Refusing to extend a line long ago drawn by the Massachusetts Supreme Judicial Court, the United States Court of Appeals for the First Circuit recently determined in Sanders v. Phoenix Insurance Co., 843 F.3d 37 (1st Cir. 2016), that an insurer’s duty to defend under a standard form homeowner’s policy was not triggered by a demand letter sent pursuant to Mass. Gen. Laws c. 93A. In reaching its conclusion, the First Circuit rejected the claimant’s invitation to expand the duty to defend by treating c. 93A demand letters as analogous to notice letters issued by the federal Environmental Protection Agency pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The First Circuit also reaffirmed longstanding Massachusetts law that an insurer has no duty to indemnify where it has no duty to defend.
The First Circuit characterized the underlying facts in Sanders as forming a “tragic tale.” The policyholder in that case was an attorney who began an on-again, off-again romantic relationship with a client who had retained him to initiate divorce proceedings. The attorney eventually distanced himself from the relationship, and the client took her own life.
Believing that there was a link between the attorney’s actions and the client’s death, the client’s executor sent the attorney a demand letter pursuant to Mass. Gen. Laws, c. 93A, § 9. Because some of the alleged actions took place in the attorney’s home, the attorney demanded that his homeowner’s insurer defend and indemnify him. The homeowner’s insurer disclaimed on two grounds: (1) that the death of the deceased was not an “occurrence” covered under the policy, and (2) that coverage was barred under the policy’s professional services exclusion.
The homeowner’s insurer declined to attend a subsequent mediation. The case eventually settled with a contribution from the attorney’s professional liability insurer, and an assignment by the attorney of his rights under his homeowner’s policy.
Affirming the district court, which had granted the homeowner’s insurer’s motion to dismiss, the First Circuit agreed that an insurer had a duty to defend only a “suit,” even though the insurer also had the right to investigate and settle any “claim or suit.” Because the claim was settled without a suit being filed, the First Circuit determined the insurer had no duty to defend. (Elsewhere in the opinion, the First Circuit concluded that the voluntary mediation that the executor and the attorney participated in was not a “suit” within the meaning of the policy.) The First Circuit noted that the policy at issue draws a clear distinction between the duty to defend (which applies to suits alone) and the right to investigate (which applies to both suits and claims).
The First Circuit rejected the executor’s argument that it should extend the pre-suit duty-to-defend exception that the Massachusetts SJC had made in Hazen Paper Co. v. U.S. Fidelity & Guaranty Co., 555 N.E.2d 576 (Mass. 1990). In Hazen Paper, the SJC determined that a CERCLA notice letter was analogous to a suit because failing to respond to such a letter would have exposed the insured to financial penalties and other potentially severe consequences. The SJC in Hazen Paper distinguished CERCLA letters from a “conventional demand letter based on a personal injury claim,” which the court stated would not trigger a duty to defend. Although the First Circuit recognized that failing to make a reasonable offer in response to a c. 93A demand letter potentially exposes the insured to attorney’s fees and multiple damages, it concluded that a c. 93A demand letter is more similar in nature to a conventional demand letter. Accordingly, the First Circuit refused to hold that Chapter 93A demand letters are a functional equivalent of a suit, and concluded that the homeowner’s insurer had no duty to defend.
Applying the holding from another Massachusetts SJC case (Bagley v. Monticello Insurance Co., 430 Mass. 454 (1999)) as well as the language in the policy itself, the First Circuit in Sanders concluded that because the insurer had no duty to defend the insured, it also no duty to indemnify. The First Circuit therefore rejected the executor’s reliance on cases from other jurisdictions holding that a separate analysis was needed to determine whether the insurer was obligated to indemnify the insured. The First Circuit also ruled that no action against the insurer for indemnification could lie in the absence of a final judgment or settlement agreement executed by the insurer.
While the policy at issue in Sanders was a homeowner’s policy, the policy’s distinction between a “claim” and “suit” is similar to the language in a CGL policy—giving the holding a broader reach. Indeed, the First Circuit relied on cases outside the homeowner’s context in reaching its conclusion. The First Circuit also reaffirmed that a federal court in a diversity case is “duty-bound to accept controlling state law where it can be discerned,” and that the court is not free to pick and choose which state’s jurisprudence is the most sound. It will be interesting to see whether courts applying Massachusetts law will rule differently if the failure to respond to a pre-suit demand letter has more serious consequences.
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