A recent Supreme Judicial Court (SJC) decision offers guidance for situations in which a defendant settles a case and assigns its insurance rights to the plaintiff. Settlement agreements are encouraged as a matter of general policy. However, must an insurer be bound by the terms of such an agreement, even if not a party? What happens when the parties are engaged in “underlitigation,” a collusive arrangement where the parties refrain from introducing evidence that would destroy insurance coverage? What recourse does the insurer have to challenge the settlement amount?
The case of Commerce Insurance Company vs. Justina S. Szafarowicz, et al. (131 N.E.3d 782 (Oct. 1, 2019)) analyzes these issues. In a long, but clear opinion, Chief Justice Ralph D. Gants reaffirmed the SJC policy of encouraging settlement agreements, while also providing clear protections for insurers and methods of challenging agreements that might prejudice liability carriers.
The Underlying Wrongful Death Action
The case arises from a wrongful death action. David Szafarowicz was struck and killed by a car driven by Matthew Padovano. The decedent’s estate sued Padovano, who tendered the claim to his family’s auto liability insurer, Commerce Insurance Company.
Commerce agreed to defend the claim, and paid its compulsory policy limits of $20,000, but reserved its rights to deny an additional $480,000 in indemnification obligations if it was determined that the accident was caused by an intentional act, and thus not an “accident,” as defined by the policy.
Commerce also filed a separate declaratory judgment action to determine whether the policy provided coverage for the estate’s claim. Meanwhile, Commerce attempted to intervene in the wrongful death case. It cited to a criminal proceeding against Padovano arising out of the same accident, and evidence from that proceeding that Padovano’s actions were intentional, as opposed to accidental. Commerce claimed that neither party had incentive to introduce that evidence because they both “would prefer that insurance coverage exist for this loss.”
Underlitigation
The judge denied Commerce’s request to intervene, but also recognized the unfairness of “underlitigation,” which in this case meant that the plaintiff refrained from introducing evidence of the defendant’s intentional conduct, offering instead evidence of mere negligence. As a result, the defendant’s insurer would not be able to disclaim coverage on grounds that the policy did not...
