The Supreme Judicial Court held that the insurance company was excused from its obligation to indemnify the insured because the insured had breached its promise in the policy not to "voluntarily make any payment, assume any obligation or incur any expense" except at its own cost. Id. at 359.
Here, MHCS's policy required it to give St. Paul notice of any claims against it, and when faced with a claim, the policy instructed MHCS not to "assume any financial obligation or pay out any money without [St. Paul's] consent." The plaintiffs breached these terms by waiting almost a year before notifying St. Paul of Foster's suit and by deciding to pay their attorney in excess of $200,000 to defend against the suit without St. Paul's approval. By giving St. Paul no notice during the first year of the suit, the plaintiff left St. Paul with no power to affect the course and cost of the litigation during that time. Under Augat, St. Paul should not have to pay for the portion of the Foster suit it had no opportunity to influence. See also, Hoppy's Oil Serv., Inc. v. Insurance Co. of North America, 783 F. Supp. 1505, 1509 (D.Mass. 1992) (stating that "No duty to defend or to participate in a defense can arise before the insurer has notice of the suit against the insured, or at least of the underlying claim and the likelihood of suit."); American Mut. Liab. Ins. Co. v. Beatrice Companies, 924 F. Supp. 861, 874 (N.D.Ill. 1996) (stating that under Massachusetts law "insurers are not liable for pre-notice defense costs"). The American Mutual court explained:
The prejudice requirement was adopted to prevent complete forfeiture based upon technical failure of the insured to provide timely notice. In contrast, enforcement of the rule that pre-tender defense costs are not recoverable does not result in complete forfeiture of an insured's right to recover fees. Rather, the rule gives the insured the choice of defending some or all of a claim on its own.Id. at 873.
C. Conclusion
Under the circumstances of this case, the plaintiffs must bear the defense costs they incurred prior to giving St. Paul notice of the Foster litigation. St. Paul also did not violate Mass. Gen. Laws ch. 93A when it refused to pay such expenses. The defendant's motion for summary judgment is GRANTED.
The plaintiff's motion for partial summary judgment is DENIED. The plaintiff's motion to file a substitute complaint is also DENIED as the amendment would not affect the grant of summary judgment for the defendant.