The Massachusetts Supreme Judicial Court (“SJC”) has made it clear that an insurer cannot avoid claims for failing to defend a policyholder merely by tendering payment to the policyholder at the last minute. The central issue in the case of Auto Flat Car Crushers, Inc. v. Hanover Ins. Co., SJC-11477, 2014 WL 5149647 (Mass. Oct. 15, 2014) (J. Lenk) involved whether a policyholder could pursue a claim under Massachusetts’ consumer protection statute, M.G.L. c. 93A, § 11 (“Chapter 93A”), against its insurer after accepting reimbursement of expenses incurred in connection with a dispute with the Department of Environmental Protection (“DEP”). The SJC found that the policyholder was not required to make a showing of uncompensated loss to establish the damages element under Chapter 93A. Accordingly, even where the insurer has reimbursed the policyholder for its defense expenses and for interest, it may still be liable for unfair or deceptive conduct, and multiple damages, under Chapter 93A. 

In Auto Flat, plaintiff-insured Auto Flat Car Crushers, Inc. (“Auto Flat”), a vehicle crushing service in Millis, Massachusetts, was notified by the DEP in 2004 that it was a “party with potential liability” in connection with the release of hazardous material at a salvage yard.  Id. at *1-2. In addition, the DEP ordered Auto Flat to take various responsive actions. Id. In turn, Auto Flat notified its insurer, Hanover Insurance Company (“Hanover”), with whom Auto Flat maintained a garage insurance policy, and sought defense for the DEP matter and indemnification for the costs of resolving the DEP matter. See id. at *2. Hanover denied coverage, citing a number of exclusions to the policy, including a pollution exclusion, and continued to deny coverage even after Auto Flat renewed its request months later. See id.

After incurring four years of defense expenses and remediation costs in the underlying DEP matter, Auto Flat once again renewed its request for coverage in 2008. Id. Hanover maintained its position and continued to deny coverage. Id. As a result, Auto Flat initiated a coverage action against Hanover in Superior Court, asserting breach of contract and declaratory judgment claims against Hanover based on its refusal to fulfill its coverage obligations. See id. In December 2009, on a motion for partial summary judgment, the lower court declared that Hanover had a duty to defend Auto Flat in connection with the DEP matter. Id. Following this declaration, Auto Flat amended its complaint to assert a Chapter 93A claim against the insurer based on Hanover’s unfair or deceptive act or practice of refusing to provide Auto Flat a defense in the DEP litigation in the first place. See id. Thereafter, while reserving its rights as to its Chapter 93A claim, Auto Flat accepted reimbursement, with interest, for its expenses in litigating and resolving the DEP matter.

In response, Hanover moved for summary judgment on the Chapter 93A claim and predicated its motion on the argument that Hanover’s reimbursement of expenses precluded a finding that Auto Flat had suffered a monetary loss, as required under Chapter 93A. See id. at *3. The Superior Court once again found in favor of Auto Flat and denied Hanover’s motion, finding that Auto Flat had, in fact, suffered a monetary loss as a matter of “historical fact,” because Hanover’s reimbursement was not made until after the commencement of the coverage action. See id. Thereafter, the parties jointly moved for interlocutory review by the Appeals Court and the SJC transferred the case on its own motion.  Id. at *4.

As the parties did not dispute that Auto Flat was fully reimbursed, with interest, the dispute on appeal focused largely on whether the insurer’s payment of compensatory damages eliminated Auto Flat’s ability to establish any actual damages, which Hanover argued was necessary for recovery on a Chapter 93A claim. See id.

In determining whether summary judgment was properly denied to Hanover on Auto Flat’s Chapter 93A claim, the Court addressed two key issues: (i) whether establishing damages required a showing of uncompensated loss; and (ii) whether a prior judgment establishing the amount of actual damages is a prerequisite to recovery. See id. at *6. As to the first issue, the Court found that Chapter 93A did not require an “uncompensated loss,” and that any reimbursement received from an insurer prior to judgment or settlement should be treated as a setoff against any damages award, not as a bar to recovery. Id. at * 7. Grounding its decision in public policy, the Court found that to find otherwise would be inconsistent with the purpose of Chapter 93A; it would “free [insurers] to engage in dilatory conduct, arguably in violation of G.L. c. 93A, with the knowledge that, so long as they ultimately reimbursed claimants for their resulting expenses, statutory liability could be avoided.” See id. at *8.

As to the second issue, the Court rejected Hanover’s contention that a plaintiff can only recover multiple damages under Chapter 93A when it has obtained a judgment in its favor. See id. at *8. Although the amount of a judgment may be a useful and appropriate basis for an award of multiple damages, the Court held that a prior judgment is neither determinative nor required under § 11. See id. The Court went on to provide an instructive discussion about the appropriate reckoning of damages for policyholders under Chapter 93A. In a typical coverage case, the insurer’s delay or refusal to settle the underlying claim may result in litigation by the policyholder against the insurer. If such a case results in a judgment for the policyholder, then the amount of the judgment serves as the “actual damages” to be used in calculating any award of multiple damages under Chapter 93A. See id. at *10 (citing R.W. Granger & Sons v. J&S Insulation, Inc., 435 Mass. 66, 85 (2001)). In cases where no judgment has been entered, however, like in Auto Flat, “the amount of damages recoverable… will depend on the nature and extent of actual damages flowing from the statutory violation at issue.” Id. at *10. Where the alleged violation was a breach of the duty to defend, actual damages may include out-of-pocket expenses or even the amount of the settlement in the underlying litigation. See id. Applying this statute to the facts at hand, the Court suggested that, on remand, if Auto Flat establishes that Hanover’s breach of the duty to defend constituted a willful or knowing violation of Chapter 93A, Auto Flat could recover a multiple of all of its actual damages (i.e., defense costs and indemnification). Any award of damages would be reduced by the amount that Auto Flat had been reimbursed by Hanover.

The Auto Flat decision is likely to influence the way both insurers and policyholders respond to coverage claims in Massachusetts. Awareness that insurers cannot insulate themselves from consumer protection claims by providing reimbursement after protracted litigation may cause insurers to more seriously evaluate coverage requests at the outset, as a strategy of delay could prove costly. On the other hand, policyholders may be more likely to take an aggressive legal position when making coverage requests, using the threat of a Chapter 93A claim as leverage. Ultimately, the SJC’s Auto Flat opinion clarified the broad impact of Chapter 93A and should be viewed positively by policyholders as reflecting an important decision in their favor.