MHM Corr. Servs. v. Darwin Select Ins. Co.

MHM CORRECTIONAL SERVICES, INC., & others^[1] v. DARWIN SELECT INSURANCE COMPANY^[2] & another.^[3]

No. 22-P-167

Appeals Court of Massachusetts

December 27, 2022

Summary decisions issued by the Appeals Court pursuant to M.A.C. Rule 23.0, as appearing in 97 Mass.App.Ct. 1017 (2020) (formerly known as rule 1:28, as amended by 73 Mass.App.Ct. 1001 [2009]), are primarily directed to the parties and therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, such decisions are not circulated to the entire court and, therefore represent only the views of the panel that decided the case. A summary decision pursuant to rule 23.0 or rule 1:28 issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent. See Chace v. Curran, 71 Mass.App.Ct. 258, 260 n.4 (2008).

MEMORANDUM AND ORDER PURSUANT TO RULE 23.0

Plaintiff MHM Correctional Services, Inc. (MHM), is insured under an umbrella policy issued by defendant Darwin Select Ins. Co. now known as Allied World Surplus Lines Ins. Co. (Allied World). MHM brought this action seeking to establish that Allied World must reimburse it for the expenses it incurred in defending a particular class action suit. On summary judgment, a Superior Court judge ruled that Allied World was not liable, as a matter of law, on two independent grounds (1) MHM failed to provide Allied World with timely notice of a claim, and (2) the expenses at issue did not amount to compensable "loss" or "defense expenses" covered by the policy. For the reasons that follow, we affirm the allowance of summary judgment in part, vacate in part, and remand.

Background.

MHM is a contractor that provides mental health care services to inmates at various correctional institutions, including facilities run by the Alabama Department of Corrections (ADOC). Pursuant to its contract with ADOC, for the relevant years, MHM agreed to: "indemnify and hold harmless . . . ADOC . . . from and against all claims, losses, or costs arising out of MHM's negligence, gross negligence, wantonness, deliberate indifference, or criminal negligence, or from willful disregard of proper or lawful written instructions from the Commissioner of the ADOC."

In April of 2014, the Southern Poverty Law Center (SPLC) notified ADOC by letter of its intent to bring a class action suit against various Alabama agencies and officials, alleging that substandard health care had been provided to inmates at ADOC facilities (the Dunn litigation). Although MHM itself was not named as a defendant in SPLC's notice letter, MHM was aware that it could face liability in the Dunn litigation given its contractual agreement to indemnify ADOC. Accordingly, on behalf of MHM, Western Litigation -- the third-party claims administrator for MHM's primary insurer, Evanston Insurance Co. (Evanston) -- notified Allied World about the imminent Dunn litigation by email dated April 28, 2014. Allied World responded that because no claim against MHM had yet been made, it did not plan to investigate the matter yet, but it urged MHM to contact it again "should this matter develop into a claim."

SPLC filed the Dunn litigation on June 17, 2014. Consistent with SPLC's notice letter, MHM was not named as a party. Nevertheless, MHM promptly notified Allied World that the suit had been filed. Specifically, on June 30, 2014, acting on MHM's behalf, Western Litigation emailed Allied World what was styled as a "Supplemental Notice of Loss," which included a copy of the Dunn complaint. The record reveals that Allied World was aware that MHM had agreed to indemnify ADOC pursuant to its underlying contract, and, accordingly, that Allied World expected that MHM would be brought into the Dunn litigation. For example, on the very same day that Allied World received the notice email that the Dunn litigation had been filed, a claims handler working for Allied World entered a comment that stated: "Class Action Complaint was just filed naming 40 Inmates Plaintiff[s] . . . Insured not a defendant at this time. It is likely insured to be added to Complaint once the contract is provided in discovery." Allied World's claims handler went on to note that "[t]he primary policy is with Evanston . . . and their defense expenses are outside the limits. Mgmt is currently reviewing the complaint . . . [and outside counsel] has been retained to assist and monitor the case."

Going forward, Allied World continued to monitor the Dunn litigation. For example, on July 21, 2014, a claims handler noted that: "Insured has not been named in the complaint as of yet. Therefore, coverage on hold until insured is brought in the case." Throughout 2014 and 2015, claims handlers sent periodic emails to Western Litigation asking if MHM or its employees had been named as defendants in the Dunn litigation.

Meanwhile, ADOC formally demanded that MHM indemnify and defend it with respect to the Dunn litigation. By letter dated June 24, 2014, MHM agreed to take over the defense of the Dunn litigation as to claims based on mental health services (while reserving certain rights). MHM promptly brought these developments to the attention of Evanston, its primary insurer, which initially had agreed to fund the defense of the Dunn litigation. However, believing that Evanston would keep Allied World informed (as it had notified other excess carriers in the past), MHM did not separately notify Allied World.

In November of 2015, Evanston reversed its position that it would fund the defense of the Dunn litigation. That same month, MHM notified Allied World that it still had not been named as a party in the Dunn litigation, that the "time for adding parties has long since run," that it was handling its own representation in house, and that discovery was ongoing. Allied World continued to track the litigation and initiated a phone conference with MHM on April 20, 2016, with respect to the ongoing discovery in which MHM was involved. It was in that conference call that Allied World was told of ADOC's formal indemnification demand and of MHM's June 24, 2014, letter agreeing to pay certain costs of defending the Dunn litigation. Thus, Allied World learned of the June 24, 2014, letter approximately twenty-two months after the fact.

After officially opening a claim regarding the Dunn litigation, Allied World disclaimed coverage on various nonexclusive grounds. For example, Allied World asserted it had no duty to indemnify or defend MHM because MHM had never been named as a defendant.

MHM filed the current litigation in Superior Court in 2017. In 2019, MHM entered in a settlement with ADOC in which -- in exchange for a release of liability -- MHM agreed to pay up to $100,000 in future expenses in defense of the Dunn litigation, in addition to the expenses MHM already had incurred. The question in the current litigation then became whether Allied World bore liability under the umbrella policy for the past and future Dunn litigation expenses that were covered by this 2019 settlement.

As noted, Allied World eventually prevailed on summary judgment based on two alternative grounds: (1) that MHM failed to provide reasonable notice of a claim, and (2) that MHM had not incurred any compensable "loss" or "defense expenses" under the umbrella policy. This appeal followed.^[4]

Discussion.

1. Notice.

Most of the parties' briefing has addressed whether the notice that MHM provided Allied World was reasonable under applicable Virginia law.^[5] Virginia cases make "it clear that there is not a fixed number of days in which notice must be given for it to be reasonable" (citation omitted). Dabney v. Augusta Mut. Ins. Co., 282 Va. 78, 88 (2011). In lieu of such a set formula, courts apply a three-factor test to "the facts and circumstances of each case." State Farm Fire & Cas. Co. v. Scott, 236 Va. 116, 120 (1988). As summarized in a recent Federal case applying Virginia law:

"In Virginia, delay in providing notice constitutes a breach of contract when the failure [is deemed] substantial and material. To determine whether [t]he failure is substantial and material, the Court applies a three-factor test, evaluating the reasonableness of the delay, the duration of the delay, and whether the insurer suffered prejudice" (quotations and citations omitted).

Builders Mut. Ins. Co. v. Wedge Constr., 423 F.Supp.3d 253, 257 (E.D. Va. 2019). A particularly strong showing on one factor can make up for a weak showing on another. See State Farm Fire & Cas. Co. v. Wallace, 997 F.Supp.2d 439, 452 (W.D. Va. 2014) ("it appears that if any single factor is of a sufficient severity, that will be enough to constitute a material breach of the policy").

The parties agree that MHM did not fulfill its notice obligation until April 20, 2016, almost two years after SPLC filed the Dunn litigation. Allied World argues that in light of the length of this almost two-year delay, the judge properly determined that MHM failed to provide reasonable notice even without a showing of prejudice. See Nationwide Mut. Fire Ins. Co. v. Overstreet, 568 F.Supp.2d 638, 646 (E.D. Va. 2008) ("[T]he Supreme Court of Virginia has also held that a long delay in notifying an insurer of an occurrence with no justification, can in certain circumstances constitute a violation of a notice provision as a matter of law"). MHM counters by pointing to extenuating circumstances, such as how it provided Allied World notice of the Dunn litigation before that action even was filed and that Allied World was aware that MHM faced potential liability even though not named as a party. Although the issue is close, we agree with MHM that these extenuating circumstances were enough to warrant having a jury resolve...