The Appeals Court of Massachusetts reversed the dismissal of claims against an insurance company after it admitted it had a duty to defend its insured in an underlying matter but refused to do so, remanding its insured’s allegations of breach of contract and unfair or deceptive practices. The case is John Moriarty & Associates, Inc. v. Zurich American Insurance Co., 2023 Mass. App. LEXIS 50 (Mass. App. Ct. 2023).
In addition, this case has brought forth a larger legal question in Massachusetts of whether an insurance company, and under what circumstances, has a right to recoup defense costs provided to an insured. The appellate court noted it was up to the Supreme Judicial Court of Massachusetts to determine if a right to recoup was recognized, according to the opinion filed March 31.
In the case presented to the appellate court, Zurich American Insurance Co. had agreed to defend and indemnify John Moriarty & Associates, a general contractor, after an employee of a JMA subcontractor brought an underlying negligence claim for an onsite injury.
In May 2020, a foreman brought a negligence action against JMA and Triple G Scaffold Services Corp., the contractor hired by JMA to perform scaffolding work at the jobsite. The foreman alleged that JMA breached its duty to provide a safe job site by “leaving an unguarded hole that acted as a trap door.” The foreman also alleged that “someone from Triple G had removed that metal grate leaving the hole exposed and unguarded,” the opinion said.
JMA requested that Zurich reimburse it for all defense costs incurred prior to Zurich’s acceptance of coverage, and JMA forwarded copies of the legal bills from its retained counsel. However, Zurich did not reimburse or pay any of its costs at that time, the opinion said.
JMA was an additional insured on a commercial general liability insurance policy issued to the subcontractor for a construction project in Boston. The insurer agreed to represent JMA subject to a reservation of rights that included a right to recoup defense costs.
JMA brought a breach of duty and a consumer protection claim against Zurich after the insurer failed to pay or reimburse the general contractor’s defense costs in the ongoing negligence action for over eight months.
In the fall of 2021, Zurich finally paid JMA’s defense counsel bills. In turn, Middlesex Superior Judge Kristen Buxton reasoned that Zurich was not in breach of policy and no actual controversy existed regarding the duty to defend and, therefore, dismissed the claims against it.
However, Buxton acknowledged that it was an “open issue” whether state law permitted an insurer to recoup defense costs, but she concluded that the question need not be resolved in the present case. Additionally, she concluded that Zurich’s duty to indemnify was premature because no determination had been made in the underlying litigation concerning JMA’s liability, the opinion said.
On appeal, a three-judge panel for the Massachusetts Appeals Court vacated the lower court’s judgment that dismissed the breach of contract claim, concluding that an insured may recover costs to prosecute an action against an insurer who admits that it has a duty to defend the insured but refuses to do so.
“Similarly concluding that an insurer’s refusal to defend while admitting that it has the duty to do so makes out G. L. cc. 93A and 176D claims, we vacate so much of the judgment as dismissed the unfair business practices claims,” Associate Justice Joseph M. Ditkoff wrote for the panel. “We further conclude that JMA has demonstrated that an actual controversy exists with respect to the issue whether Zurich may reserve the right to recoup defense costs as a matter of law, such that we vacate so much of the judgment as dismissed the request for declaratory relief on that issue.”
The panel explained that while both parties do not dispute the negligence claim being covered by Zurich’s policy, JMA adequately pleaded the breach of contract claim based on Zurich’s nonpayment of JMA’s defense costs.
Zurich argued that the previous dismissal was appropriate since it has now reimbursed JMA for defense costs in the underlying action. The insurance company further argues that JMA is not entitled to recover costs for the prosecution of the present action as a matter of law.
“Putting aside the fact that payments after the filing of the complaint are not a proper basis for a dismissal for failure to state a claim Zurich’s latter argument is premised on its theory that it is responsible only for the defense costs in the underlying action and not for JMA’s litigation costs in compelling Zurich to pay those defense costs,” Ditkoff wrote. “JMA, by contrast, argues that it is entitled to recover its costs to enforce its right to a defense where the insurer fails to pay for the defense until forced to do so by litigation.”
The panel noted that the 1997 Massachusetts Supreme Judicial Court’s decision in Preferred Mutual Insurance v. Gamache recognized that “an insured … is entitled to the reasonable attorney’s fees and expenses incurred in successfully establishing the insurer’s duty to defend under the policy.”
The panel also found that JMA demonstrated that an actual controversy exists with whether Zurich can reserve the right to recoup defense costs and also vacated the request for declaratory relief on the issue, the opinion said.
” The parties’ dispute implicates a question of law that is unsettled in Massachusetts—if, and in what circumstances, an insurer may seek to recoup defense costs provided to an insured,” Ditkoff wrote, with Associate Justices James R. Milkey and John Englander concurring. “ Given the legal uncertainty regarding the enforceability of Zurich’s reservation of a right to recoup, JMA has demonstrated a real dispute concerning the parties’ rights in which they have a definite interest.”
Zurich maintained that it could seek recoupment if: the underlying litigation revealed that the foreman’s claim was ultimately not covered and JMA forced Zurich to defend through some unfair behavior that had a “‘flavor of extortion,’” the opinion said.
“Of course, even if Massachusetts would recognize this basis for recoupment (a point which we do not reach at this juncture), that does not necessarily mean that an insurer may reserve a right to recoup on this ground without identifying some factual basis to support that assertion,” Ditkoff wrote.
Attorney Michael L. Mahoney, of Braintree, Massachusetts, represented JMA and told Law.com he and his client had no comment on the court’s decision as the matter remains in litigation on remand.
Attorneys Scarlett M. Rajbanshi, Christopher Jacob Yagoobian and Lincoln Rose, of Peabody & Arnold, represented Zurich and did not return a request for comment.
Clinton Mora is a reporter for Trending Insurance News. He has previously worked for the Forbes. As a contributor to Trending Insurance News, Clinton covers emerging a wide range of property and casualty insurance related stories.