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By: Zinnia Khan
The Supreme Judicial Court of Massachusetts (“SJC”) recently issued its highly anticipated decision in Rawan v. Continental Casualty Co. regarding the enforceability of consent-to-settle clauses. The SJC held that consent-to-settle clauses do not violate G.L. c. 176D, § 3(9)(f), the Massachusetts statute which regulates the insurance business and defines unfair claim settlement practices.
Many professional liability insurance policies include “consent-to-settle” clauses, which require an insurer to seek its insured’s consent prior to settling a covered claim. The consent-to-settle clause at issue in Rawan stated only that the insurer “will not settle any claim without the informed consent of [the insured].” After the insured, an engineering firm, refused to authorize any reasonable settlement toward the plaintiff homeowners’ claims, as recommended by the insurer, a jury found the insured liable for $400,000 in compensatory damages, and an additional $40,000 in punitive damages. The insurer paid the homeowners $141,435,98 of that figure, which was the amount within its policy limit after paying defense costs.
The homeowners then sued the insurer on the basis that the consent-to-settle clause it relied upon to refuse settlement in the initial lawsuit violated Chapter 176D. In its decision, SJC addressed both the legislative intent of Chapter 176D and the public interests affected by consent-to-settle clauses. First addressing the statute, the court held that Chapter 176D’s silence on consent to settle clauses was sufficient to indicate that the legislature did not intend to invalidate consent-to-settle clauses. With respect to public interest considerations, the court noted the insurer’s duty to third parties to effectuate settlement was still subject to the insurer’s contractual and statutory duty to its insured.
Although the court concluded that consent-to-settle clauses are enforceable, the Rawan decision has important implications for insurers, insureds, and third-party claimants. Indeed, the court made a point to emphasize that its opinion does not mean that insurers owe no duty to third parties in cases involving consent-to-settle clauses. The insurer must still abide by its obligation to effectuate settlement, which includes “a thorough investigation of the facts, a careful attempt to determine the value of the claim, good faith efforts to convince the insured to settle for such an amount, and the absence of misleading, improper, or ‘extortionate’ conduct.” If these measures are not taken, insurers could be held liable under Chapter176D (and potentially under Chapter 93A, Massachusetts’ consumer protection law), even where the insured ultimately refuses to provide its consent to settle.
For businesses and professionals, the fact that consent-to-settle clauses remain enforceable in Massachusetts is encouraging. However, because the court cautioned that the duty to effectuate reasonable settlement remains, insureds should seek the advice of their trusted insurance advisors on whether efforts toward resolution are warranted.
Insurers should pay careful attention to the court’s decision in Rawan. An insurer’s good faith duty to reasonably investigate claims and to effectuate prompt, fair, and equitable settlement of claims remains in place – particularly in cases which liability is reasonably clear.
If you have any questions or would like more information, please contact Zinnia Khan at [email protected].