A recent decision by the Massachusetts Appeals Court outlines the danger for insurers who fail to fairly and reasonably investigate claims against their insureds. In Terry v. Hospitality Mutual Insurance Company, 101 Mass. App. Ct. 597 (2022), decided on August 31, 2022, the court considered a claim for unfair and deceptive claim settlement practices under the Massachusetts Consumer Protection law, M.G.L. Chapter 93A. The plaintiff, a man injured during a barfight in a pub insured by the defendant, alleged that the pub was liable for dram shop negligence for serving two men after they were visibly intoxicated (after which they assaulted the plaintiff in the parking lot). The plaintiff prevailed on his dram shop action against the pub with an award of $250,000 in damages. Thereafter, the man filed a Chapter 93A claim against the pub’s insurer, for failing to offer a fair and equitable settlement once the pub’s liability became reasonably clear, which netted him another $500,000 in a double damages award against the insurer, along with attorney’s fees and costs.
In considering the insurer’s appeal, the court performed the standard analysis of whether (and when) the insured’s liability became reasonably clear, and the reasonableness of the insurer’s offer once that point had been reached. Where the court charted a new course is in its detailed scrutiny of every aspect of the insurer’s investigation into the claim against its insured. And the scrutiny left the court chagrined by the insurer bending over backwards to justify the its negligible offer to the injured bar patron. The insurer performed a laughably biased investigation of its insured’s liability that failed to preserve important evidence (security camera footage) and simply ignored facts that contradicted its position (witness statements in a police report and sworn deposition testimony). The appellate court affirmed the Chapter 93A award based on the insurer “cherry-picking facts” to support a pre-determined position: “While [insurer] consistently found reasons to disregard unfavorable evidence, [it] did not apply the same exacting scrutiny to favorable evidence.” Ironically, it was the insurer’s own thorough investigation file that provided the ammunition for the court’s decision, including the detailed (and patently self-serving) attempts to explain away unfavorable evidence contained therein. The Terry decision’s takeaways for liability insurers are clear. First, make sure that all liability investigations are fair and reasonable. Second, make sure that the fairness and reasonableness of the investigation are well documented in the file. Finally, though it would seem to be obvious to every insurer (with the apparent exception of the Terry insurer), make sure the investigation (and the file) support the ultimate decision of when and how much is offered to an injured claimant.