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By: Ben Dunlap
In John Moriarty & Associates, Inc. v. Zurich American Insurance Company, the Appeals Court held that an insurer’s failure to pay defense bills after agreeing to defend its insured may be a breach of the insurer’s duties – even if the insurer ultimately pays the bills during the pendency of the coverage litigation.
The case arises from a construction site accident in which an employee of a subcontractor (the insured) was injured and then sued the general contractor, John Moriarty & Associates, Inc. (an additional insured on the subcontractor’s policy). The general contractor tendered the claim to subcontractor’s insurer pursuant to the indemnity provision of the subcontract. The insurer initially agreed to defend the general contractor but then backtracked and issued a reservation of rights when it appeared a different subcontractor may be at fault (apparently reasoning that the claims potentially were not caused by the insured subcontractor and thus the indemnity provision of the subcontract may not apply).
Coverage litigation ensued when the insurer failed or refused to pay the general contractor’s defense bills for a period of nine months. The general contractor alleged in its complaint that the insurer was breaching the duty to defend that it had assumed by issuing the reservation of rights. The suit contained counts for breach of contract (duty to defend), a consumer protection act/bad faith claim (Mass. General Laws Chapter 93A) and bad faith insurance practices (Mass. General Laws Chapter 176D), and a declaratory judgment count – as to the respective rights and duties under the policy. Among other things, the general contractor sought fees incurred in bringing the coverage action – which are typically available under Massachusetts law where an insured is forced to litigate to establish its right to a defense. After the complaint was filed (and more months passed), the insurer paid the outstanding defense bills, and then it moved to dismiss the suit, arguing it was not in breach of the duty to defend because it had paid the outstanding bills. Likewise, it argued, the consumer protection act and bad faith claims should be dismissed because it was honoring its duty. The trial court dismissed all counts, agreeing with the insurer.
On appeal, the Appeals Court vacated the dismissal, concluding the general contractor’s complaint stated valid claims because, among other things: (1) the insurer may have breached the duty to defend by failing or refusing to pay defense bills for such an extended period – especially after having agreed to pay them; (2) the same conduct may be a breach of Ch. 93A and Ch. 176D; (3) the general contractor may be entitled to its fees incurred in bringing the coverage action because the insurer paid the defense bills only after suit was commenced.
Under the facts of this case, the Court based its ruling on the fact the insurer initially said it would pay the defense expenses and the timing of the insurer’s payment of defense bills which it may not have actually been obligated to pay. The Court apparently disregarded the question of whether the underlying evidence actually supported the indemnity claim and gave rise to a duty to defend.